Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

Kuwait: Concluding Statement of the 2013 Article IV Consultation

September 23, 2013

I. Introduction

High oil prices have benefited Kuwait by generating high fiscal and external current account surpluses. Recent domestic political developments have had an adverse impact on fiscal and economic developments in Kuwait. The implementation of the 2011-2014 Development Plan (DP), a public investment program, has lagged behind, and large increases in the public-sector wage bill have undermined the government’s efforts to encourage Kuwaitis to join the private sector. It is vital to agree on an agenda to place the DP on track, improve the business environment and investment climate, and strengthen non-oil growth. The long-term objective should aim toward diversification and job creation for Kuwaitis in the private sector. Building human capital, improving the efficiency of public administration, and removing impediments to physical, legal, and business infrastructure would support these goals. The financial situation of banks is strong, and the banking system is well-regulated by the Central Bank of Kuwait (CBK). Investment companies (ICs) are still deleveraging and restructuring. Establishing a strong fiscal policy framework, providing greater institutional and functional autonomy for the central bank, and developing a more formal macroprudential institutional and policy framework would help strengthen macroeconomic and financial stability.

II. Recent Developments

1. The non-oil economy is projected to have recovered in 2012. Mainly driven by consumption growth, non-oil GDP growth is projected to have increased to 2.2 percent in 2012 from 0.9 percent in 2011, after three years of negative growth in 2008–10. Growth in the oil sector continued to be strong in 2012 with crude oil production reaching capacity, keeping overall projected growth at a similar rate of 6.2 percent in 2012 compared to 6.3 percent in 2011. Average consumer price inflation decelerated to 3.2 percent in 2012 from 4.9 percent in 2011. The average inflation in June 2013 was about 3 percent (year-on-year).

2. Despite rising current expenditures, the fiscal surplus remained high at 33 percent of GDP in 2012, reflecting high oil prices and production. Spending rose by 13 percent, mainly because of a 25 percent public wage hike in April 2012. Capital expenditure underperformed the budget allocation, as continued political uncertainty stalled the implementation of investment projects. High oil export revenues contributed to an estimated external current account surplus of 43 percent of GDP in 2012.

3. Monetary policy has remained accommodative and bank credit growth has picked up. The Central Bank of Kuwait (CBK) reduced the benchmark discount rate to 2 percent in October 2012, which brought down the weighted average deposit and lending rates to 1.53 percent and 4.63 percent, respectively at end-June 2013 (from 1.60 percent and 4.86 percent, respectively in October 2012). Bank credit grew year-on-year (y-o-y) by 6.2 percent in June 2013, reflecting strong growth in personal loans. Excess liquidity of the banking system—bank reserves at the central bank—has been steadily rising as total deposits increased by 9 percent y-o-y in June 2013. Bank lending to non-bank financial institutions contracted by about 19 percent y-o-y in June 2013, representing 6.5 percent of banks’ total credit portfolio.

III. Outlook and Risks

4. The economic outlook is expected to improve in 2013-14. Non-oil growth is expected to increase modestly to 3 percent, driven by a combination of a continued increase in domestic consumption as a result of the 2012 public wage hike and some pick-up in government capital spending. A slight reduction in oil production would bring down total real GDP growth below 1 percent. Average inflation is projected to remain stable at 3.0 percent. Fiscal and current account surpluses are expected to remain large in 2013 at 27 and 39 percent of GDP, respectively. In 2014, non-oil growth is expected to increase to 4.4 percent supported by public capital spending, driving inflation to 3.5 percent.

5. Over the medium term, non-oil growth is projected to accelerate to almost 5 percent. A moderate increase in oil production is expected to further support overall growth. Inflation is projected to increase slightly as growth picks up. The fiscal and current account surpluses are projected to taper if spending continues on the current growth trajectory.

6. Achieving staff’s projected growth in the medium term requires that the government and the parliament reach an enduring political agreement to place the Development Plan and structural reforms on track. Protracted political uncertainty would adversely affect overall business confidence and the investment climate and result in lower non-oil growth than projected.

7. Downside external risks to the outlook could arise from a worsening of global economic conditions, including a slowdown in key emerging market countries, that would translate into lower oil demand and prices. However, fiscal buffers are large, and the authorities have space to smooth public spending in the medium term in the event of an oil price drop. The breakeven oil price—the price needed to balance the budget at current expenditure levels—has risen to $70 in 2013/14 (excluding investment income), which is still relatively low compared to the current level of oil prices.1 Reflecting the recent sharp increases in current expenditures—most of which are hard to reverse—and relatively small non-oil revenues, government expenditure in the baseline would exceed oil revenues by 2017/18, thus increasing the fiscal risk from a sustained drop in oil prices.

8. Tighter financial conditions due to quantitative easing (QE) tapering and/or reemergence of financial stress in the euro area may increase vulnerabilities and result in market and credit risks for banks and non-bank financial institutions, forcing further deleveraging by ICs, and increasing banks’ risk aversion. Banks have direct exposures to the real estate sector (18.5 percent of total loans in June 2013 on a consolidated basis), in addition to equity and real estate collaterals. However, the banking system is adequately capitalized and has ample liquidity to withstand shocks under severe macro scenarios. The recovery of investment companies which are exposed to market risk, particularly those under restructuring, would be further protracted, however.

IV. Policy Challenges and Priorities

A. A Macroeconomic Policy Mix to Strengthen Non-oil Growth

9. Kuwait’s economic performance has lagged behind its GCC peers. Public investment as percent of GDP has been below the GCC average because of delays in the implementation of economic reforms and infrastructure projects. Social and global competitiveness (e.g., ease of doing business) indicators have also been lagging behind other GCC countries.

10. Improving implementation of the public investment program to advance social and physical infrastructure projects would support non-oil growth. The current fiscal position is strong, providing the government with space to undertake the increased capital spending. However, the mission underlines the need to contain current spending, especially in the public wage bill, to provide fiscal buffers in the case of an oil price shock, and to continue to save for intergenerational equity.

11. Ensuring the quality and efficiency of spending is important. The mission emphasizes that the government should give priority to those projects that are enhancing growth. The mission also stresses the importance of establishing a framework for coordination among the agencies responsible for the delivery of infrastructure projects to ensure timely implementation.

12. Over the medium to longer term, oil wealth should continue to be conserved for future generations. Staff’s analysis shows that the current fiscal balances are not consistent with intergenerational equity if spending continues on its current path. In the medium term, fiscal restraint of about 8 percent of GDP through lower current spending growth and higher non-oil revenues is required to reduce non-oil deficit gradually over the medium term.2 The implementation of the proposed measures to contain the non-oil deficit should, however, commence in the near term, since delays would result in the widening of this deficit and require larger adjustment in the future.

13. Containing the increase in government jobs and wages should remain the key focus. Moreover, government job creation and increases in public sector wages reduce incentives for nationals to work in the private sector. Similarly, the large subsidy bill reduces the fiscal space for the much needed social and infrastructure investments. Subsidies, particularly for electricity and fuel subsidies (over 6 percent of GDP) engender wasteful consumption and need to be targeted. A gradual alignment with international prices while ensuring that a social safety net is in place, would in the long run increase overall efficiency and generate more fiscal space. A communications campaign that raises awareness about the cost of subsidies and the benefits of reform is essential to generate broad public support.

14. The mission underscores the importance of developing non-oil revenue sources. Little progress has been made in building the non-hydrocarbon tax system. The only major reform took place in 2008, when the corporate income tax (CIT) rate was changed from a progressive to a flat rate of 15 percent for foreign companies. The existing CIT could be applied to Kuwaiti companies. The mission will also encourage the authorities to work in concert with the other GCC countries in the implementation of the value added tax.

15. The government will benefit from developing a formal medium-term budget framework and strengthening the capacity of the macro-fiscal unit. This would better integrate the five-year DP into the annual budget planning process, look at the impact of current year commitments in a multi-year context, and identify fiscal risks on the revenue and expenditure sides. To support this framework and strengthen controls on line ministries, the introduction of Government Financial Management Information System (GFMIS) is important.

16. The current accommodative monetary policy stance is appropriate. Current liquidity conditions are supportive of emerging demand for credit. Banks should continue to be vigilant toward credit risks and continue to strengthen risk management. In the context of the currency basket exchange rate peg, in the event of a tightening of global financial conditions, the authorities should continue to be proactive in liquidity management and the use of macroprudential policies to contain emerging financial risks. The mission sees merit in further developing the domestic money market.

B. Diversification and Job Creation for Nationals in the Private Sector

17. Economic diversification into areas with potential for greater national employment should be a key priority. The rapidly increasing national labor force calls for a sustained increase in non-oil growth, investment in education, and labor market reforms. At the same time, reducing Kuwait’s dependence on oil requires reforms to spur diversification. In addition to identifying strategic areas for diversification, structural reforms will be required for improving the business environment, promoting a greater role for small and medium enterprises, coordinating with the private sector in setting up skills improvement programs, and enhancing the educational quality and vocational training of nationals. The state is creating special economic zones, which will partly alleviate the scarcity of land availability to the private sector. Promotion of export-oriented industries would further support diversification efforts. An avenue to improving export diversification would be to enhance current non-oil exports and support the entry into new product markets to generate productivity gains. Manufacturing has strong potential to create a mix of various tradable goods, and there is also scope to expand the role of tradable services.

18. There is a need for increasing the transparency, governance and effectiveness of public administration. The adoption of the anti-corruption and anti-money laundering laws and the establishment of the anti-corruption authority are part of the authorities’ efforts to address these issues. The authorities are streamlining some bureaucratic processes, and are making progress to reduce the lag for issuing licenses for new businesses through the establishment of a single-window system.

19. The passage of a number of new laws is a step in the right direction to encourage private sector development. The passage of the new Company Law, the establishment of an institutional framework for public-private partnerships (PPPs) and the recently introduced Direct Investment Promotion Law are aimed at enhancing the confidence of investors and increasing investments in Kuwait. Several new pieces of legislation are still in development, including laws for bankruptcy, transparency, public tenders, and competition. At the same time, measures such as the writing-off interest payments and rescheduling a part of the household debt create moral hazard for banks and borrowers, are counterproductive to building an efficient financial culture and a credible business environment, and should be avoided in the future.

20. Well-functioning local debt markets can make a vital contribution to the efficiency of financial intermediation. A deep and liquid domestic debt market will provide longer-term or more competitive sources of funding for public debt as well as corporate, housing, and infrastructure investment than may be available from the banking system. The government and the central bank have an important role in this process of developing the legal, institutional and regulatory infrastructure. The central bank has taken initiatives to develop the yield curve by issuing 3- and 6-month maturity CBK bonds and 1- to 10-year maturity Treasury bonds. In the future, the central bank could consider publishing an issuance calendar, increasing the size of issuances, and activating a price-based auction system when circumstances warrant, to create a more liquid benchmark yield curve.

21. An active labor market policy is required to encourage nationals to enter private sector jobs. The existing subsidy system to enhance the salaries of Kuwaitis working in the private sector, which was meant to be temporary, has become open-ended and proliferated in the budget. The recent increase in government salaries has once again widened the wage gap between the public and the private sectors and eroded the subsidy. Closing the gap between public and private sector wages by containing public-sector wage and employment growth is important. An integrated plan for job creation in the private sector is called for, some elements of which will include coordinating with the private sector in setting up skill improvement programs, enhancing the educational quality and vocational training, promoting female labor force training and participation by improving women’s access to managerial, technical, and vocational disciplines, and encouraging entrepreneurship. The government’s focus on developing small and medium-sized enterprises has the potential to improve economic diversification and create employment.

C. Strengthening Macroeconomic and Financial Stability

22. High capitalization, continued profitability, declining non-performing loans (NPL), and high provisioning of the banking system support financial stability. Banks are well regulated by the CBK and had a combined capital adequacy ratio of 18 percent (Tier 1 capital of 16 percent) at end-2012. Gross NPLs declined to 4.4 percent at end-June 2013 from 4.9 percent at end-2012. Banks had a provisioning ratio of 105 percent at end-June 2013. Banks’ exposure to ICs constitute only 4.3 percent of total lending at the end of 2012, and they are fully provisioned against the troubled ICs, mitigating credit and investment risks from the ICs sector.

23. The central bank further enhanced regulation in 2012 to strengthen the banking system, which the mission welcomes. It introduced a stable funding ratio requirement replacing the loan to deposit ratio, corporate governance codes, draft guidelines for the implementation of Basel III, and imposed stricter provisioning norms. Nevertheless, the banking system’s large exposure to the real estate sector needs close monitoring, considering that some of the real estate companies are still making losses. While the CBK already has time-varying loan-to-deposit ratios to alleviate procyclicality, time-varying loan-to-value ratios could help contain excessive exposure to the real estate sector and reduce credit concentration.

24. The expansion of Kuwaiti banks abroad is an opportunity to diversify their portfolio and earnings but also poses risks. CBK is collaborating, engaging, and sharing information with other host supervisors to help assess the financial condition of subsidiaries of Kuwaiti banks. In line with the Basel Committee views, CBK should continue to cooperate with the most important host supervisors of Kuwaiti banks. Going forward, improvements in the resolution framework, consistent with the Financial Stability Board guidelines would help facilitate the coordinated resolution of financial institutions that are active in multiple countries.

25. The independence of the central bank should be strengthened. The CBK should be provided with an enhanced mandate for institutional and functional autonomy, balanced by strengthened governance and accountability. To build on the current progress in improving regulation and supervision, the development of a more formal and transparent macroprudential framework would be desirable. It should entail assigning the mandate for financial stability to the CBK, and defining a coordination framework. Strengthening the CBK’s autonomy along with the legal underpinnings to establish and chair an appropriate form and mechanism of coordination for financial stability, with both preventive and crisis management responsibilities would enhance the ability of the authorities to deal with systemic risk.

26. Expediting the restructuring for some ICs, further strengthening the regulatory oversight, greater information disclosure, and consolidation are needed to strengthen the ICs sector. Ongoing improvements in financial sector regulation and supervision by the Capital Markets Authority are welcome. The ICs sector continued to record losses in 2012, though progressively lower since 2008. ICs continue to be vulnerable to swings in domestic and international financial and real estate markets. In the absence of an adequate bankruptcy/restructuring framework, the restructuring process has remained protracted. The authorities are currently working towards implementing a resolution framework in consultation with the World Bank. A thorough review of the investment companies segment, with particular focus on their objectives and role in the economy, and financial viability, is recommended.

27. The new anti-money laundering (AML) law is a welcome development. The Kuwaiti cabinet recently approved a draft decree, authorizing the creation of a new financial investigation agency in line with Article 16 of Law 106/2013 regarding money laundering and terrorist finance. The mission looks forward to the establishment of a fully operational and independent Financial Intelligence Unit.

D. Other Issues

28. While there has been good progress in improving Kuwait’s statistical system, the mission encourages the authorities to further their efforts in all areas of economic data.

The mission thanks the authorities for their excellent collaboration, and open and constructive discussions.

Table 1. Kuwait: Selected Economic Indicators, 2007–14
(Quota: SDR 1,381.1 million)  
(Population: 3.58 million; Dec. 2010)  
(Per capita GDP: $37,039; 2010 estimate)  
(Poverty rate: n.a.)  
Main exports: oil and gas
            Prel. Proj.  
  2007 2008 2009 2010 2011 2012 2013 2014

Oil and gas sector


Total oil and gas exports (billions of U.S. dollars)

59.1 82.6 48.9 61.8 96.7 113.7 108.3 104.9  

Average oil export price (U.S. dollars/barrel)

68.4 92.2 61.5 77.7 103.3 107.1 107.1 104.0  

Crude oil production (millions of barrels/day)

2.57 2.68 2.26 2.31 2.66 2.98 2.93 2.93  
  (Annual percentage change, unless otherwise indicated)  

National accounts and prices


Nominal GDP (market prices, in billions of Kuwaiti dinar)

32.6 39.6 30.5 34.4 44.3 51.3 51.7 52.3  

Nominal GDP (market prices, in billions of U.S. dollars)

114.7 147.4 106.0 119.9 160.7 184.5 186.1 188.1  

Real GDP (at factor cost)

6.0 2.5 -7.1 -2.4 6.3 6.2 0.8 2.6  

Real oil GDP

-4.7 6.5 -12.9 0.5 14.2 11.7 -2.0 0.0  

Real non-oil GDP

14.7 -0.5 -3.5 -3.9 0.9 2.2 3.0 4.4  

CPI inflation (average)

5.5 6.3 4.6 4.5 4.9 3.2 3.0 3.5  

Unemployment rate (Kuwaiti nationals)

6.1 4.9 3.6 2.9 3.4

  (Percent of GDP at market prices)  

Investment and savings



20.5 17.6 18.0 20.3 16.4 15.1 16.4 18.1  


3.3 3.5 4.8 5.5 4.5 3.8 5.3 6.6  


17.1 14.1 13.2 14.8 11.9 11.3 11.1 11.5  

Gross national savings

57.2 58.5 42.3 52.6 59.5 58.3 55.2 55.8  


55.2 46.8 50.6 50.3 55.8 54.9 53.5 51.5  

Private 1

2.1 11.7 -8.3 2.3 3.7 3.4 1.7 4.3  
  (Percent of GDP at market prices)  

Budgetary operations2



67.9 64.3 63.8 65.9 73.2 70.4 68.9 68.6  


51.6 52.8 52.7 54.1 62.0 58.3 56.4 53.8  

Non-oil, of which:

16.3 11.5 11.1 11.7 11.2 12.1 12.5 14.8  

Investment income

13.1 8.7 8.2 8.1 8.1 8.8 9.1 11.3  


28.1 48.5 35.3 43.5 36.5 37.0 41.5 43.5  

Expense 3

24.0 44.1 30.7 38.0 32.2 33.0 35.7 36.6  


4.1 4.4 4.6 5.6 4.4 4.1 5.9 6.9  


39.8 15.8 28.4 22.3 36.7 33.4 27.4 25.1  

Domestic financing

-3.1 -4.6 -1.8 1.1 -0.2 -1.8 -3.2 -1.7  

External financing

-36.7 -11.2 -26.7 -23.4 -36.5 -31.7 -24.2 -23.4  

Non-oil balance (percent of non-oil GDP) 4

-50.2 -56.4 -77.5 -89.6 -86.1 -89.9 -97.0 -95.1  

Total gross debt (calendar year-end)5

7.0 5.3 6.7 5.9 4.5 3.4 2.4 2.4  
  (Percent change; unless otherwise indicated)  

Money and credit


Net foreign assets6

3.1 33.1 24.1 -0.5 21.1 21.3 17.5 8.7  

Claims on nongovernment sector

35.1 16.7 6.1 1.9 2.6 3.2 7.7 8.0  

Kuwaiti dinar 3-month deposit rate (year average; in percent)

5.0 3.4 1.7 1.3 1.1 1.0 ... ...  

Stock market unweighted index (annual percent change)7

24.7 -38.0 -10.0 -0.7 -16.4 2.1 ... ...  
  (Billions of U.S. dollars, unless otherwise indicated)  

External sector


Exports of goods

62.6 87.0 54.4 67.1 103.0 120.1 115.1 111.9  

Of which: non-oil exports

3.5 4.4 5.5 5.3 6.2 6.4 6.7 7.0  

Annual percentage change

6.4 25.1 26.5 -3.4 17.0 2.7 4.9 3.9  

Imports of goods

-19.1 -22.9 -18.5 -19.4 -22.1 -22.6 -24.0 -25.9  

Current account

42.2 60.2 28.3 37.0 67.2 79.8 72.1 71.0  

Percent of GDP

36.8 40.9 26.7 30.8 41.8 43.2 38.7 37.7  

International reserve assets8

15.9 16.7 17.7 18.7 23.0 25.8 27.6 29.4  

In months of imports of goods and services

5.9 5.3 6.6 6.4 6.9 7.3 7.4 7.3  

Memorandum items:


Exchange rate (U.S. dollar per KD, period average)

3.52 3.72 3.48 3.49 3.63 3.60      

Nominal effective exchange rate (NEER, period average)

-2.1 2.9 -3.6 -0.3 0.5 1.6      

Real effective exchange rate (REER, period average)

-0.3 7.8 -1.0 0.9 1.6 1.6      

Sovereign rating (S&P)

AA- AA- AA- AA- AA AA      

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

1 Also includes government entities.

2 Kuwaiti fiscal year ending March 31, e.g. 2007 refers to fiscal year 2007/08.

3 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 were transferred. KD 1.1 billions are budgeted for each year from 2010/11 to 2014/15.

4 Excludes investment income and pension recapitalization, and after transfers for FGF (fiscal year).

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

6 Excludes SDRs and IMF reserve position.

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

8 Does not include external assets held by Kuwait Investment Authority.

1 The production level is assumed at 2.93 million barrels per day in 2013.

2 Staff uses a permanent income hypothesis model to compute the fiscal sustainability benchmark based on $89/barrel in 2018 and remaining constant in real terms thereafter for a horizon of 65 years.


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