IMF Concludes 2003 Article IV Consultation with Kuwait

The staff report for the 2003 Article IV Consultation on Kuwait highlights the economic developments and policies. The macroeconomic position over the medium term under current oil price expectations and the maintenance of a cautious policy stance is projected to weaken, but is not expected to pose sustainability issues. The implementation of the official reform program should be accelerated to further strengthen the fiscal position and create the institutional and legal environment needed for promoting private investment.


The staff report for the 2003 Article IV Consultation on Kuwait highlights the economic developments and policies. The macroeconomic position over the medium term under current oil price expectations and the maintenance of a cautious policy stance is projected to weaken, but is not expected to pose sustainability issues. The implementation of the official reform program should be accelerated to further strengthen the fiscal position and create the institutional and legal environment needed for promoting private investment.

On February 9, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the 2003 Article IV consultation with Kuwait.1


In 2002, overall real GDP declined slightly as oil output fell sharply in line with OPEC-mandated cuts. However, real non-oil GDP growth rose to 5 percent from 3.4 percent in 2001, in part, on account of the increased demand for goods and services associated with Iraqi development. Inflation remained low at about 1.5 percent.

The fiscal position improved, with the overall fiscal surplus rising to 25 percent of GDP in 2002/03. The rise in the surplus reflected, mainly, favorable oil market developments in the last quarter of the fiscal year (first quarter of 2003) and restraint on current expenditures. The external position remained comfortable despite a drop in the external current account surplus to about 12 percent of GDP as imports rose, partly, for inventory build up in anticipation of the Iraq conflict. Net investment income declined reflecting the weaker performance in the international financial markets and the decline in global interest rates. With an increase in capital outflows, net foreign assets of the Central Bank of Kuwait (CBK) declined slightly to the equivalent of about eight months of imports of goods and services.

Growth of broad money decelerated to about 5 percent in 2002 from 13 percent in 2001. While net foreign assets declined, credit growth to the private sector remained robust in response to the low interest rates and rising domestic economic activity. The financial sector continued to perform well. Reflecting the buoyant non-oil activities and ample private sector liquidity associated, in part, with the United Nations compensation payments, the stock market index rose further by 39 percent in 2002 after a 27 percent increase in 2001. Following trends in the global financial markets, the CBK reduced its discount rate twice in 2002, down to the present 3.25 percent. The Kuwaiti dinar-U.S. dollar deposit rate differential was allowed to rise slightly to 63 basis points compared with the historical 50 basis points. The Kuwaiti dinar depreciated in real effective terms by about 1.5 percent.

The macroeconomic position is estimated to have remained comfortable in 2003. Real non-oil GDP growth picked up briskly to about 6.5 percent because of the spillover effects of developments in Iraq and improved domestic confidence. The stock market-has also continued to rise sharply. Concurrently, credit expansion has been brisk and broad money is estimated to have risen by about 13 percent. The external current account surplus is estimated to have improved further to 19 percent of GDP due, in part, to an increase in oil export receipts. With an estimated sharp increase in portfolio and other investments abroad, CBK’s net foreign assets are estimated to have declined to the equivalent of about six months of prospective imports. The overall fiscal surplus for 2003/04 is projected to decline to about 19 percent of GDP. The macroeconomic position is projected to remain manageable over the medium term (2004-2008). The fiscal and external current account surpluses are projected to contract on the basis of the expectation for declining oil prices, official foreign asset position, and the authorities’ intention to follow a cautious fiscal policy.

Progress remained limited on structural reforms. The privatization law, which would allow divestment of major public sector utilities and clarify the domain for the private sector, remains to be approved by the National Assembly. However, the private sector has been encouraged to invest in areas where explicit approval by the National Assembly is not required. Implementation of the Foreign Investment law requires clarification of areas open to foreign investment including 100 percent foreign ownership. The planned revised corporate income tax law, lowering the tax rate from 55 percent to 25 percent, remains under consideration. Moreover, administered prices of publicly supplied goods and services have remained unchanged. Effective October 2003, the authorities formally implemented the Kuwaitization policy to generate employment opportunities for Kuwaiti workers in the private sector. The policy imposed quotas for percentages of Kuwaiti workers to be employed by individual non-government entities. Regarding the financial sector, the Banking law was amended in January 2004, which approves the establishment of foreign banks in Kuwait. The Financial Sector Assessment Program (FSAP) exercise has been completed.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the Kuwaiti authorities for pursuing cautious macroeconomic policies over the past several years, which have resulted in sizeable fiscal and external current account surpluses, a comfortable level of net foreign reserves, and low inflation. They agreed that the macroeconomic outlook over the medium term is likely to remain favorable. Directors considered that the main challenges ahead are to accelerate non-oil economic growth in order to absorb the rapidly growing Kuwaiti labor force and maintain intergenerational equity over the long run, and to reduce the budgetary dependence on oil revenue. They endorsed the official strategy of pursuing structural reforms and fiscal strengthening to achieve these objectives. While noting the likely positive effects of Iraq reconstruction in the period ahead. Directors encouraged the authorities to take advantage of the current favorable macroeconomic conditions and buoyant private sector, and step up the pace of implementation of their strategy. In particular, they encouraged accelerating reforms to reduce state involvement in the economy, promote private investment, and improve the functioning of the labor market.

Directors looked forward to the early passage of the Privatization Law to establish the legal and institutional framework for promoting private investment. In the meanwhile, they encouraged the authorities to move forward with early divesture of public sector activities that do not require explicit legislative action for privatization. They considered that such a step would signal the authorities’ commitment to private sector-led growth and further strengthen the environment for private investment. Directors also called for an early clarification of rules governing foreign direct investment, including the “negative list” under the Foreign Investment Law, and the establishment of a level playing field for domestic and foreign investors in terms of access to the domestic financial markets and tax treatment. In this context, they recommended early enactment of a non-discriminatory corporate income tax.

Directors supported the authorities’ strategy of addressing unemployment pressures through the development of skills needed by the private sector. However, they urged authorities to apply the Kuwaitization policy flexibly in order to avoid adverse effects on the competitiveness of the private sector. They stressed the importance of promoting market-based wage flexibility for the Kuwaiti workforce. In this context, they supported civil service reforms aimed at linking wages to productivity in the public sector. Moreover, in order to minimize the burden on the budget, Directors encouraged the authorities to adopt a plan for rationalizing benefits to workers in both the public and private sectors. There was broad support for linking labor market reforms to state enterprise restructuring and private sector development, to facilitate redeployment of jobs from the public to the private sector.

Directors commended the authorities for maintaining financial system stability through sound macroeconomic policies and effective banking regulation and supervision. They welcomed the FSAP findings that the most critical elements of the systemic liquidity and crisis management policies are in place. They noted that, while some banks are sensitive to fluctuations in equity and property prices, their exposure appears to be manageable. Directors also noted that the newly implemented Islamic Banking Law and the recently amended Banking Law would further strengthen the effectiveness of banking regulation and supervision, and called for determined enforcement of these laws.

Noting the large swings in stock prices, Directors called for steps to strengthen the regulation and supervision of the capital market-including the creation of a single, independent, and accountable regulatory agency to oversee the securities market. There was broad support for the authorities’ plan to encourage development of new financial products and to liberalize rules governing nonresident participation. Directors commended the authorities for the recent strengthening of regulatory and supervisory framework for combating money laundering and terrorism financing.

Directors commended the maintenance of a strong overall fiscal balance in 2002/03 and 2003/04. However, they noted that the non-oil fiscal deficit remains high. They therefore welcomed the authorities’ plans to tighten fiscal policy in the period ahead, notwithstanding the recent rise in oil prices. Directors encouraged the authorities to improve the budget structure by reducing current expenditure, particularly on wages and subsidies, in conjunction with civil service reform and adjustment of prices of goods and services provided by the public sector toward cost recovery. On the revenue side, they stressed the need to boost non-oil revenue, and encouraged the authorities to work with regional partners toward the introduction of the value added tax. Directors supported the authorities’ intention to implement fiscal policy in the context of a medium-term macroeconomic framework by adopting a three-year rolling budget. In this context, they advised the authorities to target a declining non-oil deficit relative to non-oil GDP, based on realistic oil price assumption, in order to cushion the impact of oil revenue volatility and strengthen the counter-cyclicality of fiscal policy.

Directors endorsed the authorities’ policy of maintaining a pegged exchange rate arrangement with the U.S. dollar under the prevailing free exchange and trade system as a first step toward the GCC-wide monetary union. They supported a continued prudent monetary policy, backed by a sound financial system and a tight fiscal policy, to help ensure the stability of the peg. They considered that further strengthening the independence of the central bank will be important to boost the credibility of monetary policy and investor confidence. Directors encouraged the authorities to adjust the ceilings on lending rates to reflect differential risks and improve resource allocation, and to introduce a limited deposit insurance scheme for social welfare reasons. Directors welcomed the progress in trade liberalization and regional integration in the GCC states, observing that it will contribute to the diversification and efficiency of Kuwait’s economy.

Directors commended the progress made in improving the quality and dissemination of economic data, particularly in the areas of public finances, national accounts, and the balance of payments. They encouraged continued progress in improving the quality, timeliness, and transparency of the economic data.

Directors commended Kuwait for its generous financial assistance to developing countries.

It is expected that the next Article IV consultation with Kuwait will take place on the standard 12-month cycle.

Public Information Notices (PINS) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

Kuwait: Selected Economic Indicators

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

The fiscal year was changed from July–June to April–March effective 2001/02.

Includes profits of public enterprises.

Three–month Kuwaiti dinar deposits.


Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.

Kuwait: Staff Report for the 2003 Article IV Consultation
Author: International Monetary Fund