IMF Executive Board Concludes 2015 Article IV Consultation with Kuwait

This 2015 Article IV Consultation highlights that decline in oil prices has adversely affected Kuwait's fiscal and current account balances and slowed growth in 2014-15. Real non-oil GDP growth is projected to slow in 2015 and 2016, and pick up to 4 percent in the medium term, supported by government investment in infrastructure and private investment. The fiscal and external positions are projected to deteriorate further in 2015 and 2016, and improve somewhat over the medium term as oil prices and production recover partially.

Abstract

This 2015 Article IV Consultation highlights that decline in oil prices has adversely affected Kuwait's fiscal and current account balances and slowed growth in 2014-15. Real non-oil GDP growth is projected to slow in 2015 and 2016, and pick up to 4 percent in the medium term, supported by government investment in infrastructure and private investment. The fiscal and external positions are projected to deteriorate further in 2015 and 2016, and improve somewhat over the medium term as oil prices and production recover partially.

On November 25, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Kuwait.

The decline in oil prices has adversely affected Kuwait’s fiscal and current account balances and slowed growth in 2014–15. With high financial buffers and substantial borrowing space, the government can smooth the fiscal adjustment in response to the decline in oil prices, and continue to support growth through sizable investment spending. Real non-oil GDP growth is projected to slow in 2015 and 2016, and pick up to 4 percent in the medium term, supported by government investment in infrastructure and private investment. Average inflation is projected to increase to 3.4 percent in 2015 and will remain broadly stable at that level over the medium term, given limited global inflation.

The fiscal and external positions are projected to deteriorate further in 2015 and 2016, and improve somewhat over the medium term as oil prices and production recover partially. The oil price decline has increased the urgency of diversifying the economy and creating high productivity jobs is a priority to reduce Kuwait’s dual dependency on oil revenue and expatriate workers. The government is focusing on reforms to contain current expenditure, prioritize capital expenditure and pursue with policies aimed towards increasing the role of private sector investment and job creation for nationals.

Executive Board Assessment2

Executive Directors agreed with the thrust of the staff appraisal. They noted that Kuwait’s large fiscal and external buffers have cushioned the macroeconomic impact of the fall in oil prices and will facilitate adjustment in the period ahead. Accordingly, Directors encouraged the authorities to take advantage of the available policy space to pursue gradual, sustained reforms to safeguard fiscal sustainability, promote export diversification, and boost private sector participation in the economy.

Directors underscored the need for fiscal consolidation through higher non oil revenue mobilization, expenditure restraint, and further subsidy and public sector wage reforms. In particular, they supported the authorities’ plans to introduce a value-added tax and a business profits tax. Directors also recommended combining domestic and external financing sources to maintain capital spending and preserve the social safety net.

Directors agreed that the pegged exchange rate regime has served Kuwait well and delivered monetary stability. While welcoming the general soundness of the banking system, they encouraged the central bank to remain vigilant and develop its macroprudential policy framework to further strengthen financial sector stability. Continued close oversight of nonbanks should also remain on the policy agenda.

Directors stressed the critical importance of further promoting private employment for Kuwaiti nationals to reduce demands on the budget and transform the country’s development model. Accordingly, they recommended deeper labor market reforms as well as additional efforts to modernize education and training. Directors also encouraged the authorities to implement further reforms to diversify the economy by improving the business environment, stepping up privatization, and strengthening governance.

Directors welcomed Kuwait’s progress in upgrading its regime against money laundering and the financing of terrorism. They also commended efforts to improve the quality and availability of key economic statistics.

Kuwait: Selected Economic Indicators, 2011–16

(Quota: SDR 1,381.1 million)

(Population:4 million; Dec. 2014)

(Per capita GDP: $43,119; 2014 estimate)

(Poverty rate: n.a.)

(Main export: oil)

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

Also includes government entities.

Based on fiscal year cycle which starts on April 1 and ends on March 31.

In 2006/07 KD 2 billion was transferred to partly cover the actuarial deficit of the Public Pension Fund.

In 2008/09, KD 5.5 billion was transferred. KD 1.1 billion is budgeted for each year from 2010/11 to 2014/15.

Excludes investment income and pension recapitalization.

Excludes debt of Kuwait’s SWF related to asset management operations.

Excludes SDRs and IMF reserve position.

Change in the KSE as of May 9, 2012 for 2012.

Does not include external assets held by Kuwait Investment Authority.

1

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.

2

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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

Kuwait: 2015 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Kuwait
Author: International Monetary Fund. Middle East and Central Asia Dept.