IMF Executive Board Concludes 2006 Article IV Consultation with Kuwait

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.


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.

On March 10, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kuwait.1


Kuwait’s macroeconomic performance strengthened further in 2004 and 2005. Real GDP expanded at an average rate of 7.5 percent, as a result of higher oil production and buoyant non-oil activity (6.4 percent). After taking into account the terms-of-trade gains, per capita GDP increased by 44 percent to more than $26,000 during the two-year period through 2005. Inflation remained low at 1.3 percent in 2004, although it has risen to almost 4 percent in 2005, due to rising non-oil activity, abundant liquidity, and the delayed effect of the depreciation of the dinar against euro and yen. The weighted stock price index more than tripled during 2003–05, although the pace of increase over the recent two-year period (39 percent annually) has been slower than in other heavily oil-endowed Gulf Cooperation Council (GCC) countries, in part reflecting a tighter monetary policy stance.

The central government budgetary position strengthened further due to higher oil revenues, with the overall fiscal surplus estimated at 24 percent of GDP in 2004/05. Fiscal policy was expansionary in 2004/05, as expenditures increased by more than 14 percent and the non-oil primary deficit in relation to non-oil GDP increased by 4 percentage points to 61 percent. The expansionary fiscal stance was primarily attributable to sharply higher subsidies and transfers and higher capital outlays, while the growth in the wage bill was moderate. Overall, two-thirds of the increase in hydrocarbon revenues is estimated to have been saved in 2004/05, and Kuwait’s government saving rate of 28 percent of GDP in 2004/05 was the highest amongst all GCC countries.

Broad money growth steadily accelerated during 2004–05 and grew by 16.7 percent during the 12-month period through September 2005, despite efforts to tighten the stance of monetary policy. This acceleration is attributable to the expansion of credit to the private sector (13.1 percent of broad money) and an increase in net foreign assets (15.7 percent of broad money). A tightening of monetary conditions since the second half of 2004 was pursued by increasing the benchmark interest rate in line with global interest rate developments, by introducing a ceiling on the credit to deposits ratio in July 2004, and by the re-introduction of market-based monetary instruments in August 2005. Banking supervision has strengthened further, and Central Bank of Kuwait applied the Basel II capital adequacy requirements for conventional banks effective December 31, 2005. The banking sector has been opened further for foreign banks.

The external current account registered annual surpluses averaging $25 billion (37 percent of GDP) during 2004–05, primarily on account of high oil revenues. At an annualized rate, exports of oil and oil products increased by over 47 percent, but non-oil export growth slowed down to 15 percent following a surge of about 70 percent in 2003, because of slower growth of re-exports to Iraq. Import growth remained high as a result of strong domestic economic activity. The real effective exchange rate (REER) of the Kuwaiti dinar depreciated by 5 percent in 2004; however, with the strengthening of the U.S. dollar vis-à-vis other major currencies in recent months, the REER appreciated by 11.7 percent during January–November 2005.

Progress continues on the structural reform front, albeit at a slow pace. Private sector participation in the sectors previously dominated by the public sector has increased (particularly in telecommunications, airlines, and infrastructure development). However, several draft laws (including the privatization and competition laws) aimed at promoting a more market-friendly business environment are awaiting parliamentary approval. The Kuwaitization policy, in place since October 2003 and aimed at increasing the proportion of Kuwaitis employed in the private sector, is being applied in a flexible manner and contributed to a higher proportion of Kuwaiti nationals joining the private sector in recent years.

Executive Board Assessment

Executive Directors commended the authorities for a further strengthening of Kuwait’s macroeconomic position in 2005. The high pace of economic expansion, driven in part by oil-related inflows and terms-of-trade gains, boosted per capita income and contributed to large fiscal and current account surpluses as well as to the rapid accumulation of external assets for future generations. Looking ahead, Directors agreed that Kuwait’s financial position is likely to remain strong over the medium term given the favorable outlook for oil prices. They encouraged the authorities to develop a comprehensive and transparent strategy to manage fiscal surpluses over the medium-term as well as to foster private-sector-led economic diversification, growth and job creation, which are needed to absorb the rapidly growing Kuwaiti labor force.

Directors commended the authorities for continuing to play a constructive role in support of oil price stability. As oil production is currently running almost at full capacity, they supported the large investment plans being implemented to expand capacity, increase refining operations, and almost double petrochemicals production. These actions demonstrated the authorities’ readiness to support global economic expansion through oil market stability and also realize financial gains for the Kuwaiti population.

Directors observed that Kuwait’s overall fiscal position will remain in comfortable surplus over the medium term, and urged the authorities to seize this opportunity to further improve the structure of the budget by gradually increasing capital expenditure, rationalizing subsidies, and achieving a better balance between productive expenditure and fiscal savings. They welcomed the authorities’ commitment to contain recurrent outlays despite intensifying pressures for higher expenditures and new public sector hiring, while increasing spending on health, education, and physical infrastructure. Directors noted that efficient management of the rapidly growing public sector savings will be key to Kuwait’s long-term fiscal viability. Directors supported the authorities’ plan to build up the reserves of the Reserve Fund for Future Generations, and the recent budget announcement to use a part of the fiscal surplus to recapitalize the social security system, but also underscored the importance of implementing a reform program to ensure the social security system’s long-term actuarial soundness. With regard to increasing non-oil revenues, some Directors suggested that consideration be given to the introduction of a Value Added Tax, in coordination with other members of the GCC.

Directors commended the authorities for their prudent conduct of monetary policy, which has helped maintain price stability and the exchange rate peg. They supported the authorities’ intention to keep the exchange rate peg unchanged until the GCC monetary union is formed, and to remain open toward the choice of exchange rate regime under the planned monetary union. Directors observed that the ceiling on the loans-to-deposits ratio introduced in 2004 to tighten monetary conditions has contributed to a deceleration in the rate of credit growth in 2005 and to a rapid buildup of deposits. They suggested, however, that consideration be given to phasing out the ceiling on the loans-to-deposits ratio, in light of the diminished effectiveness of the ceiling and the reintroduction of market-based instruments.

Directors commended the authorities for ensuring that the Kuwaiti banking system is financially sound, well managed, and well supervised. They welcomed the steps taken to further strengthen banking supervision and open further the sector to foreign banks. Directors observed that the continuing upward trend in the stock price index in recent years, while reflecting strong economic fundamentals, should be carefully monitored to assess its potential impact on the financial sector. In this context, they urged the authorities to implement the Financial Sector Assessment Program recommendations relating to the stock market and insurance sector. Directors recommended, in particular, an expeditious passing of capital market and insurance laws, and establishing comprehensive oversight of the stock exchange, investment companies, and the insurance sector. Directors noted that, while the banking system appears to have the ability to withstand any reasonable market correction, there is scope for improved transparency through the implementation of more comprehensive accounting standards for other financial and non-financial companies. Regarding Anti-Money Laundering/Combating Financing of Terrorism, the authorities were encouraged to work toward adopting the legislation currently under review and to authorize the Financial Intelligence Unit to share information with its global counterparts.

Directors urged the authorities to cast structural reforms in the context of a comprehensive strategy aimed at strengthening the private sector, and increasing investment and employment. They encouraged the authorities to expedite the updating of outdated laws and regulations to promote a more market-friendly environment, and to move to market-based pricing of electricity, petroleum products, and water. To promote further private sector participation, a number of Directors also encouraged the authorities to reduce the maximum income tax rate on foreign companies, in line with other GCC countries. Directors urged the authorities to apply the Kuwaitization policy flexibly, so that the competitiveness and profitability of the private sector are not adversely affected, and to intensify their efforts to raise the skills of the Kuwaiti labor force. Directors also encouraged the authorities to consider positive incentive schemes in support of the goals of the Kuwaitization policy.

Directors welcomed the improvements in the quality of economic data. They urged the authorities to increase the timeliness and dissemination of some key economic data. Directors also encouraged the authorities to improve communications between the various government agencies to improve compilation of both the national income and balance of payments statistics. Directors also suggested that the authorities adopt common data standards, in coordination with other GCC countries, as a step toward establishing the convergence criteria for the planned monetary union. They welcomed Kuwait’s contribution to oil market transparency by providing data to the Joint Oil Data Initiative, and urged the authorities to improve the timeliness of oil data provision.

Directors expressed their appreciation to the Kuwaiti authorities for their continued support to low-income countries through their sizeable external development assistance program, including through the Heavily Indebted Poor Countries Initiative.

Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Kuwait: Selected Economic Indicators

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

Fiscal year ending March 31.

Three–month Kuwaiti dinar deposit rate.

Excludes SDRs and IMF reserve position.


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. This PIN summarizes the views of the Executive Board as expressed during the Executive Board discussion based on the staff report.

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