On behalf of the Kuwaiti authorities, we thank staff for the constructive Article IV Consultation discussions and for the useful reports. The authorities were in general agreement with staff conclusions and recommendations, particularly, regarding sustaining fiscal consolidation, maintaining financial sector stability, and supporting long-term growth through economic diversification, promoting private sector development, and job creation.
Kuwait’s non-oil GDP grew by 2.5 percent in 2017, driven by improved confidence, and is expected to increase further, benefiting from accelerated project implementation. Prudent policies over the past years, guided by the Kuwait Vision 2035 and the National Development Plan, and the accumulation of high financial buffers in two sovereign wealth funds, are enabling Kuwait to continue to support growth in the medium term.
Fiscal Policy and Reforms
Kuwait’s fiscal position has stabilized due to a series of policy measures adopted in the past few years. Nonetheless, the authorities are fully aware that continued efforts are needed to preserve fiscal space for growth-enhancing spending, while maintaining fiscal sustainability, recognizing that oil resources are nonrenewable. Accordingly, fiscal consolidation and reforms continue to rank high on their agenda.
To ensure fiscal sustainability, the authorities intend to undertake additional measures to increase non-oil revenues and contain growth in spending. Diversifying the revenue base is a priority for them. Important actions in this regard include increasing the price of government services and the planned introduction of VAT and excise taxes within the framework of a GCC-wide tax reform initiative. On August 2017, the cabinet approved the Unified GCC VAT framework agreement and the Unified GCC Selective Excise Tax Agreement, which are now pending parliamentary ratification. Full implementation of these taxes will not only improve non-oil revenues, but will also strengthen the institutional structure needed to lessen Kuwait’s dependence on oil.
Current expenditure was cut by KD 3.25 billion (about 17 percent of non-oil GDP), and capital investment was raised. The cost of subsidies continued to decline as electricity and water prices were raised by about 180 percent between May and August 2017, following a substantial increase in fuel prices starting in 2016. The authorities streamlined current spending, rationalized employment benefits, and improved the targeting of social benefits. They recognize that there is scope for additional consolidation and have already begun to further tighten controls over current transfers, simplify and harmonize the wage structure, and reduce inefficiencies in other current and capital spending with input from the ongoing comprehensive review of spending programs.
The authorities agree that reorienting public expenditure toward capital investment is important to support non-oil growth, improve infrastructure, and encourage productivity gains. Their national development plan includes as a central pillar the scaling up of infrastructure projects. To mitigate against the risk of possible delays in project implementation, the General Secretariat of The Supreme Council for Planning and Development (GSSCPD) monitors and regularly evaluates the implementation progress against key performance indicators and budget. In addition, the GSSCPD regularly publishes updates on projects’ status and works with the relevant government agencies to improve the pace and quality of projects’ implementation.
The authorities recognize that financing needs remain large in the coming period and take note of staff’s recommendation for more ambitious consolidation efforts. Nonetheless, they believe that the adjustment should be carried out at a measured pace to alleviate the potential adverse impact on economic activity and the financial sector. Kuwait’s fiscal balance—after transfers to the Future Generation Fund (FGF) and excluding investment income—can improve by about 5 percent of GDP compared to the staff baseline if current oil prices and Kuwait’s production levels are sustained in 2018. The authorities expect a more rapid reduction in the government deficit and financing needs, reflecting the different oil price assumptions, and larger expected savings from expenditure rationalization measures.
The authorities are adopting a dynamic financing strategy, striking a balance between issuing external debt, domestic debt, and drawing down the General Reserve Fund. They are also strengthening the debt legal frameworks and related institutions. They established a debt management unit to coordinate the authorities’ efforts in this regard, with the objective of maintaining Kuwait’s debt sustainability.
They have also made good progress in developing a medium-term expenditure framework. The cabinet approved the implementation of three-year rolling expenditure ceilings and started to put in place a top-down process for budgetary allocations to the line ministries. These measures are strengthening the budget planning and execution processes and underpin the authorities’ consolidation plans. The authorities agreed with staff on the importance of maintaining consensus on fiscal reforms. They are exerting a great effort to better communicate the objectives of the reform and cost of delays. They also pointed to Kuwait’s vibrant democratic process as a key instrument to build and sustain a wide consensus around important reforms, as evidenced in the comprehensive reform strategy that was adopted and enacted during the recent episode of low oil prices.
Monetary and Financial Sector Policies
The Central Bank of Kuwait (CBK) has aimed to ensure that monetary conditions remain conducive to economic growth and financial stability. The authorities share the staff’s assessment that the exchange rate peg continues to serve Kuwait well and provides an effective nominal anchor for monetary policy.
Kuwait’s financial sector is sound and stable, with well capitalized, liquid, and profitable banks, whose asset quality is high and non-performing loan ratios are at historically low level. The CBK has taken several important steps on the regulatory front to safeguard the stability of Kuwait’s financial sector, starting with enhancing the capital adequacy regime by setting out higher and better quality capital; the CAR of the banking sector stands at 18.3 percent, well above the Basel benchmark. The CBK also set additional capital requirements, up to 2 percent, for systemically important banks. Furthermore, capital conservation buffer and countercyclical capital buffer requirements aim to help banks maintain additional cushion and limit the buildup of systemic risk, and the simple leverage ratio is substantially higher than the global benchmark.
The CBK has weighed the compliance costs of each regulatory measure against its benefits, and regulations are set and periodically reassessed with the goal of not only making the sector resilient, but efficiently resilient. The authorities welcome the staff’s assessment that the banking sector is prudently regulated and that the CBK has been proactive in strengthening its supervision. In this regard, the CBK has launched initiatives to identify emerging pressures on the banking sector, including those related to the real estate sector and the impact of U.S. monetary policy normalization.
The authorities appreciate staff’s analysis in the Selected Issues Paper on the liquidity conditions and CBK’s liquidity management framework. They concur with the staff assessment that banks maintain healthy liquidity and their reserves remain high. They agree that the current amble liquidity environment offers an opportunity to further enhance the liquidity forecasting framework. The CBK is coordinating closely with other stakeholders, including the Ministry of Finance and Kuwait Investment Authority, with whom it exchanges liquidity data and projections on regular basis.
The authorities take note of the staff recommendation to strengthen the crisis management and resolution framework. They aim to further enhance the crisis management and preparedness framework, including by introducing a special resolution regime for banks. Bank deposits are fully guaranteed.
Kuwaiti banks have not experienced withdrawals of correspondent banking relationships. Nonetheless, the CBK took preemptive steps aimed at limiting the risk of withdrawals of CBRs, and actively clarified to banks the international standards and regulatory expectations. The CBK also maintained open channels of communication between domestic and foreign banks and relevant regulators. Continued efforts aim at strengthening the AML/CFT framework, and Kuwait recently joined the Egmont Group.
Boosting Private Sector Employment
The authorities agree with staff’s view that the more constrained budgetary environment puts a premium on structural reforms that promote private sector development, diversification, and job creation. The Kuwait National Development Plan aims to create employment for Kuwaitis through private sector-led economic diversification, improving human capital development, and strengthening institutions.
Small and Medium Enterprise (SME) Development is recognized as a key priority for the authorities. The National Fund for SME Development, and the supporting legal and institutional framework, are key parts of the authorities’ effort to support the creation of jobs for Kuwaitis in the private sector. The National Fund helps Kuwaiti entrepreneurs in more than just funding their business ideas, but also providing a host of services, including working with business development centers and universities in business incubation, capacity building, and encouraging better integration of SMEs into supply chains.
The ongoing business environment reforms have helped to improve Kuwait’s ranking in the Doing Business Indicators. Achievements include the shortening of the time required to start a business, and shrinking the number of procedures needed to start a business or register a property.
The authorities established a one-stop-shop for investors and started an online establishment and registration of companies. They are committed to continue reforming the business environment, enhancing public private partnerships, and creating incentives for entrepreneurship, fostering productivity and competitiveness, and encouraging private initiative and investment. In this regard, their actions will include facilitating access to finance and land, and reducing the burden of administrative procedures.