IMF Executive Board Concludes 2013 Article IV Consultation with Kuwait

Press Release No. 13/480
December 2, 2013

On November 25, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kuwait.1

High oil prices and increased production have enabled the government to continue to record high fiscal and external surpluses and build strong buffers. Overall real non-oil gross domestic product (GDP) growth is projected to increase modestly to 3 percent in 2013, driven by an increase in domestic consumption and pick-up in public investment. A slight reduction in oil production would bring down total real GDP growth below 1 percent. The overall average consumer price inflation (CPI) is projected at 3 percent in 2013. The fiscal and external surpluses are projected at 27 percent of GDP and 39 percent of GDP, respectively, in 2013, reflecting high oil prices. Monetary policy has remained accommodative and bank credit growth has picked up.

Bank profitability has remained stable and soundness indicators appear strong. Banks had an average capital adequacy ratio of 18.3 percent (Tier 1 capital of 16.6 percent) at end-June 2013. Gross nonperforming loans declined to 4.6 percent at end-June 2013 from 5.2 percent at end-2012. Banks had a provisioning ratio of 107 percent at end-June 2013. Some investment companies continued to record losses in 2012, though of a lower order compared to 2008; a few of these are still deleveraging and restructuring their balance sheets.

The economic outlook is expected to improve further in 2014 and over the medium term. In 2014, non-oil growth is expected to increase to 4.4 percent supported by public capital spending, driving average inflation to 3.5 percent. A constant level of oil production would keep total real GDP growth below 3 percent. Fiscal and current account surpluses are expected to remain large in 2014. Over the medium term, non-oil growth is projected to accelerate to about 5 percent as large infrastructure investments are expected to support the growth momentum. 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. The main downside risk to the outlook is a sustained fall in oil prices.

Executive Board Assessment2

Executive Directors welcomed Kuwait’s recent economic performance. High oil prices and increased production have enabled the build-up of large fiscal and external buffers, and the non-oil sector is continuing its recovery. Nevertheless, the outlook is subject to risks from global and regional developments, and the economy remains highly oil-dependent. Directors therefore encouraged the authorities to make further efforts to promote economic diversification, particularly in areas with potential for greater national employment.

Directors noted that while the fiscal position is strong, a sustained period of low oil prices could deplete fiscal surpluses. To contain risks, free up resources for increased capital spending, and to save for future generations, Directors agreed that it will be important to restrain current expenditure growth, including the public sector wage bill and generalized subsidies, and to enhance non-oil revenues. They considered that strong fiscal frameworks will be needed to guide public spending in the medium term. In this context, strengthening the macro-fiscal unit would support the development of a medium-term budget framework and greater efficiency of public spending.

Directors agreed that the current accommodative monetary stance remains appropriate and the exchange rate peg to a basket has provided a strong and credible monetary anchor. They noted that the banking system is well regulated and resilient to shocks, and welcomed continued steps to strengthen financial regulation and supervision. Continuous refining of the macroprudential toolkit and greater central bank autonomy would enable the authorities to better deal with systemic risk. Directors cautioned that the recent large consumer debt relief program could give rise to moral hazard. Noting the continued weak balance sheets of some investment companies, they called for the completion of the restructuring process and a review of the sector.

Directors welcomed the recent passage of important legislation that will enhance the investment climate and forge partnerships with the private sector, and encouraged further steps in this direction. To foster Kuwaiti employment in the private sector, Directors underscored the need to contain public sector wage and employment growth, enhance educational quality, further promote female labor force participation, and create an enabling environment for small and medium enterprises. Well-functioning local debt markets could help the diversification process. Directors also encouraged continued efforts to improve effectiveness in public administration, and the establishment of an independent Financial Intelligence Unit.


Kuwait: Selected Economic Indicators, 2007–14  
 
(Quota: SDR 1,381.1 million)
(Population: 3.8 million; Dec. 2012)
(Per capita GDP: $48,260; 2012 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

                 

Investment

20.5 17.6 18.0 20.3 16.4 15.1 16.4 18.1  

Public

3.3 3.5 4.8 5.5 4.5 3.8 5.3 6.6  

Private1

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  

Public

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

                 

Revenue

67.9 64.3 63.8 65.9 73.2 70.4 68.9 68.6  

Oil

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  

Expenditures

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  

Capital

4.1

4.4 4.6 5.6 4.4 4.1 5.9 6.9  

Balance

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

-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

Money and credit

(Percent change; unless otherwise indicated)

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 billion was transferred. KD 1.1 billion is 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 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.



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