## 1kwtea2019001 ## Source details **Canonical URL:** [1kwtea2019001](https://www.imf.org/-/media/files/publications/cr/2019/1kwtea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1kwtea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1kwtea2019001.pdf.json) --- ### Banking sector and credit conditions - Systemwide capital adequacy ratio reached 18 percent in September 2018. - Liquidity ratios were comfortably within regulatory requirements; ample liquidity driven by deposit growth and government debt redemption in 2018 supports a credit recovery. - Profits rose and asset quality improved, with NPLs net of specific provisions falling to a historical low. - The Central Bank of Kuwait (CBK) raised the repo rate several times but kept the policy lending rate at 3 percent since March 2018. - Bank lending interest rates have risen by less than deposit rates; reduced spread between lending and deposit rates signals lower interest rate margins going forward. - Private sector loans grew 4.1 percent year-on-year in December 2018, supported by household, construction, and oil sector borrowing. - Borrowing limits for personal loans: up to 25 times net monthly salary or a maximum of KD 25,000 (up from 15 times or KD 15,000). ### Executive Board assessment, outlook, and macroeconomic projections - Growth and fiscal outlook - Growth is expected to strengthen and the underlying fiscal position to gradually improve over the medium term. - Staff baseline oil price assumption: average oil price of US$61.5 per barrel in 2019–20, falling to US$60.6 over the medium term. - Underlying fiscal position (non-oil balance excluding investment income) projected to improve by about 12½ percentage points of non-oil GDP by FY2024/25. - Overall balance projected to deteriorate by about 9 percentage points of GDP over the same period due to lower projected oil revenues. - Selected medium-term projections (selected series and years as reported) - Total oil and gas exports (billions of U.S. dollars): 97.6 (2014), 48.5 (2015), 41.5 (2016), 49.6 (2017), 65.7 (2018), 58.3 (2019), 59.6 (2020), 60.2 (2021), 60.9 (2022), 62.1 (2023), 63.6 (2024). - Average oil export price (U.S. dollars/barrel): 96.5 (2014), 49.0 (2015), 41.0 (2016), 53.4 (2017), 70.6 (2018), 61.5 (2019), 61.4 (2020), 60.6 (2021), 60.1 (2022), 60.2 (2023), 60.6 (2024). - Crude oil production (millions of barrels/day): 2.87 (2014), 2.86 (2015), 2.95 (2016), 2.70 (2017), 2.74 (2018), 2.79 (2019), 2.86 (2020), 2.93 (2021), 2.99 (2022), 3.05 (2023), 3.11 (2024). - Real GDP (annual percentage change): 0.5 (2014), 0.6 (2015), 2.9 (2016), -3.5 (2017), 1.7 (2018), 2.5 (2019), 2.9 (2020), 2.9 (2021), 2.5 (2022), 2.7 (2023), 2.9 (2024). - CPI inflation (average): 3.1 (2014), 3.7 (2015), 3.5 (2016), 1.5 (2017), 0.7 (2018), 2.5 (2019), 2.7 (2020), 4.7 (2021), 3.9 (2022), 3.0 (2023), 3.0 (2024). - Private sector loans growth (percent change): 5.2 (2014), 7.6 (2015), 2.9 (2016), 2.8 (2017), 4.1 (2018), 6.1 (2019), 6.7 (2020), 8.0 (2021), 7.2 (2022), 7.1 (2023), 7.4 (2024). - Current account (percent of GDP): 33.4 (2014), 3.5 (2015), -4.6 (2016), 5.9 (2017), 12.7 (2018), 7.4 (2019), 8.0 (2020), 8.0 (2021), 6.6 (2022), 6.1 (2023), 5.5 (2024). - International reserve assets (billions): 32.3 (2014), 28.3 (2015), 31.2 (2016), 33.5 (2017), 37.0 (2018), 37.2 (2019), 38.8 (2020), 41.1 (2021), 43.0 (2022), 45.3 (2023), 47.9 (2024). - Total gross debt (calendar year, percent of GDP): 3.4 (2014), 4.7 (2015), 10.0 (2016), 20.7 (2017), 14.8 (2018), 17.8 (2019), 21.0 (2020), 26.2 (2021), 31.1 (2022), 34.7 (2023), 38.4 (2024). - Outlook and risks - Non-oil growth projected: 3 percent in 2019 and 3½ percent in 2020; could reach 4 percent once headwinds from new taxes wear off. - Inflation should pick up to 2.5 percent in 2019–20. - Main risks: sustained drop in oil prices, delays in reforms, tighter global financial conditions, heightened regional tensions. - Staff estimates: a $10 per barrel higher/lower oil price in 2019 would imply 5 and 6.5 percent of GDP improvement/worsening in Kuwait’s fiscal and external balances compared to the baseline. ### Fiscal developments, financing needs, and debt projections - Fiscal developments and constraints - After the first current account deficit in more than two decades in 2016, the current account shifted back into surplus in 2017 and reached an estimated surplus of 12.7 percent of GDP in 2018. - Delays in the passage of a new debt law rendered the government unable to issue debt since October 2017, forcing draws on the General Reserve Fund (GRF). - Staff’s measure of the underlying fiscal position—non-oil balance less investment income in percent of non-oil GDP—indicates a modest loosening in FY17/18 and FY18/19. - Fiscal-year indicators (FY2015/16–18/19, percent on fiscal year basis, selected rows) - Revenue: 52.3; 52.8; 58.9; 60.9 - Oil revenue: 35.4; 34.5; 38.0; 43.7 - Non-oil revenue: 16.9; 18.3; 20.9; 17.1 - Expenditure 1/: 52.7; 52.3; 50.8; 48.3 - Current: 45.0; 44.2; 42.6; 40.6 - Capital: 7.7; 8.1; 8.2; 7.7 - Overall balance: -0.3; 0.5; 8.1; 12.6 - Excluding oil and investment income: -49.0; -48.6; -46.4; -44.1 - Overall balance (after transfers to FGF and excl. investment income) 2/: -17.5; -17.9; -12.6; -5.2 - Financing needs and public debt projections (FY2018/19–24/25, selected) - Net financing needs (in KD billion): 2.2; 4.3; 5.1; 5.6; 6.2; 6.7; 7.2; cumulative 35.2 - Domestic (net issuance): -1.2; 1.0; 1.0; 1.0; 0.7; 1.0; 1.0; cumulative 5.7 - External (net issuance): 0.0; 0.7; 1.8; 1.8; 1.8; 1.8; 1.8; cumulative 9.7 - Drawdown of GRF: 3.3; 2.6; 2.3; 2.8; 3.7; 3.9; 4.4; cumulative 19.8 - Public debt 2/: 14.8; 17.8; 21.0; 26.2; 31.1; 34.7; 38.4 - Stock of KIA assets 2/ 3/: 403; 425; 418; 410; 402; 392; 379 - Stock of GRF assets 2/ 3/: 575; 448; 413; 325; 16 - Stock of FGF assets 2/ 3/: 346; 371; 370; 369; 369; 367; 364 ### Financial sector recommendations and financial stability guidance - Directors welcomed the banking system's sound position and commended prudent regulation and supervision. - To enhance financial sector resilience, implement FSSA recommendations: - Further enhance crisis management framework, notably by establishing a special resolution regime for banks. - Unwind the blanket guarantee of deposits once preconditions are met. - Strengthen liquidity management and bolster systemic risk oversight. - Gradual relaxation of interest ceilings (current spread limits: spread over CBK discount rate cannot exceed 300 basis points for consumer and installment loans; 250 for corporate loans with maturity under 1 year; 400 for maturities of more than 1 year). - Strengthen AML/CFT framework; prepare for FATF/MENAFATF mutual evaluation in 2021 and act on the ML/TF national risk assessment. ### Structural reforms, private sector development, and labor market - Reform priorities to reduce oil dependence and boost private-sector employment: - Reduce role of public sector through privatization and public-private partnerships (PPPs). - Lower public-private wage premia; gradually align public sector wages with private sector. - Improve business environment: ease administrative procedures, facilitate trading across borders, promote competition, reduce restrictions on foreign ownership, improve access to land. - Support SMEs and startups via enhanced access to finance, facilitating participation in public tenders, training entrepreneurs, and the Fund for SME Development focusing on on-lending, training, and risk-sharing instruments. - Human capital and education: - Reform education (including vocational training and STEM emphasis) to raise productivity and non-oil export potential; staff estimates that rebalancing spending and reforms could raise non-oil growth potential to 5 percent (from 4 percent currently). - Privatization and PPPs: - Accelerate execution with transparent and competitive processes to limit contingent liabilities. ### Fiscal policy options, adjustment scenarios, and intergenerational equity - Authorities and staff agree adjustment should be primarily expenditure-based, supported by non-oil revenue mobilization. - Policy measures recommended: - Contain spending and cut inefficiencies: close transfer loopholes, modernize procurement, limit grants to priority sectors, improve capital project selection and execution. - Increase non-oil revenue: introduce VAT and excises; interim measures include repricing government services, enforcing hiring penalties, strengthening revenue collection. - Curtail public wage bill (17 percent of GDP): centralize compensation policy, harmonize wage grid, limit public employment growth. - Phase out subsidies and rationalize transfers: fuel/electricity/water subsidy bill almost 6 percent of GDP; transfers 9 percent of GDP. - Consider broadening taxation: apply profit tax to domestic companies; consider income tax on high-income individuals or excises on luxury goods. - Adjustment scenarios and fiscal savings (percent of GDP) - Baseline reforms total by 2024/25: 2.2 percent. - Additional reforms under adjustment scenario total by 2024/25: 5.0 percent. - Adjustment Scenario assumptions to FY2024/25 include: fuel subsidy elimination saving 0.7 percent of GDP; water and electricity subsidy cuts saving 2 percent of GDP; wage bill savings 1.3 percent of GDP; procurement/waste savings 1.2 percent of GDP; additional revenue 0.7 percent of GDP from profit tax/excises; compensatory schemes costing 0.4 percent of GDP; accelerated capital spending costing 0.8 percent of GDP. - Intergenerational equity: even with fully implemented measures under consideration, the non-oil fiscal balance would fall short of levels needed to ensure equally high living standards for future generations — a gap of 11.6 percent of non-oil GDP by 2024. ### External sector assessment and exchange rate - Exchange rate regime: peg to an undisclosed basket of currencies (in place since May 2007); Directors concurred the pegged regime remains appropriate. - Reserves and KIA assets - CBK gross international reserves: $33.5 billion at end-2017; forecast to reach $37 billion by end-2018. - Staff estimates KIA’s total assets about 400 percent of GDP at end-2018, with roughly 85 percent in the FGF and the remainder in the GRF. - External sustainability (PIH model) - Current account estimated: 12.7 percent of GDP in 2018. - Current account norm (annuity real per capita): 20.8 percent of GDP in 2018. - Current account gap: -8.1 percent of GDP in 2018. - Staff’s recommended fiscal adjustment would largely close the current account gap over the medium term. - REER assessment: staff considers the dinar to be overvalued between 5–15 percent; PIH-based CA gap used for CA-gap-based REER assessment. ### VAT, excises, and macroeconomic effects (multipliers and distributional considerations) - VAT/excise timing and revenue - Introduction of excises on tobacco and sugary drinks assumed in FY2020/21 and VAT in FY2021/22; VAT at low 5 percent rate estimated to generate stable revenue and help upgrade tax administration. - Introduction of excises and VAT is expected to generate non-oil revenue of about 2.2 percent of GDP by FY2024/25 under baseline assumptions. - Fiscal multipliers and growth effects - Short-term multiplier used: 0.3; Long-term multiplier used: 0.4. - VAT would have greatest impact on growth in 2022 (first full year of impact). - Quantified impacts in 2022: - VAT (with exemptions): non-oil growth about 0.8 percentage point lower than if no VAT were introduced. - VAT (no exemptions): non-oil growth a further 0.6 percentage point lower. - Inflationary impact (pass-through assumptions: full pass-through) - VAT with no exemptions: prices could jump by 5 percent in the month introduced; average inflation could rise to 6 percent in 2020. - VAT with exemptions (goods and services exempted account for about 36 percent of CPI basket): prices could jump by 3.3 percent in the month introduced; average inflation could reach 4.7 percent in 2020. - Staff projection without VAT reform: 2.5 percent average inflation. - Inflationary impact should dissipate by the third year; CBK could tighten monetary policy if inflation persisted. - Policy conclusions: VAT brings important benefits; costs moderate and short-lived; further delays in VAT introduction could be costly; preparations (administrative capacity, communications) should continue; strengthen social assistance to protect vulnerable groups. ### Access to finance for SMEs (constraints and recommendations) - Current situation and indicators - Only 2.5 percent of total bank credit goes to SMEs. - CBK regulations give preferential risk weights for SME loans: "75 percent versus standard 100 percent." - National Fund for SME Development provides "up to 80 percent of funding to eligible SMEs" (established 2013). - Policy recommendations - Relax interest rate caps to allow banks to price risk and extend credit to wider segments. - Facilitate alternative delivery channels (FinTech) with appropriate regulation to foster competition. - Establish an electronic registry of movable assets and a full-fledged credit bureau for commercial lending. - Revamp insolvency law to strengthen legal rights and recovery. - Shift National Fund’s focus toward on-lending through intermediaries, training entrepreneurs, and developing risk-sharing instruments (partial credit guarantees and equity finance). - Expected systemic effects: better pricing of risk, reduced loan concentration, fostered competition, and increased SME access to finance. ### Risk assessment highlights (RAM) - Main external risks and responses - Large and protracted decline in oil prices: Likelihood Medium/Short to Medium Term; Expected impact High. Recommended response: more ambitious fiscal consolidation, rebalancing spending toward growth-enhancing investment, preserve bank liquidity, enhance CBK liquidity management, maintain supervisory vigilance. - Tighter global financial conditions: Likelihood High/Short term; Expected impact Medium. Recommended response: deploy external buffers, enhance CBK surveillance. - Intensification of geopolitical risks: Likelihood Medium/Short to Medium Term; Expected impact Medium. Recommended response: use financial buffers, enhance surveillance, CBK stand ready to inject liquidity. - Main domestic risks and responses - Slower and less effective implementation of planned reforms: Likelihood Medium/Medium to Long Term; Expected impact High. Recommended response: build national consensus, strengthen anticorruption and public spending quality, expedite PFM reforms. - Severe property price correction: Likelihood Low; Expected impact Medium. Recommended response: deploy macroprudential tools, improve real estate statistics, strengthen crisis preparedness. ### Institutional and statistical recommendations - Fiscal governance and transparency - Adopt GFSM2014; improve timeliness and coverage of fiscal reporting; publish periodic fiscal reports including financing strategy and reconciliations; consider Fiscal Transparency Evaluation. - Implement new procurement law, develop e-procurement, strengthen internal controls, and build procurement workforce capacity. - Debt management and market borrowing - Approve debt law to resume market borrowing; draft law would extend maturity limit up to 30 years (from current 10 years) and allow Sukuk issuance. - Establish asset-liability management committee; publish issuance calendar and move to market-based auctions. - Statistics and data - Improve national accounts (rebase CPI), produce quarterly national accounts, strengthen CSB capacity; address data gaps in government and external accounts (FGF and GRF operations, KIA assets) and report consolidated GFS. *International Monetary Fund. KUWAIT: STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION (excerpts).* ### 2017. As a result, it has had to draw on the General Reserve Fund assets for financing. ### 1kwtea2019001 - 2017. As a result, it has had to draw on the General Reserve Fund assets for financing. ### Banking sector and credit conditions - The systemwide capital adequacy ratio reached 18 percent in September 2018. - Liquidity ratios were comfortably within regulatory requirements. - Profits rose and asset quality improved, with NPLs net of specific provisions falling to a historical low. - The Central Bank of Kuwait (CBK) raised the repo rate several times but kept the policy lending rate at 3 percent since March 2018. - Bank lending interest rates have risen by less than deposit rates. - Ample liquidity—driven by deposit growth and government debt redemption in 2018—is supporting a credit recovery. - Private sector loans grew 4.1 percent year-on-year in December 2018, supported by household, construction, and oil sector borrowing. ### Executive Board Assessment — growth, fiscal reform, and fiscal governance - Growth is expected to strengthen and the underlying fiscal position to gradually improve over the medium term. - Directors underscored the need for timely and well-sequenced fiscal and structural reforms to: - reduce Kuwait's dependence on oil, - boost government saving, - create more private sector jobs. - Directors called for deeper fiscal reforms to ensure adequate savings for future generations, including: - tackling spending rigidities and the large public sector wage bill, - gradually aligning public sector wages with those in the private sector, - increasing non-oil revenue, - boosting capital outlays to improve infrastructure and raise potential growth. - Directors encouraged proceeding with the introduction of GCC-wide excises and VAT. - Directors emphasized improving fiscal framework and governance to bolster credibility by: - enhancing fiscal transparency, - improving the public procurement framework, - increasing spending efficiency to cut waste and reduce vulnerability to corruption. ### Financial sector recommendations - Directors welcomed the banking system's sound position and commended prudent regulation and supervision. - To enhance financial sector resilience, Directors encouraged implementing the recommendations of the FSSA, particularly: - further enhancing the crisis management framework, notably by establishing a special resolution regime for banks, - unwinding the blanket guarantee of deposits once preconditions are met, - strengthening liquidity management, - bolstering systemic risk oversight, - gradual relaxation of interest ceilings. - Directors encouraged strengthening the AML/CFT framework. ### Structural reforms and private sector development - Directors stressed the need for structural reforms to improve the business environment, support entrepreneurship, and foster productivity: - further easing administrative procedures, - facilitating trading across borders, - promoting competition. - Support for SMEs and startups via: - enhancing access to finance, - facilitating participation in public tenders, - training entrepreneurs. ### Exchange rate and external outlook - Directors concurred that the pegged currency regime remains appropriate, with the peg to a basket of currencies providing an effective nominal anchor. - Directors noted that the recommended fiscal adjustment would largely close the current account gap over the medium term. ### Key statistics and medium-term projections (selected, as reported) - Total oil and gas exports (billions of U.S. dollars): 97.6 (2014), 48.5 (2015), 41.5 (2016), 49.6 (2017), 65.7 (2018), 58.3 (2019), 59.6 (2020), 60.2 (2021), 60.9 (2022), 62.1 (2023), 63.6 (2024). - Average oil export price (U.S. dollars/barrel): 96.5 (2014), 49.0 (2015), 41.0 (2016), 53.4 (2017), 70.6 (2018), 61.5 (2019), 61.4 (2020), 60.6 (2021), 60.1 (2022), 60.2 (2023), 60.6 (2024). - Crude oil production (millions of barrels/day): 2.87 (2014), 2.86 (2015), 2.95 (2016), 2.70 (2017), 2.74 (2018), 2.79 (2019), 2.86 (2020), 2.93 (2021), 2.99 (2022), 3.05 (2023), 3.11 (2024). - Real GDP (annual percentage change): 0.5 (2014), 0.6 (2015), 2.9 (2016), -3.5 (2017), 1.7 (2018), 2.5 (2019), 2.9 (2020), 2.9 (2021), 2.5 (2022), 2.7 (2023), 2.9 (2024). - Real non-oil GDP (annual percentage change): 4.9 (2014), 4.2 (2015), 1.4 (2016), 2.1 (2017), 2.5 (2018), 3.0 (2019), 3.5 (2020), 3.4 (2021), 3.2 (2022), 3.7 (2023), 4.0 (2024). - CPI inflation (average): 3.1 (2014), 3.7 (2015), 3.5 (2016), 1.5 (2017), 0.7 (2018), 2.5 (2019), 2.7 (2020), 4.7 (2021), 3.9 (2022), 3.0 (2023), 3.0 (2024). - Private sector loans growth (percent change): 5.2 (2014), 7.6 (2015), 2.9 (2016), 2.8 (2017), 4.1 (2018), 6.1 (2019), 6.7 (2020), 8.0 (2021), 7.2 (2022), 7.1 (2023), 7.4 (2024). - Net foreign assets (percent change): 3.6 (2014), -2.1 (2015), 8.7 (2016), -3.1 (2017), 10.0 (2018), 2.7 (2019), 5.6 (2020), 7.5 (2021), 6.1 (2022), 6.5 (2023), 6.9 (2024). - Current account (billions of U.S. dollars): 54.4 (2014), 4.0 (2015), -5.1 (2016), 7.1 (2017), 18.0 (2018), 10.2 (2019), 11.4 (2020), 11.9 (2021), 10.4 (2022), 10.0 (2023), 9.5 (2024). - Current account (percent of GDP): 33.4 (2014), 3.5 (2015), -4.6 (2016), 5.9 (2017), 12.7 (2018), 7.4 (2019), 8.0 (2020), 8.0 (2021), 6.6 (2022), 6.1 (2023), 5.5 (2024). - International reserve assets: 32.3 (2014), 28.3 (2015), 31.2 (2016), 33.5 (2017), 37.0 (2018), 37.2 (2019), 38.8 (2020), 41.1 (2021), 43.0 (2022), 45.3 (2023), 47.9 (2024). - International reserve assets in months of next year's imports of goods and services: 7.4 (2014), 6.5 (2015), 6.5 (2016), 6.6 (2017), 7.0 (2018), 6.8 (2019), 6.8 (2020), 7.0 (2021), 7.0 (2022), 7.1 (2023), 7.2 (2024). - Total gross debt (calendar year): 3.4 (2014), 4.7 (2015), 10.0 (2016), 20.7 (2017), 14.8 (2018), 17.8 (2019), 21.0 (2020), 26.2 (2021), 31.1 (2022), 34.7 (2023), 38.4 (2024). - Revenue (percent of GDP): 67.4 (2014), 52.3 (2015), 52.8 (2016), 58.9 (2017), 60.9 (2018), 58.6 (2019), 58.0 (2020), 58.7 (2021), 57.2 (2022), 55.8 (2023), 54.6 (2024). - Expenditures (percent of GDP): 48.8 (2014), 52.7 (2015), 52.3 (2016), 50.8 (2017), 48.3 (2018), 50.5 (2019), 51.0 (2020), 51.9 (2021), 51.9 (2022), 51.7 (2023), 51.1 (2024). - Balance (percent of GDP): 18.6 (2014), -0.3 (2015), 0.5 (2016), 8.1 (2017), 12.6 (2018), 8.0 (2019), 7.0 (2020), 6.7 (2021), 5.2 (2022), 4.2 (2023), 3.4 (2024). - Balance (after transfers to FGF and excl. investment income) (percent of GDP): 2.3 (2014), -17.5 (2015), -17.9 (2016), -12.6 (2017), -5.2 (2018), -10.4 (2019), -11.6 (2020), -12.3 (2021), -13.0 (2022), -13.5 (2023), -13.7 (2024). - Non-oil balance excl. investment income (percent of non-oil GDP): -102.5 (2014), -88.3 (2015), -83.8 (2016), -86.5 (2017), -87.8 (2018), -85.7 (2019), -84.7 (2020), -81.3 (2021), -78.9 (2022), -77.2 (2023), -75.3 (2024). - Excluding oil-related subsidies and benefits (percent of non-oil GDP): -81.2 (2014), -77.5 (2015), -74.8 (2016), -77.4 (2017), -77.2 (2018), -76.4 (2019), -75.8 (2020), -72.8 (2021), -70.8 (2022), -69.3 (2023), -67.7 (2024). - Kuwaiti dinar 3-month deposit rate (year average; in percent): 0.8 (2014), 0.8 (2015), 1.1 (2016), 1.5 (2017), 2.3 (2018). ### Staff report — key issues, outlook, and policy priorities (summary) - Context: Growth strengthened and fiscal and external positions improved thanks to higher oil prices; increased uncertainty about oil price prospects underscores the need to reduce dependence on oil and increase savings for the future. - Key priority: build national consensus around equitable and well-sequenced reforms to underpin fiscal consolidation and promote the private sector; reforms should improve quality of public services, strengthen governance, and be supported by a vigorous communications campaign. - Outlook and risks: - Non-oil growth is expected to strengthen as infrastructure projects accelerate and credit recovers. - Lower oil prices in 2019 will dampen the overall fiscal balance. - Underlying fiscal position (non-oil balance excluding investment income) should gradually improve over the medium term thanks to expected new taxes, repricing of government services, and spending restraint. - Fiscal financing needs will remain large reflecting mandatory transfers to the Future Generations Fund (FGF). - Downward risks include a sustained drop in oil prices, delays in reforms, tighter global financial conditions, and heightened tensions in the region. - Macroeconomic policy guidance: - More ambitious reforms are needed to secure adequate savings for future generations and reduce financing needs. - Recommended measures include reforming the public wage bill, subsidies, and transfers; raising non-oil revenue; and enhancing the fiscal policy framework and governance to increase efficiency of spending on human and physical capital. - Financial stability guidance: - Continue strengthening cross-border supervision, crisis management and liquidity forecasting frameworks, and deepening capital markets. - Private-sector led growth: - Reduce the role of the public sector through privatization and public-private partnerships (PPPs), - lower public-private wage premia, - improve the business environment. *International Monetary Fund. KUWAIT: STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION (excerpts).* ### 2.5 percent. After the first deficit in more than two decades in 2016, the current account shifted ### Kuwait — Fiscal and External Balances and Oil Dependence ### Fiscal and External Balances: recent developments and fiscal-year data - After the first current account deficit in more than two decades in 2016, the current account shifted back into surplus in 2017 and reached an estimated surplus of 12.7 percent of GDP in 2018. - Inflation fell to a multiyear low of 0.7 percent. - Staff’s measure of the underlying fiscal position—non-oil balance less investment income in percent of non-oil GDP—indicates a modest loosening in FY17/18 and FY18/19. - Delays in the passage of a new debt law rendered the government unable to issue debt since October 2017, forcing draws on the General Reserve Fund (GRF). Fiscal Developments, FY2015/16–18/19 (percent, fiscal year basis) - Revenue: 52.3; 52.8; 58.9; 60.9; 94.2; 91.0; 109.7; 121.1 - Oil revenue: 35.4; 34.5; 38.0; 43.7; 63.7; 59.5; 70.9; 87.0 - Non-oil revenue: 16.9; 18.3; 20.9; 17.1; 30.5; 31.5; 38.9; 34.1 - Expenditure 1/: 52.7; 52.3; 50.8; 48.3; 94.8; 90.2; 94.7; 96.1 - Current: 45.0; 44.2; 42.6; 40.6; 81.0; 76.1; 79.3; 80.8 - Capital: 7.7; 8.1; 8.2; 7.7; 13.8; 14.0; 15.3; 15.3 - Overall balance: -0.3; 0.5; 8.1; 12.6; -0.6; 0.9; 15.0; 25.0 - Excluding oil and investment income: -49.0; -48.6; -46.4; -44.1; -88.3; -83.8; -86.5; -87.8 - Excluding fuel subsidies: -43.0; -43.4; -41.5; -38.8; -77.5; -74.8; -77.4; -77.2 - Overall balance (after transfers to FGF and excl. investment income) 2/: -17.5; -17.9; -12.6; -5.2; -31.6; -30.9; -23.5; -10.3 Memo items - Nominal GDP (KD billion): 34.1; 33.9; 37.8; 42.0 - Nominal non-oil GDP (KD billions): 18.9; 19.6; 20.3; 21.3 - Break-even oil price (U.S. $/barrel): 47.5; 43.4; 45.2; 48.3 - Break-even oil price (after transfers to FGF and excl. investment income): 72.9; 69.5; 78.7; 76.9 - Stock of KIA assets (calendar-year basis) 3/: 456; 477; 465; 403 Notes - 1/ Starting FY2016/17, there has been a reclassification of expenditure items. - 2/ Excludes revenue transferred to the FGF (4.8 percent of GDP) and investment income (13 percent of GDP) in 2018/19. - 3/ Figures are staff estimates based on inflows into FGF (10 percent of revenues excl. investment income), outflows from GRF, and assumptions on return on KIA assets. ### Monetary, credit, and financial sector developments - The CBK raised the repo rate several times while keeping the policy lending rate at 3 percent since March 2018. - Bank lending interest rates have risen by less than deposit rates; private sector loans grew 4.1 percent year-on-year in December (household, construction, and oil sector borrowing). - Systemwide capital adequacy ratio (CAR) reached 18 percent in September 2018. - Asset quality improved: NPLs net of specific provisions fell to a historical low. - Profits rose in 2018; reduced spread between lending and deposit rates signals lower interest rate margins going forward. - Bank liquidity: ample liquidity from deposit growth and government debt redemption in 2018 supports credit recovery. Selected indicators and measures (from figures and text) - Policy lending rate: 3 percent (since March 2018). - Borrowing limits: borrowers can now borrow up to 25 times their net monthly salary or a maximum of KD 25,000, up from 15 times or a maximum of KD 15,000 previously. - Average System Liquidity Ratios, 2017: current and minimum shown in charts (percent). - Interest rate series include Fed Funds Rate, Policy Rate, 3-Month Interbank Rate, Weekly Repo Rate, 3-Month LIBOR (US$). Real estate and equity - Sales of investment and residential properties rebounded since mid-2018. - Kuwaiti stocks outperformed GCC markets; market capitalization rose following March 2018 inclusion in the FTSE Russell Emerging Market Index. - Equity Prices index (Jan. 2012 = 100) shows rise to Jan-2019 levels. ### Outlook and Risks - Medium-term prospects are broadly favorable. - Growth projections: - Oil output: 2 percent growth in 2019; rebound to 2.5 percent in 2020. - Non-oil growth: projected to increase to 3 percent in 2019 and 3½ percent in 2020; could reach 4 percent once headwinds from new taxes wear off. - Inflation: should pick up to 2.5 percent in 2019–20. - Credit: expected to pick up as growth strengthens, capital projects come on stream, aided by ample bank liquidity and easing of personal loan limits. - Staff baseline oil price assumption: average oil price of US$61.5 per barrel in 2019–20, falling to US$60.6 over the medium term. - Policy measures assumed: introduction of excises on tobacco and sugary drinks in FY2020/21 and a VAT in FY2021/22, small increases in fees for government services, some current spending restraint. - Underlying fiscal position (non-oil fiscal balance excluding investment income) projected to improve by about 12½ percentage points of non-oil GDP by FY2024/25. - Overall balance projected to deteriorate by about 9 percentage points of GDP over the same period due to lower projected oil revenues. Financing needs and public debt projections (FY2018/19–24/25) - Overall balance (calendar-year series): 12.6; 8.0; 7.0; 6.7; 5.2; 4.2; 3.4 - Overall balance (after transfer to FGF and excl. inv. income): -5.2; -10.4; -11.6; -12.3; -13.0; -13.5; -13.7 - Non-oil balance excl. investment income (percent of non-oil GDP): -87.8; -85.7; -84.7; -81.3; -78.9; -77.2; -75.3 - Net financing needs (in KD billion): 2.2; 4.3; 5.1; 5.6; 6.2; 6.7; 7.2; cumulative 35.2 - Domestic (net issuance): -1.2; 1.0; 1.0; 1.0; 0.7; 1.0; 1.0; cumulative 5.7 - External (net issuance): 0.0; 0.7; 1.8; 1.8; 1.8; 1.8; 1.8; cumulative 9.7 - Drawdown of GRF: 3.3; 2.6; 2.3; 2.8; 3.7; 3.9; 4.4; cumulative 19.8 - Public debt 2/: 14.8; 17.8; 21.0; 26.2; 31.1; 34.7; 38.4 - Stock of KIA assets 2/ 3/: 403; 425; 418; 410; 402; 392; 379 - Stock of GRF assets 2/ 3/: 575; 448; 413; 325; 16 - Stock of FGF assets 2/ 3/: 346; 371; 370; 369; 369; 367; 364 - Current account balance 2/: 12.7; 7.4; 8.0; 8.0; 6.6; 6.1; 5.5 Risks - Main risks: sustained drop in oil prices and delays in reforms. - A sustained drop in oil prices could lead to twin deficits, large financing needs, tightening credit conditions, asset quality deterioration, and liquidity drying up. - Delays in fiscal and structural reforms could slow growth and increase fiscal deficits; investor appetite could wane, raising funding costs and rollover risks. - If risks materialize, authorities could draw on Kuwait’s large financial assets to meet financing needs. - Geopolitical and security tensions in the region pose additional downside risk. - Authorities built the FY2019/20 budget on a conservative $55 per barrel oil price assumption. - Staff’s calculation: a $10 per barrel higher/lower oil price in 2019 would imply 5 and 6.5 percent of GDP improvement/worsening in Kuwait’s fiscal and external balances compared to the baseline. ### Policy discussions — A. Bolstering long-term fiscal sustainability - Authorities and staff agree adjustment should be primarily expenditure-based, supported by non-oil revenue mobilization. - Government spending as a share of GDP rose fastest in the GCC during high oil prices and is currently the highest in the region; non-oil revenues are low. Policy recommendations and measures - Contain spending and cut inefficiencies via: - Close loopholes in administration of transfers. - Modernize procurement. - Limit grants to priority sectors. - Improve capital project selection and execution. - Increase non-oil revenue: - Introduce VAT and excises (delayed); staff encouraged securing parliamentary support for excises and VAT. - Interim measures: reprice government services, enforce penalties on businesses not meeting quotas on hiring Kuwaitis, strengthen revenue collection (including utilities). - VAT at low 5 percent rate: staff note it would have a moderate and temporary adverse impact on growth and inflation, yield stable revenue, help upgrade tax administration, and contribute to more informed policy-making. - Speed up preparatory work, especially administrative capacity, to avoid implementation delays. - Curtail public wage bill (17 percent of GDP): - Centralize compensation policy, harmonize public wage grid, align public wages with private sector, foster merit-based compensation. - Limit public employment growth; staff cautioned that an early civil service retirement bill approved by parliament would be costly and make public employment more attractive. - Gradually phase out subsidies and rationalize transfers: - Fuel, electricity, and water subsidy bill remains almost 6 percent of GDP. - Rationalize transfers (9 percent of GDP) by consolidating programs, improving targeting, enforcing eligibility criteria, and include measures to protect the most vulnerable. - Broadening taxation: - Apply profit tax to domestic companies; consider excise tax on luxury goods or income tax on high-income individuals. - Rebalance spending toward capital with improved implementation and project planning, selection, and execution. Intergenerational equity and adjustment scenarios - Even with fully implemented measures under consideration, the non-oil fiscal balance would fall short of levels needed to ensure equally high living standards for future generations — a gap of 11.6 percent of non-oil GDP by 2024. - Staff proposed a fiscal reform path to gradually close the intergenerational savings gap over the next decade: most adjustment from spending to decline to about 75 percent on non-oil GDP by 2024 (level Kuwait sustained in 2000–10). - Adjustment scenario estimated fiscal savings (percent of GDP) under baseline and adjustment scenarios (selected rows): - Baseline reforms total by 2024/25: 2.2 percent - Additional reforms under adjustment scenario total by 2024/25: 5.0 percent - Elements include: strengthen social transfers administration; VAT and excises; fuel price reform; electricity and water subsidy reform; corporate tax and/or PIT on wealthy; wage and benefits control; goods and services spending savings; household compensation; capital expenditure adjustments. Political economy - Authorities plan to bring the non-oil fiscal deficit down more gradually than staff recommended; staff warned that proceeding too slowly increases risk of larger, more abrupt future adjustments. - A comprehensive, well-designed fiscal and structural reform package including targeted compensatory measures and private-sector job creation could garner broad social consensus; communications campaign would be key. ### Policy discussions — B. Enhancing policy frameworks - Strengthen fiscal governance: - Adopt GFSM2014; improve timeliness of fiscal reporting; expand coverage to off-budget entities and contingent liabilities; increase transparency of oil revenue management. - Consider a focused Public Expenditure Review of education and healthcare spending. - Implement new procurement law promptly to deliver better value for money. - Strengthen operational independence and capacity of the Anti-Corruption Agency (ACA) administering asset declarations. - Fiscal framework and rules: - 3-year expenditure ceilings introduced in FY2017/18 improved planning but planned FY2019/20 spending would breach the cap if fully executed. - Staff urged introduction and adherence to new medium-term ceilings anchored to a long-term fiscal objective (e.g., intergenerational equity benchmarks). - Set an intermediary target such as non-oil primary balance to delink spending from oil revenues; authorities expressed interest in studying fiscal rule options with staff. - Develop contingent liabilities framework covering public pensions, state-owned enterprises, and PPPs. - Debt law and market borrowing: - Approval of the debt law would allow government to resume market borrowing; staff baseline assumes parliament will authorize borrowing in FY2019/20. - If delayed, continued drawdowns of the GRF will be necessary to sustain compulsory transfers to the FGF, precipitating faster GRF depletion than baseline though total KIA assets would continue to increase in nominal terms. - Once market borrowing resumes, increasing tenor of bonds would help build a long-term yield curve; issuing sovereign Sukuk would widen investor base. - Institutional improvements for debt management and capital markets: - Establishment of an asset-liability management committee (MOF, CBK, KIA, Kuwait Petroleum Corporation) welcomed to weigh borrowing and investment implications. - Publish an issuance calendar and move to market-based auctions to allow price discovery and deepen debt markets. *Source: IMF staff report excerpt on Kuwait — Fiscal and External Balances and Oil Dependence.* ### Box 1. Fiscal Governance ### Box 1. Fiscal Governance ### Fiscal Transparency - Fiscal transparency is key to boosting accountability and policy credibility. - Progress: transparency with respect to legislative oversight and public access to key fiscal data. - Gaps and recommendations: - Improve quality and coverage of fiscal reporting. - Periodic fiscal reports by the MOF could include: - a more in-depth overview of developments; - assessment of fiscal policy stance; - government’s financing strategy; and - reconciliation of outturns and approved budgets. - Adopt an Integrated Financial Management Information System to facilitate timely and accurate oversight of budget implementation. - Strengthen transparency of oil wealth management by disclosing information on the value chain from the point of extraction to how revenues flow through the government and KIA’s financial operations. - Authorities are encouraged to join the Extractive Industries Transparency Initiative. - Staff recommended conducting a Fiscal Transparency Evaluation to develop a comprehensive roadmap to address transparency needs. ### Public Procurement - Implementing the new procurement law would help deliver value for money and suppress opportunities for corruption. - Context: - Given the large size of public procurement in Kuwait, losses due to inefficiencies and abuses can be costly. - A new procurement law enacted in 2016 aims to promote competition, transparency, and equal treatment. - Law features and next steps: - Lays the ground for establishing dedicated procurement bodies in public organizations, adopting modern approaches to bid evaluation, introducing life-cycle-costing and other non-price criteria, instituting an enhanced complaint mechanism, and facilitating SME participation in public tenders. - Next steps include: - developing implementing regulations; - introducing e-procurement and framework agreements; - strengthening internal controls; and - building capacity of the procurement workforce. - Related numeric guidance: - Government spending on goods and services and capital projects is about 16 percent of GDP. - Gains from e-procurement could be large—economies that adopted it reported efficiency gains of 10-20 percent (World Bank, 2017). ### Spending Outcomes - Overall message: Socioeconomic outcomes should better correspond to high levels of public outlays. - Education: - Kuwait spends more per student than most countries, but outcomes point to lower quality of education in key areas and indicate mismatches between existing curricula and private sector skill demands. - Authorities are upgrading the curriculum, building capacity to train teachers, and planning to introduce a Teacher Certification program. - To increase spending efficiency, consider bringing the teacher and nonteaching staff headcount (per student) closer to levels consistent with Kuwait’s peers. - Healthcare: - Kuwait achieved significant improvements in health outcomes over the past 20 years, particularly in extending life expectancy and reducing infant mortality. - Kuwait spends more than double the EM average on healthcare, while health outcomes are only marginally above the EM average, suggesting ample room for efficiency gains. - Potential savings and reforms: - tighten eligibility for treatment abroad; - increase out-of-pocket spending (from an average of 13 percent to the EM and OECD averages of 15–20 percent); - promote private sector participation through privatization and public-private partnerships. - Related numeric evidence: - Reducing the efficiency gap between low-performing and best-performing OECD countries at similar levels of spending in half would increase life expectancy by over one year. Achieving this through higher spending, in contrast, would require an increase of over 30 percent. IMF (2014). - Public Investment: - The quality of infrastructure in Kuwait lags many peers, reflecting low efficiency and the level of spending. - Reforms should focus on: - improving medium-term planning of sustainable levels of investment; - enhancing evaluation and selection of projects; - implementing projects in a timely and cost-effective way. - Staff encouraged the authorities to undertake a Public Investment Management Assessment to assess infrastructure governance and support institution building. - Related conceptual note: - The frontier is defined by the countries with the highest infrastructure quality and access (output indicator based on a hybrid index made of physical and survey-based measures) for a given level of public capital stock (input). The greater the distance from the frontier, the less efficient is public investment. ### Safeguarding Financial Stability - Banking sector resilience: - Prudent regulation and supervision have helped keep the banking sector resilient. - The current FSAP found banks resilient to various stress test scenarios, including protracted credit, liquidity, and market shocks. - Main vulnerabilities: high concentration of loans, large depositors, common exposures (particularly in the real estate sector), and interconnectedness of the financial system. - CBK actions: continuous calibration of macroprudential tools; plans to upgrade stress-testing techniques and early warning indicators. - Staff noted that gradual relaxation of interest rate ceilings would allow banks to better price risks and expand lending to new market segments. - Current spread limits: The spread over the CBK discount rate cannot exceed 300 basis points for consumer and installment loans, 250 for corporate loans with maturity under 1 year and 400 for maturities of more than 1 year. - Supervisory regime improvements: - Further refinements could include enhancing consolidated supervision, strengthening cross-border supervision, and better integrating on- and off-site supervision. - To reduce inconsistent interpretation of Shariah compliance, authorities proposed draft amendments to the CBK law establishing a centralized Shariah Board at the CBK. - Systemic risk oversight and crisis management: - CBK prepared a draft law assigning the CBK an explicit financial stability mandate and creating a Financial Stability Committee to coordinate CBK, Capital Markets Authority, MOF, and Ministry of Commerce and Industry. - Reforms should focus on: - enhancing the corrective action framework; - establishing a special resolution regime for banks; - mandating bank recovery planning; - unwinding the blanket guarantee of deposits once preconditions are met (see ¶25 of the FSSA report). - Liquidity management: - Ample liquidity environment offers an opportunity to enhance the liquidity management framework. - With IMF assistance, CBK is reviewing its liquidity forecasting framework to improve accuracy and extend the forecast period. - Information-sharing arrangements between CBK and relevant agencies are essential. - Gradually reducing current ample liquidity will be needed to incentivize banks to manage balance sheets effectively and spur interbank market development. - Exchange rate and external sector: - Authorities are fully committed to the peg to an undisclosed basket of currencies. - Staff’s external sector assessment suggests an 8 percent of GDP current account gap, which would close under the staff’s proposed fiscal consolidation path (Annex V). - Staff noted that, as the economy diversifies over the longer term, the benefits of greater exchange rate flexibility may increase. - AML/CFT framework: - Authorities preparing for mutual evaluation by the FATF and MENAFATF in 2021; conducted the ML/TF national risk assessment (NRA) with World Bank assistance. - Next steps: develop a plan to address risks identified by the NRA and move towards risk-based AML/CFT efforts. - No withdrawals of correspondent banking relationships have been detected. - Authorities improving coordination between members of the National AML/CFT Committee, with the Financial Intelligence Unit preparing a memorandum of understanding with the ACA. - Further mobilizing AML measures, including prevention of offences and more effective use of financial intelligence, would support anti-corruption efforts. ### Boosting Private Sector-led Growth - Urgency and challenge: - A vibrant private sector is the only sustainable solution to creating enough jobs for large numbers of Kuwaiti youth entering the labor market. - The private sector needs to absorb most of the 99 thousand Kuwaiti nationals (21 percent of the current Kuwaiti labor force) expected to enter the job market in the next 5 years. - Structural reform priorities: - Promote entrepreneurship, foster productivity and competitiveness, and encourage private initiative. - Manage expectations about limited public sector jobs and align public wages with those in the private sector. - Business environment: - Commended reforms: streamlining registration and licensing, digitalizing administrative procedures, and relaxing restrictions on foreign direct investment. - Remaining priorities: eliminate excessive regulations, ease cost of trading across borders, enhance competition, improve access to land, and further reduce restrictions on foreign ownership. - Privatization and PPPs: - Privatization and PPPs have yet to gather momentum, though several projects are in the pipeline. - Authorities plan to accelerate execution of privatization and PPP projects. - Staff emphasized transparent and competitive execution to limit contingent liabilities for the government. - Education and labor market reforms: - Comprehensive education reform, including enhanced vocational training, would produce a better-skilled and more productive workforce. - Staff cautioned that hiring quotas for Kuwaitis may not be sustainable as they could raise cost of doing business. - Staff advised revamping public wage subsidies for nationals working in the private sector to make subsidies time-bound and targeted toward younger Kuwaitis. - SMEs and finance: - Focus on SMEs is appropriate given job-creating potential. - Revised SME definition based on number of employees and asset size should help diagnostics of obstacles and ways to create an enabling environment. - The Fund for SME Development, with its revised mandate, will be able to provide equity finance, train entrepreneurs, and promote SME integration into supply chains. - Kuwait Stock Exchange planning to set up a venture capital platform to help startups raise funds locally. - Growth potential: - Staff estimates that rebalancing government spending towards growth-enhancing investment, strengthening governance, and encouraging the private sector could raise Kuwait’s non-oil growth potential to 5 percent, from 4 percent currently. ### Statistics - Enhancing coverage, quality, and timeliness of statistics is essential for informed policy making. - Progress and recommendations: - The Central Statistical Bureau (CSB) improved methodology used to construct volume movements for product subsidies in national accounts. - CSB started disseminating quarterly GDP from early 2018. - Staff encouraged authorities to boost support to the CSB, including building technical capacity and strengthening data provision arrangements. *International Monetary Fund* ### Box 2. Access to Finance for SMEs ### Box 2. Access to Finance for SMEs ### Policy context and authorities' actions - Financial inclusion of SMEs is the authorities’ policy priority. - The national development program has placed SMEs "at the center of the sustainable growth and job creation strategy" given limited availability of public sector jobs relative to the size of the cohort entering the workforce. - Regulatory and public support measures taken: - CBK’s regulations give preferential risk weights for SME loans: "75 percent versus standard 100 percent." - In 2013, the authorities set up the National Fund for SME Development to provide "up to 80 percent of funding to eligible SMEs." ### Current situation and constraints - SME lending remains low: - "Only 2.5 percent of total bank credit goes to SMEs." - Demand and supply factors: - Demand factors may be partly responsible. - The "2017 WBG Business Confidence survey of mostly mid-sized and small enterprises" found access to finance to be the "second largest constraint to doing business, after obtaining licenses." - Sources cited: "CBK, World Bank FinStats Database." - Methodological note: "Lerner index compares output pricing and marginal costs (markup) based on the methodology described in Demirgüç-Kunt and Martínez Pería (2010). Higher values of the Lerner index indicate less bank competition." (footnote 1) ### Policy recommendations to enhance SME access to finance - Regulatory measures: - "Relaxing interest rate caps would allow banks to properly price risk and extend credit to wider segments of the economy." - Facilitating alternative means of financial services delivery, including FinTech—"provided they are appropriately regulated"—to foster competition and boost access. - Institutional measures: - Establish an "electronic registry of movable assets" and a "full-fledged credit bureau for commercial lending" to mitigate credit information asymmetry. - "Revamping the insolvency law would strengthen parties’ legal rights." - Strategic measures for public SME support: - Shift the National Fund’s focus from direct financing toward: - "on-lending through financial intermediaries," - "training of entrepreneurs," - developing risk-sharing instruments such as "partial credit guarantee schemes and equity finance vehicles." - Expected systemic effects: - More appropriate pricing of risk and relaxed caps would enable banks to "extend credit to wider segments of the economy" and "reduce high concentration of loans in banks." - FinTech and regulatory changes would "foster competition in the financial sector and boost access to finance." *Sources: CBK; World Bank FinStats Database; Staff Paper, “Financial Inclusion of Small and Medium-Sized Enterprises in the Middle East and Central Asia.”* ### Annex I. Status of Staff’s 2017 Article IV Recommendations ### Annex I. Status of Staff’s 2017 Article IV Recommendations ### Implementation status and key policy actions - Implement gradual fiscal consolidation and shift expenditure composition toward growth-enhancing investment. - Staff’s measure of the underlying fiscal position—non-oil balance less investment income in percent of non-oil GDP—indicates a minor loosening in FY17/18 and FY18/19. - In GDP terms current expenditure declined slightly, supported by lower wage bill and spending on goods and services. - Gains were partially offset by a rising subsidy bill (due to higher oil prices) and higher interest payments. - The share of capital outlays in total expenditure has remained broadly unchanged. - Further reform energy and water subsidies. - Following significant electricity and water price increases in 2017, the authorities focused their efforts on revenue collection. - Introduce excises, VAT, and a business profit tax for domestic companies, and improve tax administration. Adjust prices of government services. - The GCC-wide excises and VAT are pending parliament’s approval. - The authorities expect to receive parliament’s authorization for excises and implement them in FY2020/21. - The VAT is likely to be postponed until FY2021/22. - The IMF has recently provided technical assistance on the VAT. - The government raised fees for some services, including for work permits and health care fees for expatriates. - Establish a medium-term fiscal framework and improve public financial management. - The government introduced 3-year rolling expenditure ceilings in 2017, but they have been discontinued in the FY2019/20 budget. - Further improve business environment to foster diversification (business climate, privatization, competition). - Progress in streamlining registration and licensing, digitizing administrative procedures, and relaxing restrictions on FDI. - Intent to focus on removing excessive regulations, easing the cost of trading across borders, enhancing competition, and improving access to land. - Further strengthen AML/CFT and anticorruption frameworks. - Completed the ML/TF national risk assessment with assistance from the World Bank. - Implementing recommendations of the recent IMF diagnostic of the effectiveness of the AML/CFT regime. - Improving coordination between members of the National AML/CFT Committee. - Strengthen insolvency regime and crisis management framework and develop special resolution regime for banks. - Authorities received TA from IMF and World Bank; the recent FSAP covered these issues extensively. - Establish framework to operationalize macro-prudential measures. - The CBK has a functioning macro-prudential framework. It has recently eased limits on consumer lending. - Further develop and extend a liquidity forecasting framework. - The CBK is working to enhance its liquidity forecasting framework. - The IMF is providing assistance to strengthen the liquidity forecasting tool and operational framework and improve the effectiveness of liquidity management. - Develop a medium-term debt management strategy, introduce regular market-based auctions, increase coordination between MOF, CBK, and KIA. - A draft debt law is pending parliament’s approval; it would extend the borrowing limit and allow issuing debt instruments with maturities up to 30 years (from the current limit of 10 years). - The government is preparing a draft law that would allow government Sukuk issuance. - Further improve national accounts; produce quarterly national accounts; rebase CPI. - The Central Statistical Bureau has rebased CPI data using weights from the 2013 household survey. - It has started disseminating quarterly GDP from early 2018. *Source: Annex I. Status of Staff’s 2017 Article IV Recommendations (IMF staff text).* --- ### Annex II. Risk Assessment Matrix (RAM) ### RAM methodology note - The RAM shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). - Relative likelihood: “low” indicates a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent. - “Short term (ST)” and “medium term (MT)” indicate the risk could materialize within 1 year and 3 years, respectively. ### Main external risks, likelihoods, impacts, and recommended responses - Large and protracted decline in oil prices - Likelihood/Time Horizon: Medium/Short to Medium Term - Expected impact: High — fiscal and external balances would deteriorate; higher government financing needs; weakening private sector confidence; lower FDI and non-oil growth; contractionary effect on financial liquidity; risk of crowding out private credit if domestic financing used; potential impairments in banks’ assets via equity and real estate volatility. - Recommended policy response: - More ambitious fiscal consolidation is needed, while mitigating impact by rebalancing spending toward growth-enhancing investment. - Accelerate measures to encourage private investment and boost non-oil activity, including improving the business climate. - Financing strategy should preserve adequate bank liquidity; enhance CBK liquidity management capabilities; maintain supervisory vigilance. - Continue reforms to reduce Kuwait’s dependence on oil. - Tighter global financial conditions - Likelihood/Time Horizon: High/Short term - Expected impact: Medium — government external borrowing more expensive; domestic borrowing risks crowding out private credit; banks and investment companies dependent on foreign funding face higher costs; sharp rate increases could trigger corrections in GCC equity and real estate markets, posing financial stability risks. - Recommended policy response: - Deploy large external buffers to finance fiscal deficit and mitigate financial system impact. - CBK should enhance surveillance of banking stability risks. - Weaker than expected global growth and rising protectionism - Likelihood/Time Horizon: Low to Medium/Short to Medium Term - Expected impact: Direct impact limited; large indirect impact through lower oil prices and FDI. - Recommended policy response: See recommended response to lower oil prices. - Intensification of geopolitical risks - Likelihood/Time Horizon: Medium/Short to Medium Term - Expected impact: Medium — operates mainly through oil prices and regional contagion; confidence shock could trigger capital outflows. - Recommended policy response: - Use Kuwait’s large financial buffers to moderate shock effects. - Enhance financial system surveillance; CBK stand ready to inject liquidity and respond via monetary and prudential measures. ### Main domestic risks, likelihoods, impacts, and recommended responses - Slower and less effective implementation of planned reforms - Likelihood/Time Horizon: Medium/Medium to Long Term - Expected impact: High — lower investor confidence and investment, hindering non-oil growth and diversification; weaker private sector employment prospects; potential increase in public sector job creation. - Recommended policy response: - Build national consensus for key fiscal and structural reform. - Strengthen anticorruption efforts; improve public spending quality with focus on infrastructure and service delivery efficiency. - Expedite public financial management reforms emphasizing transparency and public accountability. - Severe property price correction - Likelihood/Time Horizon: Low - Expected impact: Medium — banks have substantial loss absorption capacity, but high exposures to real estate (direct and indirect) could cause significant losses. - Recommended policy response: - Use macro-prudential tools to limit real estate exposures. - Improve real estate statistics to support monitoring and supervisory response. - Strengthen crisis preparedness and management frameworks. *Source: Annex II. Risk Assessment Matrix (IMF staff text).* --- ### Annex III. Public Sector Debt Sustainability Analysis (DSA) — Baseline Scenario (selected indicators) - As of February 01, 2019 Selected series (calendar-year basis; values correspond to years 2017–2024 unless otherwise noted) - Nominal gross public debt (in percent of GDP): 5.3, 20.7, 14.8, 17.8, 21.0, 26.2, 31.1, 34.7, 38.4 - Public gross financing needs (in percent of GDP): -21.7, -5.7, -11.1, -5.5, -6.1, -6.0, -3.8, -4.1, -3.9 - Real GDP growth (in percent): 1.6, -3.5, 1.7, 2.5, 2.9, 2.9, 2.5, 2.7, 2.9 - Inflation (GDP deflator, in percent): -0.2, 13.7, 15.4, -5.2, 1.5, 1.7, 1.7, 1.9, 2.2 - Nominal GDP growth (in percent): 1.7, 9.7, 17.4, -2.9, 4.4, 4.6, 4.3, 4.7, 5.1 - Effective interest rate (in percent): 2.6, 4.2, 3.7, 4.8, 5.2, 5.5, 5.3, 5.5, 5.5 - Change in gross public sector debt (cumulative 2019–24): 0.3, 10.7, -5.9, 3.0, 3.2, 5.3, 4.9, 3.6, 3.7, cumulative 23.6 - Primary deficit (in percent of GDP): -22.5, -7.0, -12.0, -10.2, -8.5, -8.3, -7.4, -6.6, -6.0, cumulative -47.0 - Primary (noninterest) revenue and grants (in percent of GDP): 66.4, 58.4, 58.4, 59.9, 58.2, 58.5, 57.6, 56.2, 55.0, cumulative 345.3 - Primary (noninterest) expenditure (in percent of GDP): 43.9, 51.5, 46.4, 49.7, 49.7, 50.2, 50.1, 49.6, 49.0, cumulative 298.3 - Identified debt-creating flows (change in percent of GDP): -0.1, -0.9, -3.1, 1.0, 3.3, 3.1, 1.7, 2.0, 1.5, cumulative 12.4 - Other identified debt-creating flows (asset accumulation requirement; in percent of GDP): 22.4, 6.6, 11.3, 10.0, 11.6, 11.2, 8.8, 8.3, 7.4, cumulative 57.3 Ratings and spreads (panel) - EMBIG (bp): 352 (noted alongside sovereign spreads) - Moody's: Aa2 / Aa2 - S&P: AAAA - Fitch: AAAA Notes on derived contributions: - Automatic debt dynamics (interest rate/growth differential) contribution series: 0.1, -0.5, -2.4, 1.2, 0.1, 0.2, 0.3, 0.2, 0.1, cumulative 2.2 - Real interest rate contribution and real GDP growth contribution are shown in the DSA decomposition. *Source: Annex III. Public Sector Debt Sustainability Analysis (IMF staff estimates).* --- ### Annex IV. Baseline and Adjustment Scenarios — Assumptions and Key Projections ### Key assumptions — Baseline Scenario - Based on enacted and announced policies and reforms; assumes modest expenditure restraint. - Introduction of excises in FY2020/21 and the VAT in FY2021/22, estimated to generate non-oil revenue of about 2.2 percent of GDP by FY2024/25. - Strengthen social transfers administration to yield savings of 0.6 percent of GDP by FY2024/25. - Spending restraint assumptions: - Public wages grow with inflation; employment expands at 2 percent annually. - Transfers grow with inflation. - Spending on goods and services expands in line with non-oil GDP. - Capital expenditure assumed to grow in line with non-oil GDP. ### Key assumptions — Adjustment Scenario - Targets gradual reduction of expenditure to about 75 percent of non-oil GDP by FY2024/25. - Fuel prices gradually increase from FY2019/20 to reach cost recovery by FY2024/25, saving 0.7 percent of GDP (elimination of fuel subsidy). - Water and electricity tariffs increase gradually to cut the subsidy in half by 2024, yielding savings of 2 percent of GDP by end of forecast period. - Wage bill: constant public employment; compensation grows more slowly than inflation; expected savings of 1.3 percent of GDP by FY2024/25. - Better procurement and waste reduction: savings of 1.2 percent of GDP in spending on goods and services by FY2024/25. - Introduction of a profit tax on domestic companies and/or excises on luxury goods (or tax on high-income individuals) starting FY2021/22 with additional revenue of 0.7 percent of GDP by FY2024/25. - Compensatory schemes to mitigate adverse effects on vulnerable households amounting to 0.4 percent of GDP by FY2024/25. - Debt issuance assumed unchanged compared to baseline, producing much slower drawdown of assets. - Accelerating capital spending: grow at 1 percent above nominal non-oil GDP growth, costing 0.8 percent of GDP by FY2024/25. ### Selected projection highlights (Baseline vs Fiscal Adjustment Scenario) - Baseline: Non-oil balance excl. investment income (percent of non-oil GDP) for 2015–2024: -88.3, -83.8, -86.5, -87.8, -85.7, -84.7, -81.3, -78.9, -77.2, -75.3 - Baseline: Non-oil primary revenue (percent of GDP) 2015–2024: 3.6, 3.7, 4.4, 4.2, 4.5, 4.6, 6.2, 6.6, 6.5, 6.4 - Baseline: Primary spending (percent of GDP) 2015–2024: 52.6, 52.2, 50.4, 47.6, 49.8, 50.1, 50.8, 50.6, 50.2, 49.5 - Baseline: Total government debt (percent of GDP) 2015–2024: 4.7, 10.0, 20.7, 14.8, 17.8, 21.0, 26.2, 31.1, 34.7, 38.4 - Baseline: Total buffer by the KIA (percent of GDP) 2015–2024: 456.3, 476.6, 464.8, 403.2, 425.0, 418.1, 410.4, 401.9, 391.7, 379.4 - Baseline: Net government financial assets (2-1) 2015–2024: 451.7, 466.6, 444.1, 388.4, 407.2, 397.1, 384.2, 370.8, 356.9, 341.0 - Baseline: Current account balance (percent of GDP) 2015–2024: 3.5, -4.6, 5.9, 12.7, 7.4, 8.0, 8.0, 6.6, 6.1, 5.5 - Baseline: Real GDP growth (percent, yoy) 2015–2024: 0.6, 2.9, -3.5, 1.7, 2.5, 2.9, 2.9, 2.5, 2.7, 2.9 - Adjustment Scenario (selected): Non-oil primary revenue (percent of GDP) rises to 6.8, 7.2, 7.1, 7.0 in later projection years; Primary spending (percent of GDP) declines relative to baseline (e.g., 48.6, 48.5, 47.7, 46.1, 44.6 in projection years). - Fiscal Anchor under Adjustment: Distance from expenditure rule (75 percent of non-oil GDP) shown in the table (values indicating distance by year). ### Fiscal adjustment dynamics (selected indicators) - Baseline: Annual change in overall balance to GDP (2015–2024): -18.9, 0.9, 7.6, 4.5, -4.6, -1.0, -0.3, -1.5, -1.0, -0.8, cumulative -9.1 - Adjustment Scenario: Annual change in non-oil primary balance to non-oil GDP shows stronger positive adjustment (e.g., cumulative and annual entries culminating in 22.5 over 2019–24 in adjustment scenario). *Source: Annex IV. Baseline and Adjustment Scenarios (IMF staff estimates).* ### Annex V. External Sector Assessment ### Annex V. External Sector Assessment ### External position and current account - The current account (CA) returned to surplus in 2017 after recording its first deficit in many years in 2016. - The CA is estimated to have reached 12¾ percent of GDP in 2018 but is expected to decline in 2019 on account of lower oil prices. - Staff estimates that investment income reached a record high of about US$19 billion in 2017 and should remain broadly stable over the medium term. - Staff’s recommended fiscal adjustment would bring the current account to a level consistent with fundamentals. ### Capital and financial account; net flows - The capital and financial account (FA) registered net outflows in 2018. - FA largely reflects the accumulation (or use) of Kuwait’s foreign assets held by the Kuwait Investment Authority (KIA). - Flows reversed from inflows of about US$9 billion in 2016 to estimated outflows of US$14½ billion in 2018. ### Reserves and KIA assets - CBK’s gross international reserves amounted to $33.5 billion (28 percent of GDP, 6.6 months of imports, 28 percent of broad money) at end-2017. - CBK reserves are forecast to reach $37 billion by end-2018 or about 102 percent of the IMF’s reserve adequacy metric. - Staff estimates that KIA’s total assets reached about 400 percent of GDP at end-2018, with roughly 85 percent of it in the FGF and the remainder in the GRF. - Both FGF and GRF are mainly invested in foreign assets. Selected reserve adequacy and related metrics (as reported) - CBK Gross International Reserves: 28 33 43 117 333 352 537 036 (table formatting in source preserves yearly series; CBK gross level at end-2017 = $33.5 billion) - KIA Assets (staff estimates): 522985 521366 555595 568723 (table formatting as in source) - ARA metric: 28413281743358036147 (as reported in source table) - Foreign Reserves as a % of the ARA metric (in percent): 100111100102 (as reported) - Foreign Reserves (including KIA) as a % of the ARA metric (in percent): 1940196117541676 (as reported) - Foreign Reserves in percent of GDP: 25 28 28 26 (reported series) - Foreign Reserves in percent of broad money: 25 27 28 29 (reported series) - Foreign Reserves in months of next year's imports of goods and services: 6.5 6.5 6.6 7.0 (reported series) ### Exchange rate regime, NEER/REER and real oil prices - The exchange rate regime is a peg to an undisclosed basket of currencies (in place since May 2007). - The peg has “served Kuwait well, providing an effective nominal anchor as well as limited exchange rate flexibility.” - The NEER has remained largely unchanged over the past few years, while the REER has experienced a long-term trend appreciation that has been less pronounced than in other GCC countries. - GCC charts in the source show REER and NEER indexed to 2010=100 and real oil price on the right axis (Dec-99 to Dec-18 series). ### External sustainability: PIH model findings - Because Kuwait is projected to run persistent CA surpluses, the permanent income model (PIH) is the preferred method for assessing external sector sustainability. - The current account norm implied by a constant real per-capita annuity (under the baseline) is a surplus of 20.8 percent of GDP in 2018. - The estimated current account gap (CA gap) is about 8.1 percent of GDP in 2018 (12.7 percent estimated CA vs 20.8 percent norm). - The CA gap is forecast to fall to 6 percent of GDP over the medium term. - The PIH-based assessment finds that closing the PIH fiscal gap (estimated at about 7 percent of GDP in 2024) as proposed by staff would fully eliminate the estimated CA gap over the long term. Tabulated PIH results (2018, as presented) - Current account estimated: 12.7 (percent of GDP) - Current account norm (annuity real per capita): 20.8 (percent of GDP) - Current account gap: -8.1 (percent of GDP) - Current account norm (annuity constant to GDP): 19.5 (percent of GDP) - Current account gap (annuity constant to GDP): -6.8 (percent of GDP) - Fiscal balance estimated: 12.6 (percent of GDP) - Fiscal balance norm: 17.8 (percent of GDP) - Fiscal balance gap: -5.2 (percent of GDP) ### EBA-lite 2.0 assessment and limitations - The revised External Balance Assessment-lite (EBA-lite 2.0) methodology is not well suited for an undiversified exporter such as Kuwait. - Imposing a fiscal surplus 7 percent of GDP higher than projected under the baseline (consistent with intergenerational equity) would imply a current account norm of about 33½ percent of GDP under EBA-lite 2.0. - The corresponding current account gap would be about 21 percent of GDP, with the policy gap explaining only 3 percentage points. - The EBA-lite 2.0 model features an unusually large residual for Kuwait: 18 percent of GDP out of the 21 percent of GDP current account gap. - Given the large residual, staff used the CA-gap estimate from the PIH model for the CA-gap-based REER assessment. EBA-lite 2.0 table excerpts (2018, as presented) - Current account estimated: 12.7 - Current account norm (EBA-lite 2.0, with PIH-based CA gap): 33.5 - Policy gap: -3.1 - CA-Fitted: 30.4 - Current account gap (EBA-lite 2.0): -20.8 - Residual: -17.7 ### REER assessment and exchange rate valuation - The REER model based on EBA-lite 2.0-like fundamentals suggests a small undervaluation of about 3 percent. - Applying EBA-lite 2.0 elasticities to the PIH-based CA gap implies an overvaluation of about 15 percent. - Staff considers the dinar to be overvalued between 5–15 percent, given that the PIH-based approach better captures Kuwait’s undiversified commodity-exporter features and the sensitivity to assumptions. Reported REER metrics (2018) - REER Elasticity (PIH (real per capita)/CA model (adjusted)): -0.53 - REER Gap (+overvaluation) (PIH): 15.2 - REER model gap (unadjusted): -2.8 ### Macroeconomic implications of REER adjustments and policy guidance - REER depreciation would have a limited impact on the CA in Kuwait due to: - Exports dominated by oil (limited responsiveness to non-oil price/competitiveness changes). - Very limited substitutability of imports by domestic products, in part because of the significant share of imported labor and intermediate inputs in domestic production. - Therefore, exchange rate depreciation is somewhat ineffective in compressing imports and closing the CA gap. - The CA gap should be closed through fiscal consolidation: staff’s recommended fiscal adjustment would not only close the CA gap but also be reflected in a more depreciated REER. *Source: IMF staff calculations and analysis in Annex V. External Sector Assessment (as provided in the source content).* ### 8. Expenditure multipliers were used to ### 8. Expenditure multipliers were used to ### Multipliers and methodology - Tax multipliers for VAT are not available for Kuwait or other GCC countries because these countries have had no consumption or income taxes on households. - Current expenditure multipliers are used as a proxy because the VAT introduction would have a similar effect to public wage cuts by reducing consumption. - Literature estimates for current spending multipliers in the GCC: - Espinoza and Senhadji (2011): Short-term 0.2 – 0.3; Medium-term 0.6 – 1.1. - Cerisola et al. (2015): Short-term 0.2 – 0.4; Medium-term 0.3 – 0.7; Medium-term 1.4 and 0.7 (table shows both capital and current spending lines). - IMF (2016) (using data through 2015): Short-term 0.3; Medium-term no statistically significant effect beyond one year in updated estimates, but table reports Short-term 0.4 and 0.3, Medium-term 1.6 and 0.3. - Analysis in this note uses: - Short-term multiplier: 0.3 - Long-term multiplier: 0.4 - The fiscal multiplier definition used: "The fiscal multiplier indicates the amount non-oil GDP would change if government spending changes by one unit." ### Impact on non-oil growth - Timing: - The VAT would have the greatest impact on growth in 2022, the first full year of the impact. - The contractionary impact will continue into the third year due to lagged effects. - The headwind would dissipate by the fourth year, with non-oil growth returning to its potential 4 percent rate. - Quantified impacts in 2022: - Under the VAT with exemptions scenario: non-oil growth would be about 0.8 percentage point lower than if no VAT were introduced. - If no exemptions were granted: non-oil growth could be down a further 0.6 percentage point. - Scenarios modeled (chart labels preserved): - No VAT - VAT (no exemptions) - VAT (with exemptions) ### Impact on inflation - Pass-through assumptions: - Estimates of price elasticities of supply and demand are not available for Kuwait. - Staff has assumed a full pass-through given Kuwait is a price taker in international markets and local product markets are, for the most part, imperfectly competitive. - Shock approach: - The inflationary impact is estimated by shocking the affected components of the CPI basket with the 5 percent tax rate in April 2021. - VAT with no exemptions scenario: all CPI basket items are assumed to be impacted. - VAT with exemptions scenario: goods and services assumed to be exempted account for about 36 percent of the basket. - Quantified inflation effects: - Prices could jump by 5 percent in the month the VAT is introduced under the VAT with no exemptions scenario. - Prices could jump by 3.3 percent in the month the VAT is introduced under the VAT with exemptions scenario. - Under VAT with no exemptions: - Average inflation could rise to 6 percent in 2020. - Under VAT with exemptions: - Average inflation could reach 4.7 percent in 2020. - Staff projection without VAT reform: 2.5 percent average inflation. - Comparison with regional outcomes: - Saudi Arabia observed a one-month consumer price jump of 3½ percent when VAT was introduced; yoy inflation rose to 3 percent in January 2018 from -1 in December 2017. - UAE observed consumer prices rising by 2.6 percent with the VAT introduction; yoy inflation reached 4.7 percent in January 2018, up from 2.7 percent in December 2017. - Staff expects Saudi Arabia and the UAE to collect about 1¾-2 percent of GDP in VAT; both countries are expected to raise about 1½ percent of GDP in revenues in 2018. - Duration of inflationary impact: - The inflationary impact should fully dissipate by the third year due to: - One-off effects disappearing and imported goods following international levels. - Contractionary effects of the VAT weighing on aggregate demand. - The credible exchange rate peg anchoring inflation expectations. - In the unlikely event of persistently high inflation after VAT introduction, the Central Bank of Kuwait could tighten monetary policy. The dinar’s peg to a basket of currencies provides a degree of monetary policy flexibility. ### Policy conclusions and recommendations - Net assessment: - The VAT would bring important benefits for Kuwait, while its costs will be moderate and short-lived. - Benefits include promoting revenue diversification, contributing to fiscal adjustment, and strengthening tax administration and overall policy-making. - Contractionary and inflationary costs are expected to be moderate and temporary. - Urgency and implementation: - Further delays in VAT introduction could become costly for Kuwait. - Key stakeholders should intensify consultations to overcome the current impasse over the VAT. - Technical preparations for the eventual introduction of the VAT and excises should continue, most importantly: - Building administrative capacity. - Laying out the communications strategy with the public and businesses. - Delays in the VAT (and excises) reform would put Kuwait at the risk of falling behind its fellow GCC members. - Social mitigation: - It is important to reassess and, strengthen as needed, social assistance programs to mitigate the negative impact of the VAT on the most vulnerable groups. *Source: 1kwtea2019001 - 8. Expenditure multipliers were used to (PDF chapter/section).* ### Annex VII. Exports and FDI as Engines of Growth and ### Annex VII. Exports and FDI as Engines of Growth and Diversification ### A. Introduction — structural context and need for diversification - Kuwait’s exports are concentrated in hydrocarbons and related products: 83 percent. - Kuwait continues to primarily rely on exports of raw materials, with little value added beyond extraction. - The 2014 oil price shock demonstrated high susceptibility of fiscal and external accounts to oil price fluctuations (2014–16), increasing the need to reduce oil dependence. - Vision 2035 aims to transform Kuwait from a public sector- and oil-driven economy to a more diversified private sector-driven economy with jobs for nationals. ### B. Recent trends in trade and FDI - Trade openness and volumes - Ratio of exports and imports of goods and services to GDP exceeded 95 percent in 2018. - Over the past two decades, the volume of goods and services trade grew at an average annual rate of 5.1 percent, higher than the real GDP growth rate of 4.1 percent. - Non-oil exports and export structure - Non-oil exports have been flat as percent of GDP over the past two decades. - Kuwait’s non-oil exports amounted to 4.5 percent of GDP and 9 percent of total exports in 2017. - Exports of services (particularly communication) expanded rapidly in 2002-09 but dwindled after the global financial crisis. - Export quality (proxy based on unit value) is low compared to EM and regional averages. - Herfindahl-Hirschmann Index (HHI) indicates Kuwait’s exports are highly concentrated relative to other GCC countries. - FDI patterns - Kuwait is a net investor in the rest of the world and invests part of its large oil revenues abroad. - Except for a short-lived surge in 2009-12 (primarily foreign acquisitions in telecommunications), inward FDI has been low. - FDI inflows are heavily concentrated by sector: business services accounted for 53 percent of cumulative FDI inflows in 2012-16; real estate 14 percent; financial services 10 percent; telecom 5 percent; tourism 5 percent; other 13 percent. - Cumulative FDI inflows by source, 2012-2016: France 41 percent; UAE 18 percent; China 15 percent; South Korea 9 percent; other 9 percent; Japan 3 percent; Bahrain 3 percent; USA 2 percent. ### C. Trade and investment environment — constraints and reforms - Non-tariff barriers and trade facilitation - Kuwait has free trade with GCC customs union members but intra-regional trade remains low. - GCC common external tariffs are low, but non-tariff restrictions are prevalent in Kuwait. - WEF’s Global Enabling Trade Report ranks Kuwait in the bottom 25th percentile on market access, border administration, infrastructure, and operating environment. - Areas of weakness: time and cost to import and export (documentary and border compliance), predictability of procedures, openness to foreign participation, and quality of infrastructure. - FDI policy and restrictions - New FDI law created a “one-stop shop” and allows tax and customs relief, land and real estate allocations, and permission to recruit foreign labor. - Special economic zones (SEZ) offer independent, more liberal regulations and developed infrastructure. - Openness to foreign investment outside SEZs remains low due to restrictions on foreign ownership and onerous licensing and registration requirements. - Prohibition of land ownership by non-GCC citizens is cited as an impediment. - Licensing requirements can be ambiguous and are not predefined. - Governance, legal system, and corporate governance - Improved governance and consistent, timely, nondiscriminatory enforcement of law would make Kuwait more attractive to FDI. - Courts are perceived as slow; arbitration and mediation mechanisms are not well utilized. - Corporate governance concerns: lack of an independent board, insufficient oversight of key enterprise risks, weak transparency and disclosure practices. - Competition and public sector dominance - Kuwait has passed a competition law and established a Competition Protection Bureau. - Market competition is weak, with implementation and enforcement issues; the law does not apply to government or government-controlled entities. - Procurement practices that give preferential treatment to local suppliers and the large public sector can create an uneven playing field for foreign companies. - Privatization efforts: in 2016 the government announced that nearly 60 percent of public sector companies are earmarked for privatization and allowed the private sector to acquire shares of up to $9 billion. - Infrastructure and human capital - Kuwait lags other GCC countries on the World Bank’s Logistics Performance Index (LPI). - Human capital is a key determinant of export performance and FDI. - Kuwait has tightened regulations for hiring foreign nationals, especially for high-skilled jobs, which could discourage FDI. - Kuwait lags AEs in education outcomes, especially in STEM education, despite significant spending. ### D. Quantifying potential non-oil exports and FDI — empirical findings - Non-oil export potential - Using regression coefficients from studies identifying determinants of country exports, Kuwait has one of the largest non-oil exports gaps in the GCC. - Non-oil exports potential estimated relative to fundamentals: country size, income level, human capital, macroeconomic stability, real effective exchange rate (REER), trade openness, and infrastructure. - Regression results indicate non-oil exports would rise in response to competitiveness gains and improvements in human capital. - In a fixed exchange rate regime, competitiveness gains can be achieved by lowering unit labor costs; containing relatively high wages (partly driven by generous public-private wage premia) is one policy lever. - Education reform is critical to move up to higher value-added goods and services; Kuwait lags AEs in STEM outcomes. - FDI potential - Empirical determinants of FDI in non-commodity exporters: trade openness (ratio of total trade to GDP), growth, quality of legal systems, and human capital have positive and statistically significant impacts on FDI inflows. - Using regression coefficients from the cited study, Kuwait’s FDI gap is estimated at 2.3 percent of GDP. ### Policy recommendations (implied from analysis) - Make the operating environment more enabling to non-oil exports and FDI by: - Easing non-tariff trade restrictions and improving border administration, documentary and border compliance time and costs, and predictability of procedures. - Reducing restrictions on foreign ownership outside SEZs and clarifying licensing and registration requirements. - Allowing land ownership or addressing land-ownership prohibitions that impede FDI. - Improve governance, rule of law, and dispute-settlement mechanisms: - Modernize the legal system, better utilize arbitration and mediation, and ensure consistent application of rules to reduce discretion and corruption opportunities. - Strengthen corporate governance: ensure independent boards, better oversight of enterprise risks, and improved transparency and disclosure. - Promote competition and level the playing field: - Enforce competition law broadly, including reforms to procurement practices and to the treatment of government-controlled entities. - Pursue privatization where appropriate (noting the 2016 privatization announcement targeting nearly 60 percent of public sector companies and allowing private acquisition of up to $9 billion in shares). - Invest in infrastructure and human capital: - Improve logistics and transport infrastructure and services to raise LPI performance. - Reform education, with emphasis on STEM and skills relevant to higher value-added production. - Labor market adjustments: - Align public sector wages with labor productivity and consider measures to contain unit labor costs to improve competitiveness, while balancing employment objectives for nationals. *Prepared by Anastasia Guscina and Botir Baltabaev, drawing on IMF staff analysis.* ### 2017. The results suggest that improving ### 1kwtea2019001 - 2017. The results suggest that improving ### Findings on FDI, human capital, and non-oil exports - Improving the investment climate and labor markets would be among the most effective ways to boost FDI. - Further removing restrictions on FDI and upgrading the legal environment and education to the advanced economy average would increase Kuwait’s FDI potential by 0.3 percentage point of GDP. - FDI can play an instrumental role in boosting Kuwait’s non-oil exports by: - facilitating access to foreign markets, - bringing modern management practices and technical know-how, - enhancing market competition, and - augmenting worker skills. - Non-oil export boost from higher human capital (Goods and services, percent change in the level) — IMF Staff estimates: - 0.8 - 2.3 - 3.0 - 3.5 - 1.7 - 0.9 - 2.0 - Actual and Potential FDI Inflows: 2011 (Percentage of GDP) - -17 - TIMSS 8th Grade Scores for the Region, 2015 — Science Scores and Math Scores (regional presentation; sources: TIMSS 2015; and IMF staff calculations). - Note: These indicators should be interpreted with caution due to a limited number of respondents, a limited geographical coverage, and information availability. They may also not reflect more recent important structural transformations. ### Policy recommendations to realize non-oil export and FDI potential - Invest in human capital, including by reforming the education system so that it can equip Kuwaitis with knowledge and skills demanded in the global economy. - Implement labor market reforms to reduce unit labor costs and strengthen competitiveness. - Further enhance the legal framework to increase predictability and protection, including for minority investors, provide dispute prevention and resolution mechanisms, and strengthen public governance. - Improve the business climate, including by easing foreign ownership restrictions; enhancing corporate governance; lowering restrictions on foreign workers. - Reduce non-tariff barriers to trade and trade costs, including by streamlining and automating border procedures. - Reduce the role of the public sector in the economy and raise the efficiency of public investment. *Source: KUWAIT — INTERNATIONAL MONETARY FUND (excerpts).* ### References ### References and Informational Annex (KUWAIT Staff Report for the 2019 Article IV Consultation) ### References - Dabbah, M. (2007). Competition Law and Policy in the Middle East, Cambridge Univ. Press, p. 20-21. - Heuser, C., and M. Aaditya, 2017, “Services Trade and Global Value Chains” (June 27, 2017). World Bank Policy Research Working Paper No. 8126. - International Monetary Fund, 2018a, “Opportunity for All: Promoting Growth and Inclusiveness in the Middle East and North Africa.” - __________________, 2018b, “Trade and Foreign Investment—Keys to Diversification and Growth in the GCC”. - __________________, 2017, “Fiscal Adjustment in the GCC: Towards a Growth-Enhancing-Expenditure-Based Adjustment.” - Rahman, J., A. Stepanyan, J. Yang, and L. Zeng, 2015, “Exports in a Tariff-Free Environment: What Structural Reforms Matter? Evidence from the European Union Single Market.”, IMF Working Paper, WP/15/187, IMF, Washington, DC. - S&P Global Market Intelligence, 2017, “Lagging Corporate Governance Still the Achilles' Heel Of Gulf Companies,” S&P Global. - Walsh, James P. and Yu Jiangyan, 2010, “Determinants of Foreign Direct Investment: A Sectoral and Institutional Approach.” IMF Working Paper, WP/10/187, July. ### Fund relations — key points and technical assistance (As of January 31, 2019) - Kuwait contributed to the PRGF-HIPC Trust: interest-free deposit of SDR 4.2 million maturing in 2024 and a grant contribution of SDR 0.1 million. - Exchange rate arrangement: Since May 2007, a conventional peg against an undisclosed currency basket; accepted Article VIII, Sections 2 (a), 3, and 4. - Article IV consultations: last completed on January 12, 2018 (Country report 18/21—Published January 26, 2018). - FSAP: last update March 2010; current FSAP mission took place April–May 2018 (focused on financial sector oversight, capital markets, SME access to finance). - Recent technical assistance since 2014 (selected items and dates): - LEG: Central Bank Law — January 2014 - FAD: Tax Policy and Administration — February 2014; September 2015; October-November 2018 - MCM: Macroprudential Policy — March 2014; Deposit Insurance System — September 2015; Bank Stress Testing — May-June 2016; Crisis Management and Resolution — April-May 2017; Monetary Policy Operations — February 2019 - FAD: Fiscal Rule — February 2015; Establishing a Debt Management Office — November 2015; Debt Management Strategy — January 2016; Macro-Fiscal Unit — November 2016; Macro-Fiscal Unit — May 2017 - STA: National Accounts Statistics — March 2015; Government Finance Statistics — April-May 2018; Government Finance Statistics — September-October 2018; National Accounts Statistics — January 2019 - LEG: AML/CFT ongoing TA project — May 2012–16; AML/CFT Diagnostic — October 2018 - Resident representative: None. - Kuwait consented to the quota increase under the Fourteenth General Review of Quotas. ### Relations with the World Bank (As of January 16, 2019) - Country Partnership Strategy (2016–20) organized around four strategic themes: 1. Public sector performance and citizen accountability — includes PEFA support, public procurement guidebook, Public Expenditure Review (PER), State Audit Bureau support, and Public Financial Management (PFM) program. 2. Private sector development — support to transform Kuwait into a trade and financial hub; activities include enhancing institutional effectiveness of the Competition Protection Authority, improving the business environment, and analysis of trade diversification opportunities. 3. Human development — flagship education program: $35 million multi-year strategic partnership supporting education reforms; engagements on social protection, labor, and health. 4. Infrastructure Development and Urban Management — land management modernization, disaster risk management, and solid waste management and planning. - Ongoing activities (selected): - PEFA Capacity Building and PFM Reforms (Ministry of Finance) - Kuwait National ML/TF Risk Assessment (P159136) - Doing Business Reform (KDIPA) (P155328) - Kuwait Competition Protection Agency Phase II (P162614) - School Education Quality Improvement (SEQI) – Phase II (P154848) - Program for Modernization of Land Management in Kuwait (P151988) - Solid Waste II (P122085) - Public-Private Partnerships Project Guidebook (P157147) ### Statistical issues (As of February 22, 2019) - Overall assessment: Data provision has some shortcomings but is broadly adequate for surveillance; timeliness for national and fiscal accounts is a concern. - National accounts and production: - Compiled by the Central Statistical Bureau (CSB). - Annual GDP estimates derived from regular annual surveys by five major industries: agriculture, manufacturing, construction, trade, and financial services. - Business register is outdated (based on the 2000 establishment census); recommendation to conduct a new establishment census and rebase GDP time-series. - IMF-Arab Monetary Fund TA mission (January 2019) recommended: i) strengthen coordination/data exchange between CSB and Central Bank of Kuwait; ii) improve GDP estimates for holding companies; iii) include non-observed economic activities in GDP. - Price statistics: - Consumer Price Index (CPI) published monthly (last observation for October 2018); weights revised in June 2017 based on the 2013 Household Income and Expenditure Survey. - Producer Price Index (PPI) covers selected Mining and Quarrying and Manufacturing and Utilities; recommended updates: weights from the 2010 base year, extend coverage to services and construction, compile separate indexes for domestic and export markets. - Government finance statistics: - Kuwait reclassified the budget according to GFSM 2001 starting fiscal year 2016-17; STA assisted to update classification to GFSM 2014 and compile annual GFS for Budgetary Central Government. - Need for intra-annual data to monitor budget execution. - Major components not reported: extra-budgetary revenues (investment income and transfers of profits of public institutions), extra-budgetary expenditures (interest on foreign debt and treasury paper), operations by the Future Generations Fund (FGF) and General Reserve Fund (GRF) of KIA. - Data on operations of the Public Institute for Social Security are not made available. - STA indicated FGF and GRF should be classified as part of government. - Recommendation to report GFS as Statement of Sources and Uses of Cash for consolidated central government; encouraged adoption of practices in “Code of Good Practices on Fiscal Transparency”. - Monetary and financial statistics: - CBK reports sectoral balance sheet data for Central Bank, other depository corporations (ODCs), and other financial corporations (OFCs) to STA using SRFs. - Recommended expanding coverage of ODCs to include investment companies and OFCs to include insurance companies and other financial intermediaries. - Kuwait began reporting FSIs to STA in December 2017: 20 FSIs for deposit-takers (12 core and 8 encouraged). - External sector statistics: - CBK compiles quarterly BOP and IIP data in accordance with BPM6; improvements made in travel and communication services estimates, but further improvements needed for several service items and private transfers. - IIP excludes most general government external assets held by KIA in FGF and GRF; full IIP data including KIA assets traditionally reported to the Fund by the Executive Director for Kuwait at Article IV Board meeting. - CBK participates in CPIS (data from 2003 onwards) and Coordinated Direct Investment Survey; CPIS data exclude holdings of foreign securities held by government agencies. - CBK improved external accounts reporting (separate reporting of financial transactions in the BOP, revisions to report forms); remittances estimation improved, but delays and data gaps remain. - Merchandise trade data compiled and disseminated by CSB on monthly/quarterly/annual basis. - Data standards and quality: - Kuwait participates in e-GDDS since 2000 but has not implemented a National Summary Data Page; metadata last updated in 2010 and 2011. ### Table of Common Indicators Required for Surveillance (Last updated February 22, 2019) — selected entries (dates preserved) - Exchange rates: Date of latest observation Nov 2018; Date received Jan 2019; Frequency: D (Daily) for Data, Reporting, and Publication. - International reserve assets and reserve liabilities of the monetary authorities: Date of latest observation Nov 2018; Date received Jan 2019; Frequency: M (Monthly). - Reserve/base money: Nov 2018; Jan 2019; Frequency M. - Broad money: Nov 2018; Jan 2019; Frequency M. - Central bank balance sheet: Nov 2018; Jan 2019; Frequency M. - Consolidated balance sheet of the banking system: Nov 2018; Jan 2019; Frequency M. - Interest rates: Nov 2018; Jan 2019; Frequency M. - Consumer price index: Date of latest observation Oct 2018; Date received Dec 2018; Frequency M. - Revenue, expenditure, balance and composition of financing—general government: Date of latest observation 2016; Date received Oct 2016; Frequency A. - Stocks of central government and central government-guaranteed debt: Date of latest observation Dec 2014; Date received Sep 2015; Frequency M. - External current account balance: Q3 2018; Date received Jan 2019; Frequency Q. - Exports and imports of goods and services: Q3 2018; Date received Jan 2019; Frequency Q. - GDP/GNP: Dec 2017; Date received Dec 2018; Frequency A. - Gross external debt: Dec 2014; Date received Apr 2015; Frequency A. - International investment position: Q3 2018; Date received Jan 2019; Frequency A. ### Statement by Hazem Beblawi and authorities (March 25, 2019) — key messages and statistics - Recent developments: - Growth resumed in 2018, supported by increases in both oil and non-oil activity; fiscal and external accounts posted large surpluses reflecting higher international oil prices. - Banking sector reported sound indicators and credit is recovering. - Authorities guided by Kuwait Vision 2035 and the National Development Plan (NDP); consensus-building is essential for reforms. - Fiscal policy and reforms: - Authorities adopt conservative budget oil price of $55 pbl. - Measures to contain growth of current expenditure, improve targeting of transfers, control eligibility of benefits, and cut operating costs. - Electricity and water prices increased significantly in 2017. - Parliamentary approval awaited for GCC-wide excises and VAT: expected in FY20/21 (excises) and FY21/22 (VAT). - Interim measures to enhance non-hydrocarbon revenue: repriced government services, enforced penalties on businesses not meeting Kuwaiti hiring quotas, strengthened revenue collection (including utilities). - Authorities plan to reduce the non-oil fiscal deficit more gradually than staff recommended; emphasize need to build broad public support. - Institutional improvements: enhanced fiscal statistics, new public procurement law, national anti-corruption strategy (Nazaha collaboration with UNDP, Supreme Council for Planning and Development, UNODC). - Introduction of three-year expenditure ceilings in FY17/18. - Established asset-liability management committee (representatives from Ministry of Finance, Central Bank, KIA, and Kuwait Petroleum Corporation). - Monetary and financial sector policies: - CBK actions to maintain dinar attractiveness while supporting lending amid U.S. Fed rate increases. - Authorities view current basket pegged exchange rate regime as effective. - Banking system indicators: - Systemwide capital adequacy ratio reached 18 percent in September 2018. - NPLs net of specific provisions fell to a historical low. - CBK has strengthened crisis management: bank-specific insolvency framework incorporated into draft commercial insolvency law; improved Emergency Liquidity Assistance (ELA) framework; considering a stand-alone bank resolution unit. - Authorities noted need for more TA to design comprehensive deposit insurance solution, particularly for Islamic banking. - CBK view: interest rate ceilings protect consumers and facilitate SME access to finance; staff advised gradual relaxation of ceilings. - CBK preparing draft law for explicit financial stability mandate and creation of a Financial Stability Committee (to coordinate CBK, Capital Markets Authority, Ministry of Finance, and Ministry of Commerce and Industry). - CBK reviewing liquidity forecasting framework with Fund assistance. - Boosting private sector-led growth: - Kuwait NDP aims to create employment through private sector-led diversification, human capital development, and institutional strengthening. - Authorities supporting SMEs and startups via access to finance (venture capital, credit guarantees), training, public tender participation, National Fund for SME Development, business incubation, capacity building, and integration into supply chains. - Established one-stop-shop for investors and online company registration services; committed to improving business environment, PPPs, entrepreneurship incentives, productivity, competitiveness, and private investment. *Prepared by Middle East and Central Asia Department with inputs from other departments and the World Bank.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1kwtea2019001.pdf_