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### CONTEXT
- Kuwait faces “lower-for-longer” oil prices from a position of strength, with large financial buffers estimated by staff at about 470 percent of GDP and low debt.
- The 2014 oil price shock caused a sharp deterioration in fiscal and external balances; resilient non-oil activity and strong financial sector oversight have kept the banking system sound.
- Government reform strategy aims to reduce dependence on hydrocarbons and boost growth and job creation for nationals; measures included fuel, electricity, and water price increases and other steps to raise government saving and improve the business environment.
- Political development: government resigned end-October 2017; Prime Minister reappointed and new government reaffirmed commitment to the reform strategy.

### RECENT MACRO-FINANCIAL DEVELOPMENTS
- Real activity and inflation
  - Real non-hydrocarbon growth set to reach 2½ percent in 2017.
  - Hydrocarbon output cut of close to 6 percent in 2017 brings overall real GDP down by about 2½ percent in 2017.
  - Inflation on track to reach a multiyear low of 1¾ percent in 2017.
- Fiscal developments
  - Energy subsidy reductions (some KD 2 billion) and other measures reduced current spending by about KD 3¼ billion over the past two years.
  - Overall fiscal accounts broadly balanced in 2016/17; fiscal balance excluding mandatory transfers to the Future Generations Fund (FGF) and investment income posted a large deficit of 17½ percent of GDP for a second year.
  - External bond issuance: USD 3.5 billion 5-year at about 2.9 percent; USD 4.5 billion 10-year at about 3.6 percent.
  - Selected fiscal numbers (2014/15–2016/17):
    - Revenue: 67.4, 52.1, 52.5 (percent of GDP)
    - Oil revenue: 51.9, 35.3, 34.3 (percent of GDP)
    - Non-oil revenue: 15.4, 16.9, 18.2 (percent of GDP)
    - Expenditure: 48.8, 52.5, 51.7 (percent of GDP)
    - Current: 43.3, 44.8, 44.0 (percent of GDP)
    - Capital: 5.4, 7.6, 7.7 (percent of GDP)
    - Overall balance: 18.6, -0.3, 0.8 (percent of GDP)
    - Overall balance (after transfers to FGF and excl. investment income): 2.4, -17.5, -17.6 (percent of GDP)
    - Break-even oil price (overall balance; U.S. dollar per barrel): 54.3, 47.7, 42.5
    - Stock of GRF assets: 118.3, 144.0, 137.1 (KD billion, staff estimates)
    - Stock of FGF assets: 227.3, 316.0, 333.1 (KD billion, staff estimates)
- External sector
  - Current account recorded first deficit in many years in 2016 of about 4½ percent of GDP.
  - As oil prices recover in 2017, current account expected to be broadly balanced.
- Banking sector and financial indicators (as of Q2 2017)
  - Capital Adequacy Ratio (CAR): 18.3 percent.
  - Gross NPLs to total loans: 2.4 percent.
  - Return on Assets (ROA): 1.1 percent.
  - Loan-loss provisioning: over 200 percent coverage.
- Deposits and credit
  - Private sector deposit growth declined; credit to private sector underlying trend remained above 5½ percent.
  - CBK raised policy rate in tandem with U.S. Federal Reserve; interbank market rates rose; bank lending rates rose to a lesser extent.
- Sectoral exposures and risks
  - Real estate slowdown caused small uptick in sector NPLs; close to one fifth of banks’ lending is to the real estate sector.
  - Banks’ exposure to Investment Companies (ICs) reduced to about 2½ percent of total loans.

### OUTLOOK, RISKS, AND SPILLOVERS
- Growth and inflation projections
  - Non-oil growth projected to increase gradually to about 4 percent over the medium term.
  - Hydrocarbon output forecast to increase by 4½ percent in 2018 (staff baseline established before the recent extension of the OPEC+ agreement).
  - Inflation expected to rise to 2½ percent in 2018 and to peak at 3¾ percent in 2019 before stabilizing below 3 percent.
  - Current account broadly balanced over the forecast period with gradual pickup in oil production and prices.
- Fiscal baseline assumptions and projections
  - Mission baseline assumes oil prices at around $49 per barrel in 2017–19, increasing to about $52 per barrel over the medium-term.
  - Baseline accounts for introduction of a VAT and excises on tobacco and sugary drinks, some increases in price of government services, and full compliance with new three-year expenditure ceilings.
  - Three-year expenditure ceilings imply annual real expenditure increases of about 1¼ percent a year on average.
- Key balance-sheet and financing projections (2016/17–2021/22)
  - Overall balance (percent of GDP): 0.8 (2016/17), 1.7 (2017/18), 1.5 (2018/19), 1.3 (2019/20), 0.9 (2020/21), 0.1 (2021/22).
  - Overall balance (after transfer to FGF and excl. inv. income): -17.6, -15.9, -15.5, -15.3, -15.3, -15.3 (2016/17–2021/22).
  - Non-oil balance (% of non-oil GDP): -80.8, -79.4, -76.9, -74.5, -72.4, -70.7 (2016/17–2021/22).
  - Gross financing in KD billion: 6.0, 5.8, 6.0, 6.3, 6.7, 7.2 (2016/17–2021/22); cumulative 2017/18–2021/22 = 32.0.
  - Domestic (net issuance) KD billion: 2.2, 1.5, 1.0, 1.0, 1.0, 1.0 (2016/17–2021/22); cumulative 5.5.
  - External (net issuance) KD billion: 2.4, 2.4, 1.8, 1.8, 1.8, 1.8 (2016/17–2021/22); cumulative 9.6.
  - Drawdown of GRF KD billion: 1.4, 1.9, 3.2, 3.5, 3.9, 4.4 (2016/17–2021/22); cumulative 16.9.
  - Public debt (percent of GDP, calendar years): 9.9 (2016), 19.1 (2017), 27.0 (2018), 32.3 (2019), 36.8 (2020), 40.5 (2021).
  - Stock of the GRF assets (KD billion, staff estimates/projections): 137.1, 126.2, 113.8, 101.0, 88.4, 75.4 (2016/17–2021/22).
  - Stock of the FGF assets (KD billion, staff estimates/projections): 333.1, 323.3, 316.8, 309.2, 302.0, 294.0 (2016/17–2021/22).
  - Stock of the KIA assets (KD billion, staff estimates/projections): 470.2, 449.5, 430.6, 410.2, 390.3, 369.4 (2016/17–2021/22).
  - Current Account balance (percent of GDP, calendar years): -4.5 (2016), 0.3 (2017), -0.3 (2018), -0.1 (2019), 0.2 (2020), 0.1 (2021).
- Gross financing needs and cumulative financing
  - After transfers to the FGF and excluding investment income, a fiscal deficit of about 15 percent of GDP annually will generate cumulative financing needs of some US$ 100 billion over 5 years under the baseline.
  - Financing expected to be met through limited domestic borrowing, external borrowing, and drawdown of GRF assets.
- Financial sector outlook
  - Macro-fiscal environment broadly supportive of financial stability and credit growth; credit expected to grow broadly in line with non-oil GDP growth.
  - Stepped up project implementation will support bank profitability and internal capital generation.
- Key risks
  - External: sustained lower oil prices; tighter global financial conditions and U.S. monetary policy normalization.
  - Domestic: delays in project and reform implementation.
  - Bank sector: downside risks to asset quality could be exacerbated if risks materialize.

### OIL PRICE SENSITIVITY (staff sensitivity)
- If current oil prices of about $59 per barrel are sustained throughout 2018 and Kuwait’s production is maintained at the present level:
  - Fiscal balance (after transfers to the FGF and excluding investment income) would reach -10½ percent of GDP (compared to -15½ percent of GDP under staff’s baseline).
  - Current account balance would reach 5¼ percent of GDP (compared to –¼ percent of GDP under staff’s baseline).

### GROWTH PROSPECTS AND REFORM SCENARIO
- Short-term: fiscal adjustment may dampen non-oil growth in short-term, but rebalancing toward growth-enhancing investment and confidence gains would boost non-oil growth to 4¼ percent by 2022.
- Long-term: structural reforms could raise Kuwait’s non-oil long-term growth to well above 5 percent.
- Illustrative mission scenario:
  - After 10 years, non-oil output would be between 5 to 10 percent higher than under the baseline.
  - Medium-term fiscal multipliers applied: 0.4 for tax revenues, 0.4 for current expenditures, and 1.0 for capital expenditures.
  - Reform scenario assumptions:
    - Private-sector investment average annual growth increases from about 4.7 percent in 2026–27 under the baseline to close to 6.3 under the reform scenario.
    - Contribution of capital to annual growth rises by ½ percentage point.
    - Contribution of total factor productivity increases by at least 1 percentage point.

### FISCAL CONSOLIDATION, SUSTAINABILITY, AND TARGETS
- Intergenerational equity gap
  - Government’s non-oil balance projected to fall well short of levels needed to ensure equally high living standards for future generations—by close to 18 percent of non-oil GDP by 2022.
  - Staff recommended additional fiscal consolidation to close this gap over ten years.
- Recommended pace and targets
  - Gradual additional adjustment to achieve intergenerational equity within ten years.
  - Recommended fiscal path would reduce government deficit (after transfer to the FGF and excluding investment income) from a projected 17½ percent of GDP in 2016/17 to about 9 percent by 2022.
- Spending and revenue measures
  - Emphasize curtailing current expenditure; scope to tighten transfers, reduce inefficiencies, control wage bill growth, and improve procurement.
  - Diversify revenue base: introduce VAT and excises; speed up preparatory work and consider IMF technical assistance for tax administration.
  - Revenue-diversifying measures supportive but bulk of additional effort should come from curtailing current expenditure.
- Expenditure reform priorities
  - Repricing government services more ambitiously.
  - Business profit tax reform to broaden tax base.
  - Improve public investment management, project selection, implementation, coordination, and anti-corruption measures.
  - Anchor expenditure ceilings to a long-term fiscal policy objective (e.g., intergenerational equity) and set an intermediary target (e.g., non-oil primary balance).
- Wage bill and transfers
  - Wage bill reform: simplify and harmonize wage grid; foster merit-based compensation; rationalize allowances; limit public sector employment growth.
  - Subsidies and transfers: subsidy and total transfer bills were 5.7 and 10.3 percent of GDP in 2016/17; staff encouraged deeper reforms with compensatory measures for the most vulnerable.
- Fiscal savings composition (selected figures, percent of GDP by year, 2017/18 to 2022/23)
  - Baseline reforms total: 0.8, 1.3, 1.8, 2.2, 2.2, 2.2.
  - Additional reforms under adjustment scenario total: 1.1, 2.1, 3.3, 5.0, 5.8.
  - Selected additional measures (percent of GDP by year):
    - Fuel price reform: 0.1, 0.2, 0.3, 0.4, 0.4
    - Electricity and water subsidy: 0.5, 1.0, 1.4, 1.9, 2.0
    - Corporate profit tax: 0.0, 0.0, 0.0, 0.7, 0.6
    - Wage control: 0.4, 0.8, 1.3, 1.7, 2.3
    - Household compensation: -0.1, -0.1, -0.1, -0.1, -0.1
    - Capital expenditure: -0.1, -0.1, -0.2, -0.3, -0.4
    - Other: 0.2, 0.4, 0.6, 0.8, 1.0

### FISCAL FINANCING STRATEGY AND DEBT MANAGEMENT
- Authorities’ financing strategy combines:
  - limited domestic borrowing to avoid crowding out private sector credit,
  - external bond issuance,
  - drawdown of GRF liquid assets.
- Staff encouraged strengthening debt management capacity, addressing legal hurdles to borrow and issue longer-dated bonds and Sukuk, introducing regular domestic debt auctions, and developing secondary markets.
- Authorities agreed in principle and noted limited competition in banking system when designing auctions.

### FINANCIAL STABILITY, SUPERVISION, AND LIQUIDITY MANAGEMENT
- Banking system under Basel III regulations; resilient to stress tests.
- Macro-prudential framework in place and periodically reassessed.
- Liquidity conditions
  - Local banks maintain liquidity ratios close to 30 percent, well above the 18 percent requirement.
  - Central bank domestic currency liabilities vis-à-vis commercial banks in the form of deposits have fallen since early 2016, but overall reserves remain high.
- Staff recommendations
  - Strengthen liquidity forecasting and central bank liquidity management.
  - Establish a financial stability committee.
  - Enhance crisis management: corrective action framework, a special resolution regime for banks, strengthen emergency liquidity assistance, mandate bank recovery planning, and reform blanket deposit guarantees.
- Correspondent banking and AML/CFT
  - Kuwaiti banks have not experienced withdrawals of CBRs.
  - FIU joined the Egmont Group; NRA nearing completion with World Bank assistance.
  - Staff recommended focusing AML/CFT resources based on NRA results.

### STRUCTURAL REFORMS FOR PRIVATE SECTOR LED GROWTH
- Priorities
  - Transition from public sector-led growth to private sector-driven growth.
  - Tackle labor market inefficiencies, rationalize allowances, align public and private wages, and manage expectations on public sector job availability.
  - Accelerate privatization and PPPs on a transparent basis.
  - Improve business environment: reduce customs burden, ease trade barriers, improve access to land, digitize procedures, reduce excessive regulation.
  - Support SMEs: access to finance, venture capital, and remove constraints such as the 300 bps cap on maximum lending spread (staff suggested focused relaxation).

### EXTERNAL SECTOR ASSESSMENT AND EXCHANGE RATE
- Peg assessment
  - Staff considers the peg to a basket of currencies appropriate and effective as a nominal anchor.
- External buffers and reserves
  - CBK gross international reserves: $31.2 billion at end-2016 (28 percent of GDP, 6.8 months of imports, 27 percent of broad money).
  - KIA assets estimated at about 470 percent of GDP in 2016 (about 320 percent in the FGF and 150 percent in the GRF).
- External sustainability (PIH)
  - Implied current account norm (constant real per-capita annuity) is a surplus of 11.9 percent of GDP in 2017.
  - Estimated current account gap of about 12 percent of GDP projected to reduce to 10 percent of GDP by 2022.
  - Closing the PIH fiscal gap (estimated at 9¾ percent of GDP in 2016) over ten years would broadly eliminate the current account gap.
- EBA-lite diagnostics (2016)
  - Current account actual: -4.5 (percent of GDP)
  - Current account norm: 14.8 (percent of GDP)
  - Current account gap: -19.3 (percent of GDP)
  - Policy gap: -3.5 (percent of GDP)
  - Residual: -15.7 (percent of GDP)
- Policy implication
  - Large CA gap reflects suboptimal public saving of hydrocarbon revenues; fiscal consolidation is primary lever to close CA gap rather than exchange rate depreciation.

### RISK ASSESSMENT (Annex II highlights)
- Lower energy prices: Likelihood Low/Short to Medium Term; Expected impact High; Recommended response: use buffers for gradual adjustment; if sustained, implement more ambitious consolidation and stronger liquidity management.
- Tighter global financial conditions: Likelihood High/Short term; Expected impact Medium; Recommended response: enhanced surveillance and monitoring of ICs and banks.
- Slower implementation of Development Plan: Likelihood Medium/Short to Medium Term; Expected impact Medium; Recommended response: better integrate DP with MTFF and public expenditure review.
- Severe property price correction: Likelihood Low; Expected impact Medium; Recommended response: use macro-prudential tools, improve real estate statistics, strengthen crisis preparedness.

### PUBLIC SECTOR DEBT SUSTAINABILITY (Annex III key figures)
- Nominal gross public debt (percent of GDP): 2015: 5.4; 2016: 4.7; 2017: 9.9; 2018: 19.1; 2019: 27.0; 2020: 32.3; 2021: 36.8; 2022: 40.5 (and 43.5 in another row).
- Effective interest rate (percent): 2015: 3.2; 2016: 2.2; 2017: 4.7; 2018: 7.8; 2019: 7.7; 2020: 7.4; 2021: 7.3; 2022: 7.3.
- Identified debt-creating flows (cumulative) and primary deficit (percent of GDP) series reported in DSA tables.

### BASELINE VS REFORM SCENARIO (Annex IV selected)
- Baseline assumptions
  - Non-oil revenues increase from excises and VAT (2019) at 5 percent (estimated to generate around 1 percent of GDP additional revenue).
  - Savings from fuel price increases (about 0.2 percent of GDP by 2022) and electricity and water tariff adjustments (1. 1 percent of GDP) included.
  - Spending restraint: public employment expands at 2 percent annually; capital expenditure grows in line with non-oil GDP.
- Reform scenario assumptions
  - Expenditure share of non-oil GDP reduced to 54 percent by 2022.
  - Fuel subsidy elimination saves 0.4 percent of GDP by 2022.
  - Water and electricity tariff increases cut subsidy in half by 2022 (2 percent of GDP savings).
  - Compensation to vulnerable households assumed at 0.1 percent of GDP.
  - Wage reform: initial KD 320 million increase due to standardization; annual wage increases below inflation; savings of 2.3 percent of GDP by 2022.
  - Corporate profit tax on domestic corporates starting in 2021 generating 0.7 percent of GDP per year.
- Key indicators (selected, percent of GDP)
  - Baseline overall balance: 2015: -0.3; 2016: 0.8; 2017: 1.7; 2018: 1.5; 2019: 1.3; 2020: 0.9; 2021: 0.1; 2022: 0.4.
  - Reform scenario overall balance: -0.3, 0.8, 1.7, 2.6, 3.4, 4.1, 5.0, 6.1 (2015–2022).
  - Baseline total government debt (percent of GDP): 4.7, 9.9, 19.1, 27.0, 32.3, 36.8, 40.5, 43.5 (2015–2022).
  - Fiscal Reform Scenario total government debt (percent of GDP): 4.7, 9.9, 19.1, 27.0, 32.3, 36.8, 40.5, 43.4 (2015–2022).

### STATISTICS, INSTITUTIONS, AND TECHNICAL ASSISTANCE
- Statistical improvements: CPI rebased using 2013 household survey weights; progress toward quarterly national accounts.
- Data gaps and needs: improvements in services, transfers, extra-budgetary flows, coverage of government-held external assets in IIP.
- Institutional steps: macro-fiscal unit established; three-year expenditure ceilings implemented; work on laws to extend borrowing limit and allow Sukuk issuance under way.

### STAFF CONCLUSIONS AND RECOMMENDATIONS (summary)
- Proceed with VAT and excise introduction while further curtailing current expenditure.
- Implement deeper reforms to reduce financing needs, preserve liquid buffers, and achieve intergenerational equity over ten years.
- Curtail wage bill and rationalize subsidies/transfers with protection for the vulnerable.
- Maintain balanced financing approach: drawdown of GRF assets, measured domestic issuance, and some external borrowing.
- Strengthen medium-term fiscal framework: anchor ceilings to long-term objective and adopt intermediary non-oil balance target.
- Use ample liquidity to improve liquidity forecasting and central bank operations; strengthen crisis management and resolution frameworks.
- Prioritize structural reforms to unlock private-sector investment, employment, and productivity gains.

*International Monetary Fund staff report (excerpts).*

### 2017. The staff team comprised Stéphane Roudet (head), Botir

### KUWAIT

### CONTEXT
- Kuwait faces “lower-for-longer” oil prices from a position of strength, with large financial buffers estimated by staff at about 470 percent of GDP and low debt.
- The 2014 oil price shock caused a sharp deterioration in fiscal and external balances; resilient non-oil activity and strong financial sector oversight have kept the banking system sound.
- The government launched a comprehensive reform strategy aimed at reducing dependence on hydrocarbons and boosting growth and job creation for nationals (Box 1 in Country Report No. 17/15). This included fuel, electricity, and water price increases and other steps to raise government saving and improve the business environment (Annex I).
- Political context: the government resigned at end-October 2017 amid tensions with the parliament; the Prime Minister was reappointed to form a new cabinet, and the new government reaffirmed its commitment to the reform strategy.

### RECENT MACRO-FINANCIAL DEVELOPMENTS
- Real activity and inflation
  - Real non-hydrocarbon growth recovered after 2015 stagnation and is set to reach 2½ percent in 2017, driven by improved confidence.
  - Hydrocarbon output cut of close to 6 percent in 2017 (implementation of the OPEC+ deal) will bring overall real GDP down by about 2½ percent in 2017.
  - Inflation is on track to reach a multiyear low of 1¾ percent in 2017, due to a decline in housing rents and favorable food price developments, despite higher energy and water prices.
- Fiscal developments
  - Further efforts to curtail current expenditure and lower energy subsidies (some KD 2 billion) reduced current spending by about KD 3¼ billion over the past two years.
  - Overall fiscal accounts were broadly balanced in 2016/17, but the fiscal balance excluding mandatory transfers to the Future Generations Fund (FGF) and investment income posted a large deficit of 17½ percent of GDP for a second year.
  - Financing needs were covered through drawdown in readily available General Reserve Fund (GRF) assets, domestic borrowing, and a successful debut international sovereign bond sale (USD 3.5 billion 5-year at about 2.9 percent; USD 4.5 billion 10-year at about 3.6 percent).
  - Selected fiscal numbers (2014/15–2016/17 table excerpts):
    - Revenue: 67.4, 52.1, 52.5 (percent of GDP)
    - Oil revenue: 51.9, 35.3, 34.3 (percent of GDP)
    - Non-oil revenue: 15.4, 16.9, 18.2 (percent of GDP)
    - Expenditure: 48.8, 52.5, 51.7 (percent of GDP)
    - Current: 43.3, 44.8, 44.0 (percent of GDP)
    - Capital: 5.4, 7.6, 7.7 (percent of GDP)
    - Overall balance: 18.6, -0.3, 0.8 (percent of GDP)
    - Overall balance (after transfers to FGF and excl. investment income): 2.4, -17.5, -17.6 (percent of GDP)
    - Break-even oil price (overall balance; U.S. dollar per barrel): 54.3, 47.7, 42.5
    - Stock of GRF assets: 118.3, 144.0, 137.1 (KD billion, staff estimates)
    - Stock of FGF assets: 227.3, 316.0, 333.1 (KD billion, staff estimates)
- External sector
  - External current account recorded its first deficit in many years in 2016 (of about 4½ percent of GDP), largely driven by the further decline in oil prices.
  - As oil prices recover in 2017, the current account is expected to be broadly balanced.
- Banking sector and financial indicators (as of Q2 2017)
  - Capital Adequacy Ratio (CAR): 18.3 percent.
  - Gross NPLs to total loans: 2.4 percent.
  - Return on Assets (ROA): 1.1 percent.
  - Loan-loss provisioning: over 200 percent coverage.
  - Banks maintained strong liquidity buffers; deposits at CBK declined since 2015 while holdings of Treasury bonds increased.
- Deposits and credit
  - Private sector deposit growth declined in recent years; partly offset by increased public sector deposits and some international funding.
  - Growth of credit to the private sector slowed mildly on a year-on-year basis since July 2016; underlying trend (after adjusting for a large one-off loan repayment) remained above 5½ percent.
  - CBK raised its policy rate in tandem with the U.S. Federal Reserve with some deviations after the June 2017 FOMC meeting and after the December 2017 Fed rate hike, pushing interbank market rates up; bank lending rates rose to a lesser extent.
- Sectoral exposures and risks
  - Real estate experienced a significant slowdown, causing a small uptick in sector NPLs; close to one fifth of banks’ lending is to the real estate sector.
  - Real estate credit growth driven mainly by installment loans secured by salary assignment, presenting a lower risk profile.
  - Banks’ exposure to Investment Companies (ICs) reduced to about 2½ percent of total loans.
  - Equity markets recovered since early 2016 but remained very volatile.

### OUTLOOK, RISKS, AND SPILLOVERS
- Growth and inflation projections
  - Non-oil growth projected to increase gradually to about 4 percent over the medium term, driven by accelerated project implementation under the 5-year development plan and improved confidence.
  - Hydrocarbon output forecast to increase by 4½ percent in 2018 (staff baseline established before the recent extension of the OPEC+ agreement) and to expand gradually thereafter in line with investment plans.
  - Inflation expected to rise to 2½ percent in 2018 and to peak at 3¾ percent in 2019 due to the introduction of new taxes, before stabilizing below 3 percent.
  - Gradual pickup in oil production and prices will keep the current account broadly balanced over the forecast period.
- Fiscal baseline assumptions and projections
  - Mission’s baseline assumes oil prices at around $49 per barrel in 2017–19, increasing to about $52 per barrel over the medium-term.
  - Baseline accounts for introduction of a value-added tax (VAT) and excises on tobacco and sugary drinks, some increases in price of government services, and full compliance with new three-year expenditure ceilings (indicative medium-term caps).
  - Three-year expenditure ceilings imply annual real expenditure increases of about 1¼ percent a year on average.
- Financing needs and balance-sheet projections (2016/17–2021/22 table excerpts)
  - Overall balance (percent of GDP): 0.8 (2016/17), 1.7 (2017/18), 1.5 (2018/19), 1.3 (2019/20), 0.9 (2020/21), 0.1 (2021/22).
  - Overall balance (after transfer to FGF and excl. inv. income): -17.6 (2016/17), -15.9 (2017/18), -15.5 (2018/19), -15.3 (2019/20), -15.3 (2020/21), -15.3 (2021/22).
  - Non-oil balance (% of non-oil GDP): -80.8, -79.4, -76.9, -74.5, -72.4, -70.7 (2016/17–2021/22).
  - Gross financing in KD billion: 6.0 (2016/17), 5.8 (2017/18), 6.0 (2018/19), 6.3 (2019/20), 6.7 (2020/21), 7.2 (2021/22); cumulative 2017/18–2021/22 = 32.0.
  - Domestic (net issuance) KD billion: 2.2, 1.5, 1.0, 1.0, 1.0, 1.0 (2016/17–2021/22); cumulative 5.5.
  - External (net issuance) KD billion: 2.4, 2.4, 1.8, 1.8, 1.8, 1.8 (2016/17–2021/22); cumulative 9.6.
  - Drawdown of GRF KD billion: 1.4, 1.9, 3.2, 3.5, 3.9, 4.4 (2016/17–2021/22); cumulative 16.9.
  - Public debt (percent of GDP, calendar years): 9.9 (2016), 19.1 (2017), 27.0 (2018), 32.3 (2019), 36.8 (2020), 40.5 (2021).
  - Stock of the GRF assets (KD billion, staff estimates/projections): 137.1 (2016/17), 126.2 (2017/18), 113.8 (2018/19), 101.0 (2019/20), 88.4 (2020/21), 75.4 (2021/22).
  - Stock of the FGF assets (KD billion, staff estimates/projections): 333.1, 323.3, 316.8, 309.2, 302.0, 294.0 (2016/17–2021/22).
  - Stock of the KIA assets (KD billion, staff estimates/projections): 470.2, 449.5, 430.6, 410.2, 390.3, 369.4 (2016/17–2021/22).
  - Current Account balance (percent of GDP, calendar years): -4.5 (2016), 0.3 (2017), -0.3 (2018), -0.1 (2019), 0.2 (2020), 0.1 (2021).
- Gross financing needs and cumulative financing
  - After transfers to the FGF and excluding investment income, a fiscal deficit of about 15 percent of GDP annually will generate cumulative financing needs of some US$ 100 billion over 5 years under the baseline.
  - Financing needs expected to be met through limited domestic borrowing, external borrowing, and drawdown of GRF assets; readily available GRF buffers would decline under the baseline while total KIA assets continue to increase in nominal terms.
- Financial sector outlook
  - Macro-fiscal environment expected to remain broadly supportive of financial stability and credit growth; credit to the private sector expected to grow broadly in line with non-oil GDP growth, driven by installment loans and project financing.
  - Stepped up project implementation will support bank profitability and internal capital generation.
- Risks (Annex II)
  - External risks: sustained lower oil prices could lead to higher deficits and financing needs, adverse market sentiment, reduced appetite for GCC international sovereign bonds, higher funding costs and risks for sovereign and banks due to tighter global financial conditions and U.S. monetary policy normalization.
  - Domestic risks: delays in project and reform implementation could entail slower growth and larger fiscal deficits.
  - If investor appetite for international sovereign bonds declines, authorities may face a choice between issuing more domestic debt (risking crowding out private credit and slowing growth) or allowing financial buffers to decline.
  - Banking sector: loss absorption buffers are high and liquidity is ample, but downside risks to asset quality exist and could be exacerbated if domestic or external risks materialize, with implications for credit to the private sector and growth.

*International Monetary Fund staff report (excerpts).*

### 12.      Staff highlighted the large potential growth dividends from additional fiscal and

### 12.      Staff highlighted the large potential growth dividends from additional fiscal and

### Growth prospects and reform scenario
- Short-term: Fiscal adjustment may dampen non-oil growth in the short-term, but rebalancing government outlays towards growth-enhancing investment, more effective government spending, and confidence gains would boost non-oil growth to 4¼ percent by 2022.
- Long-term: Structural reforms have the potential to raise Kuwait’s non-oil long-term growth to well above 5 percent by boosting investment and raising total factor productivity growth.
- Illustrative mission scenario (Box 1):
  - After 10 years, non-oil output would be between 5 to 10 percent higher than under the baseline, resulting in greater economic diversification.
  - Medium-term fiscal multipliers applied: 0.4 for tax revenues, 0.4 for current expenditures, and 1.0 for capital expenditures.
  - The recommended fiscal path would reduce non-oil growth by about ½ percent in the short- to medium-run compared to staff’s baseline, but gradual rebalancing toward capital expenditure and quality improvements would help offset that impact.
  - Reform scenario assumptions:
    - Private-sector investment average annual growth increases from about 4.7 percent in 2026–27 under the baseline to close to 6.3 under the reform scenario.
    - Contribution of capital to annual growth rises by ½ percentage point.
    - Contribution of total factor productivity increases by at least 1 percentage point.

### Oil prices, recent developments, and near-term fiscal/external impacts
- Authorities’ view: Oil price projections under the baseline were seen as overly conservative; recent recovery in oil prices expected to bolster fiscal and external positions and reduce financing needs.
- Staff’s sensitivity analysis: If current oil prices of about $59 per barrel are sustained throughout 2018 and Kuwait’s production is maintained at the present level:
  - Fiscal balance (after transfers to the FGF and excluding investment income) would reach -10½ percent of GDP (compared to -15½ percent of GDP under staff’s baseline).
  - Current account balance would reach 5¼ percent of GDP (compared to –¼ percent of GDP under staff’s baseline).
- Staff noted uncertainty about oil output recovery, referencing the recent extension of the OPEC+ agreement.

### Fiscal consolidation, sustainability, and targets
- Intergenerational equity gap:
  - Government’s non-oil balance projected to fall well short of levels needed to ensure equally high living standards for future generations—by close to 18 percent of non-oil GDP by 2022.
  - Staff recommended additional fiscal consolidation to close this gap and reduce financing needs, preserve liquid buffers, and curb projected government debt buildup.
- Recommended pace:
  - Staff suggested gradual additional adjustment at a pace that achieves intergenerational equity within ten years, with modest short-run growth costs reversed over time.
  - Recommended fiscal path would reduce the government deficit (after transfer to the FGF and excluding investment income) from a projected 17½ percent of GDP in 2016/17 to about 9 percent by 2022.
  - Ministry of Finance officials envisaged a more rapid reduction, reflecting different oil price assumptions and conservative expenditure ceiling assumptions.

### Spending, revenue diversification, and tax administration
- Streamline government spending and enhance public financial management:
  - Scope for expenditure savings given large increase in government expenditure during high oil price period.
  - Identified options include tightening controls over transfers, reducing inefficiencies in current and capital spending, controlling wage bill growth, and improving procurement processes.
  - Strengthening controls over spending will help limit implementation risks as expenditure ceilings become more binding.
- Diversify revenue base:
  - Planned introduction of new taxes and repricing of government services to create a larger non-oil revenue base welcomed.
  - Given complexity and scope of VAT and excise reforms, staff recommended speeding up preparatory work to avoid implementation delays once the GCC agreement is ratified by parliament.
  - Consider IMF technical assistance to strengthen tax administration capacity and maximize revenue impact.
- Revenue-diversifying measures are supportive but bulk of additional effort should come from curtailing current expenditure.

### Expenditure composition and efficiency reforms
- Expenditure structure:
  - Large increase in government spending over past decade biased toward rigid current expenditures—particularly the wage bill, energy subsidies and transfers—necessitating addressing rigidities and reducing waste.
- Expenditure reform priorities:
  - Repricing government services more ambitiously.
  - Business profit tax reform to broaden tax base to encompass all enterprises operating in Kuwait to enhance non-oil revenue and level the playing field.
  - Improve public investment management, project selection, implementation, coordination, and anti-corruption measures.
- Medium-term fiscal framework:
  - Move from incremental annual budgets to medium-term expenditure ceilings welcomed.
  - Staff recommended anchoring expenditure ceilings to a long-term fiscal policy objective (for example based on intergenerational equity) and setting a consistent path for an intermediary target to delink spending from oil revenue volatility.
  - Medium-term budget planning should consider fiscal risks, including public pension fund actuarial gaps, and coordinate with institutions implementing the development plan.

### Wage bill, public employment, and transfers/subsidies
- Wage bill reform:
  - Controlling the wage bill is paramount to underpin fiscal adjustment and boost private sector growth and job creation.
  - Staff encouraged comprehensive reforms: simplify and harmonize public wage grid, foster merit-based compensation, realign public and private compensation for equal competencies, rationalize allowances and benefits, limit public sector employment growth, and communicate policy clearly.
- Subsidies and transfers:
  - Subsidy and total transfer bills remain large: respectively 5.7 and 10.3 percent of GDP in 2016/17.
  - Subsidies and untargeted transfers are costly, encourage excessive consumption, inefficient capital allocation, and disproportionately benefit the wealthiest.
  - Authorities intend to focus on better controlling eligibility requirements rather than new policy changes; staff encouraged deeper reforms with a well-designed communication strategy and compensatory measures for the most vulnerable.
- Fiscal savings composition (selected figures from cumulative fiscal saving table):
  - Baseline reforms total (2017/18 to 2022/23): 0.8, 1.3, 1.8, 2.2, 2.2, 2.2 (In percent of GDP by year).
  - Additional reforms under the adjustment scenario total (2017/18 to 2022/23): 1.1, 2.1, 3.3, 5.0, 5.8 (In percent of GDP by year).
  - Selected measures under additional reforms (percent of GDP by year):
    - Fuel price reform: 0.1, 0.2, 0.3, 0.4, 0.4
    - Electricity and water subsidy: 0.5, 1.0, 1.4, 1.9, 2.0
    - Corporate profit tax: 0.0, 0.0, 0.0, 0.7, 0.6
    - Wage control: 0.4, 0.8, 1.3, 1.7, 2.3
    - Household compensation: -0.1, -0.1, -0.1, -0.1, -0.1
    - Capital expenditure: -0.1, -0.1, -0.2, -0.3, -0.4
    - Other: 0.2, 0.4, 0.6, 0.8, 1.0

### Financial sector resilience and private sector activation
- Reforms to boost private investment and productivity:
  - Accelerated reforms to tackle labor market inefficiencies.
  - Increase reliance on privatization and public-private partnerships.
  - Improve the business climate to unlock significant additional private sector investment and productivity growth.
- Expected outcomes:
  - Unlock private sector job creation and entrepreneurship, particularly for youth, through wage bill and public employment reforms and improved incentives.

_Italic: Source: cr1821 (IMF staff report)._

### 22.      Staff supported the authorities’

### 22.      Staff supported the authorities’ balanced approach to fiscal financing and the ongoing strengthening of related institutional and legal frameworks

### Fiscal financing strategy and debt management
- Authorities’ financing strategy to sustain transfers to the FGF while adjusting the fiscal position:
  - limited domestic borrowing to avoid crowding out private sector credit
  - external bond issuance
  - drawdown of GRF liquid assets
- Rationale: preserve adequate buffers against shocks while taking advantage of favorable borrowing conditions and relatively higher returns on FGF assets.
- Staff encouraged:
  - strengthening capacity at the debt management unit
  - addressing legal hurdles to maintaining the government’s ability to borrow and issue longer-dated bonds and Sukuk
  - introducing regular domestic debt auctions to allow price discovery and developing secondary markets to facilitate issuance of corporate bonds and liquidity management
- Authorities’ response: agreed in principle; noted need to consider limited competition in the banking system when designing auctions.

### Strengthening the Medium-Term Fiscal Framework (MTFF) — Box 3
- Context:
  - high susceptibility of government finance to oil prices has made fiscal policy challenging
  - requirement to transfer a minimum of 10 percent of total revenues to the FGF has helped dampen fiscal procyclicality but constrained asset-liability management, evidenced by the run up in spending during the oil price boom (2005–14)
- Progress:
  - macro-fiscal unit established to track fiscal performance and analyze macro-fiscal issues
  - introduction of three-year expenditure ceilings and a top-down process for budgetary allocations to line ministries
- Recommended reforms:
  - adopt a formal long-term policy objective (e.g., an intergenerational equity benchmark)
  - introduce a formal intermediary target (e.g., non-oil primary balance) consistent with the long-term objective to set expenditure ceilings via a reliable top-down process and avoid procyclicality
  - consider impacts of reforms and policy decisions earlier in the budget process and communicate them to line ministries
  - enhance fiscal reporting (frequency, timeliness, and analysis) to strengthen accountability and transparency

### Exchange rate arrangement
- Staff and authorities shared assessment: the peg to an undisclosed basket remains appropriate.
- Exchange rate arrangement has provided an effective nominal anchor (Annex V).
- CBK commitment: fully committed to the exchange rate regime and uses monetary policy instruments to maintain an adequate short-term interest rate differential with the U.S.
- Staff noted: over the longer term, as the economy diversifies, benefits of greater exchange rate flexibility may increase.

### Safeguarding financial stability — regulation and supervision
- Banking system:
  - banks are under Basel III regulations for capital, liquidity, and leverage
  - banks are resilient to various stress tests, including credit, liquidity and market shocks
- Macro-prudential framework:
  - comprehensive set of macro-prudential measures being enforced
  - staff welcomed CBK reviews of scope of macro-prudential policy and tools to balance preempting risk buildup and not stifling credit growth
  - staff recommended establishing a financial stability committee including all relevant stakeholders
- Vulnerabilities and monitoring:
  - downside risks to asset quality, high loan concentrations, common exposures, and interconnectedness noted
  - staff welcomed initiatives to identify emerging pressures, including those related to the real estate sector and U.S. monetary policy normalization
  - staff recommended conducting reverse stress testing as a complementary tool

### Liquidity conditions and central bank liquidity management — Box 4
- Current liquidity conditions:
  - local banks maintain liquidity ratios close to 30 percent, well above the 18 percent requirement
  - central bank domestic currency liabilities vis-à-vis commercial banks in the form of deposits have fallen significantly since early 2016, but including CBK bonds and tawarruq, bank reserves remain high
  - banks have increased holdings of Treasury bonds, convertible into cash via CBK repurchase operations; use of repurchase operations is low and relatively infrequent under prevailing conditions
- Staff recommendations:
  - take advantage of ample liquidity to enhance liquidity management framework
  - extend assessment beyond short-term via liquidity forecasting to improve planning of central bank operations and support Treasury debt management
  - formal information-providing agreements with relevant entities and improved cashflow information to aid forecasting
  - strengthen coordination between State entities (e.g., Kuwait Investment Authority, Ministry of Finance) and CBK; formal agreements may be needed for necessary data access

### Crisis management, resolution, and deposit insurance
- Staff recommended focusing on:
  - enhancing the existing corrective action framework
  - establishing a special resolution regime for banks
  - strengthening the emergency liquidity assistance framework
  - mandating bank recovery planning
  - reforming the current blanket guarantee of deposits
- Expected benefits: promote orderly resolution of banks, promote market discipline, and help safeguard fiscal resources
- Additional recommendation: formalize arrangements between key regulators to improve crisis preparedness
- Authorities’ comment: noted legal complexity of formulating meaningful resolution and deposit insurance frameworks and welcomed further engagement with the Fund.

### Correspondent banking relationships (CBRs) and AML/CFT
- CBK actions on CBRs:
  - Kuwaiti banks have not experienced withdrawals of CBRs
  - several domestic banks have preemptively severed links with a few domestic charities and foreign exchange houses
  - CBK participates in international forums and maintains communication channels between domestic and foreign banks and relevant regulators
- AML/CFT framework strengthening:
  - Kuwait’s Financial Intelligence Unit (FIU) joined the Egmont Group
  - ongoing ML/TF national risk assessment (NRA) with World Bank assistance is nearing completion
  - NRA results will facilitate risk-based AML/CFT efforts and help reallocate resources in a revised national strategy focusing on proceeds of corruption and terrorism financing

### Anti-corruption framework
- Anti-Corruption Agency (ACA):
  - now fully operational
  - constitutional court decision rejected a petition challenging constitutionality of the ACA framework law establishing financial disclosure principles
  - amendments to the ACA law are being prepared to strengthen the framework
  - ACA is leading development of a national anti-corruption strategy
- Staff recommendations for the strategy:
  - focus on effective implementation with concrete and measurable results
  - foster synergies between AML and anti-corruption frameworks, including encouraging information sharing between the FIU and ACA

### Private sector-led growth, diversification, and labor market reforms
- Policy priority: transition from public sector-led growth to private sector-driven growth to promote diversification and job creation
- Labor market challenges and indicators:
  - under current trends, less than 15 percent of new nationals entering the labor market over the next 5 years would be absorbed by the private sector
  - limited scope for new public sector jobs going forward
- Recommended reforms:
  - manage expectations about limited availability of public sector jobs
  - better align public and private sector wages and benefits to tame reservation wages and support private sector competitiveness
  - continue education reforms (World Bank-supported) to address skill mismatches and improve employability of Kuwaitis in the private sector
  - rationalize public sector allowances and benefits
- Labor market scenarios (summary from staff analysis):
  - three scenarios illustrate absorption of 117 thousand new labor force entrants by 2022:
    - Scenario I: public sector absorbs only a small fraction of new entrants to keep the wage bill lower, but unemployment rate rises
    - Scenario II: government absorbs most new entrants to keep unemployment low at the expense of higher wage bill
    - Scenario III: government undertakes fiscal and structural reforms to boost higher private sector absorption of new entrants

### Privatization, PPPs, business environment, and SMEs
- Privatization and PPPs:
  - staff welcomed focus on privatization and PPPs for productivity gains and greater private sector role
  - encouraged accelerating execution of planned privatizations and PPPs on a transparent and competitive basis
  - advised reviewing existing processes to tackle hurdles and limit hidden costs and contingent liabilities for the government
- Business environment:
  - progress in streamlining registration and licensing has led to a marked improvement in the World Bank Doing Business ranking
  - continued reforms needed: reduce customs compliance burden, ease trade barriers, improve access to land, digitize administrative procedures, and reduce excessive regulations
- SMEs:
  - revamping of the National Fund for SME Development aims to foster access to finance, train entrepreneurs, and integrate SMEs into supply chains
  - SME Fund collaborating with stakeholders to improve credit information and review financing means including equity participation
  - staff suggested venture capital and other equity finance to complement bank lending to SMEs
  - concern: existing cap on banks’ lending spreads may constrain pricing of higher SME risks — banks subject to a maximum 300 bps spread between their lending rates and the CBK's discount rate
  - staff suggested focused relaxation of this cap to encourage bank lending to SMEs

### Statistical issues
- Recent improvements:
  - rebasing of the consumer price index welcomed
  - progress toward producing quarterly national accounts
- Staff encouragement: continue working with IMF staff to improve quality of annual national accounts

*IMF Country Report excerpt (staff appraisal).*

### 36.      Kuwait is facing “lower-for-longer” oil prices from a position of strength. The country’s

### Kuwait is facing “lower-for-longer” oil prices from a position of strength.

### Outlook and risks
- Non-oil growth is expected to continue to recover gradually to about 4 percent over the medium term.
- The fiscal and external positions are projected to remain broadly balanced.
- Possible upside risks in the short term if the recent increase in oil prices is sustained.
- Over the medium term, risks to the outlook stem mainly from a decline in oil prices.
- Additional risks: slow project implementation; spillovers from heightened regional security risks; more volatile global financial conditions.

### Fiscal policy: findings and recommendations
- Findings:
  - Large financial buffers and low debt provide policy space to implement necessary fiscal consolidation gradually.
  - Lower oil prices have weakened fiscal and external positions and generated large fiscal financing needs.
  - Recent efforts to streamline current spending, diversify revenue, and improve the business environment are under way.
- Recommendations:
  - Proceed with plans to introduce excises and the VAT, while further curtailing current expenditure.
  - Deepen reforms to reduce financing needs more rapidly, create space for growth-enhancing capital outlays, and achieve intergenerational equity levels over ten years.
  - Curtail the wage bill by better aligning public and private sector compensation and limiting public sector employment growth as more private sector jobs are created.
  - Reduce the large subsidy and transfer bills through well-communicated reforms that protect the most vulnerable.
  - Build on the recent introduction of expenditure ceilings by further strengthening the medium-term fiscal framework: anchor policies through clearly-specified long- and medium-term fiscal objectives and better account for possible fiscal risks.

### Financing approach and debt management
- Maintain the current balanced financing approach combining:
  - drawdown of assets in the GRF,
  - measured amounts of domestic bond issuance,
  - some external borrowing.
- Objectives of this approach: mitigate potential crowding out of private sector credit while maintaining a high level of liquid buffers.
- Continued progress in strengthening institutional and legal frameworks will make debt management more effective and support the development of capital markets.

### Financial sector resilience
- The banking sector is sound: high capitalization, robust profitability, and good asset quality, buttressed by prudent regulation.
- Concerns: high loan concentrations, common exposures and interconnectedness.
- Commended initiatives: CBK efforts to identify emerging pressures.
- Recommendations:
  - Use ample liquidity as an opportunity to strengthen the liquidity forecasting framework to better underpin liquidity management operations.
  - Enhance crisis management and preparedness framework, including by introducing a special resolution regime for banks and a deposit insurance mechanism.

### Exchange rate policy
- The peg to an undisclosed basket of currencies remains appropriate.
- Rationale: it has provided an effective nominal anchor.
- A moderate current account gap can largely be closed by increasing fiscal savings as recommended over the medium term.

### Structural reforms for private-sector-led growth
- Objectives: promote private sector development, diversification, and job creation; move from public sector-led growth to private sector-driven growth.
- Key reforms:
  - Create incentives for risk-taking and entrepreneurship.
  - Education reform to equip new graduates with relevant skills for private sector jobs.
  - Greater use of privatization and partnerships with the private sector to boost productivity, private sector investment and job creation.
  - Improve the business environment: facilitate access to land, reduce the burden of administrative procedures and excessive regulations, and foster competition.
  - Support SMEs by facilitating access to finance and creating a conducive environment from project design to development.

*Source: KUWAIT — INTERNATIONAL MONETARY FUND*

### 43.      Staff recommends that the next Article IV consultation takes place on the standard

### 43.      Staff recommends that the next Article IV consultation takes place on the standard 12-month cycle.

### Recommendation
- Staff recommends that the next Article IV consultation takes place on the standard 12-month cycle.

### Recent macroeconomic developments (highlights from figures)
- Real GDP Growth (2009–17): contributions shown separately for Oil and Non-oil GDP; series span 2009–2017 (figures presented in source charts).
- Headline and Core Inflation (2009–17): year-on-year percent change series presented; food/rent and core contributions shown in chart.
- Government Spending and Non-oil fiscal balance (2009–17): Government spending and non-oil fiscal balance presented as percent of non-oil GDP (calendar/fiscal year distinctions noted).
- Current account and overall fiscal balance (2009–17): percent of GDP series presented alongside average oil export price (US$/barrel).
- Contributions to real GDP growth (2009–17): components include public consumption, private consumption, investment, exports, imports.

### Fiscal developments (Figure 2 and Tables 2a/2b — key figures)
- Using calendar year for non-oil GDP, while using fiscal year for revenue, current expenditure, capital expenditure, and the balance.
- Table 2a (Billions of Kuwaiti Dinars) — selected rows (2013/14–2022/23):
  - Revenue (includes grants) (A): 35.8, 29.2, 17.8, 17.9, 19.1, 19.9, 21.0, 22.0, 22.9, 23.8 (2013/14–2022/23 series).
  - Oil and gas revenue: 29.3, 22.5, 12.1, 11.7, 12.8, 13.4, 14.0, 14.6, 15.3, 16.1.
  - Investment income and transfer of profits of public entities: 4.3, 4.6, 4.5, 5.0, 5.0, 5.1, 5.3, 5.4, 5.5, 5.6.
  - Total expenditure (B): 18.6, 21.1, 18.0, 17.6, 18.5, 19.3, 20.4, 21.6, 22.8, 23.6.
  - Expense (C): 16.6, 18.8, 15.4, 15.0, 15.7, 16.3, 17.2, 18.1, 19.0, 19.6.
  - Net acquisition of nonfinancial assets (D): 2.0, 2.4, 2.6, 2.6, 2.8, 3.0, 3.2, 3.5, 3.8, 4.0.
  - Gross operating balance [=A-C]: 19.2, 10.4, 2.5, 2.9, 3.4, 3.6, 3.8, 3.9, 3.8, 4.2.
  - Net lending / borrowing [=A-B]: 17.2, 8.1, -0.3, 0.3, 0.6, 0.6, 0.5, 0.4, 0.1, 0.2.
  - Overall balance (after transfers to FGF and excl. investment income): 9.7, 1.0, -6.0, -6.0, -5.8, -6.0, -6.3, -6.7, -7.2, -7.2 (percent of GDP values presented also in Table 2b).
  - Non-oil balance: -12.1, -14.4, -12.2, -11.4, -12.2, -12.8, -13.5, -14.2, -15.3, -15.9 (billions of KD in Table 2a; percent of non-oil GDP in Table 2b also shown).
- Table 2b (Percent of GDP) — selected ratios:
  - Revenue (includes grants): 73.7, 67.4, 52.1, 52.5, 52.5, 51.4, 50.9, 50.1, 48.8, 47.5 (2013/14–2022/23).
  - Oil and gas (percent of GDP): 60.3, 51.9, 35.3, 34.3, 35.2, 34.6, 33.9, 33.3, 32.6, 32.1.
  - Total expenditure (percent of GDP): 38.3, 48.8, 52.5, 51.7, 50.9, 49.9, 49.7, 49.3, 48.7, 47.1.
  - Non-oil balance (percent of non-oil GDP): -24.9, -33.3, -35.6, -33.4, -33.5, -33.1, -32.7, -32.4, -32.5, -31.7.

### Financial developments (Figure 3 and Table 5 — banking sector)
- Capital adequacy and leverage (2014–16 charts): Capital Adequacy Ratios and Leverage Ratios presented for GCC peers and Kuwait.
- Banking indicators (Table 5, selected series, percent unless noted):
  - Regulatory capital to risk-weighted assets: 20.2, 19.3, 15.6, 16.7, 18.9, 18.5, 18.5, 18.9, 16.9, 17.5, 18.6, 18.3 (2006–Jun-17).
  - Gross non-performing loans to total loans: 4.6, 3.8, 6.8, 11.5, 8.9, 7.3, 5.2, 3.6, 2.9, 2.4, 2.2, 2.4.
  - Return on Average Assets (ROAA): 2.7, 3.3, 0.8, 0.7, 1.2, 1.1, 1.2, 1.0, 1.1, 1.1, 1.1.
  - Return on Average Equity (ROAE): 20.1, 24.3, 6.5, 6.1, 9.1, 8.1, 9.1, 7.4, 8.7, 8.8, 8.5, 8.8.
  - Loans to deposits (percent): 96.1, 103.1, 109.0, 113.0, 116.5, 110.9, 100.5, 99.5, 103.6, 108.3, 108.9, 108.1.

### Monetary developments (Figure 4 and Table 4 — monetary survey)
- Interest rates (2004–September 2017 charts): 3-month Interbank Rate, Deposit Rate (weighted average), Lending Rate, US Federal Funds Rate series shown.
- Monetary aggregates (Table 4, Millions of KD, end of period 2013–2022):
  - Broad money (M2): 32,558; 33,620; 34,239; 34,835; 36,675; 39,188; 42,185; 45,452; 49,142; 53,023 (2013–2022).
  - Money: 8,677; 9,253; 9,091; 8,812; 9,884; 10,588; 11,425; 12,337; 13,366; 14,448.
  - Quasi money: 23,882; 24,367; 25,148; 26,024; 26,791; 28,600; 30,760; 33,115; 35,776; 38,574.
  - Claims on nongovernment sector (end period): 31,099; 32,706; 35,177; 36,201; 38,039; 40,749; 43,970; 47,479; 51,438; 55,605.
- Foreign assets (net) changes and central bank/local banks breakdown presented; annual percent changes in foreign assets and domestic assets are tabulated.

### Investment companies operations (Figure 5)
- Assets and liabilities series for investment companies presented 2001–September 2017 with breakdowns:
  - Total assets (KD billions) and foreign assets (KD billions) series presented from Jan-08 to Sep-17.
  - Number and assets of Conventional and Islamic investment companies across years (table within figure).
  - Off-balance sheet assets and asset-to-GDP and percent of banking assets ratios presented in chart and table.

### Economic outcomes under baseline and reform scenarios (Figure 6)
- Charts present scenario comparisons (2015–2022) for:
  - Overall Balance (Percent of GDP): Baseline vs Adjustment Scenario series 2015–2022 shown in chart.
  - Non-oil Primary Revenue (Percent of GDP): series 2015–2022 for Baseline and Adjustment.
  - Total KIA Assets and GRF assets (Percent of GDP): Total KIA assets and o.w. GRF assets staff estimates and projections.
  - Non-oil Real GDP Growth (Percent): series 2015–2022.
  - Inflation (Percent): series 2015–2022.
  - Public Debt (Percent of GDP): series 2015–2022; note: Debt financing under baseline and adjustment scenarios are assumed to be the same.
- Sources: IMF staff calculations. KIA and GRF assets are staff estimates and projections.

### Labor market trends (Figure 7)
- Nationals in public sector (2016): cross-country percent of total employment of nationals chart shows Qatar, Kuwait, Saudi Arabia, Oman, Bahrain.
- Employment by sector and nationality (1995–2016): stacked series for National public, National private, Expatriate public, Expatriate private (millions).
- Employment growth and contributions (2011–2016): total employment y-o-y percent change and contributions from Kuwaiti and non-Kuwaiti employment.
- Education and wage indicators: average years of schooling and TIMSS math score (2015); public wage premium series (latest available).

### Institutions and governance (Figure 8)
- Global Competitiveness indicators (2018) and Doing Business comparisons:
  - Competitiveness pillars charts including Institutions, Infrastructure, Macroeconomic Environment, Health and Primary Education, etc., with Kuwait vs GCC excluding KWT and Singapore.
  - Doing Business indicators and rankings among 189 countries; Doing Business over time for Kuwait (2014, 2017, 2018) presented as higher score implies better business climate.
  - Quality of infrastructure and electricity supply (2016) plotted against GDP per capita.

### Selected economic indicators (Table 1, 2013–22, selected rows)
- Oil and gas sector:
  - Total oil and gas exports (billions of U.S. dollars): 108.6, 97.6, 48.5, 41.5, 45.3, 47.4, 49.4, 51.5, 53.8, 56.3 (2013–2022).
  - Average oil export price (U.S. dollars/barrel): 105.5, 96.5, 49.0, 41.7, 49.1, 49.0, 49.4, 50.0, 50.8, 51.9.
  - Crude oil production (millions of barrels/day): 2.93, 2.87, 2.86, 2.95, 2.71, 2.83, 2.93, 3.02, 3.10, 3.18.
- National accounts and prices:
  - Nominal GDP (market prices, in billions of Kuwaiti dinar): 49.4, 46.3, 44.5, 33.5, 35.9, 38.1, 40.5, 43.1, 46.1, 49.3.
  - Nominal GDP (market prices, in billions of U.S. dollars): 174.2, 162.7, 114.6, 110.9, 117.3, 124.3, 132.3, 140.9, 150.6, 160.9.
  - Real GDP (annual % change): 1, 0.4, 0.6, -1.0, 2.2, -2.5, 3.9, 3.3, 3.2, 3.3, 3.1 (series as presented in table header; note formatting in source).
  - Real oil GDP: -1.8, -2.1, -1.7, 2.3, -6.0, 4.6, 3.5, 3.0, 2.8, 2.5.
  - Real non-oil GDP: 4.0, 5.0, 0.0, 2.0, 2.5, 3.0, 3.0, 3.5, 4.0, 4.0.
  - CPI inflation (average): 2.7, 3.1, 3.7, 3.5, 1.8, 2.5, 3.7, 3.2, 3.0, 2.7.
- Budgetary operations (percent of GDP, Table 1):
  - Revenue: 73.7, 67.4, 52.1, 52.5, 52.5, 51.4, 50.9, 50.1, 48.8, 47.5.
  - Oil revenue: 60.3, 51.9, 35.3, 34.3, 35.2, 34.6, 33.9, 33.3, 32.6, 32.1.
  - Balance: 35.4, 18.6, -0.3, 0.8, 1.7, 1.5, 1.3, 0.9, 0.1, 0.4.
  - Balance (after transfer to FGF and excl. inv. income): 20.0, 2.4, -17.5, -17.6, -15.9, -15.5, -15.3, -15.3, -15.3, -14.3.
- Total gross debt (calendar year-end): 3.1, 3.4, 4.7, 9.9, 19.1, 27.0, 32.3, 36.8, 40.5, 43.5 (billions? table heading indicates percent of GDP and billions elsewhere; source formatting retained).
- International reserve assets (billions of U.S. dollars): 32.2, 32.3, 28.3, 31.2, 31.8, 32.9, 34.5, 36.4, 38.7, 40.6.
- Break-even oil price (overall balance; U.S. dollar per barrel): 42.5, 54.3, 47.7, 42.5, 46.8, 47.0, 47.7, 48.8, 50.9, 51.5.

### Balance of payments (Table 3, selected rows)
- Current account (billions of U.S. dollars): 70.2, 54.4, 4.0, -5.0, 0.3, -0.4, -0.2, 0.2, 0.2, 0.3 (2013–2022 series).
- Goods (trade balance): 90.2, 77.5, 27.9, 20.1, 23.7, 25.1, 26.7, 28.1, 29.7, 31.3.
- Exports: 115.8, 104.5, 54.5, 46.5, 50.7, 53.1, 55.5, 58.0, 60.7, 63.6.
- Oil exports: 108.6, 97.6, 48.5, 41.5, 45.3, 47.4, 49.4, 51.5, 53.8, 56.3.
- Investment income (receipts): 14.6, 16.3, 16.5, 17.6, 17.8, 17.8, 18.2, 18.5, 18.6, 18.7.
- Current transfers: -19.1, -20.7, -16.6, -17.3, -17.6, -18.5, -18.9, -19.1, -19.3, -19.5.
- Capital and financial account (billions): -64.2, -52.4, -11.1, 6.3, 0.2, 1.6, 1.7, 1.7, 2.1, 1.7.
- International reserve assets (billions of U.S. dollars): 32.2, 32.3, 28.3, 31.2, 31.8, 32.9, 34.5, 36.4, 38.7, 40.6.

### Monetary survey (Table 4 — selected series and growth rates)
- Broad money (end of period, Millions of KD): 32,558; 33,620; 34,239; 34,835; 36,675; 39,188; 42,185; 45,452; 49,142; 53,023 (2013–2022).
- Claims on nongovernment sector: 31,099; 32,706; 35,177; 36,201; 38,039; 40,749; 43,970; 47,479; 51,438; 55,605.
- Growth rates (annual percent change, selected):
  - Broad money: 9.7, 3.3, 1.8, 1.7, 5.3, 6.9, 7.6, 7.7, 8.1, 7.9.
  - Claims on nongovernment sector: 7.2, 5.2, 7.6, 2.9, 5.1, 7.1, 7.9, 8.0, 8.3, 8.1.

### Financial soundness indicators (Table 5 — banking sector, 2006–Jun-17)
- Capital adequacy and liquidity:
  - Regulatory Tier I capital to risk-weighted assets: 17.7, 17.2, 14.3, 14.9, 17.3, 16.9, 16.0, 17.1, 15.6, 16.1, 16.7, 16.4.
  - Core liquid assets to total assets: 29.3, 26.9, 20.8, 20.4, 17.7, 22.1, 21.0, 22.5, 24.7, 24.3, 24.1, 23.9.
- Asset quality and provisioning:
  - Gross non-performing loans to total loans: 4.6, 3.8, 6.8, 11.5, 8.9, 7.3, 5.2, 3.6, 2.9, 2.4, 2.2, 2.4.
  - Specific provisions to gross NPLs: 47.4, 47.2, 29.0, 38.3, 33.9, 29.5, 26.9, 31.7, 35.2, 32.7, 32.9, 31.6.
- Profitability and efficiency:
  - Return on Average Assets (ROAA): 2.7, 3.3, 0.8, 0.7, 1.2, 1.1, 1.2, 1.0, 1.1, 1.1, 1.1.
  - Non-interest expenses to gross income: 27.6, 23.9, 26.4, 36.9, 37.7, 36.1, 34.0, 37.2, 33.4, 31.8, 29.6, 27.4.

*Source: Excerpts and data as presented in the IMF staff report figures and tables provided in the source content.*

### Annex I. Status of Staff’s 2016 Article IV Recommendations

### Annex I. Status of Staff’s 2016 Article IV Recommendations

### Progress on fiscal consolidation and expenditure composition
- Current expenditure was further curtailed in 2016/17, driven mostly by a decline in subsidies and transfers, allowing for an improvement in the underlying (non-oil) fiscal position.
- Electricity and water prices were increased by about 180 percent cumulatively between May and August 2017.

### Revenue and tax reform measures
- The MOF has prepared a draft excise tax bill targeting selective goods, such as tobacco and sugary drinks.
- A number of government fees—including work permit and health care fees for expatriates—have been increased.
- The GCC regional agreement on VAT and excise is pending ratification by the Parliament.

### Fiscal framework and public financial management
- The government has started implementing 3-year rolling expenditure ceilings and a top-down approach to budgeting.

### Structural reform, business environment, and governance
- Kuwait’s ranking in the WB Doing Business Indicators has improved by 6 positions this year, reflecting progress in streamlining procedures to start businesses.
- Regulators are placing greater emphasis on risk-based AML/CFT inspections. The National Risk Assessment is close to completion.
- After legal challenges, the constitutional court recently upheld the law pertaining to the mandate, powers, and organizational structure of the ACA.
- The authorities recently received Fund TA on insolvency regime and crisis management framework, and developing a special resolution regime for banks.

### Financial sector and macroprudential work
- Macroprudential measures are periodically reassessed by the CBK.
- Coordination between the CBK, the KIA and the DMO on liquidity forecasting is ongoing.
- The government submitted to Parliament a law to extend the borrowing limit and allow government debt instruments with maturities up to 30 years (from a current limit of 10 years).
- The government is working on a law that would allow it to issue Sukuk.

### Statistics and national accounts
- CPI data has been rebased using weights derived from the 2013 household survey.
- The authorities are working to produce quarterly national accounts and improve the methodology to estimate subsidies at constant prices.

*Source: Annex I. Status of Staff’s 2016 Article IV Recommendations*

---

### Annex II. Risk Assessment Matrix

### Key identified risks, likelihoods, impacts, and recommended policy responses
- Lower energy prices
  - Likelihood/Time Horizon: Low/Short to Medium Term
  - Expected impact: High — fiscal and external balances would deteriorate; government financing needs would increase; potential crowding out of private credit; private sector confidence decline; non-oil growth softening; banking liquidity and asset quality pressures; second-round effects on growth, asset quality and bank liquidity.
  - Recommended policy response: Use financial buffers for gradual fiscal adjustment; with sustained declines implement more ambitious fiscal consolidation; increase diversification efforts; consider financing options that maintain banking liquidity; enhance central bank liquidity management capabilities; supervisory vigilance to identify emerging financial stability risks.

- Tighter global financial conditions
  - Likelihood/Time Horizon: High/Short term
  - Expected impact: Medium — funding, market and credit risks for investment companies (ICs) and banks; selected banks with increased reliance on foreign liabilities could face funding tightness; government tapping international markets; some IC exposures to global/regional financial and real estate markets.
  - Recommended policy response: Enhanced surveillance of banking stability risks; improved monitoring and risk-based supervision of ICs.

- Deepening in Qatar diplomatic rift and slowdown in GCC integration
  - Likelihood/Time Horizon: Low/Short to Medium Term
  - Expected impact: Low — investor confidence across the GCC could be affected, leading to capital outflows or higher financing costs; risks to banks if growth slows, mitigated by large loss absorption buffers.
  - Recommended policy response: Enhanced surveillance of financial system.

- Slower and less effective implementation of the Development Plan (DP) 2015-19
  - Likelihood/Time Horizon: Medium/Short to Medium Term
  - Expected impact: Medium — lower non-oil growth prospects.
  - Recommended policy response: Better integrate the DP with the medium-term fiscal framework; improve budget performance through a public expenditure review to support prioritization of public spending; strengthen anticorruption efforts.

- Reversal of fiscal reforms or slower adjustment of non-core government spending
  - Likelihood/Time Horizon: Medium/Short to Medium Term
  - Expected impact: Medium — lower pace of underlying fiscal adjustment; larger financing needs and greater reliance on accumulated buffers.
  - Recommended policy response: Correct slippages; implement medium-term fiscal framework to underpin fiscal adjustment and reduce medium-term risks.

- Severe property price correction
  - Likelihood/Time Horizon: Low
  - Expected impact: Medium — potential significant losses given high exposures to real estate sector directly and indirectly; banks have substantial loss absorption capacity but risks remain.
  - Recommended policy response: Use macro-prudential tools to limit real estate exposures; improve real estate statistics; strengthen crisis preparedness and management framework.

*Source: Annex II. Risk Assessment Matrix*

---

### Annex III. Public Sector Debt Sustainability Analysis (DSA)

### Key debt and macro-financial indicators (as of November 02, 2017)
- Nominal gross public debt (percent of GDP):
  - 2015: 5.4
  - 2016: 4.7
  - 2017: 9.9
  - 2018: 19.1
  - 2019: 27.0
  - 2020: 32.3
  - 2021: 36.8
  - 2022: 40.5
  - 2022 (other row): 43.5
- Public gross financing needs (percent of GDP): -29.6, -0.4, 1.1, -1.8, -1.3, -0.9, -0.4, 0.3, 2.4, 5 (table entries).
- Real GDP growth (in percent):
  - 2015: 2.9
  - 2016: -1.0
  - 2017: 2.2
  - 2018: -2.5
  - 2019: 3.9
  - 2020: 3.3
  - 2021: 3.2
  - 2022: 3.3 (and 3.1 in another row)
- Inflation (GDP deflator, in percent):
  - 2015: 5.5
  - 2016: -24.8
  - 2017: -4.9
  - 2018: 9.9
  - 2019: 2.0
  - 2020: 3.1
  - 2021: 3.2
  - 2022: 3.5 (and 3.6 in another row)
- Effective interest rate (in percent) defined as interest payments divided by debt stock:
  - 2015: 3.2
  - 2016: 2.2
  - 2017: 4.7
  - 2018: 7.8
  - 2019: 7.7
  - 2020: 7.4
  - 2021: 7.3
  - 2022: 7.3

### Contributions to changes in public debt (selected)
- Change in gross public sector debt (cumulative): -0.9, 1.2, 5.2, 9.2, 7.9, 5.3, 4.5, 3.7, 3.0, 33.6.
- Identified debt-creating flows (cumulative): -0.6, 1.2, 1.0, 12.7, 4.3, 2.9, 2.2, 2.1, 2.6, 26.7.
- Primary deficit (percent of GDP): -30.3, -1.1, 0.9, -2.6, -2.7, -2.8, -2.7, -2.2, -2.5, -15.4.
- Primary (noninterest) revenue and grants (percent of GDP): 69.0, 55.4, 51.7, 52.8, 51.7, 51.0, 50.3, 49.1, 47.8, 302.8 (table entry).
- Primary (noninterest) expenditure (percent of GDP): 38.7, 54.3, 52.6, 50.3, 49.0, 48.3, 47.7, 46.9, 45.3, 287.5 (table entry).

### Automatic debt dynamics and other flows
- Automatic debt dynamics (interest rate/growth differential) contribution: -0.4, 1.3, 0.4, 0.1, 0.3, 0.2, 0.3, 0.1, 0.2, 1.2.
- Of which: real interest rate and real GDP growth contributions are shown in table (detailed entries preserved above).
- Other identified debt-creating flows (asset accumulation requirement) entries: 30.1, 1.0, -0.3, 15.2, 6.7, 5.4, 4.6, 4.2, 4.9, 40.9.
- Residual, including asset changes: -0.4, 0.0, 4.3, -3.5, 3.6, 2.4, 2.4, 1.6, 0.4, 6.9.

### Alternative scenarios and assumptions (selected)
- Baseline scenario underlying assumptions include projections for real GDP growth, inflation, primary balance, and effective interest rate across 2017–2022. Example: Baseline real GDP growth series: -2.5, 3.9, 3.3, 3.2, 3.3, 3.1 (table entries).
- Contingent Liability Shock and Constant Primary Balance scenarios are included with their own series for real GDP growth, inflation, primary balance, and interest rates (values preserved in tables).

*Source: Annex III. Public Sector Debt Sustainability Analysis (DSA)*

---

### Annex IV. Baseline and Reform Scenario

### I. Assumptions — Baseline scenario
- Based on enacted and announced policies and reforms, and assumes expenditure restraint.
- Non-oil revenues are assumed to increase as a result of introducing excises and VAT (2019) at 5 percent (estimated together to generate around 1 percent of GDP of additional revenue).
- Savings from the fuel price increases (about 0.2 percent of GDP by 2022) and the electricity and water tariff adjustments (1. 1 percent of GDP) are included.
- Spending restraint: wages and transfers are assumed to grow with inflation, while public employment expands at a rate of 2 percent annually; goods and services expand in line with non-oil GDP.
- Capital expenditure is assumed to grow in line with non-oil GDP.

### I. Assumptions — Reform scenario
- Assumes a gradual reduction of expenditure as a share of non-oil GDP to 54 percent by 2022.
- Further to the baseline, fuel prices are assumed to gradually increase starting from fiscal year 2018/19 to reach international or cost recovery levels by 2022 (elimination of fuel subsidy will save 0.4 percent of GDP).
- Water and electricity tariffs are assumed increase gradually to cut the subsidy in half by 2022 (2 percent of GDP savings by 2022).
- Compensation for fuel price changes is assumed to be paid to the most vulnerable households. Staff assumed compensation will take up about one fourth of the projected saving from reform (cost of 0.1 percent of GDP).
- The wage bill: stable public employment and wages increasing by slightly less than inflation. The wage reform under consideration will lead in the first year to an increase in the wage bill by KD 320 million due to standardization of the salary structure, and annual wage increases below inflation—consistent with staff advice to allow flexibility to increase wage by less than inflation if macroeconomic conditions warrant (2.3 percent of GDP savings by 2022).
- Goods and services, transfers, and other current spending items are projected to increase by a slower rate than in the baseline (non-oil GDP growth) by 2.5 percent to help achieve the expenditure target and reflect the authorities’ objectives in the Vision to rationalize spending (1 percent of GDP savings).
- The reform scenario makes room for additional allocations for capital spending (1 percent above nominal non-oil GDP growth), costing 0.4 percent of GDP by 2022.
- Non-oil revenues increase as a result of introducing the corporate profit tax on domestic corporates starting in 2021 (estimated additional revenue of 0.7 percent of GDP every year).

### II. Key indicators, 2015–22 (selected, in percent of GDP)
- Baseline scenario (overall balance):
  - 2015: -0.3
  - 2016: 0.8
  - 2017: 1.7
  - 2018: 1.5
  - 2019: 1.3
  - 2020: 0.9
  - 2021: 0.1
  - 2022: 0.4
- Baseline non-oil primary balance (percent of non-oil GDP): -87.7, -80.8, -79.4, -76.9, -74.5, -72.4, -70.7, -67.5.
- Baseline primary spending (percent of GDP): 52.4, 51.4, 50.2, 49.0, 48.6, 48.0, 47.3, 45.7.
- Baseline total government debt (percent of GDP): 4.7, 9.9, 19.1, 27.0, 32.3, 36.8, 40.5, 43.5.
- Baseline total buffer by the KIA (staff estimates and projections): 460.0, 470.2, 449.5, 430.6, 410.2, 390.3, 369.4, 349.9.
- Baseline real GDP growth (percent): -1.0, 2.2, -2.5, 3.9, 3.3, 3.2, 3.3, 3.1.
- Fiscal Reform Scenario overall balance (percent of GDP): -0.3, 0.8, 1.7, 2.6, 3.4, 4.1, 5.0, 6.1.
- Fiscal Reform Scenario total government debt (percent of GDP): 4.7, 9.9, 19.1, 27.0, 32.3, 36.8, 40.5, 43.4.
- Fiscal Adjustment under the Reform Scenario (annual change in overall balance to GDP and non-oil primary balance to non-oil GDP) includes entries such as:
  - Annual change in overall balance to GDP: -18.9, 1.2, 0.9, 0.9, 0.8, 0.7, 0.9, 1.1, 5.3 (table entries).
  - Annual change in non-oil primary balance to non-oil GDP: 15.1, 7.0, 1.4, 4.1, 4.1, 3.8, 4.3, 4.4, 22.1 (table entries).

*Source: Annex IV. Baseline and Reform Scenario*

### Annex V. External Sector Assessment

### Annex V. External Sector Assessment

### Exchange rate and external position
- Staff considers the peg to a basket of currencies as appropriate for Kuwait.
- The current exchange rate arrangement has been in place since May 2007 and has provided an effective nominal anchor.
- The NEER has remained largely unchanged over the past few years.
- The REER appreciated between mid-2014 and end-2016, but at a slower pace than in other GCC countries, while it depreciated in the first half of 2017 in line with the US dollar.

### Current account (CA) and financial account (FA) developments and projections
- Kuwait recorded its first current account (CA) deficit in over a decade in 2016.
- CA turned into a deficit of 4.5 percent of GDP in 2016 driven by further decline in oil prices.
- The current account is expected to be broadly balanced in 2017, as the projected rise in oil prices more than offsets the drop in export volumes due to the OPEC+ agreement.
- The CA is projected to remain broadly balanced over the medium term.
- The capital and financial account (FA) balance was positive in 2016.
- FA balance movements mirror the CA as they reflect to a large extent the accumulated (or use of) foreign assets by the Kuwait Investment Authority (KIA).
- Net portfolio outflows declined from US$33 billion to US$18.8 billion in 2016.
- Other investment inflows increased to nearly US$30 billion in 2016 as the government drew down GRF reserves.
- Overall, financial inflows were larger than the CA deficit, boosting the CBK foreign exchange reserves by US$3.2 billion in 2016.
- The FA surplus is expected to decline slightly in 2017, due to an improving CA balance.

### Foreign reserve adequacy and net external buffers
- CBK gross international reserves reached $31.2 billion (28 percent of GDP, 6.8 months of imports, 27 percent of broad money) at the end of 2016.
- CBK reserves stood at 110 percent of the Fund’s standard reserve adequacy level in 2016.
- Prior to 2015, exports of goods and services and broad money contributed the most to the ARA metric; since 2015 the share of exports dropped due to the decline in oil prices, increasing the contributions from broad money, short term external debt, and other liabilities.
- Reserves are forecast to rise to $31.8 billion in 2017 (about 101 percent of the ARA metric), due to the increase in medium term external debt of the government.
- The ARA metric adjusted for commodity exporters puts the adequacy of CBK reserves at about 83 percent in 2016.
- CBK international reserves constitute only a small part of the country’s net external buffers.
- KIA assets are estimated at about 470 percent of GDP in 2016, with about 320 percent in the FGF and 150 percent in the GRF; the bulk of these resources are invested in foreign assets and can be used to bolster central bank reserves if needed.

### External sustainability and intergenerational equity (PIH analysis)
- The external sustainability approach for Kuwait is based on intergenerational equity objectives and uses the permanent income model (PIH).
- The implied current account norm (constant real per-capita annuity) is a surplus of 11.9 percent of GDP in 2017.
- This is compared in the text to a baseline current account deficit of 0.1 percent of GDP, implying an estimated current account gap of about 12 percent of GDP that is projected to reduce to 10 percent of GDP by 2022.
- The imbalance is largely due to suboptimal saving of hydrocarbon revenues by the public sector; closing the large PIH fiscal gap (estimated at 9¾ percent of GDP in 2016) over the next ten years would broadly eliminate the estimated current account gap.
- The PIH is the preferred method for analyzing Kuwait’s external sustainability in this assessment, as the CA gap reflects suboptimal saving of hydrocarbon revenues rather than traditional competitiveness issues.

### EBA-lite results and diagnostics
- EBA-lite estimates show the current account balance was lower than the norm in 2016.
- Key EBA-lite figures (2016):
  - Current account actual: -4.5 (percent of GDP)
  - Current account norm: 14.8 (percent of GDP)
  - Current account gap: -19.3 (percent of GDP)
  - Policy gap: -3.5 (percent of GDP)
  - Residual: -15.7 (percent of GDP)
- Imposing a fiscal policy consistent with intergenerational equity (a fiscal balance 9¾ percent of GDP higher than in 2016 as per the PIH) brings the EBA-lite current account norm to about 15 percent of GDP, resulting in a current account gap of about 19 percent of GDP; however, the policy gap explains only about 3.5 percentage point of the estimated gap, with the large residual indicating limitations of this assessment method for undiversified commodity exporters.
- Table (selected figures):
  - External sustainability approach (2017): Current account projected 0.3 (percent of GDP); Current account norm 11.9 (percent of GDP); Current account gap -11.6 (percent of GDP); Fiscal balance norm 10.6 (percent of GDP); Actual fiscal balance 0.8 (percent of GDP); Fiscal balance gap -9.8 (percent of GDP).
  - EBA-lite approach (2016): Current account actual -4.5; Current account norm 14.8; Current account gap -19.3; Policy gap -3.5; CA-Fitted 11.2; Residual -15.7.
  - Additional temporary factors: -6.0 (percent of GDP) — about 4.2 percent is due to very low oil prices in 2016, relative to current WEO forecasts.
  - Additional adjustments to norm: -4.8 (percent of GDP).
  - REER elasticity (percent): -35.0; REER gap (+ overvaluation, percent): 22.6 (no-adj) and 24.5 (ad-hoc adj).

### Policy implications and recommendations
- Staff finds the current peg to an undisclosed basket of currencies appropriate and effective as a nominal anchor.
- The large current account gap reflects suboptimal public saving of oil revenues; substantial fiscal adjustment consistent with intergenerational equity (closing the PIH fiscal gap of 9¾ percent of GDP over about ten years) would broadly eliminate the current account gap.
- Fiscal consolidation is therefore the primary policy lever to close the CA gap and support intergenerational equity.

*International Monetary Fund — Annex V. External Sector Assessment*

### 1.8 is due to possible errors in estimating services flows and non-oil exports.

### cr1821 - 1.8 is due to possible errors in estimating services flows and non-oil exports.

### Current account assessment and adjustments
- Staff identified a large residual in the EBA-lite CA model, attributed to possible errors in estimating services flows and non-oil exports.
- An adjustment was made to:
  - Estimate the impact of temporary and statistical factors on the 2016 CA deficit.
  - Bring the cyclically-adjusted CA norm in line with the PIH norm.
- The CA-norm was brought closer to the PIH estimates (to 12 percent of GDP).
- Adjusted results:
  - Current account gap after adjustments: 8.5 percent of GDP.
  - Staff view: Given Kuwait’s export structure (dominated by oil) and limited import substitutability (significant share of imported labor and intermediate inputs), REER depreciation would have limited impact on the CA. Closing the CA gap would therefore require recommended fiscal adjustment.
- Projection and model notes:
  - Source for projected current account and norms: Staff calculations and projections.
  - The macro-balance approach (EBA-lite) employs regression analysis across a large cross-section of countries; while multilateral consistency is an advantage, the model may not fully capture features of undiversified commodity exporters such as Kuwait.

### Fiscal policy findings and recommendations
- Fiscal consolidation remains a priority to preserve fiscal space and maintain fiscal sustainability given nonrenewable oil resources.
- Recent fiscal measures and impacts:
  - Current expenditure was cut by KD 3.25 billion (about 17 percent of non-oil GDP).
  - Capital investment was raised.
  - Electricity and water prices were raised by about 180 percent between May and August 2017 (following fuel price increases starting in 2016), reducing subsidies.
- Revenue-side reforms in progress or planned:
  - Diversifying the revenue base is a priority, including increasing prices of government services and planned introduction of VAT and excise taxes within a GCC-wide initiative.
  - On August 2017, the cabinet approved the Unified GCC VAT framework agreement and the Unified GCC Selective Excise Tax Agreement; these are pending parliamentary ratification.
- Fiscal outlook and targets:
  - Kuwait’s fiscal balance—after transfers to the Future Generation Fund (FGF) and excluding investment income—can improve by about 5 percent of GDP compared to the staff baseline if current oil prices and Kuwait’s production levels are sustained in 2018.
  - Authorities acknowledge need for additional consolidation but favor a measured pace to avoid adverse impacts on activity and the financial sector.
- Policy recommendation for closing external gap:
  - Staff indicates the CA gap could only be closed by recommended fiscal adjustment rather than by exchange rate depreciation.

### Monetary and financial sector stability
- Exchange rate arrangement:
  - Since May 2007, Kuwait’s exchange rate arrangement has been a conventional peg against an undisclosed currency basket; authorities accept Article VIII obligations.
- Banking sector soundness:
  - CAR of the banking sector: 18.3 percent.
  - Additional capital requirements: up to 2 percent for systemically important banks.
  - Capital conservation buffer and countercyclical capital buffer requirements are in place; simple leverage ratio substantially higher than global benchmark.
  - Banks maintain healthy liquidity; CBK monitors liquidity and exchanges data with Ministry of Finance and Kuwait Investment Authority.
- Macroprudential and supervisory actions:
  - CBK has strengthened capital adequacy, reassessed regulations periodically, and launched initiatives to identify emerging pressures (including real estate and U.S. monetary policy normalization).
  - Staff recommends strengthening crisis management and resolution framework, including introducing a special resolution regime for banks.
  - Bank deposits are fully guaranteed.
- AML/CFT and correspondent banking:
  - Continued efforts to strengthen AML/CFT framework; Kuwait recently joined the Egmont Group.
  - No withdrawals of correspondent banking relationships reported; CBK took preemptive steps and maintained open communication with domestic and foreign banks.

### Structural reforms and private sector development
- Authorities prioritize private-sector-led diversification, job creation, and SME development under Kuwait Vision 2035 and the National Development Plan.
- Ongoing and planned measures:
  - National Fund for SME Development supports entrepreneurship with funding, incubation, capacity building, and integration into supply chains.
  - Business environment reforms have shortened time to start a business and reduced procedures for business registration and property registration.
  - Authorities established a one-stop-shop for investors and started online establishment and registration of companies.
  - Continued reforms include facilitating access to finance and land, reducing administrative burdens, enhancing PPPs, and creating incentives for entrepreneurship.
- World Bank–supported and related activities (listed in the source) focus on public sector performance, private sector development, human development, and infrastructure and urban management.

### Data, statistics, and institutional capacity
- General assessment:
  - Data provision has shortcomings but is broadly adequate for surveillance; timeliness and coordination across statistical agencies need improvement.
- National accounts:
  - Annual GDP estimates derived from benchmark year 2010; rebasing to 2013 is underway. Annual and quarterly improvements are planned.
  - Two methodological issues under discussion: (i) construction of volume movements for subsidies on products, and (ii) aggregation of FISIM into GDP.
- Price statistics:
  - CPI published monthly (last observation August 2017); weights revised June 2017 based on 2013 HIES.
  - PPI covers selected Mining and Quarrying and Manufacturing and Utilities; needs updating and extension to services and construction.
- Government finance statistics:
  - Annual GFS reported for publication in GFSY, but major components of extra-budgetary revenues and expenditures and reserve funds financing operations are not fully reported.
  - Progress toward GFSM 2001 guidance is noted, including new chart of accounts and move to accrual reporting.
- Monetary and financial statistics:
  - CBK reports sectoral balance sheet data to STA using SRFs, but timeliness and coverage could be improved; some financial corporations remain outside coverage.
  - Kuwait is not reporting FSIs to STA for public dissemination; authorities are encouraged to report FSIs for deposit-taking sectors and other financial corporations.
- Balance of payments and external statistics:
  - CBK compiles detailed annual BOP and IIP data from 2009 and quarterly BOP from 2015 in accordance with BPM6; trade data by CSB disseminated quarterly.
  - Enhancements made in travel and communication services estimates, but more improvements needed for several service items and private transfers.
  - IIP data provided to staff exclude many external assets held by the general government; fuller reporting is expected to be provided by the Executive Director for Kuwait at the upcoming Article IV board meeting.
  - Kuwait participates in CPIS and the Coordinated Direct Investment Survey; CPIS reporting excludes substantial government-held foreign securities.
- Data dissemination and standards:
  - Kuwait is an early GDDS participant; metadata last updated in 2010 and 2011.
  - CBK, CSB, and Ministry of Finance maintain webpages with various statistics; no data ROSC is available.

### Representative institutional and resource figures
- IMF quota and holdings (as reported):
  - Quota: 1,933.50 (SDR Million) 100.00 percent.
  - Fund holdings of currency: 1,777.79 (SDR Million) 91.95 percent.
  - Reserve position in Fund: 156.68 (SDR Million) 8.10 percent.
- SDR Department:
  - Net cumulative allocation: 1,315.57 (SDR Million) 100.00 percent.
  - Holdings: 1,327.80 (SDR Million) 100.93 percent.
- Kuwait’s policy and institutional actions referenced:
  - Establishment of a debt management unit and adoption of three-year rolling expenditure ceilings; top-down budget allocation process initiated.
  - The General Secretariat of The Supreme Council for Planning and Development (GSSCPD) monitors project implementation and key performance indicators.

*Prepared by IMF staff; figures and findings drawn from staff report and informational annex for Kuwait (December 21, 2017).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1821.pdf_