Statement by IMF Staff Representative
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International Monetary Fund
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Kuwait’s 2006 Article IV Consultation reports that its macroeconomic performance has been strong in recent years reflecting sharply higher oil and non-oil activity. 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.

Abstract

Kuwait’s 2006 Article IV Consultation reports that its macroeconomic performance has been strong in recent years reflecting sharply higher oil and non-oil activity. 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.

This statement provides information on recent developments in Kuwait that has become available since the staff report was circulated to the Executive board on February 22, 2006. The new information does not change the thrust of the staff appraisal.

Fiscal developments. The 2006–07 budget framework was announced recently. The budget is based on an oil price assumption of $36 per barrel compared with $21 per barrel assumed in the 2005–06 budget, and the average export price of $47 per barrel estimated to have been received in 2005/06. The total expenditure has been budgeted at KD 10.326 billion, an increase of almost 43 percent over the 2005/06 budget allocation of KD 7.232 billion. The increase is largely on account of KD 2.2 billion allocated to finance a part of the accumulated actuarial shortfall of the Public Institution for Social Security (KPISS). Excluding this transfer to the KPISS, the budget framework envisages an increase of 12.4 percent in total spending over the 2005/06 budget. The increase in wages and salaries (chapter I) is budgeted to be limited at 7.6 percent. However, the allocation for goods and services (chapter II), transport and equipment (chapter III), and capital spending including land acquisition (chapter IV) have been significantly increased from their 2005/06 budget allocations by 31.8, 38.9, and 27.7 percent, respectively.

Oil sector developments. The oil ministry has resumed discussions with parliament over the proposed Project Kuwait bill relating to the development of the country’s northern oil fields. Meanwhile, Kuwait has signed a joint-venture deal with China to build a petrochemical refining complex in China with an investment of over $6 billion.

Monetary developments. The final quarter of 2005 showed a continuation of the trend observed during the first three quarters. Broad money grew by 16.5 percent during the year, mainly due to the dynamism of private sector credit (growing by 14.2 percent of the initial broad money stock). Growth of net foreign assets (NFA), however, decelerated substantially in the final quarter of the year, containing the 12-month growth in relation to broad money at 4.8 percent (down from 15.7 percent as of end-September). These developments are closely linked to the reintroduction of market-based monetary management mechanisms by the Central Bank of Kuwait (CBK), which encouraged banks to switch from foreign assets to CBK bonds and deposits.

Stock market developments. Kuwait has been moderately resilient to the recent correction in stock prices in several GCC equity markets. After growing moderately vis-à-vis other major oil exporting countries in the GCC during 2004–05 (see Box 1 in the staff report SM/06/74, 2/22/06), the weighted Kuwaiti stock price index in the first two months of the year has remained virtually unchanged, despite a modest decline (4 percent) from its peak level in early-December 2005.

GCC Stock Market Change 1/

(Percentage change)

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Sources: Bloomberg and Global Investment House.

All data are end of month.

Shua’a Capital index is a composite index of 14 Arab countries.

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Kuwait: Staff Report for 2006 Article IV Consultation
Author:
International Monetary Fund