Statement by the IMF Staff Representatives

The strong economic and financial position of Kuwait has improved further, but inflation has risen. The nation has made significant progress on the issues raised in the 2007 consultation. Kuwait’s integration into the global economy has been increasing in recent years. Global integration is underpinned by active membership in global and regional trade initiatives and an ongoing push to liberalize domestic regulations. Both the external current account and fiscal positions are projected to remain in large surplus, albeit at declining levels owing to the high import intensity of the planned investment projects.

Abstract

The strong economic and financial position of Kuwait has improved further, but inflation has risen. The nation has made significant progress on the issues raised in the 2007 consultation. Kuwait’s integration into the global economy has been increasing in recent years. Global integration is underpinned by active membership in global and regional trade initiatives and an ongoing push to liberalize domestic regulations. Both the external current account and fiscal positions are projected to remain in large surplus, albeit at declining levels owing to the high import intensity of the planned investment projects.

1. This statement summarizes information that has become available since the staff report on Kuwait was circulated to the Executive Board on April 3, 2008. The new information does not change the thrust of the staff appraisal.

2. Kuwait’s Government resigned on March 17, partly reflecting difficulties in reaching consensus with parliament on public expenditures. Subsequently, Emir Sheikh Sabah Al-Ahmad dissolved the parliament and set new elections for May 17, 2008. The previous government remains in office as caretaker.

3. The state budget for 2008/09 that had been approved by the Council of Ministers and submitted to parliament in January 2008 has already taken effect. It will be formally issued by Amiri decree to become law. The parliament elected in May will have the right to review all decrees issued in the absence of parliament and may approve them with or without amendment.

4. Inflationary pressures continued. Inflation declined somewhat to 6.7 percent (y/y) in November, but subsequently rose to 7.5 percent (y/y) in December 2007. In addition to the global increase in commodity and food prices, inflation was fuelled by a 12.6 percent increase in rents. As of end-March 2008, the Kuwaiti Dinar/U.S. dollar exchange rate had appreciated by 8.2 percent since the move to a basket peg in May 2007. In January 2008, the Central Bank of Kuwait (CBK) cut the REPO rate by 50 basis points to 3.5 percent and the discount rate from 6.25 to 5.75 percent.

5. On March 24, 2008, the Central Bank of Kuwait (CBK) took several measures, with a view to contain consumer credit growth, in part by making bank lending less attractive. These measures include: (a) reducing the maximum monthly installment than can be charged under consumer and installment loans from 50 to 40 percent of clients’ net salary or monthly income, and to 30 percent for pensioners; (b) reducing the maximum interest rate on such loans from 4 to 3 percent above the discount rate; (c) fixing the interest rate on this type of loans for five years instead of allowing it to change with changes in the discount rate; and (d) prohibiting banks from charging interest on this type of loans upfront. The CBK has also intensified efforts through moral suasion to ensure bank lending remains prudent.

6. Kuwait’s stock market index gained 14 percent during the first quarter of 2008, following its 24 percent gain in 2007.

7. Recent data indicate that imports in 2007 were higher by $3 billion than estimated in the staff report; exports were broadly in line with estimates.

8. The Kuwait planning council has recently released an ambitious five-year plan (2009-14) that envisages significant reforms to boost the non-oil economy and attract more foreign investment to improve Kuwait’s competitiveness as a financial hub in the region. The plan proposes speeding up of privatization, including reducing the government share in land ownership from the present 90 percent. At the same time, the plan calls for large investments in infrastructure. Rationalization of the welfare system is also envisaged.

Kuwait: 2008 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Kuwait
Author: International Monetary Fund