Simulating policy responses to multiple economic shocks: An experiment with combined impacts of COVID‐19 and oil price crash on Kuwait

• Published date: 01 September 2023
• Author: Ayele U. Gelan,Sulayman Al‐Qudsi,Ahmad AlAwadhi
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/opec.12279

OPEC Energy Rev. 2023;47:197–215.

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197wileyonlinelibrary.com/journal/opec

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INTRODUCTION

Small open economies have been most severely hurt by COVID- 19 simply because of their reliance on the rest of the

world for exports and imports. During the first quarter of 2020, the Kuwaiti economy began to receive two major concur-

rent shocks – the COVID- 19 and unprecedented crash in the oil price. These were powerful events with double whammy

or multiple shock effects on the country's economic fabric. Each of these two events are substantial shocks in its own

right, let alone when occurring concurrently to the same economy and in the same year. The Kuwaiti authorities have

been used to dealing with adverse exogenous shocks coming from the world market they often tapped to existing reserves

funds to finance spending commitments. However, the COVID- 19 shock proved to be a great deal trickier because it

caused economic disruptions with greater scope in its coverages of economic sectors (Al- Qudsi et al.,2021).

Kuwait's first COVID- 19 case was registered on 24 February 2020 and the first death was recorded on 4 April 2020.

The authorities swiftly moved to putting in place strict curtailment measures to avert the looming danger. According to

DOI: 10.1111/opec.12279

ORIGINAL ARTICLE

Simulating policy responses to multiple economic shocks:

An experiment with combined impacts of COVID- 19 and oil

price crash on Kuwait

Ayele U.Gelan

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SulaymanAl- Qudsi

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AhmadAlAwadhi

© 2023 Organization of the Petroleum Exporting Countries.

Techno- Economic Division, Kuwait

Institute for Scientific Research (KISR),

Safat, Kuwait

Correspondence

Ahmad AlAwadhi, Techno- Economic

Division, Kuwait Institute for Scientific

Research (KISR), Safat, Kuwait.

Email: aawadhi@kisr.edu.kw

Funding information

Kuwait Foundation for the

Advancement of Sciences, Grant/

Award Number: CORONA PROP. 92

Abstract

Researchers and policy- makers are used to measuring impacts of an economic

shock. However, multiple economic shocks generate disruption that are chal-

lenging, not just analytically but also in the interpretations of results (Pagan &

Robinson, European Economic Review, 145, 2022, 104120). The disruptions come

through multiple channels whose impacts were trickier to measure than emanat-

ing from those of a single shock. This study develops and applies a framework to

conduct simulation experiments with multiple economic shocks. Kuwaiti data

were used to simulate multiple economic shocks to the economy originating from

the Corona Pandemic and the collapse of oil price, which simultaneously hap-

pened during the first quarter of 2020. As an oil exporting country, Kuwait is used

to dealing with recurrent changes in oil prices in the world market as a single

shock. However, unlike the oil shock, COVID- 19 has many demand and supply

shocks, each with separate transmission channels. The objective here is to quan-

tify relative contributions to overall adverse effects on GDP, and then identify

policy instruments required to implement a successful recovery. A recursive dy-

namic economy- wide model was formulated and calibrated. The results indicate

that the GDP effects range from 35% to 11% declines from the baseline scenario

depending on effectiveness of policy responses.

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GELAN et al.

the Oxford COVID- 19 government response tracker (Hale et al.,2021), Kuwait's lockdown measures were among the most

stringent in the world. The curtailment measures ranged from full lockdown for the first few months of the pandemic to

partial lockdown, which stayed on for the remaining COVID- 19 period, until measures were relaxed in 2021.

The literature on pandemics indicate that macroeconomic impacts depend on extents of disruptions caused to eco-

nomic activities (Boissay & Rungcharoenkitkul,2020; Keogh- Brown et al.,2020). Pandemic induced supply and demand

disruptions are often classified into temporary and permanent shocks (Jena et al.,2021). Transitory supply side shocks

are related to absenteeism or loss of workdays and reduction in labor input; either due to sickness and hence inability

to work or lockdown requiring people to stay at home for reasons to do with social distancing or capital productivity

reduction due to idleness. Demand side losses are related to increased international trade costs; and reduced household

consumption (or increased in household savings) (Angelini et al.,2020; Maliszewska et al.,2020; PwC,2020). The per-

manent shocks, on the other hand, are related to losses due to a reduction in the size of the work force due to mortality.

This study has three interrelated objectives: identifying economic disruption transmission channels of COVID- 19

that are relevant to the context of the Kuwaiti economy; quantifying the relative contributions of each component to the

overall adverse effects on GDP; and then find combinations of policy instruments required to implement a successful

recovery.

The study was conducted by using a recursive dynamic computable general equilibrium (CGE) model. CGE models

are often implemented by measuring changes at margins; that is applying relatively small changes to simulate and un-

derstand big real- world events. It is possible to obtain some sense of magnitude for large shocks, by experimenting with

small changes and then getting a sense of direction (positive or negative) as well as sense of magnitude. The effects ob-

tained from relatively smaller changes can give direction regarding the likelihood in magnitude of larger changes. This

logic has been pursued in this study.

A unique feature of COVID- 19 is that its economic impacts come through multiple channels. Relying on literature

review, about five separate shocks were identified (Maliszewska et al.,2020; World Bank,2014). Accordingly, the double

whammy shocks in this study were implemented by applying six isolated or individual shocks, five COVID- 19 shocks

plus the oil shock. A CGE modelling approach was used to conduct a series of simulation experiments, first applying each

isolated shock in turn and then applying all the six shocks at once and quantifying the economic impacts in each case.

In order to minimise the damage on the economy, the Kuwaiti authorities have applied a series of policy measures.

The interventions were classified into two broad categories: financial supports to businesses and other measures related

to business productivity enhancement in the medium to the long- term. The simulation experiment focused on synergies

between these two recovery measures, the difference between separate or simultaneous applications of these policy

instruments. Altogether, about 11 shocks were applied in this study, six isolated, two policy shocks and three combined

shocks. Given the multiplicity of the shocks, the economic impact was measured by mapping the shocks to one economic

indicator, change in real GDP.

The remaining parts of this paper is structured as follows. Section2 discusses the background and context to the study.

Section3 presents the analytical framework, the Kuwaiti economy- wide model and the base baseline data. Section4

discuss the findings of the simulation experiments and parameter sensitivity analysis. Concluding remarks are made in

Section5.

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BACKGROUND

2.1

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The COVID- 19 shock

The first COVID- 19 case and death were registered in Kuwait on 24 February 2020 and 4 April 2020, respectively

(Figure1). Since then Kuwait has gone through a series of COVID- 19 waves, lurching through a series of new daily

peaks: 958 on 22 May 2020– 1827 on 6 July 2021. A new peak in number of deaths occurred on 17 July 2021 with 16 deaths

recorded on that date. By August 2021 about 56% of Kuwait's total population was vaccinated against COVID- 19 at least

one dose (Mathieu et al.,2021).

Table1 compares Kuwait against Gulf Cooperation Council member countries, other selected countries and the world

average in terms of COVID- 19 cases in terms of deaths per million population, standardised indictors for ease of compar-

ison. The data is sorted in descending order of records of new deaths per million population up to 18 August 2021. Oman

tops the list with 2.05 new daily deaths per million. Kuwait stands third with about 1.02 deaths per million of COVID- 19-

related deaths, coming just after EU.