IMF Executive Board Concludes 2012 Article IV Consultation with Kuwait

Public Information Notice (PIN) No. 12/60
June, 15, 2012

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 June 15, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Kuwait on a lapse of time basis. Under the IMF’s lapse of time procedures, the Executive Board completes the Article IV Consultations without convening formal discussions.

Background

The 2012 consultation discussions were held against the backdrop of significantly higher oil revenues for Kuwait, a product of higher global oil prices and an increase in oil production. The policymaking landscape changed significantly in 2011 and early 2012. After six cabinet resignations in the past five years, the Prime Minister resigned in late 2011 and new Parliamentary elections were held in early February 2012, producing significant gains for the opposition. A new government was formed shortly after.

Real Gross Domestic Product (GDP) growth in 2011 is estimated at around 8¼ percent, supported by a 15 percent increase in oil production. Higher oil revenues resulted in an increase in Kuwait’s current account and fiscal surpluses to over 41 and 30 percent of GDP, respectively. Growth in non-oil economic activity was moderate and is estimated at about 4½ percent in 2011, primarily driven by higher government expenditure—the government’s wage bill and capital expenditure are estimated to have increased by almost 20 percent in FY 2011/12. Banks’ private sector credit growth continued to be weak, at about 2½ percent, held back largely by a decline in lending to investment companies (ICs).

Headline inflation in 2011 increased to about 4¾ percent, from 4 percent in 2010, as food inflation increased to almost 9¼ percent (8¼ in 2010). On the other hand, nonfood inflation remained relatively subdued at 3½ percent, although somewhat higher than the almost 3 percent observed in 2010. Equity prices in the Kuwait Stock Exchange (KSE) came under renewed downward pressure and the stock market’s unweighted index declined by almost 16½ percent—its fourth consecutive annual decline—although it showed some rebound in the first four months of 2012.

The financial sector faced a mixed environment in 2011. The banking sector remained well capitalized, liquidity conditions continued to be favorable, and lending to some sectors strengthened. Nevertheless, banks’ profits remained largely flat due to a significant buildup in provisions. ICs hit renewed setbacks due to adverse market conditions and the reemergence of global liquidity strains. Average equity prices of ICs declined by almost 27 percent in 2011, which brought the cumulative decline vis-à-vis August 2008 to almost 79 percent.

Executive Board Assessment

In concluding the 2012 Article IV Consultation with Kuwait Executive Directors endorsed staff’s appraisal, as follows:

The economic outlook for 2012 is broadly positive. Economic recovery is expected to strengthen, led by high government expenditure—particularly wages and capital expenditure. High fiscal and external surpluses are expected to persist. Inflation is projected to moderate slightly due to a decline in global food inflation. Low implementation rates of the capital budget and legislative bottlenecks could, however, dampen the recovery.

Near term economic policies should continue to remain supportive. While the supportive fiscal stance is appropriate and has been called for in recent years in view of still-moderate economic growth and low inflationary pressure, the recurrent nature of expenditure growth increases the rigidity of the budget and complicates short-term fiscal management. Inflation is projected to remain low, but inflation risk is on the upside and the authorities should be ready with a strategy for fiscal adjustment if inflationary pressures build up. This strategy should safeguard the capital budget as much as possible. The real exchange rate is broadly in line with fundamentals.

Kuwait has significant fiscal space but the country is now at a crossroads as regards conserving wealth for its future generations. Kuwait’s non-oil primary deficit is above the estimated baseline benchmarks that take into account intergenerational equity in the distribution of oil wealth. Furthermore, rising public sector wage and pension costs and rapid population growth are expected to exert pressures on public finances in the medium term. If Kuwait is to preserve wealth equally for its future generations, fiscal consolidation will be needed in the medium term.

Overall, there is a need to improve the productivity and welfare impact of government spending. Reallocating government expenditure toward capital expenditure would enhance non-oil GDP growth and improve the long-term outcomes of the fiscal accounts, while improving the productivity of government expenditure and contributing to the diversification objectives of the DP. In this connection, the authorities are encouraged to improve the government’s capacity to implement the capital budget, contain the growth of the public sector wage bill, avoid a further buildup of the pension system’s unfunded liabilities, and avoid new measures that would further increase current expenditures. The introduction of a VAT would be a step forward. The adoption of a medium-term budget framework and a well-designed fiscal rule could improve fiscal management. Finally, the phased retargeting of fuel-related subsidies to the most vulnerable segments of the population should be part of a medium- to long-term fiscal reform program.

Legislative and other reforms are needed to improve Kuwait’s business environment and employment opportunities for Kuwaitis. Specific attention should be given to upgrading the education system to make it attuned to the needs of the business sector. Corporate governance should be enhanced by strengthening institutions’ board member composition and member roles, and enforcing the appropriate implementation of auditing and reporting standards. On the legislative side, the authorities should proceed with modernizing legislation to enhance the business environment, taking into account best international practices to avoid the pitfalls of recent legislative experience. Finally, the authorities are encouraged to undertake a comprehensive review of business procedures and requirements with the view to streamlining them.

The authorities are encouraged to continue to be vigilant toward existing and emerging financial sector risks. To this end, they should maintain their strategy of building precautionary provisions and retained profits by banks, continue to enhance ICs supervision, and develop the needed tools for ICs resolution. Furthermore, in developing a new and improved national legislative base, the authorities should continue to take into account the specific nature of the central bank’s operations and the need to strengthen and preserve its operational independence.

There has been significant progress in improving Kuwait’s statistical system, but further improvements are needed. In this regard, the authorities are encouraged to provide the needed resources to the Central Statistical Bureau.


Kuwait: Selected Economic Indicators, 2007–13
 
(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. Proj.
  2007 2008 2009 2010 2011 2012 2013
 

Oil and gas sector

             

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

59.1 82.6 48.9 61.8 96.7 114.4 105.4

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

68.4 92.2 61.5 77.7 103.3 113.4 109.0

Crude oil production (millions of barrels/day)

2.57 2.68 2.26 2.31 2.66 2.90 2.80
  (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 35.6 47.2 54.3 53.6

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

114.7 147.4 105.9 124.3 171.2 195.3 192.8

Real GDP (at factor cost)

6.4 4.3 -7.8 2.4 8.3 6.6 1.8

Real oil GDP

-4.7 5.4 -12.9 0.7 14.9 8.4 -3.4

Real non-oil GDP

15.3 2.7 -4.8 3.4 4.5 5.5 5.2

CPI inflation (average)

5.5 10.6 4.0 4.0 4.7 4.4 4.1

Unemployment rate (Kuwaiti nationals)

6.1 4.9 3.6 2.9 3.4 ... ...
  (Percent of GDP at market prices)

Investment and savings

             

Investment

20.5 17.6 18.0 19.1 16.3 16.7 19.3

Public

3.3 3.5 4.8 5.3 4.9 5.4 6.6

Private1

17.1 14.1 13.2 13.8 11.4 11.3 12.7

Gross national savings

57.2 58.5 44.7 49.9 57.7 61.0 58.8

Public

55.2 46.8 50.6 49.3 50.7 51.5 50.0

Private 1

2.1 11.7 -7.6 0.7 7.0 9.5 8.8

Savings/investment balance

36.8 40.9 26.7 30.8 41.4 44.2 39.5
  (Percent of GDP at market prices)

Budgetary operations2

             

Revenue

68.0 64.3 63.2 64.0 66.2 67.9 65.3

Oil

51.6 52.8 52.2 51.8 54.9 56.3 52.7

Non-oil, of which:

16.4 11.5 11.0 12.2 11.3 11.7 12.6

Investment income

13.1 8.7 8.1 8.8 8.5 9.0 9.8

Expenditures

28.1 48.6 35.0 41.7 35.6 36.9 40.2

Expense3

24.0 44.1 30.4 36.4 30.7 31.1 33.4

Capital

4.1 4.4 4.6 5.3 4.9 5.8 6.8

Balance

39.8 15.8 28.2 22.3 30.6 31.0 25.1

Domestic financing

-3.1 -4.6 -1.7 2.0 -0.5 -1.0 -1.0

External financing

-36.7 -11.2 -26.4 -24.3 -30.2 -30.0 -24.0

Total gross debt (calendar year-end)4

7.0 5.3 6.7 5.7 4.3 3.7 3.8
  (Changes in percent of beginning broad money stock)

Money and credit

             

Net foreign assets5

1.1 10.0 8.3 0.1 7.5 4.1 4.2

Claims on nongovernment sector

35.6 19.2 7.1 2.0 2.8 4.4 9.0

Broad money

19.3 15.6 13.4 3.0 8.5 8.6 9.2

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

5.2 3.3 1.4 0.8 0.8 ... ...

Stock market unweighted index (annual percent change)6

24.7 -38.0 -10.0 -0.7 -16.4 11.0 ...
  (US$ billions, unless otherwise indicated)

External sector

             

Exports of goods

62.6 87.0 54.4 67.6 104.3 121.7 113.2

Of which: non-oil exports

3.5 4.4 5.5 5.8 7.6 7.3 7.8

Annual percentage change

6.4 25.1 26.5 5.7 30.0 -4.2 7.2

Imports of goods

-19.1 -22.9 -18.5 -20.1 -22.0 -23.3 -24.9

Annual percentage change

17.7 20.0 -19.2 8.3 9.4 5.9 6.9

Current account

42.2 60.2 28.3 38.3 70.8 86.4 76.2

Percent of GDP

36.8 40.9 26.7 30.8 41.4 44.2 39.5

External debt including private sector

57.6 60.5 45.5 31.1 ... ... ...

International reserve assets7

15.9 16.7 17.7 18.7 23.0 24.8 26.5

In months of imports of goods and services

5.9 5.3 6.6 6.4 7.0 7.1 7.1

Memorandum items:

             

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

3.52 3.72 3.48 3.49 3.63 ... ...

Nominal effective exchange rate (NEER, period average)

-2.1 2.9 -3.6 -0.3 0.3 ... ...

Real effective exchange rate (REER, period average)

-0.2 7.9 -1.2 0.9 1.5 ... ...

Sovereign rating (S&P)

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 billion is budgeted for each year from 2010/11 to 2014/15.

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

5 Excludes SDRs and IMF reserve position.

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

7 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. 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.



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