This Selected Issues paper discusses the designing and implementing of Kuwait�s fiscal policy for the medium term. Fiscal policy has a major role to play in supporting macrostability and diversification. The fiscal strategy design and implementation on a yearly basis are based on a few key areas such as determining targets or ceilings for major fiscal parameters for a three-year rolling framework with binding next budget year and indicative two outer years, establishing a clear process for expressing policy objectives and their link to expenditure, etc. The illustrative budget sequencing with the fiscal strategy spearheading medium-term fiscal policymaking and linked to the annual budget process would support fiscal policy implementation.

Abstract

This Selected Issues paper discusses the designing and implementing of Kuwait�s fiscal policy for the medium term. Fiscal policy has a major role to play in supporting macrostability and diversification. The fiscal strategy design and implementation on a yearly basis are based on a few key areas such as determining targets or ceilings for major fiscal parameters for a three-year rolling framework with binding next budget year and indicative two outer years, establishing a clear process for expressing policy objectives and their link to expenditure, etc. The illustrative budget sequencing with the fiscal strategy spearheading medium-term fiscal policymaking and linked to the annual budget process would support fiscal policy implementation.

Designing and Implementing Fiscal Policy for the Medium Term1

Kuwait’s highly volatile fiscal revenues and a non-diversified economy imply that fiscal policy has two important goals: (i) to smooth spending and build precautionary and intergenerational savings; and (ii) to facilitate economic diversification. Going forward, successfully formulating and implementing medium-term fiscal policy require parallel efforts to strengthen the annual budget process and macroeconomic forecasting through fiscal strategy, including medium-term fiscal and expenditure frameworks, and to build and enhance capacity at the Ministry of Finance through the macro-fiscal unit.

A. Introduction

1. Kuwait’s economy is highly dependent on oil income and is vulnerable to oil price volatility. Oil revenues accounted for about 81 percent of total government revenues, including investment income, in 2013. Real revenues exhibited high volatility (Figure 1), which warrants smoothing of spending. Nonetheless, despite being less volatile than revenues, spending also showed considerable volatility, affecting consumption and welfare (Figure 1).2 In addition, the drop in real spending in the 1980s and 1990s when oil prices fell substantially, suggests that the buildup of precautionary savings or a buffer of liquid and safe assets is important to protect the economy against negative income shocks. Realizing this, Kuwait has operated a Future Generations Reserve Fund (FGRF) for the benefit of future generations, permitting oil assets to be diversified into long-term financial investments.3 The size of the FGRF and other reserve funds was estimated at about $500 billion in 2013.

Figure 1.
Figure 1.

Real Revenue and Spending and Oil Price, 1985–2013

(KD billions; unless otherwise specified)

Citation: IMF Staff Country Reports 2014, 334; 10.5089/9781498381307.002.A001

Source: IMF, World Economic Outlook.

2. The concentration of the economy in oil and the prevailing growth model have resulted in declining productivity, crowding out of the non-oil tradable sector, and large public employment. Total factor productivity (TFP) has declined and stagnated since 1970, especially if compared to some other countries. Relative (to the US) income per worker has fallen since 1980 from about three times the US income to about the US level (Figures 23). The tradable sector has become essentially oil-based, with oil exports constituting 86 percent of total exports of goods and services in 2013, suggesting very little export diversification. Most of Kuwaiti nationals, 70 percent, have opted out working in government jobs, which are mostly highly paid.

Total Factor Productivity and Relative GDP per Worker

Figure 2.
Figure 2.

Total Factor Productivity, 1970–2010

(Index, 1970 = 100)

Citation: IMF Staff Country Reports 2014, 334; 10.5089/9781498381307.002.A001

Source: Penn World Tables 7.3; Arezki and Cherif (2010).
Figure 3.
Figure 3.

GDP per Worker Relative to the US

Citation: IMF Staff Country Reports 2014, 334; 10.5089/9781498381307.002.A001

Source: Penn World Tables 7.3.

3. Fiscal policy has a major role to play in supporting macro-stability and diversification. Depending on one large and volatile source of income such as oil, smoothing expenditure, investing, and building reserves are important. It is, however, not sufficient because the current growth model of relying on oil income, government spending, and public jobs would not support productivity gains, diversification, and sustainable growth. In this regard, in addition to smoothing spending and building reserves for precautionary and intergenerational purposes, fiscal policy for the medium-term has another important objective in Kuwait, that of facilitating the development of the non-oil tradable sector.4 Public investment becomes one potential instrument to use, and how much to invest and in which projects are important questions to be addressed.

4. The conduct of fiscal policy in achieving expenditure smoothing, a reserve build-up, and the development of the tradable sector requires several important elements. These include (i) a fiscal strategy, including medium-term macroeconomic and fiscal frameworks, the allocation of revenues among current spending, investment, and saving, and a medium-term expenditure framework with spending ceilings and public investment program; and (ii) the annual budget designed to support these reforms and linked to a medium-term expenditure framework. Based on international practice, the paper provides the main elements of the fiscal strategy and its link to the budget process and provides a way to the design and implementation of fiscal policy in Kuwait.

5. A comprehensive reform agenda to support prudent medium-term fiscal policymaking includes formalizing the development of a medium-term fiscal strategy and medium-term orientation within the annual budget process. This could be achieved by developing three important elements: (i) medium-term macroeconomic framework, which would provide multiyear projections of key economic variables such as GDP, inflation, oil prices, exchange rates, current account, and labor market indicators; (ii) medium-term fiscal framework (MTFF), which would provide multiyear targets or ceilings on aggregate fiscal variables such as overall spending, deficit, and debt; and (iii) medium-term budget or expenditure framework (MTBF or MTEF), which translates the overall budget envelope into a set of multiyear expenditure ceilings and policies for main spending units (e.g. ministries). Comprehensive and transparent reporting is crucial to ensure accountability and credibility.

B. Medium-Term Frameworks and Fiscal Strategy

Importance of medium-term approach to fiscal policy

6. The annual budget cycle encourages more procyclical policy responses during booms and busts. Delinking the annual budget from the short-term volatility in oil revenue, and basing spending decisions on a longer-term perspective is particularly important in preventing volatile annual revenues from translating into expenditure fluctuations that can destabilize the economy and reduce the quality of government spending. During good times when oil prices or production rates are high, a multiyear framework can help governments resist the pressure to increase spending and build up reserves, which can be used in bad times without compromising long-term policy objectives. Medium-term fiscal and expenditure frameworks can help protect priority expenditures and maintain the strategic focus of policy plans. In addition, medium term fiscal framework improve the budget process and outcome through greater clarity of policy objectives, predictability in budget allocations, comprehensiveness of coverage, and transparency in the use of resources.

7. The foundation for the medium-term revenue and expenditure projections is a credible annual budget, which is yet to be fully met in Kuwait. The annual budget is based on a very conservative oil price assumption, which is consistently much lower than actual oil prices. As a result, budget outturns have deviated from budgets. The budget process in Kuwait does not have a medium-term focus and follows largely an annual and input-oriented approach, which hampers focusing on strategic priorities of the government and ministries and the monitoring of output and performance. It also renders it difficult to reprioritize spending in response to short-term fiscal developments. In addition, forecasting of revenue and expenditure has only begun at the newly established macro-fiscal unit at the Ministry of Finance and has yet to be fully integrated in the budget process. The fiscal forecasting capacity is further hindered by lack of regular updates of macroeconomic forecasts and lack of independent validation of forecasts. The work on improving data quality, coverage, and frequency is ongoing at the Central Statistical Office and should continue. In Kuwait, like in other resource-rich countries, using more realistic oil price assumptions in the preparation of the budget is key in avoiding consistent deviations of actual oil prices from the budget and the ad-hoc elements in spending decisions that they often cause.

Fiscal strategy as a vehicle of medium-term fiscal policymaking

8. A simple medium-term framework with a fiscal strategy document should be first put in place. More specifically, in the short term, a simple MTFF would provide a projection of the fiscal balance, non-oil balance and include estimates of government revenues and spending at a more aggregate level. A fiscal strategy document would incorporate the MTFF and translate it to a statement on medium fiscal policy priorities. This document could also contain fiscal risk analysis, indicating the sensitivity of fiscal plans to varying assumptions regarding the economy, the hydrocarbon sector, contingent liabilities, and other uncertain events (see Appendix for more details). In a second stage, a simple MTEF could provide guidelines (envelopes) to line ministries to prepare medium-term spending plans. In the medium term, reforms should aim at developing a more binding framework.

9. A full and effective medium-term framework requires several critical prerequisites, including (i) accurate medium-term macroeconomic forecasts, (ii) a comprehensive and unified top-down budget process, and (iii) credible annual budgets. These requirements which are based on the experiences of countries that have successfully introduced MTEF, explain why the adoption of MTEFs is a relatively recent phenomenon, with mixed success rates. In addition, challenges specific to resource-rich countries include the difficulty to assess long-term fiscal sustainability in the face of uncertain prices and resource stocks and to translate long-term fiscal sustainability into intergenerational equity while responding to investment needs and ensuring high-quality projects.

10. A fiscal strategy is guided by government objectives and fiscal responsibility principles. As argued above, the government’s major objectives include smoothing spending and building precautionary and intergenerational savings and facilitating the development of the non-oil tradable sector. In addition to being guided by these important objectives, fiscal policy should also follow prudent fiscal management principles. In many countries, these include (i) maintaining prudent levels of public debt for fiscal sustainability; (ii) pursuing policies to moderate cyclical fluctuations in economic activity; (iii) exercising prudent management of public sector assets, liabilities, and fiscal risks to avoid burdening future generations; and (iv) ensuring predictability in the level of tax rates and bases.

11. The top-down budget process provides a foundation for formulating the fiscal strategy and strengthens fiscal discipline. First, the aggregate expenditure should be decided based on the fiscal strategy, MTFF, and fiscal rules where applicable, and not by summing up spending of individual ministries. Second, total expenditure should be allocated to ministries to arrive at expenditure ceilings. The Ministry of Finance should focus on establishing and monitoring total expenditure levels rather than negotiating the details of various spending proposals. Line ministries would have the flexibility to propose expenditure details within the respective ceilings. However, the Ministry of Finance would still need to scrutinize the credibility of expenditure projections by line ministries.

12. A flexible approach to building a fiscal strategy incorporates a three-year horizon, a rolling framework, and an annual update. The three-year rolling framework is used by many countries such as France, Sweden, the UK, Australia, and New Zealand. The rolling nature of the framework means that the first year’s targets and ceilings are fixed and binding while those in the second and third years are indicative (e.g. Australia and New Zealand). The fiscal strategy is updated each year and needs to consider updated forecasts, changes in policy, and progress against fiscal principles and rules. Thus, in the following year, the indicative ceilings and targets would form the basis for the update while the deviations from these targets would be rationalized.

13. Given the binding aggregate spending ceiling, the medium-term fiscal framework could make explicit provisions for an uncommitted budget margin to deal with uncertainty in budget items. The size of this margin should be at least 1 percent of expenditure in the first year; 2 percent in the second year; and 3 percent in the third year, in line with international practice. Of the total margin, 1 percent of expenditure per year should be ring-fenced for contingencies in each of the three years, which should be sufficient to meet any unexpected budget overruns. Rules governing allocation of this reserve for contingencies as well as for other purposes needs to be clearly established.

14. To improve accountability and credibility of fiscal policy, the mid-year and annual fiscal reports should analyze the implementation of fiscal strategy and progress against the fiscal principles and rules. The reports should also update the macroeconomic forecasts and report on the fiscal outturns. These reports should mirror the contents of the fiscal strategy and be published on the ministry of finance website.

Incorporating the Development Plan into the fiscal strategy and strengthening capital budgeting

15. Incorporating priorities and projects of the five-year Development Plan into the fiscal strategy and the annual budget requires strengthening of the capital budgeting process and public investment program. The existing procedures and processes in Kuwait do not facilitate efficient rationalization of resources to meet government priorities. The translation of the Development Plan into policy actions is lacking although the four-year government action plan has to be drafted as the new government takes office or new parliament is elected. First time this year, the Development Plan and the annual budget were submitted to parliament at the same time. Capacity to analyze and rank capital projects is underdeveloped, while implementation, monitoring and evaluation of capital projects are weak. Competition of capital investment across different sectors is not systematic.

16. A well-functioning capital budgeting process includes:

  • Establishing priorities – The fiscal strategy incorporating the Development Plan objectives could be used for this purpose. Line ministries could use their fiscal strategy submissions to the ministry of finance to propose projects for funding in line with spending ceilings and sectoral objectives.

  • Encouraging competition for resources – A database of capital project proposals and approved capital projects with the web capability could be developed. The information could include expenditures, physical progress, delays, cost overruns, cost-benefit analysis, and various project progress details. As a result, project ranking from economic and financial perspective should be facilitated. All project proposals across different sectors would be ranked to encourage competition across sectors. Some countries (e.g. Chile) have introduced funds in which the capital spending envelope is open to competition across sectors.

  • Strengthening selection and review processes – Once ranking criteria have been determined, a project appraisal and review process could be established to propose projects to be accepted or rejected. Establishing a centralized gateway process to analyze and rank capital project proposals could improve the efficiency of public investment, which is lacking (see Selected Issues Paper in this volume). A gateway process is an institutional arrangement that empowers the minister of finance to stop or suspend a capital project that cannot demonstrate efficiency or that could endanger overall fiscal discipline. However, responsibility for policy design remains with the sponsoring line ministry. The UK has the gateway system at the Cabinet level that reviews and analyzes capital projects.

  • Ensuring adequate funding – Once reviews had taken place and the capital projects had proved to have satisfactory performance, funding for continuation of existing projects would take precedence over new proposals. New projects would only be considered when funding for existing projects had been allocated. Any project not securing full funding should be deferred or cancelled. The medium term nature of funding capital projects should be incorporated into the fiscal strategy and be within the expenditure ceilings.

  • Improving accountability of capital project performance – Frequently updated reports of the project progress should be published on the ministry of finance website, indicating important project status information.

An illustrative timeline for incorporating fiscal strategy into the updated budget process

17. For effective medium-term fiscal policy, it has to be linked to the annual budget process. The design and implementation of the fiscal strategy would be an integral part of the new budget model. The indicative calendar and sequencing of the updated budget process is shown schematically below (see Table 1 for more details):

Table 1.

Indicative Calendar for Main Stages in the Budget Process

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18. In the first and the second phases, the fiscal strategy document is prepared. In the first phase, macroeconomic projections and fiscal and expenditure frameworks are updated for the upcoming budget year and two outer years. Key policy priorities in line with the Development Plan and the government action plan are specified. In the second phase, total expenditure ceiling is determined for the medium term while spending ceilings for main spending units (e.g. ministries) are specified in line with policy priorities. The ministry of finance (with input from line ministries) clearly specifies the no-policy-change assessment of expenditure and the impact of spending initiatives proposed that are within the aggregate expenditure ceilings for the medium term. A process of the prioritization of spending and linking policy priorities to spending needs to take place. Similar to Ireland and New Zealand, a review team of senior officials and advisers led by the ministry of finance and supported by the cabinet could be set up to deal with this challenge. The review team could also work with ministries and other entities to develop proposals for significant policy, regulatory, service and consequent expenditure changes to support government policy priorities and goals. Once the cabinet agrees on the fiscal strategy document with the binding aggregate spending ceiling for the upcoming budget year and indicative ceilings for the second and third year, it is submitted to parliament. The top-down approach thus enables the cabinet and parliament to focus on overall fiscal policy rather than get mired in details of the budget discussions.

19. In the third and fourth phases, the preparation of budget details start finished by the submission to parliament for approval. The Ministry of Finance issues budget circulars and transmits expenditure ceilings to main spending units that start preparing their budget requests within those ceilings. Line ministries can take the initiative to identify savings to finance new policies. The Ministry of Finance continues to monitor that the total expenditure level is in line with the aggregate ceiling for the upcoming year and that the impact of spending plans for the medium-term by main spending units is not underestimated. While ceilings remain indicative for the period beyond the budget year, they should be regarded as binding on all spending units’ plans that have implications for spending beyond the budget year. The budget is prepared using the latest macroeconomic forecast and payroll and other fiscal data. For instance, personnel spending for each ministry needs to be based on the actual number of persons on the payroll and latest payroll data, while unfilled posts could be included in the ministry of finance budget estimates to be released when the post is filled. After the draft budget is finalized, it is submitted to parliament. Since parliament has already approved the total spending level through the adoption of the aggregate expenditure ceiling, and has been informed of the allocation to main spending units, the discussion of the budget in parliament should not lead to an increase of total expenditure, but rather focus on the allocation of the expenditure to policies, budget lines, and appropriations.

Towards fiscal rules – anchoring fiscal targets in the fiscal strategy

20. A well-designed fiscal rule could be considered as a way of reinforcing multiyear fiscal framework, as it provides an anchor for the formulation of medium-term fiscal targets or ceilings. Different fiscal rules have very different implications for the way fiscal policy delivers fiscal policy objectives and responds to shocks, and policymakers’ choice of appropriate fiscal rules is thus key in ensuring its success.

21. Many countries have resorted to fiscal rules. Fiscal rules are of several types: expenditure, revenue, budget balance, and debt. Each rule has its advantages and disadvantages.5 As illustrated in Bova, Carcenac, and Guerguil (2014), the number of emerging and developing countries with fiscal rules increased substantially in the 2000s (Figure 4). Debt and balanced budget rules are used more frequently than expenditure and revenue rules (Figure 5). Usually debt rules involve certain debt ceilings (e.g. 60 percent of GDP in the European Union), while budget rules use balanced budget in structural or cyclically-adjusted terms (that is, adjusting for economic cycles). Expenditure rules usually involve restraints on the growth rate of spending, for instance, in line with nominal GDP growth. Many countries also use a combination of these rules, usually debt and balance rules, which could mitigate some of the shortcomings of each rule used separately.

Fiscal Rules, 1990–2012

Figure 4.
Figure 4.

Number of Countries with Fiscal Rules, 1990–2012

Citation: IMF Staff Country Reports 2014, 334; 10.5089/9781498381307.002.A001

Source: IMF Fiscal rules database (2012)
Figure 5.
Figure 5.

Type of Fiscal Rules, 2012

(Number of country with fiscal rules)

Citation: IMF Staff Country Reports 2014, 334; 10.5089/9781498381307.002.A001

Source: IMF Fiscal rules database (2012)

22. In commodity exporters, standard fiscal rules are modified to take account of fiscal sustainability or commodity price volatility. In addition to the standard rules, non-resource balance rules and structural balance rules have been used (Baunsgaard et. al. 2012). Non-resource balance rules take into account fiscal sustainability issues and use indicators based on the permanent income hypothesis (PIH), while the structural balance rules adjust for the volatility of commodity prices (e.g. Chile and Russia). Katayama (2012) explores the application of fiscal rules to Kuwait and concludes that non-oil primary balance rule or expenditure rule would have resulted in reduced spending, increasing saving by an additional 25–40 percent of GDP in the five-year period. However, these rules also have their shortcomings. The structural balance rule, while useful in restricting the government from overspending in case of higher-than-expected oil prices, does not provide the optimal amount of spending and saving given the oil production profile, high volatility, and persistence of oil income. The PIH model provides the optimal solution, which is an annuity value that can be consumed forever based on a net present value of oil wealth. It addresses the intergenerational equity concerns but does not deal with income volatility and is sensitive to parameter specifications such as the real interest rate, growth, and oil prices and production that go far into the future.

23. An alternative rule to anchor fiscal targets is a modified expenditure rule that uses a finite-horizon precautionary saving model with investment. The model incorporates investment that affects the growth path, and the finite horizon allows bypassing making stringent assumptions into the infinite future and incorporates the oil depletion profile while focusing on the relevant short and medium term decision horizon (Cherif and Hasanov 2013). For Kuwait, current spending is expected to exceed the optimal path (50 percent of permanent income) while the actual investment rate is below the optimal investment rate of 20 percent of permanent income (Figures 67). These projections are based on a projected decline in oil prices in the medium term (baseline scenario). In addition, since investment in the model directly contributes to the growth of tradable income, investment is to be allocated toward the development of the tradable sector to support growth.6

Current and Investment Spending, 2014–19

Figure 6.
Figure 6.

Optimal vs. Projected Current Spending, 2014–19

(KD millions)

Citation: IMF Staff Country Reports 2014, 334; 10.5089/9781498381307.002.A001

Source: IMF staff calculations.
Figure 7.
Figure 7.

Optimal vs. Projected Investment Spending, 2014–19

(KD millions)

Citation: IMF Staff Country Reports 2014, 334; 10.5089/9781498381307.002.A001

Source: IMF staff calculations.

24. The model also provides the optimal amount of saving after the decision on spending and investment is made. The optimal 30 percent of permanent income is accumulated in safe and liquid assets as it provides insurance in case of negative income shocks. Kuwait Investment Authority (KIA), the country’s sovereign wealth fund, already has accumulated a large amount of foreign assets, some of which are considered safe and liquid such as short-term government bills. The foreign asset accumulation is also made possible by the existing rule that a 25 percent of oil income received by the government goes to the Future Generations Reserve Fund managed by KIA, while the budget surplus is accumulated in the General Reserve Fund.

25. Given the volatile nature of resource revenues, Kuwait could benefit from a flexible fiscal framework rather than a permanent strict numerical target. As discussed above, the framework would include (i) principles for fiscal policymaking, (ii) a requirement for the government to set a target for one or more fiscal indicators, (iii) the content of the fiscal strategy statement in which those targets are set, (iv) the arrangements for reporting performance against those targets; and (v) an escape clause to deal with exceptional circumstances which prevent the government from meeting its fiscal objectives. Procedural rules in a volatile environment thus argue for allowing the Ministry of Finance the flexibility to change its quantitative fiscal targets within a principle-based framework. This indeed suggests a trade-off between a rigid fiscal rule with high risks of becoming obsolete and a flexible yet less credible rule. In that respect, having explicit revision clauses in place (e.g., targets to be reassessed at the revision of the fiscal strategy, for example) would help avoid undermining the credibility of the framework with too frequent changes.

26. The escape provisions should be specified to cover the acceptable reasons for departing from the fiscal principles and rules, including targets and limits. Changes could be permitted when any of the following applies: (i) national security requirements; (ii) natural disasters; (iii) change in the coverage of a budget that affects a policy, target, or limit; (iv) change of government; and (v) material change in the macroeconomic indicators or assumptions underpinning the macroeconomic and fiscal forecasts. Any such changes should be explained in the fiscal strategy, including: (i) reasons for departing from the fiscal principles or rules; (ii) measures the government intends to take to return to compliance; and (iii) period of time the government expects to take to return to compliance with the fiscal principles or rules.

C. Concluding Remarks

27. With a need to diversify away from oil—a major and volatile source of income for the government of Kuwait—fiscal policy has to pursue several objectives. Volatility of oil prices calls for smoothing of spending as well as accumulating safe and liquid assets. Diversification away from one source of income argues for investments in the non-oil tradable sector. The conduct of fiscal policy in achieving these goals would require several important elements: (i) a fiscal strategy, including medium-term macroeconomic and fiscal frameworks, the allocation of revenues among current spending, investment, and saving, and a medium-term expenditure framework with spending ceilings and public investment program; and (ii) the annual budget designed to support these reforms and linked to a medium-term expenditure framework.

28. The fiscal strategy design and implementation on yearly basis are based on a few key areas such as:

  • Determining targets or ceilings for major fiscal parameters for a three-year rolling framework with binding next budget year and indicative two outer years;

  • Establishing a clear process for expressing policy objectives and their link to expenditure;

  • Exercising a clear top-down approach and process for defining ministerial spending ceilings; and

  • Integrating the MTEF, including public investment program, in the budget process.

29. The illustrative budget sequencing with the fiscal strategy spearheading medium-term fiscal policymaking and linked to the annual budget process would support fiscal policy implementation. In addition, the design of procedural fiscal rules and aggregate expenditure ceilings should be explored, which should guide aggregate spending envelope and provide an anchor for fiscal policy. Lastly, the goals and initiatives of the government’s Development Plan need to be incorporated into the fiscal strategy and help steer the implementation of the government’s policy priorities. These would help the government to better achieve its two major goals of smoothing spending and building precautionary and intergenerational reserves as well as facilitate the diversification process.

Appendix I. The Main Components of the Fiscal Strategy

  • Macroeconomic forecasts: The fiscal strategy contains information on the macroeconomic situation and outlook and forecasts for:

(a) The forthcoming budget year and two further years, actual results for the two years prior to the current year (prior to the forthcoming budget year), and the estimated results for the current year of the economic aggregates that are most relevant to the fiscal strategy, including:

  • (i) GDP and its components;

  • (ii) consumer prices and deflators;

  • (iii) unemployment and other labor market indicators;

  • (v) oil and gas prices and production;

  • (vi) exchange rates and other relevant prices;

  • (vii) current account, external reserves, and the balance of payments;

  • (viii) assumptions underpinning the forecasts;

  • (ix) forecasts from international organizations or private sector institutions.

(b) Medium-term macroeconomic forecasts affecting fiscal policy, targets or limits for fiscal rules and compliance with the fiscal responsibility principles.

Fiscal framework: The fiscal framework section of the fiscal strategy contains fiscal forecasts, including the government’s planned fiscal aggregates for:

(a) The forthcoming budget year and two further years, actual results for the two years prior to the current year (prior to the forthcoming budget year), and the estimated results for the current year, including:

  • (i) expenses by total, aggregated economic classification, and functional classification;

  • (ii) revenues by classification, showing types of revenues;

  • (iii) overall and primary balance of revenues and expenses for the consolidated budget;

  • (iv) capital expenditures;

  • (v) level of debt, assets, borrowing/saving, and transfers to the Reserve Funds;

  • (vi) any other information the minister of finance determines is material to the fiscal strategy;

  • (vii) key assumptions on which the above numbers are based;

  • (viii) sensitivity analysis, taking account of possible changes in macroeconomic conditions.

(b) Forecasts for the medium term used in formulating fiscal policies in the fiscal strategy (such forecasts would take account of the impact of changes in demographics and other factors).

  • Fiscal policy: The fiscal framework section of the fiscal strategy also contains the government’s fiscal policy for the forthcoming budget year and two subsequent years, including:

(a) An explanation of the fiscal policies in relation to fiscal responsibility principles and fiscal rules, and any temporary measures to be implemented to ensure compliance, including measures to moderate cyclical fluctuations and process for their reversal;

(b) Revenue policy, including planned changes to taxes and policies affecting oil revenues and other revenues;

(c) Deficit policy, including deficit limits required by or implied by the fiscal rules;

(d) Debt policy and an analysis of debt sustainability;

(e) Asset policy and intergenerational fiscal sustainability analysis;

(f) Expenditure policy, including expenditure priorities, aggregate expenditure intentions, including for the consolidated budget and other budgets; and expenditure ceilings and other targets or limits implied by or required by the fiscal rules;

(g) Fiscal risk statement, including contingent liabilities, any commitments not included in the fiscal forecasts, and all other circumstances which may have a material effect on the fiscal and economic forecasts and which have not already been incorporated into the fiscal forecasts;

(h) Summary table of all fiscal targets or limits for the fiscal rules for the forthcoming budget year and two further years, actual results for the two years prior to the current year (prior to the forthcoming budget year), and the estimated results for the current year;

(i) An assessment of the consistency of the planned fiscal policy, aggregates, and targets or limits for fiscal rules with the fiscal responsibility principles, including a statement of government initiatives to improve policy, service delivery, and the quality of spending, initiatives to reduce barriers to business and to encourage private sector growth;

(j) An explanation of the relationship of the revised fiscal strategy to the previous fiscal strategy and explanation of any significant changes.

Medium-term expenditure framework: The fiscal strategy contains the government’s medium-term expenditure framework for spending units such as line ministries for the forthcoming budget year and two subsequent years, and has information on:

(a) The expenditure priorities and their rationale, including an explanation of how government intends to improve policy, the efficiency and effectiveness of service delivery, the quality of its regulatory activities, and its initiatives to reduce barriers to business and encourage private sector growth in various sectors;

(b) Any expenditure ceilings in addition to those required by fiscal rules;

(c) Expenditure presented by a spending unit or groups for proposed expenditure by economic classification, functional classification, and other methods of presentation;

(d) The public investment program based on the Development Plan, including priorities and rationale, estimated results for the current year and forecast costs for the forthcoming budget year and two succeeding years related to expenditure ceilings;

(e) Actual and forecast nonfinancial performance information at a suitable level of aggregation linked to the budget to show what is planned to be provided and achieved for the proposed expenditure (starting at a time when the government is ready to pursue performance assessment).

Statement of responsibility: The fiscal strategy contains a statement of responsibility signed by the prime minister and the minister of finance attesting to the reliability and completeness of the information in the fiscal strategy and its compliance with the law.

References

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  • Baunsgaard, T., M. Villafuerte, M. Poplawski-Ribeiro, and C. Richmond (2012). Fiscal Frameworks for Resource Rich Developing Countries, IMF Staff Discussion Note 12/04 (Washington: International Monetary Fund).

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  • Hasanov, F. (2013). Optimal Fiscal Policy for Kuwait: How Much to Save and How Much to Invest, Kuwait: Article IV Consultation Report, Selected Issues Papers (Washington: International Monetary Fund).

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1

Prepared by Fuad Hasanov.

2

Standard deviation of the growth rate of real oil prices, revenues, and spending was 0.3, 0.25, and 0.16, respectively, during 1986–2012.

3

The FGRF was established in 1976 with 50% of the General Reserve Fund (GRF) balance. In addition, 25% of all state revenues, including the net income of the GRF, are transferred to the FGRF annually. Kuwait Investment Authority (KIA) manages FGRF assets.

4

For more details on diversification in the GCC countries, see Cherif and Hasanov (2014).

6

For more details, see Hasanov (2013) and Cherif and Hasanov (2013).

Kuwait: Selected Issues
Author: International Monetary Fund. Middle East and Central Asia Dept.