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© 2006 International Monetary Fund
April 2006
IMF Country Report No. 06/132
Kuwait: 2006 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Kuwait
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2006 Article IV consultation with Kuwait, the following documents have been released and are included in this package:
the staff report for the 2006 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on December 14, 2005, with the officials of Kuwait on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on February 21, 2005. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a staff statement of March 8, 2006 updating information on recent developments.
a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its March 10, 2006 discussion of the staff report that concluded the Article IV consultation.
a statement by the Executive Director for Kuwait.
The documentlisted below has been or will be separately released.
Statistical Appendix
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
Copies of this report are available to the public from
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INTERNATIONAL MONETARY FUND
KUWAIT
Staff Report for 2006 Article IV Consultation
Prepared by Staff Representatives for the 2006 Consultation with Kuwait
Approved by Lorenzo Pérez and Juha Kähkönen
February 21, 2006
The 2006 Article IV consultation discussions were held in Kuwait from November 30 to December 14, 2005.
The team comprised Messrs. Mansur (head), Delgado, Floerkemeier, and Govil, and Ms. Farahbaksh (all MCD). Mr. Shaalan, Executive Director for Kuwait, also participated in the policy discussions.
The mission met with Mr. Bader Mishary Al-Humaidhi, Minister of Finance; Mr. Abdullah Abdul Rahman Al-Taweel, Minister of Commerce; Sheikh Salem Abdulaziz Al-Sabah, Governor, Central Bank of Kuwait (CBK); Dr. Nabeel Al-Mannae (Deputy Governor, CBK); and other representatives from the government and private sectors.
The previous consultation was concluded on April 25, 2005. The Public Information Notice of the Executive Board’s discussion is available at http://www.imf.org/external/np/sec/pn/2005/pn0563.htm.
Kuwait accepted the obligations of Article VIII on April 5, 1963, and maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions.
Kuwait’s currency is pegged to the U.S. dollar at a fixed exchange rate of KD 0.299 per U.S. dollar since January 2003.
The authorities will consider issuing the Public Information Notice (PIN) and publishing the staff report following the conclusion of the Article IV consultation discussion by the Executive Board.
Contents
Executive Summary
I. Background and Recent Developments
A. Overview
B. Recent Macroeconomic Developments and Structural Reforms, 2004–05
II. Report on Discussions
A. Near- and Medium-Term Outlook Remains Strong
B. Hydrocarbon Sector: Is the Investment Plan Supportive of Global Oil Market Stability and Kuwait’s Growth Potential?
C. Fiscal policy: Improving Resource Management and Ensuring Long-Term Fiscal Viability
D. Monetary and Financial Sector Policies: Promoting Financial Intermediation While Safeguarding Macroeconomic Stability
E. Structural Reform: How can Kuwait Sustain Its Non-Oil Growth Momentum?
F. Statistical and Other Issues
III. Staff Appraisal
Text Boxes
1. Kuwait Stock Market: Recent Developments and Some Characteristics
2. Hydrocarbon Sector Investment Plans, 2006–11
3. Kuwait: How Should the Fiscal Surpluses be Used?
Figures
GCC: Oil GDP as percent of total GDP
Domestic Investment in Selected GCC Countries, 2000–05
GDP Growth and Inflation, 2000–05
GCC Government Saving, 2004
Exchange Rate Movements, January 1990–November 2005
Broad Money and Credit to Nongovernment Sector, 2000–05
Fiscal and Current Account Surpluses, 2000–10
Fiscal and External Current Account Outlook Under Alternative Oil Price Scenarios
Oil Production Increase, 2003–05
Interest Rate Indicators, 2000–05
Text Tables
Kuwait Fund for Arab Economic Development, 2004/05
Tables
1. Selected Economic Indicators, 2001–06
2. Summary of Government Finance, 2001/02–2010/11
3. Summary of Balance of Payments, 2002–10
4. Monetary Survey, 2000–06
5. Selected Economic Indicators and Illustrative Baseline Scenario, 2001–10
6. Financial Soundness and Other Vulnerability Indicators, 2001–05
Appendixes
I. Fund Relations
II. Relations with the World Bank
III. Statistical Issues
Executive Summary
Current setting
Kuwait’s macroeconomic performance has been strong in recent years reflecting sharply higher oil and non-oil activity. Real GDP growth was strong (averaging 7.5 percent during 2004–05); inflation remained low; and the external current account and fiscal surpluses increased sharply. The stock price index has more than tripled during the period 2003–05, including a 67 percent increase in 2005.
Over the medium term, Kuwait’s financial position is projected to remain strong. The large external current account and fiscal surpluses are expected to lead to a buildup of a large stock of financial assets for future generations. However, GDP growth is expected to slow down unless the pace of structural reforms accelerates. There are also downside risks to this favorable medium-term financial outlook since it is based on historically high levels of oil price and output assumptions.
Policy discussions
Kuwait continued to play a constructive role in support of oil price stability. In response to growing world demand, oil production has increased significantly, and a $22 billion plan to expand crude oil capacity to 3 mbd by 2008, increase refining capacity, and almost double the production of petrochemical products is being implemented.
Although the overall fiscal position is projected to remain in a comfortable surplus over the medium term, the staff encouraged the authorities to consider improvements in the structure of the budget by gradually increasing capital expenditure, rationalizing transfers and subsidies, and achieving a better balance between productive expenditure and fiscal saving. Managing the rapidly growing savings fund for future generations effectively will also be key to Kuwait’s long-term fiscal viability.
Monetary policy has been successful in maintaining price stability and the exchange rate peg. The Kuwaiti banking system continues to be financially sound, well-managed and effectively supervised. The continuing upward trend in the stock price index, despite strong economic fundamentals, poses some risk to the otherwise favorable financial sector outlook. Staff urged the authorities to expeditiously legislate a capital market authority law to intensify oversight of the stock market.
Progress on the structural reform front remains slow. The authorities have adopted some measures to allow for a broader role of the private sector in the economy, but the reforms need to be cast in the context of a comprehensive strategy.
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March 10, 2006
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Public Information Notice (PIN) No. 06/35
FOR IMMEDIATE RELEASE
March 29, 2006
International Monetary Fund
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Washington, D. C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
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March 10, 2006