This statement provides information on recent developments in Kuwait that has become available since the staff report was circulated to the Executive Board on March 8, 2005. The new information does not change the thrust of the staff appraisal.

Oil price. After the issuance of the staff report, the WEO oil price projection was revised upward. The upward revision to the oil price projection used in the staff report is significant, ranging between $9–11 per barrel over the medium term (2005–09). As a result, both the fiscal and the external current account balances are projected to register surpluses that are much larger than those reported in the staff report. The overall fiscal surplus is now projected to be 34 percent of GDP in 2005/06, compared with 24.7 percent of GDP reported in the staff report. The external current account surplus is also projected to be 8.5 percentage points higher at more than 40 percent of GDP in 2005. On the assumption that oil prices will remain firm over the medium term, the average fiscal and current account surpluses are projected to be close to 30 percent of GDP and 40 percent of GDP, respectively, during 2006–09.

Oil production and investment in the oil sector. As a key participant in the oil market, Kuwait continues to play an important role in contributing to oil market stability and responded to the fast growing global demand for oil by increasing output. In March 2005, Kuwait produced 2.6 million barrels per day (bpd), about 0.4 million bpd above its current OPEC output quota and recent statements by the authorities indicate that actual production could be increased to 2.75–2.8 million bpd by the end of 2005, if warranted by market conditions.

Monetary developments. Credit to the private sector has slowed down, as expected, following the introduction of the 80 percent ceiling (to be fully effective in July 2005) on the credit (net of provisions) to deposits ratio in July 2004. Credit to the private sector decelerated to an average annual rate of 7.4 percent during the period August 2004-March 2005, compared with an average annual growth rate of 23.2 percent during January 2003-July 2004. At the same time, commercial banks’ deposit base increased at an annual rate of 18.9 percent since the introduction of the ceiling (compared with an annual rate of 9.4 percent in the previous 19 months). As a result, the ratio of credit to the private sector to total deposits declined from 87 percent in July 2004 to 81.3 percent in March 2005. As anticipated, banks shifted their asset composition, channeling the non-loanable portion of the increase in deposits toward foreign assets. Consequently, the net foreign assets (NFA) of the commercial banks increased by 107 percent since the introduction of the ceiling to more than US$5 billion by end-March 2005. Since interbank funding is not eligible for the purpose of meeting the new ceiling, interbank deposits declined by 78 percent during the period August 2004 through March 2005. The Central Bank of Kuwait raised its discount rate by 25 basis points to 5.25 percent on March 23, 2005 in line with the increase in the U.S. Federal Funds rate.

Stock market developments. The Kuwait stock exchange index witnessed a further increase of 33 percent in 2005 (by April 17, 2005), in the fifth year of the ongoing bull market. The sharp increase in the stock price index is a regional phenomenon, supported by continued growth in corporate profitability, record high oil prices, an improved economic outlook, and higher budgetary outlays.