Public Information Notice: IMF Concludes Article IV Consultation with Kuwait

February 22, 1999

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.

On January 29, 1999, the Executive Board concluded the Article IV consultation with Kuwait. 1


Since the completion of reconstruction and restoration of oil output in the years following the 1990-91 regional crisis, the authorities have achieved significant progress in eliminating financial imbalances, rebuilding foreign assets, resolving bad debt problems in the banking system, and upgrading bank supervision and prudential regulation. The fiscal balance shifted to a surplus of 2.6 percent of GDP in 1995/96, compared with large deficits in the previous two years, while the current account surplus continued to rise, reaching 24 percent of GDP by 1996. Real GDP growth increased to 2 percent in 1996, while inflation remained low, reflecting a stable exchange rate, supported by tight fiscal and monetary policies.

Macroeconomic developments in 1997 continued to be favorable as the fiscal position improved markedly, with the surplus reaching 21 percent of GDP in 1996/97, and the external current account surplus rising further to the equivalent to 27 percent of GDP. Real GDP growth accelerated to 2.5 percent, with the non-oil sector growing by 3.9 percent, reflecting the coming on stream of new refinery capacity and strong performance of construction and financial services. Monetary developments were marked by a sharp increase in credit to the private sector related in part to the expansion in stock market-related credit. Prudential regulations and bank supervision were further enhanced, including the introduction of prudential limits on equity-related lending. Owing in part to lower import prices, inflation declined to 0.7 percent. At end-1997, gross international reserves of the Central Bank of Kuwait (CBK) stood at US$3.6 billion, equivalent to three months of imports of goods and services.

In spite of the steep decline in oil prices in 1998 and the loss of export receipts of US$4.6 billion, the current account remained in surplus at 10 percent of GDP. With lower fiscal oil revenues, the fiscal surplus narrowed to 17 percent of GDP in 1997/98 and is expected to revert to a deficit of 7 percent of GDP in 1998/1999. In 1998, real GDP increased by 2.2 percent, with the impact of the oil price decline moderated by higher oil output in the first half of 1998, higher refined production, and the starting of production from the Equate petrochemical project. Growth of credit to the private sector slowed, reflecting the tighter prudential regulations introduced by the CBK and the sharp stock market correction. Broad money growth decelerated to about 2 percent, in line with the slowdown in economic activity. Consequently, aided by a further decline in import prices, inflation fell to 0.5 percent in 1998.

Progress in structural reforms continued during 1997 and 1998, although at a slower pace, with the government reducing its ownership of listed companies through the sale of equity shares (KD 266 million in 1997), and establishing an investment company to assist with the starting up of small and medium-size private enterprises. Legislation on privatization, and foreign direct investment, and the company law have been prepared and are awaiting approval by the National Assembly.

Executive Board Assessment

Executive Directors noted with satisfaction the improvement in Kuwait’s overall macroeconomic situation in 1997, particularly the low inflation rate, and the strengthening of fiscal and external balances. They commended the authorities for their prudent approach toward the utilization of the country’s oil wealth, which had enabled the rebuilding of foreign assets for future generations.

Directors noted that the appropriate policies of recent years, and the accumulated cushion of oil-related assets, had left Kuwait well placed to cope with the effects of the sharp decline in oil prices in 1998, particularly the projected fiscal deficit in 1998/99, the lower current account surplus, and the slowdown in economic activity.

Given the uncertain medium-term outlook for the oil market, Directors welcomed the authorities’ policy response, and their plans to introduce a comprehensive medium-term fiscal reform strategy centered around three components: accelerating privatization; containing the wage bill, in conjunction with labor market reform; and reducing subsidies and transfers. Directors emphasized the need for both revenue and expenditure measures in their fiscal efforts. They welcomed the recent adoption by the government of a wide range of fiscal revenue measures, which they believed would send a strong signal to markets. Those measures were intended to correct price distortions and rationalize the use of public services, by raising existing fees and introducing user charges on services, while protecting the low-income segments of the population. Directors hoped that the National Assembly would act speedily on these proposals. Directors noted that efforts should also be directed at containing the growth of the wage bill,cutting subsidies and transfers, reducing transfers to social security, and limiting social allowances. On the revenue side, they also encouraged the authorities to introduce excises on luxury items, and phase out exemptions on import duties.

Directors looked forward to the next phase of the privatization program, which was expected to encompass the utilities sector, and lay the basis for the privatization of the telecommunications and transport sectors. These actions would not only facilitate the restructuring of the government budget, but also enhance economic efficiency and strengthen private sector participation in the economy.

Directors welcomed the broad consensus on the need for structural reform measures aimed at enhancing the role of the private sector in the economy, encouraging foreign direct investment, reforming the Company Law, and streamlining the regulatory framework. They encouraged the authorities, and the Kuwaiti National Assembly, to approve the relevant legislation in those areas, which would help promote investment and growth, and foster competition and economic diversification. Directors stressed the essential role of private sector development in providing employment opportunities for an increasing number of Kuwaiti nationals, whose skills and salary expectations must meet the demands of the private sector. In this respect, Directors noted the authorities’ efforts to narrow the remuneration gap between the private and public sectors, including by extending social allowances to Kuwaitis working in the private sector, and by improving education and training, as appropriate. Directors, however, stressed the need to preserve labor market flexibility and to keep the reform-related costs within the overall budget constraint.

Directors welcomed the authorities’ recent moves to strengthen the prudential and supervisory framework, which had helped enhance the integrity of the financial system. They noted, in particular, that most of the recommendations of the Basle Committee on banking supervision had been implemented, and praised the Central Bank of Kuwait for its early warning system. However, given the uncertainties surrounding the oil price outlook and the growth prospects in the period ahead, Directors supported the authorities’ intention to remain vigilant in monitoring the quality of banks’ portfolios.

Directors commended the authorities for pursuing an open exchange and trade system, and a conservative and prudent monetary policy in support of the pegged exchange rate arrangement, which had served the economy well thus far. They also commended the authorities for their generous foreign aid policy, despite budgetary pressures.

Directors were encouraged by the improvements that had been made in the quality, currentness, and coverage of economic data, and welcomed the authorities’ intention to participate in the General Data Dissemination System. They encouraged the authorities to make further improvements in statistics, particularly data on national accounts, prices, public finances, and private capital flows.

Kuwait: Selected Economic Indicators, 1995–98

Prel. Est.
1995 1996 1997 1998

(Percent change)
Production and prices
Real GDP 1.0 2.1 2.5 2.2
Real non-oil GDP 3.3 3.5 3.9 2.0
Consumer price index 2.7 3.6 0.7 0.5
(In percent of GDP)
Financial variables1
Total revenue, of which: 50.0 56.1 65.8 65.0
Oil and gas revenue 36.4 36.9 44.3 38.0
Investment income2 10.8 16.4 17.8 24.1
Total expenditures 57.2 53.6 45.2 47.8
Fiscal balance (deficit-) -7.2 2.6 20.6 17.2
Change in broad money (in percent) 9.4 -0.6 3.9 2.2
Interest rates3 7.43 6.98 7.05 7.26
(In billions of U.S. dollars, unless otherwise
External sector
Exports 12.8 14.9 14.3 9.9
Of which: oil and refined products 12.1 14.1 13.5 8.9
Imports -7.3 -7.9 -7.8 -8.3
Current account 5.0 7.1 7.8 2.5
In percent of GDP 18.9 24.0 26.6 9.7
International reserve assets 3.7 3.6 3.6 3.6
In months of imports of goods and 3.5 3.3 3.3 3.2
Real effective exchange rate (percent -5.9 4.3 5.0 - 0.5
Terms of trade (percent change) -0.5 20.4 1.3 -22.6

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

1Public finance data are on a fiscal year basis (July-June).
2Includes income from government foreign assets and transfer of profits of public entities.
3Three-month interbank rate. For 1998, through September.

1Under 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 directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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