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Kuwait: Staff Report for the 2016 Article IV Consultation

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
January 2017
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Context

1. Notwithstanding high dependence on hydrocarbons, Kuwait is well positioned to weather “lower-for-longer” oil prices. Large financial buffers—which staff estimates exceed 460 percent of GDP—and low debt provide space to smooth the needed fiscal adjustment and support growth through infrastructure spending. Resilient nonoil activity and strong oversight by the Central Bank of Kuwait (CBK) have kept the financial sector sound.

Dependence on Oil: Kuwait and GCC

(2015)

Source: IMF staff calculations.

2. The main challenge for policymakers is to sustain reforms that reduce susceptibility to oil price cycles and boost private sector growth and job creation. The government has announced a comprehensive agenda—the six-pillar reform strategy (Box 1)—to underpin medium-term fiscal adjustment, encourage private sector development and diversification, and create jobs for the growing national labor force. Initial steps have been taken, most recently to advance energy pricing reforms and to ease registration and licensing procedures (Annex I), and several other measures are under preparation. In the wake of the recent parliamentary elections—which led to a significant turnover of National Assembly members—the outgoing Prime Minister was reappointed to form a cabinet. The new government has reaffirmed the authorities’ commitment to reforms. Steady implementation—a must to deliver concrete results over the next few years—will require building consensus in favor of economic transformation.

Recent Macro-Financial Developments

3. Economic activity in the nonoil sector has continued to expand, albeit at a slower pace, reflecting the impact of lower oil prices. Nonhydrocarbon growth slowed from 5 percent to an estimated 3½ percent in 2015, as higher uncertainty weighed on consumption. Notwithstanding an improvement in project implementation under the five-year Development Plan (DP), available indicators point to a further modest softening in nonoil growth this year. However, with oil production recovering after three consecutive years of decline,1 overall growth is on track to reach about 3½ in 2016 (Figure 1). Inflation, which has been hovering at around 3 percent, is set for an uptick to about 3½ this year, reflecting the recent gasoline price increases.

Figure 1.Recent Macroeconomic Developments

Sources: Country authorities; EDSS; Haver; and IMF staff calculations.

1/ Contribution to headline CPI inflation.

2/ Using calendar year.

Box 1.Kuwait’s Six-Pillar Reform Strategy

In early 2016, the government announced a comprehensive reform strategy to underpin medium-term fiscal adjustment, encourage private sector development and diversification, and create jobs for the growing national labor force. The strategy is organized around six-pillars:

  • Rationalizing government expenditure and increasing nonoil revenue to reduce the budget deficit over the medium term. The authorities plan to raise nonhydrocarbon revenue (by introducing a VAT and a business profit tax and raising the price of some government services) and curtail expenditure through rationalization of government agencies’ spending, further advancing subsidy reforms and reforming the pay structures.
  • Modernizing the role of the state. The government is to refocus on ensuring a conducive regulatory and business environment and encouraging market forces.
  • Promoting private sector development, through privatization of public enterprises, enhanced use of partnerships with the private sector, and support for small- and medium-sized enterprises.
  • Encouraging citizens’ participation in privatized enterprises and PPP projects.
  • Making the labor market and civil service more efficient. Initiatives in these areas will include reforms of public sector wages and performance evaluation systems and steps to improve labor force planning and upgrade skills through educational reforms (including enhanced vocational training).
  • Promoting supporting legislative and institutional reforms to enhance public financial management, strengthen tax administration capacity, develop financial markets, and improve the business climate.

4. Notwithstanding efforts to contain government spending, the fiscal and external accounts have deteriorated markedly. As a result of dwindling oil revenues, the authorities’ principal measure of the fiscal balance—which excludes mandatory transfers to the Future Generations Fund (FGF) and investment income and better reflects the government’s gross financing challenge—2 has swung into a large deficit (17½ percent of GDP in 2015/16). Even when including investment income and before transfers to the FGF, fiscal surpluses have vanished (text table). The underlying (nonoil) fiscal position has nevertheless improved over the past two years, reflecting a decline in the subsidy bill (Figure 2), non-recurrence of one-off spending, and efforts to curtail current expenditure. The composition of government expenditure has also improved somewhat in favor of growth-enhancing capital spending. The external current account surplus has declined significantly, reaching 5¼ percent of GDP in 2015, and is set to fall to 4½ percent in 2016.

Figure 2.Fiscal Developments

Sources: Country authorities; and IMF staff calculations.

1/ Using calendar year for non-oil GDP, while using fiscal year for revenue, current expenditure, capital expenditure, and the balance.

Fiscal Developments 2014–17
2014/152015/162016/172014/152015/162016/17
Percent of GDPPercent of Non-oil GDP
Revenue67.352.654.3167.194.993.2
Oil52.035.336.7129.063.863.0
Non-oil15.417.217.638.131.130.2
Expenditure48.852.653.7121.194.992.0
Current43.444.945.6107.681.178.2
Capital5.57.68.113.513.813.8
Overall balance 1/18.50.00.746.00.01.2
Excluding oil, investment income, recapitalization of pension−41.4−48.9−50.0−102.8−88.3−85.7
Excluding subsidy−32.8−42.9−44.6−81.4−77.5−76.5
Overall balance (authorities presentation) 2/2.4−17.5−17.35.8−31.6−29.7
Memo items:
Nominal GDP (KD billion)46.334.333.8
Nominal Non-oil GDP (KD billions)17.418.920.3
Stock of GRF assets 3/117.8144.3144.9
Stock of FGF assets 3/227.2317.3334.9
Sources: Country authorities; and IMF staff estimates.

The sharp decline in the nonoil balance as a share of nonoil GDP in 2015/16 reflected mainly the non-recurrence of one-off transfers (large increase in foreign aid and recapitalization of the pension fund) in 2014/15, a reduction in the subsidy bill, and cuts in non-essential spending. The decline in nonoil revenue in relation to nonoil GDP reflects a lower return on foreign assets than nominal nonoil GDP growth

Excludes 10 percent of total revenue transferred to the Future Generation Fund (4 percent of GDP in 2015/16) and investment income (13.8 percent of GDP in 2015/16).

The stock of General Reserve Fund (GFR) and Future Generation Fund (FGF) assets are staff estimates.

Sources: Country authorities; and IMF staff estimates.

The sharp decline in the nonoil balance as a share of nonoil GDP in 2015/16 reflected mainly the non-recurrence of one-off transfers (large increase in foreign aid and recapitalization of the pension fund) in 2014/15, a reduction in the subsidy bill, and cuts in non-essential spending. The decline in nonoil revenue in relation to nonoil GDP reflects a lower return on foreign assets than nominal nonoil GDP growth

Excludes 10 percent of total revenue transferred to the Future Generation Fund (4 percent of GDP in 2015/16) and investment income (13.8 percent of GDP in 2015/16).

The stock of General Reserve Fund (GFR) and Future Generation Fund (FGF) assets are staff estimates.

5. While financing needs have thus far been met mainly by drawing down financial buffers, the government has also increased borrowing. The government deficit has been financed mainly through drawdowns of General Reserve Fund (GRF) assets. The issuance of domestic bonds has been stepped up this year, contributing to net financing of about KD 1.4 billion between April and mid-November—over half the targeted amount for FY 2016/17. The government has also announced its intention to tap international capital markets to raise up to KD 2.9 billion.

6. The financial sector has remained sound and credit conditions favorable. As of June 2016, banks featured high capitalization (CAR of 17.9 percent), robust profitability (ROA of 1 percent), low nonperforming loans (ratio of 2.4 percent), and high loan-loss provisioning (206 percent coverage). Bank liquidity has been comfortable—after a modest decline last year, it has improved, supported by a recovery in deposits of government entities. Credit to the private sector has been increasing at a solid pace (about 6¾ percent year-over-year in September 2016, broadly in line with nominal GDP; Figure 4), driven mainly by installment loans.3

Figure 3.Financial Developments

Sources: Country authorities; Kuwait Stock Exchange; NBK reports; and IMF staff estimates.

1/ Local banks only.

2/ Previous sectoral index has been discontinued and the new index starts from May 12, 2012.

Figure 4.Monetary Developments

Sources: Country authorities; EDSS; Haver; and IMF staff calculations.

1/ Weighted average. Data only available up to December 2015.

Bank Liquidity and Reserves

Sources: Central Bank of Kuwait; Haver.

Interest Rates

(Percent)

Sources: Central Bank of Kuwait; Haver.

7. Nevertheless, a few sectors to which banks have sizable exposures have shown some weakening. The real estate sector has been confronted with a further slowdown in the volume and the value of sales. Nonfinancial corporate earnings have continued to deteriorate, resulting in an increase in vulnerabilities in some sectors, particularly real estate (Annex II). Stock prices have registered broad-based declines since mid-2014 and have remained volatile. Banks’ exposure to Investment Companies (ICs) has been reduced to 3 percent of total assets on average, but the latter are exposed to real estate and local and regional equities.

Real Estate Statistics, 2008–July 2016

(KD millions; unless otherwise specified)

Source: National Bank of Kuwait.

Note: Calculated by combining monthly average prices (per sqm when possible) in select, more active, areas of Kuwait; it is then adjusted for volatility. The indexes are based in 2010, i.e. 2010 price index equals 100. The index is not adjusted for seasonality nor the number of business days.

Sectoral Distribution of Cash Credit Facilities, 2015

(in percent of total cash credit to residents)

Sources: Haver; and IMF staff calculations.

Outlook, Risks, and Spillovers

8. Growth is expected to regain momentum over the medium term, supported by infrastructure investment. Continued improvement in project implementation under the Kuwait Development Plan (DP) will support a gradual recovery in real nonoil GDP growth to about 3½ percent in 2017 and 4 percent thereafter. Hydrocarbon output is set to increase by 2 percent annually,4 consistent with investment in the sector. Overall, real GDP growth would reach about 3 percent over the medium term. Inflation is expected to increase to 4½ percent in 2017, reflecting energy prices increases in 2016–17, before easing gradually. Higher hydrocarbon exports will lift the current account surplus above 10 percent of GDP by 2021. The authorities were broadly in agreement with staff’s assessment of the macroeconomic outlook, but noted inflation could be lower next year based on the experience of other GCC countries.

9. Kuwait’s fiscal position is projected to improve modestly, but financing needs after transfers to the FGF will remain large. Staff’s baseline scenario assumes oil prices will gradually recover to some $60 by 2021. It takes into account the fiscal impact of the measures recently enacted but does not factor in the government’s planned fiscal reforms that have yet to be implemented. Under this scenario, the fiscal balance (government definition) is projected to decline from about 17½ percent of GDP this year to 13 percent of GDP over the medium term, and cumulative gross financing needs would amount to about KD 35 billion over the next 6 years. These are assumed to be covered by a continued drawdown of assets in the GRF, measured amounts of domestic bond issuance to avoid crowding out private sector investment, and some external borrowing. The overall fiscal balance (before transfers to the FGF and including investment income) would post surpluses.

10. This macro-fiscal environment is expected to remain broadly supportive of financial stability and credit growth. Growth-enhancing capital expenditures will support bank profitability and internal capital generation. Although there are downside risks to asset quality, loss absorption buffers are high. Staff agreed with the authorities’ view that while credit growth had been robust, the significant contribution of lower-risk installment loans mitigates concerns of a build-up of financial risks.

Kuwait: Private sector credit

(y-o-y percentage change)

Source: CBK, KCSB and IMF staff calcualtions calculations

11. The main risk to the outlook is a further sustained drop in oil prices, which would lead to higher financing needs and could set in motion unfavorable macro-financial dynamics. Large fiscal deficits (Figure 6) would raise the gross financing requirement over the medium term (text table). Although the government’s strong credit rating (AA) would enable it to tap international markets, investors’ appetite for GCC bonds could decline in case of large regional financing needs. Kuwait would, therefore, be faced with the tradeoff of issuing more domestic debt, at the risk of squeezing domestic liquidity and crowding out private sector credit, or allowing readily available buffers to run lower. Staff and the authorities’ banking stress tests indicate that the financial system is resilient to severe credit and liquidity shocks.5 Nonetheless, a protracted period of lower oil prices—should it affect deposit growth, nonoil activity, stock market performance or real estate prices—could also heighten liquidity and credit risks (Box 3) and, in turn, credit and economic activity.

Figure 5.Investment Companies Operations

Sources: Country authorities; and IMF staff calculations.

Figure 6.Fiscal and Current Account Position Under Different Scenarios

Sources: IMF staff calculations.

1/ KIA and GRF assets are staff esitmates and projections.

12. Kuwait is also exposed to a number of other domestic and external risks (Annex III). Setbacks on fiscal consolidation measures would lead to higher financing needs. Slower project implementation under the development plan could weaken growth. While the country is only moderately exposed to regional spillovers, heightened security risks could affect investor confidence. More volatile global financial conditions could raise funding and market risks. In addition to the impact they could have through oil prices and financial markets conditions, significant changes to the post-election U.S. economic outlook could affect Kuwait through the exchange rate and interest rates. For example, a stronger U.S. dollar and a more rapid normalization of policy rates, may entail tighter monetary conditions given the Kuwaiti dinar peg. Outward spillovers, mainly through Kuwait’s contribution to global oil supply, investments abroad and remittances, are expected to be limited.

Financing Needs Under Different Scenarios, 2015–22(In percent of GDP)
2015/162016/172017/182018/19 2019/20 2020/21 2021/22Cumulative 2016/17-21/22
Percent of GDP
Scenario I: Baseline
Overall balance0.00.75.05.24.53.82.5
Actual balance (excluding inv. income and 10 percent of revenue)−17.5−17.3−12.6−11.7−12.0−12.1−12.8
Non-oil balance (% of non-oil GDP)−88.3−85.7−84.3−82.0−80.4−78.8−77.2
Gross financing in KD billion6.06.04.94.95.45.86.533.5
Domestic−0.32.41.01.01.11.21.48.2
External0.01.81.51.01.01.01.07.3
Drawdown of GRF6.31.92.42.93.23.64.218.1
Public debt 1/4.712.018.223.026.329.131.8
Stock of the GRF assets 1/2/144.3144.9125.1112.4100.688.676.8
Current Account balance 1/2/5.24.59.39.89.810.310.2
Scenario II: Lower oil price (25 percent less than baseline)
Overall balance0.0−2.2−6.3−6.3−7.1−7.9−9.3
Actual balance (excluding inv income and 10 percent of revenue)−17.5−20.3−24.2−23.1−23.2−23.1−23.5
Non-oil balance (% of non-oil GDP)−88.3−85.1−82.1−80.0−78.5−77.0−75.5
Gross financing in KD billion6.06.98.48.69.39.910.853.9
Domestic−0.32.41.01.01.11.21.48.2
External0.01.81.51.01.01.01.07.3
Drawdown of GRF6.32.75.96.67.17.78.538.5
Public debt 1/4.712.622.229.033.938.142.0
Stock of the GRF assets 1/2/144.3142.5127.6103.881.359.338.2
Current Account balance 1/2/5.24.5−1.6−1.3−1.3−0.9−0.9
Sources: IMF staff estimates.

It is referring to calendar years.

The stock of General Reserve Fund (GRF) assets are staff estimates and projections.

Sources: IMF staff estimates.

It is referring to calendar years.

The stock of General Reserve Fund (GRF) assets are staff estimates and projections.

Policy Discussions

With the government having laid out its economic vision under the six-pillar reform strategy, discussions focused on the appropriate pace and design of fiscal reforms, steps to safeguard financial stability, and reforms to raise growth and promote job creation for nationals. The authorities were broadly in agreement with the mission’s policy recommendations. They saw fiscal reforms as an important element of a broader reform effort to boost private sector growth and economic diversification.

A. Anchoring macroeconomic stability

13. Staff and the authorities were in agreement over the need for a sustained fiscal effort to reduce vulnerabilities and bring government savings closer to levels consistent with intergenerational equity. Under staff’s baseline projections, rising gross government debt (Annex IV) and large fiscal financing needs make the fiscal position more vulnerable to shocks.6 In addition, the nonoil fiscal balance is projected to diverge from levels consistent with intergenerational equity by some 20 percent of nonoil GDP by 2021,7 calling for a significant additional increase in fiscal saving.

Kuwait: Deviation from PIH 2016-21 1/

(Percent)

Source: IMF staff calculations.

1/ Difference between actual overall balance and level recommended by the Permanent Income Hypothesis (PIH).

14. At the same time, there was recognition that available fiscal space could be used to mitigate drawbacks from fiscal adjustment. Large buffers and low debt allow for a gradual approach to consolidation that supports growth and financial sector stability. A balanced approach to the composition of adjustment, making space for higher growth-enhancing investment, would also support macro-financial prospects.

15. On balance, staff recommended an adjustment path that would allow for achieving intergenerational equity over a ten-year period. This would entail reducing the government deficit (government definition) from a projected 17½ percent of GDP in 2015/16 to about 7 percent by 2021 (equivalent to a surplus of about 9½ percent of GDP before transfer to the FGF and including investment income) and broadly eliminating this deficit by 2025. This consolidation effort could be achieved through a combination of the main expenditure and revenue reforms included in the government’s six-pillar reform plan.8 Assuming implementation of the authorities’ planned reforms to bolster nonoil revenue, this would require a gradual reduction in government spending to about 80 percent of nonoil GDP by 2021—a level consistent with that experienced during 2000-10, when oil prices averaged about $50 per barrel. The authorities noted that the fiscal reforms identified under the government’s reform strategy could potentially lead to more rapid fiscal consolidation, but agreed that staff’s proposed path would strike an appropriate balance between higher savings and mitigating the impact of adjustment on growth. The measures listed below (text table and Annex V), drawn from the authorities’ reform strategy, would have costs for short-run growth and inflation, but these would ease over time, as dividends from higher investment bear fruit and confidence strengthens (chart).

Cumulative Fiscal Saving Under the Baseline and Adjustment Scenarios 1/(In percent of GDP)
201620172018201920202021
Baseline reforms
Fuel price reform0.20.20.40.40.40.3
Electricity and water subsidy1.71.91.91.81.7
Total0.22.02.32.32.12.0
Additional reforms under the adjustment scenario
Fuel price reform 2/0.20.30.40.6
Electricity and water subsidy 2/0.00.30.71.0
Coprorate Profit tax0.00.00.81.6
VAT0.52.01.91.8
Wage control0.10.20.50.8
Household compensation0.0−0.1−0.1−0.1
Capital expenditure−0.3−0.4−0.4−0.6
Other 3/0.51.30.81.11.51.9
Total0.51.31.33.55.26.9
Source: Authorities, Kuwait’s vision, and IMF staff calculations.

See annex V for the baseline and adjustment scenario assumptions that were used to derive these estimates.

In addition to what is assumed in the baseline.

Other includes (i) lower growth in goods and services and transfers in line with the authorities announced Kuwait’s vision and (ii) changes in interest payments, investment income and fees and other automatic changes associated with changes in inflation and GDP growth.

Source: Authorities, Kuwait’s vision, and IMF staff calculations.

See annex V for the baseline and adjustment scenario assumptions that were used to derive these estimates.

In addition to what is assumed in the baseline.

Other includes (i) lower growth in goods and services and transfers in line with the authorities announced Kuwait’s vision and (ii) changes in interest payments, investment income and fees and other automatic changes associated with changes in inflation and GDP growth.

Kuwait: Growth Impact of Fiscal Consolidation, 2015-2021 1/

(Percent change in non-oil GDP)

Source: IMF staff calculations

1/ Staff applied multipliers that were largely based on Espinoza & Senhadji (2011) and a recent IMF paper at the GCC meeting of Finance Ministers and Central Bank Governors. The estimated medium term multipliers are 0.4, 0.4 and 1.0 for tax revenues, current expenditures and capital expenditures, respectively.

Kuwait: Inflation Impact of Fiscal Consolidation, 2015-2021

Percent change in annual average CPI)

Source: IMF staff calculations

16. Given the lack of revenue diversification, staff supported the authorities’ plan to raise nonhydrocarbon revenue as part of their medium-term fiscal consolidation program. This includes introducing a value-added tax (VAT) at a rate of 5 percent, as well as raising excise tax on tobacco and sugary drinks. These measures will be implemented in the context of the regional GCC agreement and could generate additional revenue in the order of 1¾ percent of GDP. In light of possible delays in making the VAT effective (to beyond 2018), staff encouraged the authorities to step up tax administration reforms. In addition, the government is preparing a business profit tax reform that will apply to all enterprises. At a rate of 10 percent, it could raise an additional 1½ percent of GDP in revenue by 2020. Staff also supported the government’s plans to gradually adjust the price of government services.

Tax Revenues in 2015

Sources: OECD; IMF Article IV reports; and IMF staff calculations.

17. Further subsidy reform would help raise government saving while improving efficiency. Staff welcomed the important steps taken by the government this year to raise gasoline and utility prices (Annex I). It encouraged the authorities to move ahead with their plans to further rationalize energy subsidies (estimated to have amounted to about 6 percent of GDP in 2015/16). Gradual implementation would help reduce the inflationary impact and give time to businesses to adjust. Mitigating measures should be designed so as to target the most vulnerable households and promote energy efficiency. A well-designed communication strategy, highlighting the budgetary costs and distortions generated by subsidies, as well as their distributional impact and the planned compensatory measures, would help build consensus for these reforms.9

Prices for Energy Products: GCC and the United States(Latest available)
GasolineDieselElectricity
(U.S. dollars per liter)(U.S. dollars per KWh)
Bahrain0.380.320.04
Kuwait 1/, 2/0.310.390.03
Oman0.460.490.04
Qatar0.350.370.05
Saudi Arabia0.220.100.10
UAE0.480.520.12
GCC average0.370.370.06
U.S. Prices0.480.500.10

Price for Kuwait reflects the increase in gasoline prices, effective from September 2016. Before the increase, the average gasoline price was US$ 0.19.

Electricity price for Kuwait reflects the staff estimates of average increase for apartment residents, effective from May 2017. The current price is US$ 0.01 per KWh. Residential buildings, where most Kuwaitis live, will be unaffected.

Sources: Prices for GCC countries come from country authorities and are averages for 90 and 95 octane gasoline. U.S. gasoline (average for mid and high grade) and diesel prices come from the U.S. Energy Information Agency (EIA) and are adjusted for taxes. Electricity tariffs for the United States include taxes and come from EIA.

Price for Kuwait reflects the increase in gasoline prices, effective from September 2016. Before the increase, the average gasoline price was US$ 0.19.

Electricity price for Kuwait reflects the staff estimates of average increase for apartment residents, effective from May 2017. The current price is US$ 0.01 per KWh. Residential buildings, where most Kuwaitis live, will be unaffected.

Sources: Prices for GCC countries come from country authorities and are averages for 90 and 95 octane gasoline. U.S. gasoline (average for mid and high grade) and diesel prices come from the U.S. Energy Information Agency (EIA) and are adjusted for taxes. Electricity tariffs for the United States include taxes and come from EIA.

18. Staff welcomed the authorities’ intention to further contain the wage bill as part of the medium-term fiscal effort. The authorities’ proposed wage reform is intended to simplify and harmonize the wage structure and centralize wage policy decisions. In view of the already high total government wage bill—including in comparison with peers—they acknowledged the need to design the reform so as to ensure that the overall wage bill does not rise further.10 In this context, staff stressed the need to minimize initial costs of moving to the new wage grid, including through offsetting savings in allowances and bonuses. The authorities also concurred with staff’s recommendation to design the reform so as to allow for flexibility in setting wage increases and better control future wage growth. Over time, this would help reduce the wage gap with the private sector and nationals’ reservation wages, enhance private sector competitiveness, and facilitate economic diversification. While the authorities generally agreed with staff’s recommendation to limit employment growth going forward and communicate early on about its objectives to help reset expectations, they stressed this would need to be done while promoting private sector job creation for nationals.

GCC Nationals’ Empolyment and Public Wages, 2015 1/

Sources: Country authorities.

1/ Data is not available for UAE.

19. Further streamlining other current spending would create space for higher growth-enhancing investment. Staff highlighted that containing transfers to enterprises and households and goods and services would contribute to the adjustment effort, while allowing for higher capital outlays to mitigate the contractionary impact of fiscal adjustment. The authorities concurred and noted their ongoing efforts to streamline nonessential current expenditure. Indeed, spending on goods and services and transfers declined by 2 percent in 2015/16, compared to annual growth of about 13 percent on average in the preceding 5 years. Since public investment management reforms are key to improve implementation capacity and efficiency, staff welcomed the efforts underway to better prioritize projects through strengthened appraisal processes, with emphasis on encouraging diversification and employment opportunities for nationals. Systematic ex-post evaluation and effective implementation of the anti-corruption framework will also be important.

20. A medium-term fiscal framework is needed to guide fiscal consolidation and reduce implementation risks. Staff welcomed the authorities’ ongoing efforts to strengthen budget planning, including the move from annual incremental budgets to medium-term budgets starting in FY2017/18 and the planned introduction of three-year expenditure ceilings. It stressed that these reforms should take place within the context of a comprehensive medium-term framework, guided by an overarching long-term fiscal policy objective (for example based on intergenerational equity considerations) and setting a consistent path for an intermediary target (a nonoil fiscal balance objective would help delink spending from oil revenue volatility). The authorities agreed and noted that the Ministry of Finance’s macro-fiscal unit was well positioned to help in this regard. In this context, there was agreement about the importance of developing a top-down approach, strengthening budget processes—including by reducing the fragmentation of the investment budget—and expenditure control mechanisms, and developing reporting and accountability mechanisms.

21. Borrowing and investment decisions should be guided by a comprehensive asset-liability management strategy that takes into account macro-financial implications. The authorities’ short-term plans entail a combination of (i) domestic and external borrowing; (ii) a drawdown of GRF assets; and (iii) transfers to the FGF to be invested in higher-yielding assets. At the moment, higher returns on FGF assets, low borrowing costs, and the need to develop debt markets provide support for this approach. Staff recommended that, over time, the appropriate mix between the various borrowing and investment options be guided by a systematic assessment of their relative costs and benefits, including that of maintaining liquid buffers as insurance against shocks. The macro-financial impact of these options should also be assessed carefully (Box 2 and accompanying Selected Issues Paper), taking into consideration the implications of building up debt and the impact of borrowing on domestic liquidity, credit, and central bank reserves. In this regard, coordination with the CBK will remain important. Staff encouraged the authorities to sustain their balanced approach to fiscal financing over the medium-term. The authorities agreed this would help mitigate potential negative macro-financial implications and support the development of domestic debt markets.

22. Staff and the authorities concurred that the debt issuance program would benefit from a further strengthening of the institutional and legal frameworks and increased transparency. The establishment of a high-level Debt Management Committee (DMC), backed by the creation of new debt-management unit (DMU), provides a strong basis for coordination across relevant government bodies. Further efforts are ongoing to clarify responsibilities and fully operationalize the DMU. Staff welcomed the authorities’ intention to address legal hurdles that constrain the amounts and type of instruments that can be issued, including Sukuk, thereby helping broaden the investor base. It recommended putting in place a medium-term debt strategy and maintaining a debt ceiling to spur fiscal discipline. The authorities recognized that improved disclosure of the government’s assets and liabilities, more comprehensive fiscal accounts, and improved timeliness of intra-year budgetary execution data would help strengthen investor confidence and reduce borrowing costs. Promoting a deep and liquid government debt market that facilitates private debt issuance is important to foster capital market and private sector development. Introducing regular market-based auctions, communicating transparently, and developing secondary markets—an agenda the authorities intend to tackle over time—would help in this regard.

Box 2.Budget Financing Options and Potential Macro-Financial Implications1

With a few exceptions, Kuwait has not had to borrow for decades, and its domestic debt markets have therefore remained underdeveloped. The country has recorded budget surpluses since the early 1980s, with the exception of first half of the 1990s.

With the emergence of budget deficits and financing needs since 2015/16, the government has had to reassess its financing strategy. The current plans entail a combination of (i) domestic and external borrowing; (ii) a drawdown of GRF assets; and (iii) continued mandatory transfers to the FGF to be invested in higher-yielding assets. The government has also taken initial steps to develop its debt management capacity by establishing a high level debt management committee, supported by a newly-created debt management unit (DMU).

Choosing the financing mix in the context of a comprehensive asset and liability management (ALM) framework is important. This entails basing decisions not only on the cost of borrowing versus return on assets, but also the financial characteristics of sovereign’s assets and liabilities to limit potential mismatches and risks, including interest rate and exchange rate risks. The tradeoffs should also be viewed from a self-insurance perspective, where higher borrowing costs can be seen as an insurance premium against possible liquidity shocks. Increased formal coordination between the ministry of finance, the CBK, KIA, and other relevant agencies, and improvements in the timeliness of published fiscal accounts and the disclosure of government assets would help ensure effective asset and liability management.

Financing mix decisions should also be guided by a broader set of institutional, financial and macroeconomic considerations. These include macroeconomic conditions, absorptive capacity and degree of domestic financial market development, and institutional capacity, including of managing debt. The potential macro-financial consequences of the various financing options, for example on banks’ liquidity, private sector credit, and central bank reserves should be carefully assessed. In this context, external borrowing would help mitigate pressures on domestic liquidity and support central bank reserves.2 Establishing risk-free government yield curves through domestic and external borrowing would also help develop the private debt market.

Effective debt management and development of the debt market require sound institutional and legal frameworks. To this end, a formal debt management strategy with clear objectives and division of responsibilities among concerned agencies, operationalizing the DMU, developing cash management capacity, and moving towards a market-based auction system that allows for price discovery would be important. Other key steps include broadening the investor base (to include Islamic banks, investment companies, the pension fund and insurance companies), addressing legal constraints to government borrowing and sukuk issuance, and developing the secondary markets to facilitate the development of financial markets for corporates.

1 See accompanying Selected Issues Paper “Budget Financing Options and Potential Macro-Financial Implications”2 Financing through drawing assets in the GRF or external borrowing would result in equivalent transfers of foreign exchange to the government’s account at the CBK.

23. Staff shared the authorities’ view that the peg to a basket remains appropriate for the Kuwaiti economy, as it provides an effective nominal anchor. The authorities are fully committed to the current exchange rate regime. The modest depreciation against the dollar since mid-2014 (7 percent) on account of having a basket rather than dollar peg has been helpful during a period of dollar strength. Staff’s external sector assessment (Annex VI) suggests a moderate current account gap, the bulk of which would be closed by increasing fiscal savings as recommended over the medium term. Staff noted that over the longer term, as the economy diversifies, the benefits of greater exchange rate flexibility may increase.

B. Safeguarding financial stability

24. The CBK has been proactive in strengthening regulatory oversight and mitigating financial stability risks. Banks are under Basel III regulations for capital, liquidity, and leverage. Macro-prudential measures—to prevent excessive debt build up by households and limit banks’ exposure to real estate and equities—are being enforced to minimize systemic risks. A new corporate governance framework has also recently been introduced. In light of the potential risks from a sustained further decline in oil prices, and given high loan concentrations, common exposures and interconnectedness of the financial system (Box 3), the CBK’s enhanced surveillance is well positioned for early identification of financial stability risks. In particular, staff welcomed the ongoing initiatives to strengthen stress testing techniques, develop early warning indicators, step up efforts to monitor deposit trends, and identify emerging pressures in corporate and household balance sheets.

25. A number of steps would help further strengthen financial sector resilience. The authorities agreed that a formal framework for operationalizing macro-prudential measures would help maintain appropriate coverage of risks over time and the balance between preempting the buildup of excessive risks and alleviating possible liquidity shocks and pro-cyclicality in credit and asset markets. Reforms to strengthen the insolvency regime are ongoing in collaboration with the World Bank. Progress on this front, combined with judicial reforms to introduce commercial courts and expedite enforcement, would help minimize losses-given-default. While the CBK is well-equipped to deal with possible liquidity shortages,11 there was recognition that developing a liquidity forecasting framework could also help anticipate potential system-wide pressures. The CBK offers a Shari’ah compliant Lender of Last Resort (LOLR) facility to Islamic banks. The development of a sovereign Sukuk market would nonetheless help increase the availability of high-quality liquid assets for banks. There was also agreement that sustaining efforts to streamline noncore bank activities where corporate structures are complex would facilitate risk identification and effective supervision.

Box 3.Low Oil Prices, Macro-Financial Linkages and Banking System Resilience1

Kuwait’s financial sector performance has traditionally been interwoven with the oil price cycle. Given the country’s high dependence on hydrocarbons and a business model for banks that revolves around the domestic economy—as they obtain over 90 percent of their funding, and hold 80 percent of assets, domestically—deposit and asset growth, as well as asset quality, have been highly correlated with oil prices. The key channel of transmission has been government expenditure, which has been a main driver of nonoil activity, and has in the past moved in tandem with oil price fluctuations. Price fluctuations can also impact banks through asset prices—particularly equities and real estate—and regional spillovers.

In recent years, prudent macroeconomic and financial sector policies have reduced the vulnerability of the banking system to oil price shocks. Large accumulated financial buffers have provided the policy space to avoid abrupt spending cuts and increase growth-enhancing capital expenditures. An increase in public sector entities deposits has supported liquidity in the banking system, and the authorities have been careful in ensuring that domestic financing of the government deficit does not crowd out the private sector. As a result, the lower oil prices have had a limited impact on nonoil GDP growth and bank asset quality, and banks have remained profitable and liquid. Strong supervision has also contributed to banks maintaining large capital buffers and provisions.

Kuwait is, nevertheless, not immune to a protracted period of low oil prices. Reform set-backs, a slow DP implementation or a further sustained drop in oil prices, if they result in lower growth, can set in motion adverse macro-financial dynamics. Previous staff analysis found that nonoil GDP, real estate prices and equity prices drive nonperforming loans.2 Staff’s sensitivity analyses show that the banking system is on aggregate resilient, but under severe stress scenarios, a few banks may require additional capital. Loan concentrations to single borrowers present the biggest risk for banks while sectoral concentrations, particularly to real estate are a risk for selected banks. The banking system also exhibits significant deposit concentrations, although liquidity risk is mitigated by the large public ownership of the deposits and the demonstrated willingness to support banking system liquidity.

Kuwait banks exhibit significant concentrations in loan portfolios to single borrowers

Source: CBK, Bloomberg, IEA

Deposits exhibit even greater concentration, largely to government related entities

Continued enhanced surveillance and ongoing efforts to close regulatory gaps are therefore key to safeguarding financial stability. Enhanced surveillance is critical for the timely identification of risks and timely policy response. Ongoing efforts to close regulatory gaps related to the insolvency regime and crisis management will help minimize losses in the event that defaults materialize.

1 See accompanying Selected Issues Paper “Macro-financial linkages and resilience of the financial sector”.2 See “The resilience of the banking system to macroeconomic shocks in Kuwait” in IMF Country Report No. 15/328”.

26. Strengthening the crisis management framework would promote orderly resolution of banks in the event of stress and safeguard fiscal resources. A special resolution regime for banks has not yet been put in place. A blanket guarantee covers all banking system deposits. Staff recommended that consideration be given to establishing frameworks that allow for least-cost and effective resolution in the event of stress in the banking system. Formalizing arrangements between key regulatory institutions would also help improve crisis preparedness. The authorities have started preparatory work on a bank resolution framework, and IMF technical assistance in these areas is planned in the next few months.

27. Kuwaiti banks have not faced withdrawal of correspondent banking relationships. However, to avoid the perception of risk that could prompt global banks to cut relations with them, several domestic banks have preemptively severed links with some domestic charities and foreign exchange houses. The CBK has been actively participating in international forums aimed at clarifying home supervisor requirements and maintaining open channels of communication between domestic and foreign banks and regulators.

28. Efforts to implement and further strengthen the AML/CFT and anticorruption frameworks are ongoing. Consistent with the revised FATF standard, regulators are placing greater emphasis on risk-based AML/CFT inspections. The results of the ongoing ML/TF national risk assessment (NRA), conducted with assistance from the World Bank, will inform the development of a strategic plan for Kuwait. Following revocation of the 2012 decree setting up the Anti-Corruption Agency (ACA) for procedural reasons, a new law was adopted in January 2016, keeping the mandate, powers and organizational structure of the ACA broadly unchanged. Given recent adoption of related bylaws, the new framework is now fully applicable.

C. Private sector-led growth and economic diversification

29. In a more constrained budgetary environment, creating jobs for the growing young national population requires headway toward boosting private sector development and diversification. Under current trends, less than one fourth of new nationals entering the labor market over the next 5 years would find jobs in the private sector, which would imply a continued trade-off between absorbing the remaining in the public sector—and allowing the wage bill to rise—or letting unemployment increase. Breaking this trend requires switching the engines of growth from the public to the private sector, encouraging investment away from capital-intensive extractive industries, and fostering private sector hiring of nationals.

Kuwait: Labor Market absorption of nationals under different scenarios

(in percent of total new entrants) 1/

Source: IMF staff estimates

1/ The chart illustrates the challenge of employing 123 thousand expected new Kuwaiti entrants to the labor force by 2020.

Under Scenario I public sector absorbs only a small fraction of the new entrants to keep the wage bill lower, but unemployment rate rises;

In Secnario H government absorbs most of the new entrants to keep unemployment low at the expense of higher wage bill; and in Scenario H government undertakes structural reforms to boost higher private sector absorption of new entrants.

30. Addressing labor market inefficiencies is critical to bolster private sector employment of nationals. Labor market and civil service reforms should aim at improving incentives for nationals to take up jobs in the private sector, including by managing expectations about the limited future availability of public sector jobs. Sustaining the recent efforts to streamline public sector wages and benefits would also contribute to making the private sector more attractive and encourage the hiring of nationals by private-sector firms. The authorities agreed that boosting the private sector demand for nationals’ labor would also require further progress toward fostering an education system that reduces skill mismatches.

31. Staff welcomed the focus of the government’s six-pillar reform plan on privatization and public and private partnerships. Building on stronger legal and institutional frameworks, the government aims at greater use of these options to enhance the role of the private sector in the economy and upgrade infrastructure. While the privatization program is still in its early stages, several Build-Operate-Transfer projects are in the pipeline. Continued progress toward establishing clear timetables, advancing preparatory work to strengthen underlying assets, and promoting a transparent environment that fosters competition and reduces hidden costs and contingent liabilities for the government will help stimulate private sector investment and boost productivity.

32. Further improving the business environment is important to foster diversification. Recent efforts include the opening of the Kuwait Business Center, a one-stop window that will help streamline registration and licensing procedures, and steps toward digitalizing administrative procedures. Given the central role SMEs can play in economic diversification and job creation, a similar initiative is planned for SMEs. Staff emphasized the need to sustain reforms to facilitate access to land and finance, reduce the burden of administrative procedures and excessive regulations, and foster competition.12 It welcomed the authorities’ intention to improve the functioning of the National Fund for SMEs development to free up resources for small businesses and suggested consideration be given to reviewing the hurdles to SMEs’ access to finance, including the potential impact of the cap on banks’ lending interest rate spreads.

D. Statistical issues

33. The authorities are making efforts to further improve Kuwait’s statistical system. Staff welcomed the authorities’ willingness to work with IMF staff to continue to improve annual national accounts, and encouraged them to advance ongoing initiatives to produce quarterly national accounts and to establish a more recent base for the consumer price index.

Staff Appraisal

34. Kuwait is well positioned to mitigate the impact of lower oil prices on the economy. The fiscal and external positions have deteriorated significantly and nonhydrocarbon growth has moderated—from 5 percent in 2014 to about 3¼ percent this year—as a result of the drop in oil prices. However, large financial buffers and low debt provide policy space to implement the necessary fiscal consolidation gradually while increasing public investment to support growth. Against this backdrop, the fiscal and external positions are projected to improve as adjustment proceeds and oil prices recover somewhat, and nonoil growth is projected to regain momentum to about 4 percent over the medium term supported by a continued improvement in project implementation under the five-year Development Plan. The main risk to the outlook stems from a further sustained decline in oil prices. Slow project implementation, more volatile global financial conditions and spillovers from heightened regional security risks could also affect economic prospects.

35. Nonetheless, “lower-for-longer” oil prices call for steadfast implementation of reforms. The government’s six-pillar reform strategy is rightly focused on reforming public finances and promoting a greater role for the private sector in generating growth and jobs for nationals. Efforts to streamline current spending, including the recent gasoline and utility price reforms, and measures to facilitate business licensing are steps in the right direction. Maintaining consensus in favor of economic transformation and sustaining the reform momentum is paramount for the success of the strategy.

36. Fiscal reforms should focus on addressing underlying fiscal vulnerabilities and be designed so as to minimize any dampening impact on growth. Gradual removal of fuel and electricity subsidies and control of the wage bill through a well-designed reform that avoids significant upfront costs would help reduce budget rigidities, while the introduction of the VAT and business profit tax and the repricing of government services would go a long way in diversifying revenue away from oil. These fiscal reforms should be designed and sequenced with a view to striking a balance between generating fiscal savings in line with intergenerational equity levels and mitigating the drawbacks of fiscal consolidation on economic activity. A comprehensive medium-term fiscal framework based on a top-down approach and articulated around clearly-specified medium-term fiscal objectives would help guide the consolidation plans and reduce implementation risks.

37. Fiscal financing options should be assessed within a comprehensive asset/liability management framework with due consideration to macro-financial linkages. Consistent with the government’s current approach, a balanced financing mix that combines continued drawdown of assets in the GRF, measured amounts of domestic bond issuance and some external borrowing would mitigate potential crowding out of private sector credit while maintaining a high level of liquid buffers. Continued progress toward strengthening the institutional and legal frameworks, including to support a more comprehensive and longer-term view on asset and liability management, improving debt issuance processes, and fostering increased transparency would ensure effective debt management and support the development of domestic fixed income markets.

38. Steps can be taken to further strengthen financial sector resilience. In light of the potential risks from a sustained further decline in oil prices and given the financial sector risks inherent to a largely undiversified economy, the CBK initiatives to enhance financial sector surveillance are welcome. A formal framework for operationalizing macro-prudential measures, reforms to facilitate debt recovery, developing a liquidity forecasting framework, and strengthening the crisis management framework, including by introducing a special resolution regime for banks and a deposit insurance mechanism, would help further enhance financial sector resilience and ensure orderly resolution of banks in the event of stress.

39. The peg to an undisclosed basket of currencies is appropriate and can be further underpinned by fiscal adjustment. The peg has provided an effective nominal anchor. A moderate current account gap can be largely closed by increasing fiscal savings as recommended over the medium term.

40. Labor market reforms and efforts to promote the role of the private sector are important to foster diversification and boost job creation for nationals. Better aligning labor market incentives is necessary to encourage nationals to take on private sector jobs and private firms to create opportunities for them. Greater use of privatization and partnerships with the private sector will help boost productivity, private sector investment and job creation for nationals. Relying on stronger legal and institutional frameworks that foster competition and reduce hidden costs and contingent liabilities for the government is important for the success of this strategy. This should be combined with further steps to improve the business environment, including reforms to facilitate access to land and finance, reduce the burden of administrative procedures and excessive regulations, foster competition, and facilitate SMEs’ access to finance

Figure 7.Economic Outcomes under Baseline and Adjustment Scenarios

Sources: IMF staff calculations.

1/ KIA and GRF assets are staff estimates and projections.

2/ Debt financing under baseline and adjustment scenarios are assumed to be the same.

Figure 8.Labor Market Indicators

Sources: Country authorities; UNDP; and IMF staff calculations.

1 Data compiled from The Public Authority For Civil Information: Statistical Designer, forthcoming IMF working paper; and Kuwait’s Labour Force Survey, 2014.

Figure 9.Institutions and Governance

Sources: World Bank: World Governance Indicators; Fraser Institute: Economic Freedom in the World ; UNDP: Human Development Index, TIMSS.

Table 1.Selected Economic Indicators, 2013–21
Est.Proj.
201320142015201620172018201920202021
Oil and gas sector
Total oil and gas exports (billions of U.S. dollars)108.697.648.845.054.057.860.463.766.5
Average oil export price (U.S. dollars/barrel)105.498.051.944.051.954.455.957.859.3
Crude oil production (millions of barrels/day)2.932.872.862.973.033.093.153.223.28
(Annual percentage change, unless otherwise indicated)
National accounts and prices
Nominal GDP (market prices, in billions of Kuwaiti dinar)49.446.334.333.838.241.143.947.150.4
Nominal GDP (market prices, in billions of U.S. dollars)174.2162.7114.1111.3125.8135.3144.6155.2166.0
Real GDP 10.40.61.23.62.62.62.82.82.9
Real oil GDP−1.8−2.1−0.33.92.02.02.02.02.0
Real non-oil GDP4.05.03.53.23.53.54.04.04.0
CPI inflation (average)2.72.93.23.44.53.63.43.43.4
Unemployment rate (Kuwaiti nationals)4.75.04.7
(Percent of GDP at market prices)
Budgetary operations 2
Revenue73.867.352.654.355.955.154.053.051.3
Oil60.352.035.336.739.239.138.638.037.1
Non-oil, of which:13.615.417.217.616.715.915.414.914.2
Investment income9.010.513.613.913.312.712.311.911.3
Expenditures38.348.852.653.751.049.949.549.148.8
Expense34.143.444.945.643.142.041.540.940.4
Capital4.15.57.68.17.87.98.18.28.4
Balance35.618.50.00.74.95.24.53.82.5
Balance (after transfer to FGF and excl. inv. income)20.02.4−17.5−17.3−12.6−11.7−12.0−12.1−12.8
Non-oil balance (percent of non-oil GDP) 3−91.2−102.8−88.3−85.7−84.3−82.0−80.4−78.8−77.2
Excluding oil-related subsidies and benefits (percent of non-oil GDP)−70.7−81.4−77.5−76.5−76.0−74.8−73.3−71.9−70.5
Total gross debt (calendar year-end) 43.13.44.712.018.223.026.329.131.8
(Percent change; unless otherwise indicated)
Money and credit
Net foreign assets 511.43.6−2.18.10.60.40.61.60.8
Claims on nongovernment sector7.25.27.67.18.18.08.58.78.7
Kuwaiti dinar 3-month deposit rate (year average; in percent)60.80.80.81.1
Stock market unweighted index (annual percent change) 627.2−13.4−14.1−3.8
(Billions of U.S. dollars, unless otherwise indicated)
External sector
Exports of goods115.8104.555.351.961.465.668.872.675.9
Of which: non-oil exports7.27.06.56.97.47.98.48.99.4
Annual percentage change6.6−2.8−6.55.87.06.66.26.16.1
Imports of goods−25.6−27.0−27.3−26.9−28.3−29.5−30.9−32.5−33.9
Current account69.554.46.05.011.713.214.116.017.0
Percent of GDP39.933.45.24.59.39.89.810.310.2
International reserve assets 732.232.328.331.533.434.936.738.940.8
In months of imports of goods and services7.57.46.56.97.07.07.17.27.3
Memorandum items 6:
Exchange rate (U.S. dollar per KD, period average)3.533.523.32.3.32
Nominal effective exchange rate (Percentage change)1.01.43.10.9
Real effective exchange rate (Percentage change)0.81.94.83.2
Sovereign rating (S&P)AAAAAAAA
Sources: Data provided by the authorities; and IMF staff estimates and projections.

Calculated on the basis of real oil and non-oil GDP at factor cost. Staff estimates for 2015.

Based on fiscal year cycle, which starts on April 1 and ends on March 31.

Excludes investment income and pension fund recapitalization.

Excludes debt of Kuwait’s SWF related to asset management operations.

Excludes SDRs and IMF reserve position.

For 2016, data is latest available.

Does not include external assets held by Kuwait Investment Authority.

Sources: Data provided by the authorities; and IMF staff estimates and projections.

Calculated on the basis of real oil and non-oil GDP at factor cost. Staff estimates for 2015.

Based on fiscal year cycle, which starts on April 1 and ends on March 31.

Excludes investment income and pension fund recapitalization.

Excludes debt of Kuwait’s SWF related to asset management operations.

Excludes SDRs and IMF reserve position.

For 2016, data is latest available.

Does not include external assets held by Kuwait Investment Authority.

Table 2.Summary of Government Finance, 2013/14-2021/22
Est.Proj.
2013/142014/152015/162016/172017/182018/192019/202020/212021/22
(Billions of Kuwaiti Dinars)
Revenue (includes grants) (A)35.929.218.019.021.823.024.125.426.3
Taxes0.40.40.50.50.50.50.60.60.6
Other revenue35.528.717.518.521.322.523.624.825.7
Oil and gas29.322.512.112.815.316.417.218.219.0
Investment income and transfer of profits of public entities14.44.54.64.95.25.35.55.75.8
Other 21.81.70.80.80.80.80.90.90.9
Total expenditure (B=C+D)18.621.118.018.719.820.822.123.525.0
Expense (C)16.618.815.415.916.817.518.519.620.7
Compensation of employees5.45.75.86.26.66.97.37.78.1
Purchases/use of goods & services2.72.93.13.23.53.74.04.44.7
Interest0.00.00.00.10.30.30.40.50.6
Subsidies and social benefits6.87.64.84.74.74.74.95.15.3
Subsidies2.82.41.71.61.61.51.61.71.7
Social benefits4.05.23.13.13.13.23.33.53.6
Payments to social security fund2.83.11.92.02.02.12.22.22.3
Transfers to social security fund1.72.01.92.02.02.12.22.22.3
Fund recapitalization1.11.10.00.00.00.00.00.00.0
Other social benefits1.22.11.21.11.11.11.21.21.3
Oil-related0.61.30.40.30.20.20.30.30.3
Others0.60.80.80.80.90.90.91.01.0
Expense not elsewhere classified1.62.51.71.71.81.81.91.92.0
Net acquisition of nonfinancial assets (D)2.02.42.62.83.03.33.63.94.3
Grossoperatingbalance[=A-C]19.310.42.63.15.05.55.65.85.6
Netlending/borrowing[=A-B]17.38.00.00.21.92.22.01.81.3
Overall excluding 10 % trasfer and Inv. Income9.71.0−6.0−6.0−4.9−4.9−5.4−5.8−6.5
Non-oil balance−12.0−14.5−12.1−12.6−13.3−14.2−15.2−16.4−17.7
excluding investment income−16.4−19.0−16.7−17.4−18.5−19.5−20.7−22.1−23.5
excluding recapitalization of pension−15.3−17.9−16.7−17.4−18.5−19.5−20.7−22.1−23.5
excluding oil-related subsidies and benefits−11.9−14.2−14.7−15.6−16.7−17.8−18.9−20.1−21.5
Financing−9.7−1.06.06.04.94.95.45.86.5
Domestic−0.3−0.3−0.32.41.01.01.11.21.4
Banks−0.3−0.3−0.32.00.70.70.80.91.0
Non-banks0.00.00.00.40.30.30.30.30.4
External−9.4−0.76.33.73.93.94.24.65.2
External bonds0.00.00.01.81.51.01.01.01.0
Reserve funds−9.4−0.76.31.92.42.93.23.64.2
Est.Proj.
2013/142014/152015/162016/172017/18 2018/192019/202020/212021/22
(Percent of GDP)
Revenue (includes grants)73.867.352.654.355.955.154.053.051.3
Taxes0.81.01.41.41.31.31.21.21.2
Other revenue73.066.451.252.954.653.852.851.850.1
Oil and gas60.352.035.336.739.239.138.638.037.1
Investment income and transfer of profits of public entities9.010.513.613.913.312.712.311.911.3
Other3.73.92.22.32.12.01.91.91.8
Total expenditure38.348.852.653.751.049.949.549.148.8
Expense34.143.444.945.643.142.041.540.940.4
Compensation of employees11.213.217.117.716.816.616.316.015.8
Purchases/use of goods & services5.56.78.99.39.09.09.09.19.2
Interest0.10.10.10.40.70.80.91.01.1
Subsidies and social benefits14.017.614.013.412.111.311.010.710.4
Subsidies5.85.74.94.64.13.53.53.53.4
Social benefits8.211.99.08.88.07.77.57.27.0
Payments to Social Security Fund5.87.15.65.75.25.04.84.64.5
Transfers to Social Security Fund3.64.65.65.75.25.04.84.64.5
Fund recapitalization2.22.50.00.00.00.00.00.00.0
Other social benefits2.44.83.43.12.82.72.62.62.5
Oil-related1.33.01.10.80.60.60.60.60.6
Others1.11.82.32.42.22.12.12.01.9
Expense not elsewhere classified3.35.94.84.94.54.34.24.03.9
Net acquisition of nonfinancial assets4.15.57.68.17.87.98.18.28.4
Gross operating balance39.724.07.68.712.813.112.512.110.9
Net lending / borrowing35.518.50.00.75.05.24.53.82.5
Overall excluding 10 % trasfer and Inv. Income20.02.4−17.5−17.3−12.6−11.7−12.0−12.1−12.8
Non-oil balance−24.7−33.5−35.3−36.0−34.3−33.9−34.1−34.2−34.5
excluding investment income−33.8−43.9−48.9−50.0−47.6−46.6−46.4−46.1−45.8
excluding recapitalization of pension−31.5−41.4−48.9−50.0−47.6−46.6−46.4−46.1−45.8
excluding oil-related subsidies and benefits−24.4−32.8−42.9−44.6−42.9−42.5−42.3−42.0−41.8
Financing−19.7−2.217.417.312.611.712.012.112.8
Domestic−0.6−0.7−0.87.02.72.52.62.62.8
Banks−0.6−0.7−0.85.92.01.81.91.92.0
Non-banks0.00.00.01.10.80.70.70.70.8
External−19.0−1.518.310.910.19.49.69.710.2
External bonds0.00.00.05.43.92.42.32.12.0
Reserve funds−19.0−1.518.35.56.37.07.37.68.3
(Percent of nonoil GDP)
Revenue (includes grants)213.6167.194.993.299.196.993.790.686.4
Total expenditure110.8121.194.992.090.387.885.984.082.1
Gross operating balance114.859.513.815.022.723.121.820.618.4
Net lending / borrowing102.846.00.01.28.89.17.86.64.2
Non-oil balance−71.6−83.0−63.8−61.8−60.7−59.7−59.1−58.5−58.2
excluding investment income−97.7−109.0−88.3−85.7−84.3−82.0−80.4−78.8−77.2
excluding recapitalization of pension−91.2−102.8−88.3−85.7−84.3−82.0−80.4−78.8−77.2
excluding oil-related subsidies and benefits−70.7−81.4−77.5−76.5−76.0−74.8−73.3−71.9−70.5
Memorandum items:
Expenses excl. recapitalization of pension fund (percent of nonoil GDP)92.3101.481.178.276.473.871.970.068.0
Oil-related subsidies and benefits (percent of nonoil GDP)20.521.410.89.28.27.37.16.96.7
Kuwait Crude oil price, USD per barrel103.686.549.945.952.554.856.358.259.3
Total gross debt (percent of GDP)3.13.44.712.018.223.026.329.131.8
Sources: Ministry of Finance; Central Bank of Kuwait; and IMF staff estimates and projections.

Excluded from the national budget presentation. Estimated by Fund staff.

Includes UN (Iraq) compensations

Sources: Ministry of Finance; Central Bank of Kuwait; and IMF staff estimates and projections.

Excluded from the national budget presentation. Estimated by Fund staff.

Includes UN (Iraq) compensations

Table 3.Summary Balance of Payments, 2013–21
Proj.
201320142015201620172018201920202021
(Billions of U.S. dollars, unless otherwise indicated)
Current account69.554.46.05.011.713.214.116.017.0
Goods (trade balance)90.277.528.025.033.136.137.840.142.0
Exports115.8104.555.351.961.465.668.872.675.9
Oil exports108.697.648.845.054.057.860.463.766.5
Non-oil exports including re-exports17.27.06.56.97.47.98.48.99.4
Of which: re-exports1.51.51.41.51.61.71.81.92.0
Imports−25.6−27.0−27.3−26.9−28.3−29.5−30.9−32.5−33.9
Services−14.8−18.1−19.2−19.3−20.2−21.0−21.9−22.8−23.8
Transportation−4.0−3.9−3.9−4.0−4.1−4.3−4.5−4.7−4.9
Insurance0.00.00.00.00.00.00.00.00.0
Travel−9.4−11.4−11.8−11.9−12.4−12.8−13.4−14.0−14.6
Other services−1.5−2.7−3.4−3.5−3.7−3.9−4.1−4.2−4.3
Investment income13.315.613.716.216.516.817.518.218.7
Receipts14.616.316.717.517.818.218.919.720.2
General government211.412.913.413.714.214.515.015.615.8
Other sectors33.23.43.23.83.73.73.94.14.4
Payments−1.4−0.5−2.9−1.2−1.3−1.4−1.4−1.4−1.5
General government−0.70.0−2.4−0.1−0.2−0.2−0.2−0.2−0.2
Other−0.7−0.5−0.5−1.1−1.1−1.2−1.2−1.2−1.2
Current transfers−19.1−20.7−16.5−16.8−17.7−18.7−19.3−19.6−19.9
Capital and financial account−64.2−52.4−10.2−1.9−9.7−11.7−12.4−13.8−15.1
Capital account44.53.8−0.4−0.42.02.22.52.83.1
Financial account−68.7−56.2−9.8−1.5−11.8−13.9−14.9−16.6−18.2
Direct investment−15.211.4−5.1−3.2−9.1−10.4−11.1−12.6−13.4
Abroad−16.610.5−5.4−4.5−10.5−11.8−12.7−14.3−15.3
In Kuwait1.41.00.31.31.41.51.61.71.8
Portfolio investment−21.2−62.0−32.9−28.5−35.2−38.4−40.6−42.5−44.6
Other investment (net)−32.2−5.428.030.032.634.836.838.539.8
Net errors and omissions5−2.0−2.00.30.00.00.00.00.00.0
Overall balance3.30.0−3.93.11.91.51.82.11.9
Memorandum items
Current account/GDP (in percent)39.933.45.24.59.39.89.810.310.2
Current account (excl. oil)/GDP (in percent)−22.4−26.5−37.6−35.9−33.7−32.9−32.0−30.8−29.8
Investment income/GDP (in percent)7.69.712.114.613.112.412.111.811.3
WEO oil price (dollars per barrel)104.196.250.843.050.653.154.456.357.6
Import growth (in percent)5.55.51.3−1.65.34.24.94.94.6
International reserve assets (billions of U.S. dollars)632.232.328.331.533.434.936.738.940.8
In months of imports of goods and services7.57.46.56.97.07.07.17.27.3
Sources: Central Bank of Kuwait; and IMF staff estimates.

Also includes unrecorded oil exports.

Kuwait Investment Authority, Kuwait Petroleum Corporation, Kuwait Fund for Arab Economic Development, Public Institute for Social Security, Kuwait Airways Corporation, and Bank of Savings and Credit.

CBK, local banks, investment companies, exchange companies, insurance companies, and the nonfinancial private sector.

Includes UN war compensation.

Includes other unclassified private-sector flows.

Includes SDRs and IMF reserve position.

Sources: Central Bank of Kuwait; and IMF staff estimates.

Also includes unrecorded oil exports.

Kuwait Investment Authority, Kuwait Petroleum Corporation, Kuwait Fund for Arab Economic Development, Public Institute for Social Security, Kuwait Airways Corporation, and Bank of Savings and Credit.

CBK, local banks, investment companies, exchange companies, insurance companies, and the nonfinancial private sector.

Includes UN war compensation.

Includes other unclassified private-sector flows.

Includes SDRs and IMF reserve position.

Table 4.Monetary Survey, 2013-21
Proj.
End of period201320142015201620172018201920202021
(Millions of KD)
Foreign assets (net) 115,40915,97115,63316,89717,00117,06117,15917,42617,558
Central bank8,2508,5887,7758,7309,3189,77910,32310,97311,523
Local banks7,1587,3837,8598,1677,6837,2826,8366,4536,035
Domestic assets (net)17,15017,65018,45819,63122,39125,36428,76032,36936,459
Claims on government (net)−4,189−4,340−5,153−3,867−3,198−2,488−1,753−1,053−265
Central bank (net)−635−616−854−1,024−1,024−924−824−824−824
Claims000000000
Deposits6356168541,0241,024924824824824
Local banks (net)−3,554−3,723−4,299−2,843−2,174−1,564−929−229559
Claims1,5021,5631,5803,6494,4475,1895,9606,7977,726
Public debt instruments1,5021,5631,5803,6494,4475,1895,9606,7977,726
Deposits5,0575,2865,8796,4926,6216,7546,8897,0277,167
Claims on nongovernment sector31,09932,70635,17737,68340,74043,98147,70751,83756,337
Credit facilities28,91130,73733,21035,57638,46241,52245,04048,93953,187
Local investments2,1881,9691,9672,1072,2782,4592,6682,8993,150
Other items (net)−9,760−10,717−11,566−14,185−15,152−16,129−17,194−18,415−19,613
Broad money 232,55833,62134,09136,52839,39142,42545,91949,79454,017
Money8,6779,2538,9439,68010,46511,29812,25513,31614,472
Quasi money23,88224,36725,14826,84828,92631,12733,66436,47839,545
Of which: Foreign currency deposits3,1222,8913,5913,6313,8264,0304,2724,5414,836
(Annual percentage change)
Foreign assets (net)11.43.6−2.18.10.60.40.61.60.8
Central Bank12.74.1−9.512.36.75.05.66.35.0
Local banks10.03.16.43.9−5.9−5.2−6.1−5.6−6.5
Domestic assets (net)8.32.94.66.414.113.313.412.512.6
Claims on government (net)−9.8−3.6−18.725.017.322.229.5−39.9−74.8
Claims on nongovernment sector7.25.27.67.18.18.08.58.78.7
Other items (net)4.29.87.922.76.86.56.67.16.5
Broad money9.73.31.47.17.87.78.28.48.5
Money13.46.6−3.48.28.18.08.58.78.7
Quasi money8.52.03.26.87.77.68.28.48.4
Of which: f oreign currency deposits37.4−7.424.21.15.45.36.06.36.5
(Change in percent of beginning of period broad money stock)
Foreign assets (net)5.31.7−1.03.70.30.20.20.60.3
Central bank3.11.0−2.42.81.61.21.31.41.1
Local banks2.20.71.40.9−1.3−1.0−1.1−0.8−0.8
Domestic assets (net)4.41.52.43.47.67.58.07.98.2
Claims on government (net)−1.3−0.5−2.43.81.81.81.71.51.6
Claims on nongovernment sector7.04.97.37.48.48.28.89.09.0
Other items (net)−1.3−2.9−2.5−7.7−2.6−2.5−2.5−2.7−2.4
Broad money9.73.31.47.17.87.78.28.48.5
Money3.41.8−0.92.22.12.12.32.32.3
Quasi money6.31.52.35.05.75.66.06.16.2
Of which: Foreign currency deposits2.9−0.72.10.10.50.50.60.60.6
Memorandum items:
Non-oil GDP/M2 (in peercent)51.350.754.654.654.754.854.955.055.2
Foreign currency deposits/M2 (in percent)9.68.610.59.99.79.59.39.19.0
Private credit/non-oil GDP (in percent)186.1191.7189.1189.1189.1189.1189.1189.1189.1
Sources: Central Bank of Kuwait; and IMF staff estimates.

Excludes SDRs and IMF reserve position.

Excludes deposits with financial institutions, which are marginal.

Sources: Central Bank of Kuwait; and IMF staff estimates.

Excludes SDRs and IMF reserve position.

Excludes deposits with financial institutions, which are marginal.

Table 5.Financial Soundness Indicators of the Banking Sector, 2006–16

(Percent unless specified otherwise)1

2006200720082009201020112012201320142015Jun-16
Capital adequacy
Regulatory capital to risk-weighted assets20.219.315.616.718.918.518.018.916.917.517.9
Regulatory Tier I capital to risk-weighted assets17.717.214.314.917.316.916.017.115.616.116.0
Capital to assets12.612.310.911.412.612.412.612.211.111.812.0
Loan composition and quality
Oil/gas0.70.80.91.21.21.11.61.52.22.42.4
Trade11.810.410.210.610.010.512.113.012.811.711.6
Industry5.05.96.86.57.07.17.97.87.36.97.3
Construction13.412.611.911.412.712.112.612.211.912.012.2
Real estate17.519.218.120.620.019.619.218.918.517.516.7
Equity purchase loans (corporate)5.44.55.85.95.75.83.53.43.03.03.0
Agriculture/fishing0.20.10.70.30.40.20.30.30.40.30.3
Financial Institutions14.615.912.812.714.113.111.210.411.914.013.6
Of which : investment companies5.37.97.58.08.76.14.34.03.12.93.0
Of which : banks0.00.00.00.04.63.76.75.78.010.59.9
Public services1.62.21.91.61.61.72.61.82.22.21.6
Households20.319.116.016.116.317.019.420.020.220.520.5
Of which: credit card advances1.00.80.60.50.50.50.50.50.50.50.4
Of which : installment loans13.712.110.912.712.112.913.214.414.815.515.5
Of which: consumer loans3.74.12.51.02.22.22.93.02.92.52.5
Of which : equity purchase loans (individuals)1.82.12.01.91.41.42.92.62.62.52.6
Other9.69.214.813.311.111.89.510.79.79.610.8
Gross non-performing loans to total loans4.63.86.811.58.97.35.23.62.92.42.4
NPLs net of specific provsions to total loans net of specific provsions2.52.14.97.46.15.33.82.51.91.61.6
Specific provisions to gross NPLs47.447.229.038.333.929.526.931.735.232.732.7
NPLs net of specific provsions to Ter I capital12.610.831.546.233.828.751.634.011.29.59.8
Loans to shareholders, parent companies, & directors to total loans4.94.24.96.42.02.32.66.33.63.73.4
Large exposures to Tier I capital147.6141.6212.4165.1124.3105.3100.487.297.1101.1113.3
Specific provisions to gross loans2.21.82.04.43.02.11.41.21.00.80.8
Profitability
Return on Average Assets (ROAA) 22.73.30.80.71.21.11.21.01.11.11.0
Return on Average Equity (ROAE) 220.124.36.56.19.18.19.07.48.78.88.3
Net interest income to gross income33.929.036.644.549.947.648.149.947.147.649.9
Non-interest income to gross income29.029.021.625.324.633.133.432.830.830.522.8
Trading and foreign exchange income to gross income13.715.16.76.04.110.014.910.412.512.16.2
Non-interest expenses to gross income27.623.926.436.937.736.134.037.233.431.830.6
Non-interest expenses to average assets 21.41.51.61.91.62.11.91.91.61.51.5
Personnel expenses to non-interest expenses50.749.648.042.948.736.839.041.741.149.354.2
Liquidity
Core liquid assets to total assets 329.326.920.820.417.722.121.022.524.724.323.6
Core liquid assets to short-term liabilities38.634.128.028.627.836.334.830.332.731.732.0
Liquid assets to total assets34.532.928.427.922.826.527.325.430.729.830.1
Liquid assets to short term liabilities45.341.738.439.235.743.745.234.140.638.940.8
FX- loans to total loans19.723.324.925.825.525.828.128.226.030.530.8
FX- deposits to total deposits28.834.935.132.730.733.834.630.737.038.838.0
FX- liabilities to total liabilities23.227.824.222.611.211.414.518.918.830.218.8
Deposits to assets59.356.459.258.856.758.363.362.259.459.260.1
Loans to deposits96.1103.1109.0113.0116.5110.9100.599.5103.6108.3107.1
FX- loans to FX-deposits65.568.977.389.196.884.681.591.472.885.386.8
Sensitivity to market risk
Net open FX position (overall) as percent of Tier I capital0.00.011.210.78.710.28.17.718.09.9
Off-balance sheet operations as percent of assets32.134.732.525.326.225.426.327.828.528.229.9
Gross asset position in derivatives as a percentage of tier I capital77.990.971.146.933.641.165.375.0139.7120.8
Gross liability position in derivatives as a percentage of tier I capital77.991.071.146.839.440.965.175.0139.7120.8
Equity exposure to capital40.642.447.145.439.143.737.535.329.628.126.1
Source: Central Bank of Kuwait

Data are on consolidated basis.

Averaging was not applied in 2006 indicators.

Core liquid assets include: cash and cash equivalents, deposits with CBK, government securities, CBK bills, deposits with banks, certificates of deposit with other banks which mature within three months. The data were extracted from CBK prudential report.

Source: Central Bank of Kuwait

Data are on consolidated basis.

Averaging was not applied in 2006 indicators.

Core liquid assets include: cash and cash equivalents, deposits with CBK, government securities, CBK bills, deposits with banks, certificates of deposit with other banks which mature within three months. The data were extracted from CBK prudential report.

Annex I. Status of Staff Recommendations Made During the 2015 Article IV Consultation
RecommendationsCurrent Status
Containing fiscal spending and improving expenditure composition.The government has continued to reduce non-essential spending in 2015/16, including transfers abroad and wage subsidies in the private sector. It has also contained growth in goods and services and the wage bill, while allowing for increased capital expenditure. A public wage reform is under study. The 2016/17 budget envisages further restraint in current spending and improvement in capital expenditure.
Removing energy and water subsidies gradually.Following the partial elimination of diesel and kerosene subsidies effective January 2015, the government has increased gasoline prices for different grades by about 70 percent on average. The new prices have been in effect since September 1, 2016 and will be revised every three months in line with international prices. The parliament also adopted earlier this year a law that substantially increased electricity and water tariffs effective May 1, 2017 for all sectors except residential (effectively protecting Kuwaiti citizens)—depending on the sector and consumption levels, for electricity, tariff will be increased from a flat rate of 2 fils up to a range of 5-25 fils per kwh, and for water, from a flat rate of KD 0.8 up to a range of KD2-4 per 1000 Imperial Gallons.
Introducing a VAT and a corporate tax for domestic companies.Legislations under preparation.
Establishing a medium-term budget framework and improving public financial management.The government is preparing for the introduction of expenditure ceilings. The macro-fiscal unit is being integrated to the budget preparation process. The government adopted the GFSM 2001 standard starting 2015/16. The government has embarked on public expenditure management reforms, strengthened the macro fiscal unit, and established a debt management unit. Tax administration reforms are ongoing.
Establish formal macro-prudential coordination mechanism encompassing nonbank financial institutionsThe authorities have thus far been relying on a Memorandum of Understanding between CBK and the Capital Markets Authority.
Further strengthen AML/CFTKuwait is working with the MENA FATF as it continues to address the full range of AML/CFT issues identified in its mutual evaluation report
Create the right incentives for nationals to take up jobs in the private sector
Structural reforms to foster diversification (business climate, privatization, anticorruption efforts)The Kuwait business center—a single window to issue commercial licenses—has been launched.
Annex II. Performance and Vulnerabilities of Kuwait’s Nonfinancial Corporate Sector1

Non-financial corporate sector activity slowed in 2015, consistent with the moderation in nonhydrocarbon GDP growth, and corporate earnings have continued to soften. While corporates’ debt servicing profile has remained strong overall, there are some differences depending on the indicator selected and across sectors. Vulnerabilities have increased in particular in the real estate sector. Stress tests indicate vulnerabilities to changes in funding costs and earnings, with the real estate sector accounting for a significant share of vulnerable debt under the shocks.

To provide insight into corporate sector performance, detailed balance sheet data for 80 Kuwaiti non-financial companies has been assessed.2 The total aggregate revenue of these companies amounts to $21 billion, or about 34 percent of nonhydrocarbon GDP in 2015 (while their total aggregate assets represent 85 percent of nonhydrocarbon GDP). The revenue breakdown for the main sectors of the economy, following Kuwait Stock Exchange categories, is shown in table below.

Operating Revenues of Nonfinancial Corporates(Millions of U.S. dollars, unless otherwise noted)
Sectors 1/# of Firms2006200720082009201020112012201320142015Changes 14-15
Consumer Goods71,4201,9142,3712,4912,7783,0713,2473,4703,5563,592
Consumer Services101,2621,4391,6912,0331,8121,9121,8061,9531,9382,058
Energy7281335540534711529503543528527
Health Care3263302330396472514546646607592
Industrials225,1917,9628,7237,8427,4566,5546,8906,7156,7176,526
Real Estate251,0199021,6799868301,2621,0711,1561,1361,307
Technology4281180424378362328269239273275
Telecommunications25,7047,7039,0619,9538,2497,3617,2637,0946,7406,136
Total80
in millions of U.S. dollars15,42020,73724,82024,61322,67221,53121,59621,81621,49421,012
in percent of nonoil GDP37404448484139373634
growth (in percent, y/y)3420−1−8−501−1−2
Sources: Orbis, and IMF staff calculations.

Sectoral classification is based on the Kuwait Stock Exchange (KSE).

Sources: Orbis, and IMF staff calculations.

Sectoral classification is based on the Kuwait Stock Exchange (KSE).

The aggregate turnover growth of these firms declined from 1.0 percent in 2013, to contractions of about 1.5 percent in 2014 and 2.2 percent in 2015. The main sectors driving the turnover decline in 2015 were telecommunications and industrials.

Corporate profits have also declined over the past few years (Table below). Operating profits of the sampled firms have been on a downward trend since 2011, although they remain positive. In 2015, telecommunications experienced a significant profit slowdown, while health care and real estate also recorded lower profits (although still higher than in 2009–10). Partial information from a different sample of firms, available for the first half of 2016, points to a further profit slowdown in 2016, with real estate firms showing a marked decline in net profits in 1H2016 (36 percent decline y-o-y within a sample of 35 real estate firms).3

Turnover Growth Rate

(In percent)
Operating Profit /Loss(Millions of U.S. dollars, unless otherwise noted)
Sectors2006200720082009201020112012201320142015Changes 14-15
Consumer Goods199409311266210229284343305293
Consumer Services253250183137(3)1158912551223
Energy801621581252311741831860
Health Care11113414624374545433619
Industrials1,1271,1811,053867435391375511561629
Real Estate589560714404182384492531462446
Technology312639282791741324
Telecommunications1,8911,9851,7582,0541,8643,0161,8781,6471,3791,118
Total4,2824,7074,3623,9042,9824,2063,2213,2872,8242,813
Sources: Orbis, and IMF staff calculations.
Sources: Orbis, and IMF staff calculations.

Non-financial corporate sector debt is mostly concentrated in real estate and telecommunications. As of 2015, 35 and 28 percent of the debt owed by the sampled 80 firms are held on real estate and telecommunications firms’ balance sheet, respectively.

For companies in the sample, the evolution of the debt servicing profile has varied depending on the indicator selected and across sub-groups.

  • The median interest coverage ratio (ICR) for the sample as a whole increased to 4.2 in 2015 (i.e. corporates have generated enough profits to cover over four times the interest due), pointing to an improvement. However, the median ICR for large firms decreased to about 2.5 in 2015, pointing to a deterioration for that group.4
  • Driven by lower interest costs, debt-at-risk (defined as debt with ICR less than 1.5) has decreased from 23 percent of total debt of sampled firms in 2014 to 15 percent at end-2015. However, the debt with ICR<3 has increased over this period (from 44 to 50 percent).
  • The proportion of “firms-at-risk” (defined as the percentage of total firms with debt-at-risk) in the Kuwaiti non-financial corporate sample has increased from 23 to 28 percent between 2014 and 2015.

Total Debt Distribution by Sector

(In percent of total debt)

Median Interest Coverage Ratio

Debt Profile

(In percent of total debt)

Firms Profile

(In percent of total number of firms)

Debt vulnerabilities also vary significantly by sector, with debt owed by real estate sector seemingly the most vulnerable. The latter accounts for the most debt-at-risk in the sample in 2015. Moreover, the median ICR for real estate firms is relatively low and has decreased in 2015-although it remains higher than during 2008–11. On the other hand, while telecommunications account for 28 percent of total debt in the sample, this sector has no debt-at-risk.

Interest Coverage Ratio

(Median)

Real Estate Sector Interest Coverage Ratio

(Median)

Results from the sensitivity analysis indicate that the Kuwaiti non-financial corporate sector is relatively vulnerable to interest rate and earnings shocks, although with heterogeneity across sectors. Stress tests are used to assess the resilience of the non-financial corporate sector to a combination of interest rate and earnings shocks.

  • The first scenario assumes an increase in the cost of funding by 200 basis points, combined with a 2-percent worsening in aggregate firms’ earnings.
  • The second scenario assumes a combination of a decline in earnings by 12 percent (half of the more severe shock used in the third scenario), and an increase in the average interest rate by 350 basis points.
  • The third scenario is more severe, assuming further declines in corporate profitability (by 25 percent—equivalent to the largest drop in aggregate corporate earnings experienced in Kuwait over the past 10 years, which was observed in 2010), combined with tighter financial conditions (500 basis points increase in funding cost).

Indicative of the vulnerabilities to these shocks, debt-at-risk increases significantly to between 45 and 55 percent of debt, while the share of firms with debt-at-risk increases to between 40 and 50 depending on the scenario below. In terms of sectoral results, the significant worsening seen under the third scenario is driven by higher debt-at-risk in the real estate and industrial sectors.

Sensitivity Analysis

Sources: IMF staff estimates.

Annex III. Risk Assessment Matrix1
Nature/source of main threatsLikelihood of Risk/Time HorizonExpected impact on the economy if risk materializesRecommended Policy Response
Persistently lower energy pricesLow/Medium TermHigh

The fiscal and external balances would deteriorate and government financing needs would increase. To the extent these would be funded domestically, this could crowd out credit to the private sector. Private sector confidence would likely decline and nonoil growth would soften.

With economic, credit, and asset price cycles moving closely with oil price developments, lower oil prices affect liquidity in the banking system and credit growth. Volatile equity markets and a further softening in the real estate markets would also impact banks’ asset quality.

Second round effects on growth, and asset quality and liquidity in the banking sector, would depend on the policy response and in particular the magnitude of the fiscal adjustment in response to the shock.
The large financial buffers provide policy space for gradual fiscal adjustment.

However, with a further sustained decline in oil prices, the government would need to implement a more ambitious medium-term fiscal consolidation program.

Financing options should take into account the need to maintain adequate liquidity in the banking system. Central bank liquidity management capabilities should be enhanced and supervisory vigilance is needed to identify emerging financial stability risks in order to facilitate a timely response.

The framework for activation of macro-prudential policies should be strengthened.
Tighter and more volatile global financial conditionsMedium/short termMedium

This could pose funding, market and credit risks challenges for investment companies (ICs) and banks. Banks’ exposure to the equity and real estate market remains considerable. Selected banks, for which foreign liabilities are an important source of funding, could also face funding tightness.

ICs also have large exposures to global and regional financial and real estate markets, and continue to be dependent on foreign financing.

The value of Sovereign Wealth Funds and the CBK’s reserves could also be eroded.
Monitor the health of ICs and complete the restructuring of loss making ICs.

Enhanced surveillance of banking stability risks including contagion from ICs.
Heightened risk of fragmentation/security dislocation in parts of the Middle East and some countries in Africa, leading to a sharp rise in migrant flows, with negative global spillovers.HighLow

Investor confidence could be negatively affected and lead to capital outflows. Risks could increase for banks if growth slows down as a result, but some protection given the large loss absorption buffers of banks.
Analysis of transmission channels and impact study to facilitate timely policy response

Enhanced surveillance of financial system.
Slower and less effective implementation of the Development Plan (DP) 2015-19.Medium/Short to Medium TermMedium

Lower nonoil growth prospects.
Integrate the DP into a medium-term fiscal framework to ensure continued implementation. Monitor the implementation of capital expenditure. Improve performance of the budget through a public expenditure review to support prioritization of public spending and strengthen anticorruption efforts.
Reversal of fiscal reforms or slower adjustment of noncore government spendingMedium/Short to Medium TermMedium

Lower pace of underlying fiscal adjustment. Larger financing needs and need to rely more heavily on accumulated buffers.
Correct slippages. Implement medium-term fiscal framework to underpin fiscal adjustment and reduce risks over the medium term.
Severe property price correctionLowMedium

Though banks have substantial loss absorption capacity in terms of capital and loan loss provisioning, the losses could be significant in light of high exposures to the real estate sector, both directly and indirectly through collateral and common exposures.
Macro prudential tools to limit exposures to real estate should be supported by improved real estate statistics to facilitate monitoring of developments in the sector and enhanced techniques to capture banks’ direct and indirect exposures to the real estate sector to facilitate risk monitoring and timely supervisory response. Strengthen crisis preparedness and management framework.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

Annex IV. Public Sector Debt Sustainability Analysis (DSA)

Kuwait Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario

(in percent of GDP unless otherwise indicated)

Source: IMF staff.

1/ Public sector is defined as general government.

2/ Based on available data.

3/ Long-term bond spread over German bonds.

4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate;a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.

7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Kuwait Public DSA - Composition of Public Debt and Alternative ScenariosAlternative

Source: IMF staff.

Annex V. Kuwait—Baseline and Adjustment Scenario

I. Assumptions

Baseline scenario

The baseline scenario assumes expenditure restraint and is based on the 2016 budget and enacted policies or reforms.

  • Oil revenues are projected using the WEO oil price assumptions and forecast oil export volumes. Kuwait’s oil production is assumed to increase by 2 percent annually over the medium-term.
  • Non-oil revenues, except investment income from the KIA, are assumed to increase broadly in line with nonoil GDP.
  • Savings from the recent increase in fuel prices (about 0.3 percent of GDP by 2021) and the electricity and water tariff adjustment (1.1 percent of GDP) that have been approved and will come into effect early next fiscal year have been included in the baseline. Estimates were provided by the authorities.
  • The baseline assumes some spending restraint: wages are assumed to grow with inflation, while public employment expands at a rate of 2 percent annually; transfers are assumed to grow with inflation; goods and services expand in line with nonoil GDP.
  • Consistent with recent developments, capital expenditure is assumed to grow at a slightly higher rate than nonoil GDP.

Adjustment scenario

Staff’s adjustment scenario assumes a gradual reduction of expenditure as a share of non-oil GDP to 80 percent by 2021. The target is derived from a historical normal level and would result in a gradual reduction of the gap from intergenerational equity level of the non-oil primary balance. The expenditure target is consistent with the government objectives in Kuwait’s vision of “reduction of the budget deficit and movement toward sustainable public finance, and redefining of the government’s role in the national economy:”

  • Further to the baseline, fuel prices are assumed to gradually increase starting from fiscal year 2017/18 to reach international or cost recovery levels by 2021 (elimination of fuel subsidy).
  • Water and electricity tariffs are assumed increase gradually to reduce subsidy by half in 2021.
  • Compensation for fuel prices changes is assumed to be paid to households. Recent discussions between parliamentarians and the government indicate that Kuwaiti nationals may be compensated by a capped amount of 75 liters per month.
  • The wage bill is driven by stable public employment and wages increasing by slightly less than inflation. The wage reform under consideration is assumed to take effect starting 2017. Staff has assumed that it will lead in the first year to an increase in the wage bill by KD 350 million due to standardization of the salary structure, and annual wage increases in line with inflation. Staff has assumed wage increases below inflation under the adjustment scenario, in which inflation will be higher because of subsidy and VAT reforms—consistent with staff advice to allow flexibility to increase wage by less than inflation if macroeconomic conditions warrant.
  • Goods and services, transfers, and other current spending items are projected to increase by a slower rate than in the baseline (non-oil GDP growth) by 1-2 percent to help achieve the expenditure target and reflect the authorities’ objectives in the Vision to rationalize spending.
  • The adjustment scenario makes room for additional allocations for capital spending (2-2.5 percent above nominal non-oil GDP growth).
  • Non-oil revenue will increase as a result of increasing excise tax on tobacco and sugary drinks starting in second half of 2017 with full effect in 2018 by KD 200 million, introducing the corporate profit tax on domestic corporates starting 2020 (estimated additional of 1.6 percent of GDP based on IMF TA estimates), and the VAT at 5 percent (estimated to generate 1.5 percent of additional revenue) starting 2019.
II. Key Indicators, 2015–21(In percent of GDP)
Est.Proi.Cumulative
2013201420152016201720182019202020212016-21
Baseline Scenario
Overall balance35.518.50.00.75.05.24.53.82.5
Actual balance (authorities’ definition)20.02.4−17.5−17.3−12.6−11.7−12.0−12.1−12.8
Non-oil primary balance
(Percent of non-oil GDP)−91.2−102.8−88.3−85.7−84.3−82.0−80.4−78.8−77.2
Non-oil primary revenue4.54.93.63.73.43.33.23.13.0
Primary spending38.248.752.553.250.349.148.648.147.7
Total government debt3.13.44.712.018.223.026.329.131.8
Total buffer by the KIA 1/307.0345.0461.6479.7433.1410.5391.1370.7351.8
of which GRF assets106.6117.8144.3144.9125.1112.4100.688.676.8
International reserves (in months of imports)7.57.46.56.97.07.07.17.27.3
Credit to the private sector (percentage change)7.25.27.67.18.18.08.58.78.7
Real GDP growth (percent)0.40.61.23.62.62.62.82.82.9
Real oil GDP growth (percent)−1.8−2.1−0.33.92.02.02.02.02.0
Real non-oil GDP growth (percent)4.05.03.53.23.53.54.04.04.0
Fiscal Adjustment Under the Baseline:
Annual change in overall balance to GDP−18.50.74.30.2−0.7−0.6−1.32.5
Annual change in non-oil primary balance to non-oil GDP14.42.61.52.21.61.61.611.2
Fiscal Anchor:
Distance of projected NOBP from PIH (% non-oil GDP)11.813.714.616.217.719.1
Fiscal Adjustment Scenario
Overall balance35.518.50.01.26.36.57.99.19.4
Actual balance (authorities’ definition)9.71.0−17.5−16.8−11.4−10.7−9.0−7.7−6.9
Non-oil primary balance
(Percent of non-oil GDP)−91.2−102.8−88.3−85.0−82.5−80.8−76.3−72.7−69.1
Non-oil primary revenue4.54.93.63.73.73.85.15.86.3
Primary spending38.248.752.552.849.448.747.946.745.7
Total government debt3.13.44.711.817.922.725.828.230.4
Total buffer by the KIA 1/307.0345.0461.6480.2436.0415.3401.4387.6376.2
of which GRF assets106.6117.8144.2145.3127.1115.7107.4100.394.6
Current account balance69.554.46.05.012.013.815.418.019.7
International reserves (in months of imports)7.57.46.56.97.07.07.17.27.4
Credit to the private sector (percentage change)7.25.27.67.17.67.57.47.67.8
Real GDP growth (percent)0.40.61.23.62.42.52.42.42.5
Real oil GDP growth (percent)−1.8−2.1−0.33.92.02.02.02.02.0
Real non-oil GDP growth (percent)4.05.03.53.23.03.13.03.03.2
Fiscal Adjustment Under the adjustment Scenario
Annual change in overall balance to GDP−18.51.25.10.21.51.10.39.4
Annual change in non-oil primary balance to non-oil GDP14.43.32.51.74.53.73.619.3
Fiscal Anchor:
Distance of projected NOBP from PIH (% non-oil GDP)10.711.212.210.29.18.0
Sources: IMF staff estimates.

Staff estimates and projections.

Sources: IMF staff estimates.

Staff estimates and projections.

Annex VI. External Sector Assessment for Kuwait

Staff considers the peg to a basket of currencies appropriate for Kuwait. While the external position in 2015 was weaker than suggested by fundamentals and desirable medium-term policies, the recommended substantial fiscal adjustment over the medium-term would bring the current account broadly in line with the level implied by fundamentals.

Kuwait’s current account surplus has declined significantly in 2015, reflecting mainly the oil price shock. Kuwait’s large current account surplus (over 33 percent of GDP in 2014) declined to about 5¼ percent in 2015 due to lower oil prices and, to a lesser extent, declining oil export volumes. While it is set to deteriorate further this year (to a projected 4½ percent of GDP), as the further decline in oil prices more than offsets a recovery in export volumes, staff projects a gradual improvement in the current account balance over the medium term (to a surplus of above 10 percent of GDP by 2021), as oil prices pick up and hydrocarbon export volumes expand.

Current and Financial Account Balances

(Percent of GDP)

Financial outflows also eased substantially last year. The reduction in oil export receipts and related government revenue has slowed the pace of foreign assets accumulation on the part of the government. At the same time, non-government sector foreign assets continued to accumulate. Overall, portfolio outflows declined from US$62 billion to US$33 billion. On the other hand, other investments turned positive US$28 billion, as the government drew down foreign deposits to finance the budget deficit. Overall, financial outflows were somewhat larger than the current account surplus, leading to a decline in CBK foreign exchange reserves (by US$4 billion to US$28.3 billion).

Contribution to Current Account, 2010-2015

(Percent pf GDP)

Contribution to Financial Account, 2010-2015

(Percent pf GDP)

The level of CBK’s foreign exchange reserves has remained consistent with the IMF’s standard reserve coverage metrics. Foreign reserves of the CBK stood at $28.3 billion (25 percent of GDP, 6.5 months of imports, 25 percent of broad money and 99 percent of the Fund’s reserve metric) at end-2015, 1 percentage points below the minimum adequacy level.1 Traditionally, exports of goods and services and broad money contributed the most to the ARA metric, but in 2015 the share of exports dropped due to substantial decline in oil exports receipts. Consequently, the three components of the ARA metric (exports, short term external debt, and other liabilities) had similar contributions. The reserve level is on track to increase to about $31.5 billion in 2016 and reach 106 percent of the ARA metric.

Kuwait: Foreign Reserve Adequacy Assessment
Proj.
2013201420152016
(in millions of USD)
External short term debt16719190942056922094
Other liabilities (portfolio liabs + other invt liabs - STD) 1/20927215492473226149
Broad Money114816118180113335120356
Exports of goods and services1219311107396123057823
Actual CBK Foreign Reserves32245322782833431483
KIA Assets (estimates)534813561276526578533727
ARA metric32876329302857429676
Foreign Reserves as a % of the ARA metric (in percent) 2/989899106
Foreign Reserves (including KIA) as a % of the ARA metric (in percent) 2/1725180219421905
Foreign Reserves in percent of GDP19202528
Foreign Reserves in percent of broad money28272526
Foreign Reserves in 3 months of imports of goods and services7.57.46.569

Based on SPR’s calculation of reserves recommended for fixed exchange rate regimes.

As a rule of thum b, reserves within 100-150 percent of the new ARA metric are considered adequate.

Based on SPR’s calculation of reserves recommended for fixed exchange rate regimes.

As a rule of thum b, reserves within 100-150 percent of the new ARA metric are considered adequate.

In addition, the Kuwait Investment Authority also holds a large stock of financial buffers (which staff estimates at about 460 percent of GDP, with about 317 percent in FGF and 144 percent in GRF) on behalf of the government. The bulk of these financial resources, which are mainly invested in foreign assets, are held as savings for future generations, but some can also be used for precautionary motives.

Staff considers the peg to an undisclosed basket of currencies appropriate. This arrangement, which has been in place since May 2007, has provided an effective nominal anchor. The modest depreciation against the dollar since mid-2014 (7 percent) on account of having a basket rather than dollar peg has been helpful during a period of dollar strength. The NEER has remained largely unchanged since oil prices started falling in mid-2014. The REER has appreciated, but to a lesser extent than in other GCC countries.

Nominal and Real Effective Exchange Rates, and Real Oil Price, 1999-2016

GCC: Real Effective Exchange Rates

(June 2014=100)

The external sustainability approach suggests that the current account surpluses are too low to equitably support the consumption of future generations.2 The external sustainability based on the permanent income model (PIH) is the preferred method for Kuwait as the current account gap reflects suboptimal saving of hydrocarbon revenues rather than reflecting traditional competitiveness issues. The implied current account norm based on a constant real per-capita annuity is 13 percent of GDP in 2016, compared to the baseline current account surplus of 4 percent of GDP, resulting in an estimated current account gap of about 9 percent of GDP that is projected to remain broadly stable over the forecast horizon. Since external imbalances in Kuwait are largely driven by the public sector, the current account gap could be closed through fiscal consolidation. Indeed, closing the large PIH fiscal gap (estimated to reach about 12 percent of GDP by 2021) would largely eliminate the current account gap.

Kuwait: Projected and Actual Current Account vs Norms

(Percent of GDP)

Source: Staff calculation and projections

1The drop in hydrocarbon production was mainly due to the temporary closure of a neutral zone oil field and technical factors.
2A minimum of 10 percent of total revenue is transferred annually to the FGF. Income on FGF investments (mainly foreign assets) is retained in the Fund.
3Installment loans are extended to households for repair and purchase of private homes. They are secured by salary assignments and present a lower risk profile.
4Implementation of the recent OPEC agreement may lead to slightly lower hydrocarbon output increases than projected by staff in the short term—as it entails a cut of about 130 thousand mbd in 2017H1 compared to October levels. However, should the oil price increase of recent weeks be sustained, it would likely result in higher oil revenues.
5See also “The resilience of the banking system to macroeconomic shocks in Kuwait” in IMF Country Report No. 15/328; “Macro-financial linkages and resilience of the financial sector” in accompanying Selected Issues Paper; and 2015 Financial Stability Report.
6The baseline assumes a continuation of current policies of controlling current spending but does not include reforms not yet enacted in light of uncertainties on the design and timing.
7The intergenerational equity level of the non-oil primary fiscal deficit is derived from the permanent income hypothesis (PIH) which estimates a constant real per-capita annuity of the sum of discounted values of future oil revenue receipts and financial assets. The annuity is estimated at 58 percent of nonoil GDP, compared to a projected nonoil primary balance of 78 percent of nonoil GDP by 2021.
8Staff’s adjustment scenario is based on the authorities’ key reform plans that would allow achieving consolidation of about 1½ percent of GDP annually (text table and Annex V).
9See “Energy price reforms in the GCC: What can be learned from international experiences?”, IMF (2015).
10The authorities envisage a standardization of the wage structure that could entail upfront costs of up to 1 percent of 2015 GDP.
11Banks are required to comply with five liquidity indicators: the liquidity coverage ratio, a loan-to-deposit ratio (LTD), limits on maturity mismatches, a regulatory liquidity ratio and a net stable funding ratio.
12See “Enhancing Kuwait’s growth prospects in a low oil price environment” in accompanying Selected Issues Paper.
1Prepared by Mariana Colacelli and Zhe Liu.
2Balance sheet data are from Orbis and cover 80 nonfinancial firms with available total assets and turnover data over the period 2006–15.
3Economic Update, National Bank of Kuwait, August 2016.
4“Large firms” are those in the top quartile of the sample (20 firms), ranked by total assets.
1The Fund’s composite metric that measures the adequacy of precautionary reserves (developed for emerging markets) calculates the relative risk weights for each source of foreign exchange drain based on the 10th percentile of observed outflows from Emerging Markets (EMs) during exchange market pressure episodes. Reserves in the range of 100-150 percent of the composite metric are considered broadly adequate for precautionary purposes.
2The approach calculates the current account required for the net present value (NPV) of hydrocarbon and investment income to equal the NPV of imports net of non-hydrocarbon exports. To support intergenerational equity, the economy would need to choose a path for imports —and hence a current account norm—by accumulating net foreign assets at an appropriate pace. As with any analytical tool, results are sensitive to the choice of assumptions made (for instance, oil prices, return of assets, and population growth) as well as the targeted transfer to future generation (annuity).

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