## KUWAIT: STAFF REPORT FOR THE 2020 ARTICLE IV CONSULTATION (1kwtea2020001)

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### Executive Board Assessment and Context
- Challenge: reduce dependence on oil and boost savings; urgency increased as the subdued forecast for oil revenues weighs on near-term growth and fiscal and external balances.
- Strengths and risk window: large financial buffers and low debt, but "the window of opportunity to tackle its challenges from the position of strength is narrowing."
- Without course correction:
  - At current policies, the overall fiscal balance would turn into a growing deficit, which, after mandatory savings in the FGF, would give rise to large financing needs over the medium term.
  - Borrowing should be viewed as a temporary solution—while slowing the depletion of liquid financial assets, it would lead to a rapid debt buildup.
- Recommended approach:
  - Implement ambitious, growth-friendly, and socially equitable fiscal adjustment.
  - Embed fiscal measures in a comprehensive reform package that promotes private sector growth, strengthens governance and accountability, and improves public services to build broad support for reforms.
- Exchange rate and macro anchoring:
  - "The exchange rate regime remains appropriate. The peg has provided an effective nominal anchor."
  - The proposed fiscal adjustment would close the current account gap over the medium term; the arrangement should be periodically reviewed as the economy diversifies.

### Fiscal Policy: Findings, Projections, and Recommendations
- Staff’s proposed adjustment would:
  - Cut current expenditure by tackling spending rigidities.
  - Boost nonoil revenue.
  - Create space for growth-enhancing investment.
- Specific fiscal reform recommendations:
  - Reform the large public wage bill; phase out generalized subsidies and transfers in favor of targeted compensation schemes.
  - Initiate broad consultations, redouble efforts to engage parliament, and continue technical work on the GCC-wide excises and VAT.
  - Consider taxes on corporate income, luxury items, and personal income of the wealthy for a more socially-balanced adjustment mix.
  - Adopt a rules-based fiscal framework with a well-calibrated operational rule reconciling long-term savings and near-term stabilization.
  - Enhance fiscal transparency, modernize public procurement, and boost spending efficiency.
  - "Until a properly calibrated fiscal rule is in place, the current arrangement with respect to the FGF should be maintained."
- Fiscal trajectory (calendar-year basis, selected):
  - Overall balance: 2019/20 = 4.7; 2020/21 = -0.8; 2021/22 = -2.6; 2022/23 = -3.7; 2023/24 = -4.4; 2024/25 = -5.2; 2025/26 = -5.6.
  - Overall Balance (after transfer to FGF and excl. inv. income) 1/: 2019/20 = -13.9; 2020/21 = -18.3; 2021/22 = -19.8; 2022/23 = -20.9; 2023/24 = -21.4; 2024/25 = -21.8; 2025/26 = -21.9.
  - Net financing needs (KD billion): 2019/20 = 5.7; 2020/21 = 7.5; 2021/22 = 8.5; 2022/23 = 9.3; 2023/24 = 10.0; 2024/25 = 10.6; 2025/26 = 11.2; Cumulative 2020/21–25/26 = 57.1.
  - Public debt (% of GDP): 2019/20 = 11.6; 2020/21 = 15.5; 2021/22 = 30.4; 2022/23 = 41.6; 2023/24 = 55.1; 2024/25 = 65.2; 2025/26 = 74.4.
- Staff concerns:
  - Projected borrowing would be unprecedented: government debt would rise to over 74 percent of GDP by 2025 from about 12 percent currently, with net financial assets falling precipitously.
  - Passing a new debt law is a near-term priority to enable domestic borrowing and tapping international markets.
  - Borrowing should be treated as a temporary solution; urgency of fiscal adjustment is underscored.

### Financial Sector and Monetary Policy Recommendations
- Banking system resilience:
  - "Prudent regulation and supervision have helped keep banks resilient."
  - Nonperforming loans net of specific provisions stood at 1.2 percent; loan-loss provisioning stood at 229 percent.
  - Net interest income declined due to a narrowing spread between bank lending rates and cost of funds.
- Policy and structural measures:
  - Enhance the corrective action framework; establish a special resolution regime for banks; unwind the blanket deposit guarantee.
  - Gradually relax the interest rate ceiling on commercial loans to expand lending to new market segments, including SMEs.
  - Allow market forces a greater role in allocation and pricing of liquidity to promote interbank market development.
  - Strengthen crisis management and resolution frameworks, enhance liquidity management, deepen capital markets, and promote financial inclusion.
- Monetary framework and supervisory actions:
  - Authorities remain committed to the peg to an undisclosed basket of currencies.
  - CBK operationalized a liquidity forecasting tool with IMF assistance.
  - Staff encouraged publication of intervention data and bolstering cross-border supervision of foreign-owned branches.
  - Draft law on banking resolution ready for cabinet submission; internal deliberations on deposit insurance scheme design initiated.
- Lending rate ceilings (Box 1 highlights):
  - Spreads over CBK discount rate: consumer = 300 bps; short-term commercial (up to one year) = 250 bps (plus up to 50 bps commitment fee permitted); long-term commercial (over one year) = 400 bps.
  - Evidence of clustering in new loan rates at 3.5–4.0 percent and 5.5–6.0 percent; caps bind in consumer and riskier corporate segments.
  - SMEs account for 2.8 percent of total credit in Kuwait compared to 4.2 percent average in the rest of the GCC.
  - Staff view: caps could be a second-best tool for consumer protection and stability but should be gradually relaxed on commercial loans to expand access.

### Structural Reform Priorities for Private Sector-Led Growth
- Core objective: "Weaning the economy off oil hinges on the emergence of a vibrant nonoil private sector that creates jobs for the growing labor force."
- Key reforms:
  - Reduce the economic footprint of the state via privatization and PPPs.
  - Promote market competition, lower public-private wage premia, and improve the business environment.
  - Revamp insolvency framework, reduce excessive regulations, and ease trading across borders.
  - Align public sector wages with private sector, combined with education and training improvements to nurture entrepreneurship and equip graduates with in-demand skills.

### Outlook, Risks, and Near-Term Developments (including COVID-19 update)
- Baseline projections and assumptions:
  - Baseline oil price assumption: about US$62 per barrel in 2019, declining to US$54 in 2022, with a small uptick thereafter.
  - Staff assumed extension of the OPEC+ agreement through end-2020.
  - Non-oil GDP projections: could expand by 3 percent in 2020 and accelerate to 3½ percent over the medium term (staff report); revised projections in the Supplementary Information set nonoil growth at 2 percent in 2020 and 4 percent in 2021 due to COVID-19.
  - MSCI inclusion in May expected to attract about US$3.5 billion inflows (2.3 percent of GDP).
- Key risks:
  - Main near-term risks: economic impact of the COVID-19 outbreak (including through lower oil revenues) and heightened regional tensions.
  - Medium-term risks: delays in reforms and a sustained oil price drop.
  - Other downside risks: weaker-than-expected global growth, escalating trade tensions, disruptions from COVID-19, and geopolitical tensions.
- COVID-19 specific developments and policy response (Supplement):
  - Oil price decline: the average price in 2020 is now projected US$16.5 per barrel less than assumed in the staff report; long end difference narrows to about US$3 per barrel by 2025.
  - Kuwait COVID-19 statistics and responses: 123 cases as of March 16; halted commercial flights; closed schools and universities; declared March 12-26 an official holiday; salaries to be paid; most bank branches closed; CBK reduced interest rates on all monetary policy instruments by 1 percentage point; KD10 million fund set up by Kuwaiti banks.
  - Revised projections (Supplement): nonoil growth revised to 2 percent in 2020 and 4 percent in 2021 (from 3 and 3.5 percent).
  - Fiscal/external impact estimate: US$16.5 per barrel lower oil price in 2020 implies 12 and 13 percentage points of GDP worsening of Kuwait’s fiscal and external balances, translating into correspondingly higher financing needs and faster drawdown of buffers.
  - Resilience and contingency: Kuwait can withstand shocks from a position of strength: ample KIA assets and central bank reserves (435 percent of GDP noted in the Supplement), substantial borrowing space, and a well-capitalized banking sector. If parliament’s authorization to borrow is not forthcoming, authorities could consider temporarily tapping the FGF with an explicit promise to replenish it once normalized.

### Key Quantitative Indicators (selected figures preserved exactly)
- Oil and gas sector (billions of U.S. dollars):
  - Total oil and gas exports: 2019 = 58.2; 2020 = 52.9; 2025 = 57.5.
  - Average crude oil export price (U.S. dollars/barrel): 2019 = 61.8; 2020 = 55.9; 2025 = 55.2.
  - Crude oil production (millions of barrels/day): 2019 = 2.70; 2020 = 2.70; 2025 = 2.99.
- National accounts and prices:
  - Nominal GDP (market prices, in billions of Kuwaiti dinar): 2019 = 41; 2020 = 41; 2025 = 51.
  - Nominal GDP (market prices, in billions of U.S. dollars): 2019 = 137; 2020 = 135; 2025 = 168.
  - Real GDP growth (annual percentage change): 2019 = 0.7; 2020 = 1.5; 2021–2025 = 2.7 each year.
  - Real nonoil GDP (annual percentage change): 2019 = 3.0; 2020 = 3.0; 2021–2025 = 3.5 each year.
  - CPI inflation (average): 2019 = 1.1; 2020 = 1.8; 2021–2025 = 2.5 each year.
- Fiscal operations (Percent of GDP at market prices):
  - Revenue: 2019 = 59.3; 2020 = 55.5; 2025 = 50.6.
  - Oil revenue: 2019 = 39.8; 2020 = 36.7; 2025 = 32.8.
  - Nonoil revenue (of which Investment income): 2019 total = 19.5; Investment income = 14.2.
  - Expenditures: 2019 = 54.5; 2020 = 56.3; 2025 = 56.3.
  - Expense: 2019 = 47.8; 2020 = 49.3; 2025 = 49.4.
  - Capital: 2019 = 6.7; 2020 = 7.0; 2025 = 6.8.
  - Balance: 2019 = 4.7; 2020 = -0.8; 2025 = -5.6.
  - Balance (after transfer to FGF and excl. investment income): 2019 = -13.9; 2020 = -18.3; 2025 = -21.9.
  - Total gross debt (calendar year): 2019 = 11.6; 2020 = 15.5; 2025 = 74.4.
  - Estimated KIA assets: 2019 = 407.9; 2020 = 426.8; 2025 = 380.7.
  - Net government financial assets: 2019 = 396.2; 2020 = 411.3; 2025 = 306.3.
- External sector and reserves:
  - Exports of goods (billions of U.S. dollars): 2019 = 64.6; 2020 = 59.0; 2025 = 65.6.
  - Non-oil exports: 2019 = 6.3; 2020 = 6.1; 2025 = 8.1.
  - Current account (billions of U.S. dollars): 2019 = 12.1; 2020 = 4.2; 2025 = 1.4.
  - Current account (percent of GDP): 2019 = 8.8; 2020 = 3.1; 2025 = 0.9.
  - International reserve assets: 2019 = 39.6; 2020 = 40.8; 2025 = 48.7.
  - International reserves (months of next year's imports of goods and services): 7.0 (2019 through 2025).
- Monetary and financial:
  - Net foreign assets (percent change): 2019 = 6.2; 2020 = 0.2.
  - Claims on nongovernment sector (percent change): 2019 = 4.4; 2020 = 5.4; 2021–2025 ≈ 6.3–6.4.
  - Kuwaiti dinar 3-month deposit rate (year average; in percent): 2019 = 2.8.
  - Stock market unweighted index (annual percent change): 2019 = 23.2.
- Memorandum:
  - Exchange rate (U.S. dollar per KD, period average): 2019 = 3.29.

### Public Debt Sustainability and Scenarios
- Baseline DSA highlights (calendar-year basis):
  - Nominal gross public debt: 2018 = 7.0; 2019 = 14.8; 2020 = 11.6; 2021 = 15.5; 2022 = 30.4; 2023 = 41.6; 2024 = 55.1; 2025 = 65.2; 2025 = 74.4 (table lists years through 2025).
  - Effective interest rate (in percent): 2018 = 2.5; 2019 = 3.5; 2020 = 3.9; 2021 = 3.5; 2022 = 3.4; 2023 = 4.0; 2024 = 4.5; 2025 = 4.6; later year = 4.9.
  - Identified debt-creating flows (selected):
    - Primary deficit: 2018 = -21.0; 2019 = -9.7; 2020 = -6.9; 2021 = -1.3; 2022 = 1.4; 2023 = 1.8; 2024 = 1.7; 2025 = 1.5; cumulative 2020-25 = 6.2.
  - Debt-stabilizing primary balance under assumed asset accumulation of 8.8 percent of GDP in 2025 = 8.7 percent; under no asset accumulation the debt-stabilizing primary balance would have been -0.16 percent of GDP.
- Baseline vs Adjustment Scenarios:
  - Baseline: overall balance turns progressively negative through 2025 (see above).
  - Adjustment Scenario: gradual reduction of expenditure to about 75 percent of nonoil GDP by FY2028/29; under this scenario overall balance improves to positive territory by 2022 and onward (selected: 2022 = 0.8; 2023 = 1.0; 2024 = 1.2; 2025 = 1.6).
  - Key adjustment measures in Adjustment Scenario include VAT introduction (5-percent VAT) and tariff/utility price reforms, wage bill restraint, better procurement, and revenue broadening.

### Fiscal Rule Options and Design (Annex VII)
- Context:
  - Oil revenues account for 72 percent of government revenues; spending rose nearly 25 percent in dinar terms in two years starting FY2017/18.
  - SWF structure: GRF (stabilization/treasury) and FGF (intergenerational savings); KIA manages both.
- Long-term anchor (PIH-based):
  - PIH perpetuity and PIH real perpetuity scenarios considered; under real perpetuity PIH, net financial wealth would decline but remain substantial (example: 324 percent of GDP in 2094 under assumptions).
  - PIH annuity (74-year annuity) would exhaust resources by the end of the annuity but allows higher NOPD initially.
- Near-term anchor:
  - Price-based structural balance rules evaluated: 5.0.0 rule; 5.1.5 rule; 10.3 rule.
  - Expenditure rule parameters suggested: cap annual real growth in expenditure at 2.2 percent; ensure expenditure does not contract by more than 0.75 percent in any given year.
  - Calibration example: a floor on structural deficit of minus 8 percent of nonoil GDP under the real perpetuity PIH to preserve minimum net financial assets.
- Concluding guidance:
  - A transparent, rules-based fiscal framework combining a price-based structural balance rule with an expenditure rule would smooth spending, preserve savings for future generations, and insulate the economy from oil-price volatility.
  - Preconditions: enshrinement in a sound institutional framework, political commitment, comprehensive budget reporting, and transparent accounting.

### Staff Appraisal: Top Priorities (summarized)
- Build broad support for fiscal adjustment embedded in reforms that promote private sector development, improve public service quality, and strengthen governance.
- Adopt ambitious fiscal adjustment measures focused on spending rigidities, nonoil revenue, and restructuring of wage and subsidy policies.
- Put in place a rules-based fiscal framework with supporting fiscal governance reforms.
- Strengthen financial sector crisis management and resolution regimes, unwind blanket guarantees, and deepen markets and financial inclusion.
- Pursue structural reforms to reduce the role of the state and enable private sector job creation, including aligning public and private wages and improving education and training.

*Source: Kuwait—Staff Report for the 2020 Article IV Consultation (staff report reflects discussions in January 2020 and information available as of March 2, 2020; Supplementary Information as of March 12).*

### 17.6 percent in September 2019, and banks have plentiful short-term liquidity. Nonperforming

### KUWAIT: STAFF REPORT FOR THE 2020 ARTICLE IV CONSULTATION

### Executive Board Assessment and Context
- The challenge to reduce dependence on oil and boost savings has become more urgent.
- The subdued forecast for oil revenues is weighing on near-term growth and fiscal and external balances.
- Kuwait has large financial buffers and low debt, but "the window of opportunity to tackle its challenges from the position of strength is narrowing."
- Without a course correction, fiscal and financing challenges will intensify:
  - At current policies, the overall fiscal balance would turn into a growing deficit, which, after mandatory savings in the FGF, would give rise to large financing needs over the medium term.
  - Borrowing should be viewed as a temporary solution—while slowing the depletion of liquid financial assets, it would lead to a rapid debt buildup.
- Recommended approach:
  - Implement ambitious, growth-friendly, and socially equitable fiscal adjustment.
  - Embed fiscal measures in a comprehensive reform package that promotes private sector growth, strengthens governance and accountability, and improves public services to build broad support for reforms.
- Exchange rate and macro anchoring:
  - "The exchange rate regime remains appropriate. The peg has provided an effective nominal anchor."
  - The proposed fiscal adjustment would close the current account gap over the medium term; the arrangement should be periodically reviewed as the economy diversifies.

### Fiscal Policy Findings and Recommendations
- Staff’s proposed adjustment would:
  - Cut current expenditure by tackling spending rigidities.
  - Boost nonoil revenue.
  - Create space for growth-enhancing investment.
- Public wage bill and transfers:
  - "The large public wage bill should be reformed, and generalized subsidies and transfers phased out in favor of targeted compensation schemes."
- Revenue measures and consultation:
  - Government should initiate broad consultations, redouble efforts to engage parliament, and continue technical work on the GCC-wide excises and VAT.
  - Consider taxes on corporate income, luxury items, and personal income of the wealthy for a more socially-balanced adjustment mix.
- Fiscal framework and governance:
  - A rules-based fiscal framework would improve management of oil revenues and help anchor fiscal policy on the long-term objective of intergenerational equity.
  - The rule should include a well-calibrated operational rule reconciling long-term savings and near-term stabilization.
  - Fiscal governance reforms should enhance fiscal transparency, modernize public procurement, and boost spending efficiency.
  - "Until a properly calibrated fiscal rule is in place, the current arrangement with respect to the FGF should be maintained."

### Financial Sector and Monetary Policy Recommendations
- Banks and resilience:
  - "Prudent regulation and supervision have helped keep banks resilient."
  - Nonperforming loans net of specific provisions remain low, while loan-loss provisioning is high.
  - Net interest income declined due to a narrowing spread between bank lending rates and cost of funds.
- Policy and structural measures to reduce moral hazard and bolster resilience:
  - Enhance the corrective action framework.
  - Establish a special resolution regime for banks.
  - Unwind the blanket deposit guarantee.
- Market development and inclusion:
  - CBK’s continued efforts to recalibrate macroprudential tools are welcome.
  - Gradually relax the interest rate ceiling on commercial loans to expand lending to new market segments, including SMEs.
  - Allow market forces greater role in allocation and pricing of liquidity to promote interbank market development.
  - Further efforts should aim to strengthen crisis management and resolution frameworks, enhance liquidity management, deepen capital markets, and promote financial inclusion.

### Structural Reform Priorities for Private Sector-Led Growth
- Necessity:
  - "Weaning the economy off oil hinges on the emergence of a vibrant nonoil private sector that creates jobs for the growing labor force."
- Policy actions:
  - Reduce the economic footprint of the state, including through privatization and public-private partnerships (PPPs).
  - Promote market competition, lower the high public-private wage premia, and create a more conducive business environment.
  - Revamp insolvency framework, reduce excessive regulations, and ease trading across borders.
  - Align public sector wages with those in the private sector, accompanied by improvements in education and training programs to nurture entrepreneurship and equip graduates with skills for in-demand jobs.

### Outlook, Risks, and Near-Term Developments
- Outlook summary:
  - Nonoil growth is expected to strengthen in the near term, supported by government spending, employment, and credit growth.
  - Oil sector prospects are clouded by lower oil prices, weighing on fiscal and external positions.
  - As a result, the fiscal surplus is expected to turn into a deficit, elevating large financing needs over the medium term.
- Main risks:
  - Economic impact of the COVID-19 outbreak, including through lower oil revenues, and heightened regional tensions are main near-term risks.
  - Delays in reforms and a sustained oil price drop present a risk to the medium-term outlook.
- Timing and data vintage:
  - The staff report reflects discussions in January 2020 and information available as of March 2, 2020.
  - "It focuses on Kuwait’s near and medium-term challenges and policy priorities and was prepared before COVID-19 became a global pandemic... The Supplementary Information is based on the information available as of March 12."

### Key Quantitative Indicators (selected figures preserved exactly as reported)
- Oil and gas sector (billions of U.S. dollars):
  - Total oil and gas exports: 2019 = 58.2; 2020 = 52.9; 2025 = 57.5.
  - Average crude oil export price (U.S. dollars/barrel): 2019 = 61.8; 2020 = 55.9; 2025 = 55.2.
  - Crude oil production (millions of barrels/day): 2019 = 2.70; 2020 = 2.70; 2025 = 2.99.
- National accounts and prices:
  - Nominal GDP (market prices, in billions of Kuwaiti dinar): 2019 = 41; 2020 = 41; 2025 = 51.
  - Nominal GDP (market prices, in billions of U.S. dollars): 2019 = 137; 2020 = 135; 2025 = 168.
  - Real GDP growth (annual percentage change): 2019 = 0.7; 2020 = 1.5; 2021–2025 = 2.7 each year.
  - Real nonoil GDP (annual percentage change): 2019 = 3.0; 2020 = 3.0; 2021–2025 = 3.5 each year.
  - CPI inflation (average): 2019 = 1.1; 2020 = 1.8; 2021–2025 = 2.5 each year.
- Fiscal operations (Percent of GDP at market prices):
  - Revenue: 2019 = 59.3; 2020 = 55.5; 2025 = 50.6.
  - Oil revenue: 2019 = 39.8; 2020 = 36.7; 2025 = 32.8.
  - Nonoil revenue (of which Investment income): 2019 total = 19.5; Investment income = 14.2.
  - Expenditures: 2019 = 54.5; 2020 = 56.3; 2025 = 56.3.
  - Expense: 2019 = 47.8; 2020 = 49.3; 2025 = 49.4.
  - Capital: 2019 = 6.7; 2020 = 7.0; 2025 = 6.8.
  - Balance: 2019 = 4.7; 2020 = -0.8; 2025 = -5.6.
  - Balance (after transfer to FGF and excl. investment income): 2019 = -13.9; 2020 = -18.3; 2025 = -21.9.
  - Total gross debt (calendar year): 2019 = 11.6; 2020 = 15.5; 2025 = 74.4.
  - Estimated KIA assets: 2019 = 407.9; 2020 = 426.8; 2025 = 380.7.
  - Net government financial assets: 2019 = 396.2; 2020 = 411.3; 2025 = 306.3.
- External sector and reserves:
  - Exports of goods (billions of U.S. dollars): 2019 = 64.6; 2020 = 59.0; 2025 = 65.6.
  - Non-oil exports: 2019 = 6.3; 2020 = 6.1; 2025 = 8.1.
  - Current account (billions of U.S. dollars): 2019 = 12.1; 2020 = 4.2; 2025 = 1.4.
  - Current account (percent of GDP): 2019 = 8.8; 2020 = 3.1; 2025 = 0.9.
  - International reserve assets: 2019 = 39.6; 2020 = 40.8; 2025 = 48.7.
  - In months of next year's imports of goods and services: constant at 7.0 from 2019 through 2025.
- Monetary and financial:
  - Net foreign assets (percent change): 2019 = 6.2; 2020 = 0.2.
  - Claims on nongovernment sector (percent change): 2019 = 4.4; 2020 = 5.4; 2021–2025 ≈ 6.3–6.4.
  - Kuwaiti dinar 3-month deposit rate (year average; in percent): 2019 = 2.8.
  - Stock market unweighted index (annual percent change): 2019 = 23.2.
- Memorandum:
  - Exchange rate (U.S. dollar per KD, period average): 2019 = 3.29.

### Staff Appraisal (summarized)
- Top priorities:
  - Build broad support for fiscal adjustment embedded in reforms that promote private sector development, improve public service quality, and strengthen governance.
  - Adopt ambitious fiscal adjustment measures focused on spending rigidities, nonoil revenue, and restructuring of wage and subsidy policies.
  - Put in place a rules-based fiscal framework with supporting fiscal governance reforms.
  - Strengthen financial sector crisis management and resolution regimes, unwind blanket guarantees, and deepen markets and financial inclusion.
  - Pursue structural reforms to reduce the role of the state and enable private sector job creation, including aligning public and private wages and improving education and training.

*Source: Kuwait—Staff Report for the 2020 Article IV Consultation (staff report reflects discussions in January 2020 and information available as of March 2, 2020).*

### 0.7 percent in 2019 from 1.2 percent in 2018. Fiscal and current account surpluses narrowed on

### 1kwtea2020001 - 0.7 percent in 2019 from 1.2 percent in 2018. Fiscal and current account surpluses narrowed on

### Real sector developments
- GDP growth drivers and composition (2010–19, Est. figures referenced in charts):
  - Nonoil GDP and Oil GDP contributions shown separately; average oil export price (US$/bbl) plotted as RHS.
  - Headline and core inflation (year-over-year percent change) with contributions from Food and Rent.
  - Contributions to GDP growth by Public consumption, Private consumption, Investment, Exports, Imports.
- Inflation:
  - Inflation rose to 1.1 percent as food and transport prices recovered.
- Credit and monetary conditions:
  - Credit growth accelerated after late 2018 following CBK’s decision to increase macroprudential ceilings on personal loans.
  - CBK lending policy rate: hiked once in March 2018 and left unchanged at 3 percent for the rest of the year.
  - CBK raised the repo rate to maintain dinar attractiveness; repo rate stayed on hold through the first two U.S. Federal Reserve cuts in 2019 and followed after the October reduction.
  - Lending rates remained broadly unchanged since 2018, supporting credit.

### Fiscal position and fiscal developments
- Underlying fiscal position:
  - Staff’s measure of the underlying fiscal position weakened in FY2018/19.
  - The nonoil balance excluding investment income fell by 5 percentage points of nonoil GDP as government spending rose sharply.
- Government spending and wage bill:
  - Spending increased by almost 25 percent in dinar terms from FY2016/17 to FY2018/19, mostly in hard-to-reverse expenditure categories.
  - Public wage bill growth: about 6 percent annually over the same period.
  - Early retirement age for civil servants lowered by 5 years to make room for hiring, widening the state pension fund’s actuarial gap to an estimated 45 percent of GDP.
- Financing needs and buffers:
  - Financing needs (overall balance after mandatory transfers to the FGF and excluding investment income) amounted to 7.7 percent of GDP in FY2018/19.
  - Government unable to issue debt since October 2017 while new debt law awaited parliamentary approval.
  - Government drew solely on the General Reserves Fund (GRF) for financing, reducing GRF total and liquid balances to 56 and 24 percent of GDP by June 2019.
  - Combined GRF and Future Generations Fund (FGF) assets estimated to grow to 410 percent of GDP by end–2019 as FGF generated strong returns and received mandatory transfers.

### Debt law and borrowing constraints
- New debt law provisions (awaiting parliamentary approval):
  - Raise debt ceiling from KD10 to KD20 billion or 60 percent of GDP (whichever is smaller).
  - Increase maximum bond tenor from 10 to 30 years.

### Macroprudential change affecting consumer credit
- Change to personal loan ceilings:
  - 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 15,000 KD previously.

### Fiscal statistics (FY2016/17–FY2019/20, percent of GDP unless otherwise noted)
- Revenue:
  - 2016/17: 52.7
  - 2017/18: 58.3
  - 2018/19: 60.9
  - 2019/20 Proj.: 59.3
  - Oil revenue:
    - 2016/17: 34.4
    - 2017/18: 37.8
    - 2018/19: 43.7
    - 2019/20 Proj.: 39.8
  - Nonoil revenue:
    - 2016/17: 18.2
    - 2017/18: 20.5
    - 2018/19: 17.2
    - 2019/20 Proj.: 19.5
- Expenditure:
  - 2016/17: 52.2
  - 2017/18: 50.7
  - 2018/19: 51.6
  - 2019/20 Proj.: 54.5
  - Current expenditure:
    - 2016/17: 45.6
    - 2017/18: 44.2
    - 2018/19: 45.4
    - 2019/20 Proj.: 47.8
  - Capital expenditure:
    - 2016/17: 6.5
    - 2017/18: 6.6
    - 2018/19: 6.2
    - 2019/20 Proj.: 6.7
- Overall balance:
  - 2016/17: 0.5
  - 2017/18: 7.5
  - 2018/19: 9.3
  - 2019/20 Proj.: 4.7
- Excluding oil and investment income:
  - 2016/17: -48.5
  - 2017/18: -46.5
  - 2018/19: -46.5
  - 2019/20 Proj.: -49.2
- Excluding fuel subsidies:
  - 2016/17: -43.3
  - 2017/18: -41.6
  - 2018/19: -42.1
  - 2019/20 Proj.: -44.9
- Overall balance (after transfers to FGF and excluding investment income) 1/:
  - 2016/17: -17.9
  - 2017/18: -12.9
  - 2018/19: -7.7
  - 2019/20 Proj.: -13.9
- Memo items:
  - Nominal GDP (KD billion):
    - 2016/17: 33.9
    - 2017/18: 37.8
    - 2018/19: 42.0
    - 2019/20 Proj.: 41.6
  - Nominal nonoil GDP (KD billions):
    - 2016/17: 19.7
    - 2017/18: 20.7
    - 2018/19: 21.8
    - 2019/20 Proj.: 22.9
  - Fiscal break-even oil price (U.S. $/barrel):
    - 2016/17: 43.4
    - 2017/18: 45.7
    - 2018/19: 53.6
    - 2019/20 Proj.: 54.4
  - Break-even oil price (after transfers to FGF and excluding investment income):
    - 2016/17: 69.5
    - 2017/18: 79.0
    - 2018/19: 81.8
    - 2019/20 Proj.: 86.1
  - Stock of KIA assets (GRF and FGF, calendar-year basis) 2/:
    - 2016/17: 477
    - 2017/18: 460
    - 2018/19: 398
    - 2019/20 Proj.: 408
- Notes associated with table:
  - 1/ Revenue transferred to the FGF and investment income are projected at 4.5 percent and 14.2 percent of GDP respectively in FY2019/20.
  - 2/ Estimates based on inflows into FGF (10 percent of revenues excluding investment income), outflows from GRF to close the financing gap, and assumptions on KIA assets' return.

### Banking system and reserves
- Banking system:
  - The banking system is sound; systemwide capital adequacy ratio reached (chart referenced; exact ratio not provided in text excerpt).
- Reserves and sovereign assets:
  - GRF total and liquid balances: 56 and 24 percent of GDP by June 2019.
  - Combined GRF and FGF assets estimated at 410 percent of GDP by end–2019.

*International Monetary Fund — KUWAIT (extract).*

### 17.6 percent in September 2019, and banks have

### 1kwtea2020001 - 17.6 percent in September 2019, and banks have

### Banking sector and financial markets
- Banks have plentiful short-term liquidity.
- Nonperforming loans net of specific provisions stood at 1.2 percent.
- Loan-loss provisioning stood at 229 percent.
- Net interest income declined due to a narrowing spread between bank lending rates and cost of funds.
- The real estate market has stabilized; the value of real estate transactions has recovered since 2017.
- Equity markets performed strongly, in part thanks to inclusion in FTSE Russell and MSCI EM indices (MSCI inclusion expected in May 2020).

### Outlook and risks
- Baseline oil price assumption for staff projections:
  - about US$62 per barrel in 2019
  - declining to US$54 in 2022
  - with a small uptick thereafter
- Staff assumed extension of the OPEC+ agreement through end-2020.
- Non-oil GDP projections:
  - could expand by 3 percent in 2020
  - accelerate to 3½ percent over the medium term
- MSCI inclusion in May expected to attract about US$3.5 billion inflows (2.3 percent of GDP).
- Inflation is expected to edge up as housing rents start to recover.
- Downside risks highlighted:
  - sustained drop in oil prices
  - delays in reforms
  - weaker-than-expected global growth, escalating trade tensions, and disruptions from the COVID-19 outbreak
  - heightened geopolitical and security tensions in the region
  - delayed fiscal adjustment leading to faster depletion of readily available assets

### A. Averting growing financing challenges (fiscal stance and financing needs)
- Near-term government fiscal measures are modest and focus on actions not requiring legislative changes:
  - closing loopholes in various social transfer programs
  - reprioritizing capital expenditure
  - reducing waste, including through better procurement
  - repricing government services and boosting revenue collection, especially utility payments
  - seeking parliament’s approval for excises on tobacco and sugary drinks
- Fiscal balance trajectory and financing needs (calendar-year basis, unless otherwise noted):
  - Overall balance:
    - 2019/20: 4.7
    - 2020/21: -0.8
    - 2021/22: -2.6
    - 2022/23: -3.7
    - 2023/24: -4.4
    - 2024/25: -5.2
    - 2025/26: -5.6
  - Overall Balance (after transfer to FGF and excl. inv. income) 1/:
    - 2019/20: -13.9
    - 2020/21: -18.3
    - 2021/22: -19.8
    - 2022/23: -20.9
    - 2023/24: -21.4
    - 2024/25: -21.8
    - 2025/26: -21.9
  - Nonoil balance excl. investment income (percent of nonoil GDP):
    - 2019/20: -88.4
    - 2020/21: -86.7
    - 2021/22: -85.4
    - 2022/23: -84.5
    - 2023/24: -83.4
    - 2024/25: -82.3
    - 2025/26: -81.1
  - Net financing needs (in KD billion):
    - 2019/20: 5.7
    - 2020/21: 7.5
    - 2021/22: 8.5
    - 2022/23: 9.3
    - 2023/24: 10.0
    - 2024/25: 10.6
    - 2025/26: 11.2
    - Cumulative 2020/21–25/26: 57.1
  - Financing mix (2020/21–25/26 cumulative):
    - Domestic (net issuance) cumulative: 12.3 (annual path: -1.4; 1.6; 1.9; 1.9; 2.4; 2.4; 2.1)
    - External (net issuance) cumulative: 27.1 (annual path: 0.0; 5.0; 3.9; 5.0; 4.0; 4.2; 5.0)
    - Drawdown of GRF cumulative: 17.7 (annual path: 7.1; 0.9; 2.7; 2.4; 3.6; 4.0; 4.2)
  - Public debt (% of GDP):
    - 2019/20: 11.6
    - 2020/21: 15.5
    - 2021/22: 30.4
    - 2022/23: 41.6
    - 2023/24: 55.1
    - 2024/25: 65.2
    - 2025/26: 74.4
  - Stock of KIA assets (KD million, staff estimates and projections):
    - 2019/20: 408
    - 2020/21: 427
    - 2021/22: 422
    - 2022/23: 415
    - 2023/24: 405
    - 2024/25: 394
    - 2025/26: 381
  - Stock of GRF assets (KD million):
    - 2019/20: 40
    - 2020/21: 39
    - 2021/22: 32
    - 2022/23: 26
    - 2023/24: 18
    - 2024/25: 9
    - 2025/26: 0
  - Stock of FGF assets (KD million):
    - 2019/20: 368
    - 2020/21: 387
    - 2021/22: 389
    - 2022/23: 389
    - 2023/24: 387
    - 2024/25: 385
    - 2025/26: 380
  - Current account balance 2/ (% of GDP):
    - 2019/20: 8.8
    - 2020/21: 3.1
    - 2021/22: 2.1
    - 2022/23: 1.6
    - 2023/24: 1.3
    - 2024/25: 0.9
    - 2025/26: 0.9
- Staff concerns and recommendations:
  - Projected borrowing would be unprecedented: government debt would rise to over 74 percent of GDP by 2025 from about 12 percent currently, with net financial assets falling precipitously.
  - Passing a new debt law should be a near-term priority to enable domestic borrowing and tapping international markets.
  - Borrowing should be treated as a temporary solution; fiscal adjustment urgency is underscored.

### B. Ensuring long-term fiscal sustainability (structural fiscal reforms)
- Long-term challenge: looming depletion of liquid GRF assets and inadequate savings for future generations.
- Staff estimate: projected nonoil primary balance in FY2025/26 would fall about 16 percentage points of nonoil GDP short of level needed to ensure adequate savings for future generations (Permanent Income Hypothesis real perpetuity method).
- Staff adjustment path objectives:
  - Close the intergenerational savings’ gap in 10 years.
  - Gradually reduce spending, mainly by tackling spending rigidities, and boost nonoil revenues.
  - Spending would fall to about 75 percent of nonoil GDP—the level sustained in 2000–10.
  - Adjustment would weigh on growth initially but yield higher investment and benefits from structural reforms over time.
- Key reform areas and recommendations:
  - Curtailing the public wage bill:
    - Public wages and benefits account for one third of the budget.
    - Staff encouraged a holistic approach: centralize compensation policy, align public sector wages more closely with private sector, and contain future public employment and wage growth.
  - Phasing out generalized subsidies and reforming transfers:
    - Fuel, electricity, and water subsidies and transfers are almost 7½ percent of GDP.
    - Recommendation: raise utility prices to cost recovery levels; consolidate and rationalize transfers; introduce targeted compensation for lower-income households.
  - Increasing public investment and improving its efficiency:
    - Improve project selection, planning, and implementation.
    - Perform a comprehensive diagnostic of public investment management.
  - Introducing a 5-percent VAT:
    - Would broaden the tax base, yield stable revenue, help upgrade tax administration capacity.
    - Staff recommended continuing technical work and consultations; approval not expected this year.
  - Broadening coverage of profit tax and introducing excises on luxury goods or an income tax on high earners:
    - Would yield revenue and promote a more socially-balanced adjustment mix.
    - Authorities agreed wealthy should shoulder a higher burden.
- Political economy and communication:
  - Building consensus for fiscal adjustment is critical.
  - Embed fiscal measures in a comprehensive reform package that fosters private sector growth, improves public service quality and efficiency, and strengthens accountability and transparency.
  - Proactive communication on costs, benefits, and distributional impacts recommended.

### C. Putting robust policy frameworks in place (fiscal, monetary, financial, and statistical frameworks)
- Fiscal framework:
  - Staff recommended adopting a rules-based fiscal framework that:
    - Imposes a price-based structural balance target and a constraint on annual real expenditure growth.
    - Is enshrined in a sound institutional framework with political commitment, public financial management, comprehensive budget reporting, and transparent accounting.
  - Current arrangement with respect to the FGF:
    - Staff argued FGF assets should not be tapped until a properly calibrated fiscal rule is in place; FGF should be preserved for future generations.
  - Governance and transparency:
    - Strengthen Anti-Corruption Agency (ACA) independence and capacity.
    - Accelerate implementation of the procurement law adopted in 2017, including introducing e-procurement.
    - Advance GFSM2014 adoption and enhance periodic fiscal reporting, including reconciliation of outturns and budgets.
    - Improve transparency of oil wealth management and KIA financials.
  - Fiscal risks:
    - Main sources: public pension funds, state-owned enterprises (SOEs), and PPPs.
    - MoF should systematically analyze fiscal risks from SOEs and subject PPPs to value-for-money checks and careful appraisal.
    - Develop a contingent liabilities framework and build MoF analytical capacity.

- Monetary and financial sector frameworks:
  - The authorities remain fully committed to the peg to an undisclosed basket of currencies.
  - Staff’s external sector assessment suggests a 10 percent of GDP current account gap, which would close as fiscal policy moves to the desirable setting under proposed fiscal adjustment.
  - Staff encouraged publication of intervention data; authorities noted changes in reserves could be used to estimate interventions.
  - CBK supervisory and regulatory actions:
    - Commended for proactive regulation and supervision; regular stress tests and recalibration of macroprudential tools.
    - Removal of preferential (zero) risk weights for exposures to GCC sovereigns welcomed.
    - Progress toward a centralized Shariah Board at the CBK to reduce inconsistent Shariah interpretations in Islamic banks.
    - Need to bolster inspections of banks’ foreign-owned branches to improve cross-border supervision.
  - Crisis management and resolution:
    - Draft law on banking resolution ready for cabinet submission; internal deliberations on deposit insurance scheme design initiated.
    - Draft CBK law would assign an explicit financial stability mandate and establish a Financial Stability Committee (FSC); staff advised CBK to play leading role in FSC.
  - Liquidity management:
    - CBK operationalized a liquidity forecasting tool with IMF assistance; formalized information sharing and extended forecasting horizon.
    - Staff encouraged letting market forces play a bigger role in pricing and allocation of liquidity.
  - Lending rate caps:
    - Staff recommended gradual relaxation of lending rate caps to expand credit access, reduce loan concentration, and promote longer maturities.
    - Recent amendments to credit information law enable credit bureau to gather business credit information and enhance retail borrower data.
    - Gradual relaxation of consumer loan caps conditional on nationwide rating system and better risk pricing; authorities cautious on SME caps due to financial stability and consumer protection concerns.
  - Capital markets:
    - Progress in upgrading capital market infrastructure welcomed.
    - Further actions: deepen local currency bond market, diversify investor base, enhance secondary market liquidity.
  - AML/CFT:
    - Authorities preparing for an AML/CFT mutual evaluation in 2022.
    - New AML/CFT regulations issued to banks in May 2019; updated regulations for exchange companies expected soon.
    - Financial Intelligence Unit plans MoU with ACA.
    - Kuwaiti banks have not experienced withdrawals of correspondent banking relationships (CBRs).
    - Further strengthening of AML/CFT framework recommended, including risk-based supervision and freezing mechanisms related to proliferation financing.

- Statistics:
  - Central Statistical Bureau conducting a household consumption and expenditure survey and laying groundwork for the 2020 establishment census to update national accounts base year.
  - With IMF assistance, authorities are building a National Summary Data Page for the e-GDDS.

*Source: IMF staff report (excerpts).*

### Box 1. Lending Rate Ceilings in Kuwait

### Box 1. Lending Rate Ceilings in Kuwait

### Structure of the lending rate caps
- Bank lending rates in Kuwait are capped at a fixed spread over the policy rate.
- The CBK imposes limits on conventional bank lending rates on loans in Kuwaiti Dinars at specific spreads over its discount rate.
- The spreads for consumer, short-term commercial (up to one year), and long-term commercial (over one year) loans are 300, 250 and 400 bps, respectively.
- Banks are allowed to charge up to 50 bps in non-refundable commitment fees on short-term commercial loans, bringing the relevant spread to 300 bps.
- The regulation does not apply to Islamic banks, but in practice, they closely follow prevailing market lending rate charged by conventional banks.

### Evidence on interest rates and market segmentation
- There is evidence of interest rate clustering for new loans: the distribution of interest rates on net loan flows, a proxy for new loans, generates a two humped-distribution, with one at the 3.5–4.0 percent bracket and the other at 5.5–6.0 percent.
- Interpretation of the two peaks:
  - The lower bracket (3.5–4.0 percent) likely reflects loans to prime borrowers, such as large corporates, suggesting competition in this segment is bringing the market rate below the applicable cap.
  - The bunching of loans for consumers and riskier corporate borrowers at maximum allowable rates implies that the relevant caps are binding and points to potentially unobserved demand from borrowers willing to pay higher rates (those to the right of the cap in the chart).

### Impacts on SMEs, competition, and financial access
- SMEs—borrowers with a typically riskier profile—account for only 2.8 percent of total credit in Kuwait compared to 4.2 percent on average in the rest of the GCC.
- Kuwait’s banking system is concentrated, with the largest three banks accounting for two-thirds of total sector assets.
- Evidence points to limited mobility in the consumer loan segment, where borrowers, predominantly public sector employees, have a similar low risk profile—an environment with fewer incentives for banks to compete.
- Interest rate caps could be preventing banks from exercising market power; in their absence, banks could exercise pricing power by overcharging for credit. The box notes that "bank markups are high in Kuwait."
- The policy of capping interest rates appears to prevent highly risky borrowers from getting bank credit in the first place.

### Policy implications and recommendations
- Interest rate caps could therefore help, as a second-best tool, protect consumers and financial stability given the peculiarities of Kuwait’s banking sector.
- From the Staff appraisal section: "Gradually relaxing the interest rate ceiling on commercial loans would expand lending to new market segments, including SMEs."
- The caps’ role should be considered in light of market structure (concentration, borrower mobility) and trade-offs between consumer protection, financial stability, and access to credit for higher-risk segments.

*Source: Box 1. Lending Rate Ceilings in Kuwait (IMF staff text).*

### Annex I. Implementation of 2019 Article IV Recommendations

### Annex I. Implementation of 2019 Article IV Recommendations

### Fiscal Policy — Implementation Status and Key Findings
- Recommendation: Embark on fiscal consolidation to ensure adequate savings of the oil wealth for future generations.
  - Current status: Spending rose significantly, weakening the staff’s measure of the underlying fiscal position (nonoil balance less investment income in percent of nonoil GDP). Most of the spending growth was in hard-to-reverse categories: wages, subsidies, and social transfers.
- Recommendation: Curtail public wage bill growth and gradually reform subsidies and transfers.
  - Current status: The public wage bill grew by 6.5 percent and subsidies and transfers by 18 percent in FY18/19. The government strengthened utility collections, but there has been no policy change.
- Recommendation: Introduce the VAT and the excises on tobacco and sugary drinks and broaden the coverage of the profit tax.
  - Current status: Parliament’s support for tax reforms is lacking. The authorities remain hopeful to secure parliamentary approval for the excises on tobacco and sugary drinks. Meanwhile, the government is raising fees for some services, including work permits and health care fees for expatriates.

### Fiscal Frameworks, Governance, AML/CFT, and Statistics — Implementation Status
- Recommendation: Introduce medium-term expenditure ceiling to anchor fiscal policy.
  - Current status: The government discontinued the 3-year rolling expenditure ceilings introduced in 2017. Staff discussed with the authorities various fiscal rule options, and the authorities expressed interest in further work in this area.
- Recommendation: Strengthen fiscal governance: transparency, procurement, and spending efficiency.
  - Current status: The Ministry of Finance (MoF) made progress in adopting the GFSM2014. While the authorities are gradually implementing the 2017 procurement law, they have not introduced e-procurement. The MoF has engaged the World Bank on a possible public health expenditure review.
- Recommendation: Further strengthen AML/CFT and anticorruption frameworks.
  - Current status: The authorities are preparing for an AML/CFT mutual evaluation in 2022. They are improving coordination between members of the National AML/CFT Committee. Referrals of corruption cases to the prosecution are increasing.
- Recommendation: Publish quarterly GDP and strengthen data provision arrangements.
  - Current status: The Central Statistical Bureau started disseminating quarterly GDP series.

### Monetary and Financial Sector Policies — Implementation Status
- Recommendation: Establish a special resolution regime for banks and unwind the blanket deposit guarantee.
  - Current status: Draft law introducing a special resolution regime for banks has been submitted to cabinet. The authorities have initiated internal deliberations on a deposit insurance scheme.
- Recommendation: Gradually relax the interest rate ceiling.
  - Current status: The CBK remains concerned over potential implications for financial stability and consumer protection. It sees some merit in relaxing the interest rate ceilings on loans to SMEs.
- Recommendation: Further improve the liquidity management and forecasting framework.
  - Current status: The CBK has operationalized the liquidity forecasting tool, extending its forecasting horizon beyond the short run.
- Recommendation: Strengthen the debt management framework and capital market development.
  - Current status: The draft new debt law is still pending parliament’s approval, which has heightened financing pressures. Once passed, the government should be able to borrow at up to 30-year maturity and issue sovereign Sukuk.

### Structural Reforms — Implementation Status
- Recommendation: Further improve the regulatory framework and business climate to foster nonoil growth.
  - Current status: Kuwait’s position jumped in the 2020 Ease of Doing Business ranking thanks to improvements in starting a business, getting electricity, accessing credit, and trading across borders.

### Risk Assessment Matrix — Main Risks, Likelihood, Impacts, and Recommended Policy Responses
- External risks
  - Large swings in energy prices, especially their decline due to weaker than expected global growth.
    - Likelihood/Time Horizon: High/Short to Medium Term
    - Expected impact: A large drop in oil prices, especially if sustained, would generate unfavorable macro-financial dynamics, with a significant worsening in fiscal and external balances. Government financing needs would rise, and, if seen as sustained, could trigger a repricing of debt. With domestic liquidity likely tight, domestic borrowing by the government could crowd out private sector credit. Confidence would take a hit, precipitating slowdown or even contraction in investment and nonoil output. Drop in real estate and equity prices could impair banks’ assets. Higher oil prices would generate opposite effects.
    - Recommended policy response: A sustained drop in oil prices will necessitate more ambitious fiscal adjustment than currently proposed by staff. The size and pace of the adjustment would have to be calibrated to balance intergenerational equity and short-term economic stabilization objectives. Contractionary effect on economic activity should be mitigated by rebalancing spending toward growth-enhancing investment. Government should accelerate reforms to encourage private investment and boost nonoil activity, including improving governance, the regulatory framework, and the ease of doing business. Financing strategy should consider the need to maintain adequate liquidity in banks. CBK liquidity management capabilities should be enhanced, and continued supervisory vigilance is needed to identify emerging financial stability risks to facilitate a timely response. If oil prices rise, the government should save the revenue windfall. Should nonoil growth accelerate and overheating pressures arise, the government could consider cutting spending to lean against the wind.
  - Sharp rise in risk premia that exposes financial vulnerabilities.
    - Likelihood/Time Horizon: Medium/Short to Medium Term
    - Expected impact: Given Kuwait’s strong credit rating, the government will likely maintain favorable access to capital markets, though its cost of borrowing may slightly increase. Banks, investment companies (IC), and corporates dependent on foreign funding could however face considerably higher costs. Repricing of risk could trigger capital outflows, weighing on equity markets which became more exposed to global markets with Kuwait’s inclusion in global indices. Sharp increases in interest rates could trigger corrections in GCC equity and real estate markets, and, with many banks and ICs invested there, pose risks to financial stability.
    - Recommended policy response: Kuwait’s large financial assets could be deployed to finance the fiscal deficit and mitigate impact on the financial system. The CBK should continue to enhance the surveillance of banking stability risks.
  - Rising protectionism and retreat from multilateralism.
    - Likelihood/Time Horizon: High/Short to Medium Term
    - Expected impact: Direct impact is limited, but there could be large indirect effects through lower oil prices and confidence shocks.
    - Recommended policy response: See the recommended response to a drop in oil prices above.
  - Intensified geopolitical tensions and security risks.
    - Likelihood/Time Horizon: High/Short Term
    - Expected impact: The shock would mainly operate through oil prices, which would likely increase, and regional contagion. The rise in oil prices is likely to be short-lived though. Confidence shock could trigger capital outflows, which would weigh on asset prices.
    - Recommended policy response: See the recommended response to large swings in energy prices above. The authorities could lean on Kuwait’s financial buffers to moderate the impact of the shock. Enhanced surveillance of financial system would help spot systemic risks early on. The CBK should stand ready to inject liquidity in the system and respond through monetary and prudential measures to capital outflows.
- Domestic risks
  - Slower and less effective implementation of the planned reforms.
    - Likelihood/Time Horizon: Medium/Medium to Long Term
    - Expected impact: High — Delays in fiscal and structural reforms would amplify fiscal financing needs, undermine investor confidence, and slow growth. Lower investment would in turn hinder diversification and private sector job prospects. Ensuing concerns about higher unemployment could prompt the government to speed up public sector hiring, further worsening its fiscal position.
    - Recommended policy response: The government should revitalize efforts to build national consensus for fiscal adjustment and structural reforms to promote the private sector and diversify the economy. To secure broad buy-in for reforms, the government should strengthen anticorruption efforts, promote fiscal transparency and accountability, improve the quality of public spending, and enhance the delivery of public services.
  - Severe property price correction.
    - Likelihood/Time Horizon: Low/Medium Term
    - Expected impact: Medium — Though banks have substantial buffers, the losses could be significant given high exposures to the real estate sector, both directly and indirectly through collateral and common exposures.
    - Recommended policy response: Macro-prudential tools to limit exposures to real estate should be supported by improved real estate statistics. This will support monitoring of developments in the sector and enhanced techniques to capture banks’ direct and indirect exposures to the real estate sector to facilitate timely supervisory response. The CBK should continue its efforts to upgrade crisis preparedness and management framework.

### Annex III — Public Sector Debt Sustainability Analysis: Key Indicators and Projections (selected)
- Table context: Kuwait: Public Debt Sustainability Analysis (DSA) — Baseline Scenario. (In percent of GDP unless otherwise indicated on a calendar-year basis). As of January 30, 2020.
- Selected projections (calendar years shown as columns in original table):
  - Nominal gross public debt: 2018: 7.0; 2019: 14.8; 2020: 11.6; 2021: 15.5; 2022: 30.4; 2023: 41.6; 2024: 55.1; 2025: 65.2; 2024: 74.4 (table lists years through 2025).
  - Public gross financing needs: 2018: -20.1; 2019: -9.0; 2020: -6.0; 2021: -0.4; 2022: 3.4; 2023: 8.0; 2024: 5.7; 2025: 6.7; 2025: 8.8.
  - Real GDP growth (in percent): 2018: 0.8; 2019: 1.2; 2020: 0.7; 2021: 1.5; 2022: 2.7; 2023: 2.7; 2024: 2.7; 2025: 2.7.
  - Inflation (GDP deflator, in percent): 2018: -0.5; 2019: 14.6; 2020: -3.3; 2021: -2.8; 2022: 0.7; 2023: 1.3; 2024: 1.8; 2025: 1.9; 2025: 2.4.
  - Nominal GDP growth (in percent): 2018: 0.5; 2019: 16.0; 2020: -2.6; 2021: -1.3; 2022: 3.4; 2023: 4.1; 2024: 4.5; 2025: 4.7; 2025: 5.2.
  - Effective interest rate (in percent): 2018: 2.5; 2019: 3.5; 2020: 3.9; 2021: 3.5; 2022: 3.4; 2023: 4.0; 2024: 4.5; 2025: 4.6; later year: 4.9.
- Change in gross public sector debt (cumulative and annual): 2018: 1.7; 2019: -5.6; 2020: -3.2; 2021: 3.8; 2022: 14.9; 2023: 11.2; 2024: 13.6; 2025: 10.1; cumulative 2020-25: 9.2; 62.8.
- Identified debt-creating flows (selected items):
  - Primary deficit: 2018: -21.0; 2019: -9.7; 2020: -6.9; 2021: -1.3; 2022: 1.4; 2023: 1.8; 2024: 1.7; 2025: 1.5; 2025: 1.3; cumulative 2020-25: 6.2.
  - Primary (noninterest) revenue and grants: 2018: 66.1; 2019: 58.4; 2020: 59.8; 2021: 56.9; 2022: 54.6; 2023: 53.7; 2024: 52.8; 2025: 51.9; 2025: 50.9; cumulative 2020-25: 320.9.
  - Primary (noninterest) expenditure: 2018: 45.1; 2019: 48.8; 2020: 52.9; 2021: 55.6; 2022: 56.0; 2023: 55.4; 2024: 54.5; 2025: 53.4; 2025: 52.2; cumulative 2020-25: 327.0.
- Automatic debt dynamics (interest rate/growth differential contribution): 2018: 0.1; 2019: -2.2; 2020: 1.0; 2021: 0.6; 2022: 0.0; 2023: 0.0; 2024: 0.0; 2025: 0.0; cumulative: -0.2; 0.3.
- Other identified debt-creating flows (asset accumulation requirement): 2018: 20.8; 2019: 9.0; 2020: 6.3; 2021: 15.0; 2022: 10.7; 2023: 11.4; 2024: 10.1; 2025: 9.2; cumulative 2020-25: 65.3.
- Residual, including asset changes: 2018: 1.7; 2019: -2.8; 2020: -3.6; 2021: -10.4; 2022: 2.8; 2023: -2.0; 2024: 1.8; 2025: -0.5; cumulative 2020-25: -9.0.
- Notes in table: Debt-stabilizing primary balance under the assumed asset accumulation of 8.8 percent of GDP in 2025 is equal to 8.7 percent. Under no asset accumulation, the debt-stablizing primary balance would have been -0.16 percent of GDP.

### Annex IV — Baseline and Adjustment Scenarios: Assumptions and Key Elements
- Baseline Scenario assumptions (enacted and announced policies; modest expenditure restraint):
  - Introduction of excises on sugary drinks and tobacco in FY2021/22, estimated to yield revenue of about 0.2 percent of GDP by FY2025/26.
  - Strengthening administration of various social transfers and closing loopholes should generate savings of 0.7 percent of GDP by FY2025/26.
  - Spending restraint: public wages assumed to grow with inflation, employment expands at 2.8 percent annually; spending on goods and services grows with nominal nonoil GDP.
  - Capital expenditure assumed to grow with nominal nonoil GDP.
- Adjustment Scenario assumptions (gradual reduction of expenditure to about 75 percent of nonoil GDP by FY2028/29; closes real perpetuity-based PIH gap in 10 years):
  - Fuel prices assumed to gradually increase starting from FY2020/21 to reach cost recovery levels, saving 0.6 percent of GDP by FY2025/26 (eliminating fuel subsidy).
  - Water and electricity tariffs assumed to increase gradually to cut the subsidy in half by 2024, resulting in savings of 2.6 percent of GDP by the end of the forecast period.
  - Expected savings from wage bill restraint amount to 0.9 percent of GDP by FY2025/26.
  - Better procurement and waste reduction would generate savings of 0.8 percent of GDP in spending on goods and services by FY2025/26.
  - Introducing the 5-percent VAT in FY2021/22 should yield estimated revenue of 2.2 percent of GDP by FY2025/26.
  - Expanding coverage of the profit tax to domestic companies and/or introducing excises on luxury goods (or a tax on high-income individuals) starting FY2022/23 with estimated revenue yield of 0.7 percent of GDP by FY2025/26.
  - Introducing compensatory schemes to mitigate adverse effects on vulnerable households amounting to 0.2 percent of GDP by FY2025/26.
  - Boosting capital spending by allowing it to rise 1 percentage point faster than nominal nonoil GDP would cost about 0.6 percent of GDP by FY2025/26.
  - For simplicity, debt issuance is assumed unchanged compared to the baseline, with fiscal savings leading to an improvement in net financial assets.

### Baseline and Adjustment Scenario Projections — Selected Table Highlights (2015–25, In percent of GDP)
- Baseline Scenario (selected series):
  - Overall balance: 2015: -0.3; 2016: 0.5; 2017: 7.5; 2018: 9.3; 2019: 4.7; 2020: -0.8; 2021: -2.6; 2022: -3.7; 2023: -4.4; 2024: -5.2; 2025: -5.6.
  - Overall balance after transfers to FGF and excl. investment income: 2015: -17.5; 2016: -17.9; 2017: -12.9; 2018: -7.7; 2019: -13.9; 2020: -18.3; 2021: -19.8; 2022: -20.9; 2023: -21.4; 2024: -21.8; 2025: -21.9.
  - Nonoil balance excl. investment income (Percent of nonoil GDP): 2015: -88.3; 2016: -83.5; 2017: -85.5; 2018: -90.2; 2019: -88.4; 2020: -86.7; 2021: -85.4; 2022: -84.5; 2023: -83.4; 2024: -82.3; 2025: -81.1.
  - Nonoil revenue: 2015: 3.6; 2016: 3.7; 2017: 4.3; 2018: 5.0; 2019: 5.3; 2020: 5.5; 2021: 5.7; 2022: 5.7; 2023: 5.6; 2024: 5.5; 2025: 5.4.
  - Primary spending: 2015: 52.6; 2016: 52.0; 2017: 50.1; 2018: 50.6; 2019: 53.8; 2020: 55.8; 2021: 56.2; 2022: 55.7; 2023: 55.0; 2024: 54.1; 2025: 53.1.
  - (1) Total government debt: 2015: 4.7; 2016: 10.0; 2017: 20.5; 2018: 14.8; 2019: 11.6; 2020: 15.5; 2021: 30.4; 2022: 41.6; 2023: 55.1; 2024: 65.2; 2025: 74.4.
  - (2) Total buffer by the KIA: 2015: 456.3; 2016: 476.6; 2017: 460.4; 2018: 398.2; 2019: 407.9; 2020: 426.8; 2021: 421.7; 2022: 415.2; 2023: 405.0; 2024: 393.6; 2025: 380.7.
  - Net government financial assets (2-1): 2015: 451.7; 2016: 466.6; 2017: 439.9; 2018: 383.3; 2019: 396.2; 2020: 411.3; 2021: 391.4; 2022: 373.7; 2023: 349.8; 2024: 328.3; 2025: 306.3.
  - Current account balance: 2015: 3.5; 2016: -4.6; 2017: 8.0; 2018: 14.5; 2019: 8.8; 2020: 3.1; 2021: 2.1; 2022: 1.6; 2023: 1.3; 2024: 0.9; 2025: 0.9.
  - International reserves (in months of next year's imports): 2015–2025: 6.5; 6.6; 6.4; 6.8; 7.0; 7.0; 7.0; 7.0; 7.0; 7.0; 7.0.
  - Real GDP growth (percent, yoy): 2015: 0.6; 2016: 2.9; 2017: -4.7; 2018: 1.2; 2019: 0.7; 2020: 1.5; 2021: 2.7; 2022: 2.7; 2023: 2.7; 2024: 2.7; 2025: 2.7.
  - Real nonoil GDP growth (percent, yoy): 2015: 4.2; 2016: 1.4; 2017: 1.8; 2018: 2.7; 2019: 3.0; 2020: 3.0; 2021: 3.5; 2022: 3.5; 2023: 3.5; 2024: 3.5; 2025: 3.5.
- Fiscal Adjustment under the Baseline (selected):
  - Annual change in overall balance to GDP: 2015: -18.9; 2016: 0.8; 2017: 7.0; 2018: 1.8; 2019: -4.6; 2020: -5.6; 2021: -1.8; 2022: -1.1; 2023: -0.7; 2024: -0.8; 2025: -0.5; cumulative 2020-25: -10.4.
  - Annual change in nonoil primary balance to nonoil GDP: 2015: 14.3; 2016: 4.8; 2017: -2.0; 2018: -4.7; 2019: 1.8; 2020: 1.7; 2021: 1.3; 2022: 0.9; 2023: 1.1; 2024: 1.0; 2025: 1.3; cumulative 2020-25: 7.4.
- Fiscal Adjustment Scenario (selected series highlights compared to baseline):
  - Overall balance: 2015: -0.3; 2016: 0.5; 2017: 7.5; 2018: 9.3; 2019: 4.7; 2020: -0.5; 2021: -0.1; 2022: 0.8; 2023: 1.0; 2024: 1.2; 2025: 1.6.
  - Overall balance after transfers to FGF and excl. investment income: 2015: -17.5; 2016: -17.9; 2017: -12.9; 2018: -7.7; 2019: -13.9; 2020: -17.9; 2021: -17.3; 2022: -16.5; 2023: -16.2; 2024: -15.7; 2025: -15.0.
  - Nonoil balance excl. investment income (Percent of nonoil GDP): 2015: -88.3; 2016: -83.5; 2017: -85.5; 2018: -90.2; 2019: -88.5; 2020: -85.7; 2021: -79.9; 2022: -75.6; 2023: -73.0; 2024: -70.7; 2025: -68.0.
  - Nonoil primary revenue: 2015: 3.6; 2016: 3.7; 2017: 4.3; 2018: 5.0; 2019: 5.3; 2020: 5.5; 2021: 7.2; 2022: 8.3; 2023: 8.2; 2024: 8.2; 2025: 8.1.
  - Primary spending: 2015: 52.6; 2016: 52.0; 2017: 50.1; 2018: 50.6; 2019: 53.8; 2020: 55.3; 2021: 54.7; 2022: 53.3; 2023: 51.7; 2024: 49.9; 2025: 48.1.
  - (1) Total government debt under adjustment: 2015: 4.7; 2016: 10.0; 2017: 20.5; 2018: 14.8; 2019: 11.6; 2020: 15.5; 2021: 30.1; 2022: 41.1; 2023: 54.3; 2024: 64.3; 2025: 73.1.
  - (2) Total buffer by the KIA under adjustment: 2015: 456.3; 2016: 476.6; 2017: 460.4; 2018: 398.2; 2019: 407.9; 2020: 427.1; 2021: 420.7; 2022: 417.6; 2023: 411.4; 2024: 406.0; 2025: 398.7.
  - Net government financial assets (2-1) under adjustment: 2015: 451.7; 2016: 466.6; 2017: 439.9; 2018: 383.3; 2019: 396.2; 2020: 411.7; 2021: 390.6; 2022: 376.6; 2023: 357.1; 2024: 341.7; 2025: 325.5.
  - Current account balance under adjustment: 2015: 3.5; 2016: -4.6; 2017: 8.0; 2018: 14.5; 2019: 8.8; 2020: 3.3; 2021: 3.6; 2022: 4.5; 2023: 5.6; 2024: 6.6; 2025: 7.6.
- Fiscal Adjustment Under the adjustment Scenario (selected):
  - Annual change in overall balance to GDP: 2015: -18.9; 2016: 0.8; 2017: 7.0; 2018: 1.8; 2019: -4.6; 2020: -5.2; 2021: 0.3; 2022: 0.9; 2023: 0.2; 2024: 0.2; 2025: 0.4; cumulative 2020-25: -3.1.
  - Annual change in nonoil primary balance to nonoil GDP: 2015: 14.3; 2016: 4.8; 2017: -2.0; 2018: -4.7; 2019: 1.8; 2020: 2.7; 2021: 5.8; 2022: 4.3; 2023: 2.5; 2024: 2.3; 2025: 2.7; cumulative 2020-25: 20.5.

*Source: IMF staff estimates and content from Annexes I–IV of the provided IMF chapter.*

### Annex V. External Sector Assessment

### Annex V. External Sector Assessment

### Summary assessment
- Staff assesses Kuwait’s external position in 2019 to be weaker than implied by medium-term fundamentals and desirable policies.
- Implementing staff’s recommended fiscal adjustment to achieve intergenerational equity would bring the current account to a level consistent with fundamentals.

### Current account and recent developments
- Current account (CA) surplus eased to 8.8 percent of GDP in 2019 as oil exports declined due to lower oil prices and output.
- Investment income in 2019 is estimated to be broadly unchanged, at about US$20 billion (14 percent of GDP), supported by continued solid performance of KIA investments.
- With oil exports subdued and imports rising, the CA surplus is projected to dissipate over the medium term.
- Mirroring the reduced CA surplus, capital outflows declined in 2019. The government, prevented from borrowing including from external sources, drew on GRF assets to cover financing needs (the overall fiscal balance after compulsory transfers to the FGF and excluding investment income). The net impact of the drawdown from the GRF and asset accumulation in the FGF on the Financial Account was much smaller net capital outflows.

### External buffers and reserves
- CBK gross international reserves reached US$39.6 billion at end–2019, equivalent to:
  - 29 percent of GDP,
  - 7 months of imports,
  - 32 percent of broad money,
  - estimated 110 percent of the IMF’s reserve adequacy (ARA) metric.
- Government foreign assets held by the KIA are estimated to have reached 410 percent of GDP at end–2019.
- Roughly 90 percent of KIA assets are in the Future Generations Fund (FGF); the remainder are held in the General Reserve Fund (GRF) and available for government financing and replenishing CBK reserves.

### Exchange rate and competitiveness
- Kuwait’s exchange rate peg to an undisclosed basket of currencies (in place since May 2007) has provided an effective nominal anchor with limited exchange rate flexibility.
- The REER remained broadly unchanged over the past year or so but has experienced a trend appreciation for more than a decade. Since the 2014 oil price shock, the dinar’s appreciation has generally been less pronounced than that of other GCC currencies.
- REER model (regression approach) implies a small undervaluation of -2.4 percent.

### External sustainability and intergenerational equity
- The CA surplus falls short of the level needed for intergenerational equity. Using the consumption-based external sustainability model:
  - Staff estimate the CA norm implied by a constant real per-capita annuity (baseline) at a surplus of 18.9 percent of GDP in 2019.
  - Resulting CA gap in 2019: -10.1 percent of GDP (actual CA 8.8 percent of GDP; norm 18.9 percent of GDP).
- The CA gap is largely driven by suboptimal savings by the public sector.
- The same consumption-based model estimates:
  - Fiscal balance (2019): 4.7 percent of GDP.
  - Fiscal balance norm (2019): 19.5 percent of GDP.
  - Fiscal balance gap: -14.8 percent of GDP.
- Closing the fiscal gap over the long term would eliminate the CA gap.

- Assumptions used in the consumption-based exercise include:
  - Proven oil reserves were 93 billion barrels at end-2018.
  - Oil production projected to grow at a constant rate of 0.3 percent along with domestic consumption.
  - Oil prices and GDP deflator projected to grow by 2 percent.
  - Return on net foreign assets is 5 percent.
  - Population grows at 0.5 percent.

### EBA-lite 2.0 (regression) results and limitations
- The revised External Balance Assessment-lite (EBA-lite 2.0) methodology is not well suited for an undiversified exporter such as Kuwait.
- Under the assumption of a fiscal surplus consistent with intergenerational equity (19.5 percent of GDP), the EBA-lite CA regression model suggests:
  - Current account norm for 2019: 32.1 percent of GDP.
  - Corresponding current account gap: -23.3 percent of GDP (actual 8.8 percent; norm 32.1 percent).
  - Of the -23.3 percent CA gap:
    - Policy gap: -5.1 percent of GDP.
    - CA-Fitted: 26.9 percent of GDP.
    - Residual: -18.1 percent of GDP (reflecting a poor statistical fit of the regressions).
- The large residual (18.1 percent of GDP out of the 23.3 percent CA gap) indicates the EBA-lite model’s limited applicability to Kuwait.

### Staff conclusion and policy implications
- Staff gives most weight to the consumption-based model’s finding of the CA gap of about -10.1 percent of GDP.
- The external position is assessed to be weaker than warranted by fundamentals and desirable policies.
- This CA gap would be closed under staff’s recommended fiscal adjustment over the long term (i.e., fiscal consolidation to achieve the fiscal balance norm consistent with intergenerational equity).

### Key statistics and indicators (selected)
- Current account (2019): 8.8 (percent of GDP)
- Current account norm (consumption-based, 2019): 18.9 (percent of GDP)
- Current account gap (consumption-based, 2019): -10.1 (percent of GDP)
- Fiscal balance (2019): 4.7 (percent of GDP)
- Fiscal balance norm (2019): 19.5 (percent of GDP)
- Fiscal balance gap (2019): -14.8 (percent of GDP)
- EBA-lite model-based current account norm (2019): 32.1 (percent of GDP)
- EBA-lite model-based current account gap (2019): -23.3 (percent of GDP)
  - Policy gap (2019): -5.1 (percent of GDP)
  - Residual (2019): -18.1 (percent of GDP)
- Investment income (2019): about US$20 billion (14 percent of GDP)
- CBK gross international reserves (end–2019): US$39.6 billion (29 percent of GDP; 7 months of imports; 32 percent of broad money)
- KIA assets (staff estimate, end–2019): 410 percent of GDP
- ARA metric coverage (CBK reserves as % of ARA metric): 110 percent

*Source: Annex V. External Sector Assessment, IMF staff calculations.*

### Annex VII. Fiscal Rule Options for Kuwait

### Annex VII. Fiscal Rule Options for Kuwait

### A. Introduction
- Oil revenues account for 72 percent of government revenues, making fiscal accounts extremely sensitive to oil price fluctuations.
- Spending tends to be procyclical with respect to oil price; spending rose by nearly 25 percent in dinar terms in two years starting FY2017/18.
- Kuwait’s sovereign wealth fund (SWF) structure:
  - Two funds: the GRF and the FGF.
  - GRF: state’s treasury account and a stabilization fund; main repository of all the state’s oil revenues and income earned from GRF investments; retains budget surpluses in excess of mandatory savings and covers financing deficits.
  - FGF: intergenerational savings vehicle; under current rule at least 10 percent of government revenues, including GRF’s investment income, and all investment income generated by FGF assets are transferred to the FGF and reinvested; no withdrawal allowed from the FGF unless sanctioned by law.
  - Both Funds are managed by the KIA which also handles government’s external borrowing.
- Despite large SWF assets, the arrangement:
  - Imposes no constraint on fiscal policy in good times and allows spending windfalls from high oil prices.
  - Permits large deficits in low-price periods while maintaining mandatory transfers to FGF by drawing on the GRF and/or accumulating debt.
  - Lacks a mechanism to guide fiscal policy back to long-term sustainability targets.
- Projection: net financial assets – the difference between KIA assets and government debt – are projected to decline by almost 66 percent of GDP over the next 5 years.
- Fiscal rules can provide medium-term targets or ceilings to:
  - Preserve intergenerational equity by underpinning savings.
  - Insulate the economy from oil price shocks.
  - Protect government spending decisions from political pressures and reinforce multiyear budget frameworks.
- Types of fiscal rules discussed: debt, budget balance (structural/cyclically-adjusted), revenue, and expenditure rules; countries often combine rules to mitigate shortcomings.

### B. Long-Term Fiscal Anchor (PIH-based analysis)
- Methodology: Use Permanent Income Hypothesis (PIH) to estimate net wealth (initial net financial assets + present value of oil in ground) and derive long-term fiscal balance benchmarks; estimates sensitive to assumptions on reserves, extraction rates, future oil prices, exchange rate, government share of oil revenue, growth, and real interest rates.
- Scenarios considered:
  - PIH perpetuity: a perpetuity-nonoil primary deficit (NOPD) constant in percent of nonoil GDP.
  - PIH real perpetuity: a real perpetuity-NOPD (constant in real terms).
  - PIH annuity: a 74-year annuity-NOPD constant in percent of nonoil GDP (oil wealth fully exhausted at end of annuity).
- Key quantitative findings:
  - A constant perpetuity-NOPD as a share of nonoil GDP of 11.4 percent would maximize Kuwait’s net wealth at the end of the forecasting period, but implies a large upfront adjustment.
  - Under the real perpetuity PIH:
    - The NOPD would start much closer to the actual NOPD, but continually (and gradually) tighten, "averaging 68 percent of nonoil GDP over the first decade of the projection."
    - Kuwait’s net financial wealth would decline but remain substantial, e.g., at 324 percent of GDP in 2094 when oil reserves are projected to run out.
  - Targeting a constant annuity-NOPD of 38 percent of nonoil GDP over 74 years allows a higher NOPD than the perpetuity option but still implies a sizeable upfront consolidation and would exhaust resources by the end of the annuity.
- Reserves and timing:
  - Based on available proven reserves and staff assumptions on extraction, oil reserves are projected to be exhausted in 74 years (2094).
  - Hypothetical "stranded assets" scenario: if oil production ceases in 2065, higher savings would be required to ensure intergenerational equity.
- Policy implication: Regardless of PIH scenario, under staff’s baseline Kuwait is not saving sufficiently for future generations.

### C. Near-Term Anchor for Fiscal Policy (price-based and expenditure rules)
- Rationale: Price-based structural balance rules (structural primary balance calculated at a predetermined benchmark oil price) help de-link spending from price-cyclical oil revenue and smooth spending over oil price cycles.
- Benchmark oil-price rules considered:
  - 5.0.0 rule: benchmark price = 5-year historical moving average.
  - 5.1.5 rule: benchmark price = 11-year average that includes past 5 years, the current year, and 5 years of the futures price (used by Mexico and Trinidad and Tobago).
  - 10.3 rule: benchmark = the lower of a 10-year historical average and a 3-year historical average (formula followed by Russia).
- Trade-offs in benchmark choice:
  - Long moving averages achieve greater expenditure smoothing but may lead to insufficient savings or dissaving if prices drop sharply.
  - Shorter moving averages generate greater spending volatility but higher savings due to faster adjustment to price drops.
- Calibration suggestion:
  - Under the real perpetuity PIH, putting a floor on structural deficit of minus 8 percent of nonoil GDP would help ensure at minimum equivalent net financial assets in 2094 as implied by that PIH scenario.
  - The choice among the benchmark-price rules makes little difference given a flat term structure of long-term futures prices.
- Expenditure rule parameters considered:
  - Cap annual real growth in expenditure at 2.2 percent.
  - Ensure expenditure does not contract by more than 0.75 percent in any given year.
  - Note: 2.2 percent is broadly in line with estimated potential growth of Kuwait.
- Combined rule effects:
  - Combining a price-based structural balance rule with an expenditure rule leads to smoother fiscal consolidation over the medium term compared to price rules alone, and more ambitious consolidation over the longer term.
  - Counterfactual: Had a combined fiscal rule (5.1.5 price rule with a minus 8 percent of nonoil GDP floor on SB and a real expenditure growth constraint) been implemented in 2007, Kuwait would have avoided the run-up in NOPDs experienced over the last decade (analysis does not account for potential impact of tighter fiscal stance on nonoil growth).
- Additional calibrations in figures/notes:
  - A structural deficit floor of minus 8 percent of nonoil GDP is referenced repeatedly as a policy anchor in counterfactuals.
  - Alternative calibrations in figure notes: structural deficit should not exceed 5 percent of non-oil GDP with real expenditure growth not to exceed potential real growth of 2.5 percent (figure note), and a variant with structural deficit should not exceed 8 percent and real expenditure growth not to exceed potential real growth of 3 percent (figure note).

### D. Concluding Remarks (policy recommendations and prerequisites)
- A transparent, rules-based fiscal framework would help Kuwait:
  - Smooth government spending to buttress economic stabilization amid volatile oil prices.
  - Accumulate adequate savings for future generations given eventual depletion of oil reserves.
- Design trade-offs:
  - Long-term anchor choice involves intertemporal tradeoffs between consumption of current and future generations.
  - Fiscal rule design involves tradeoffs between economic stabilization, savings, and simplicity; ultimate design should reflect societal preferences and rest with the authorities.
- Preconditions for effective fiscal rule implementation:
  - Enshrinement in a sound institutional framework that includes political commitment, sound public financial management, comprehensive budget reporting, and transparent accounting practices.
  - Incorporation of the fiscal rule into the medium-term expenditure framework and the annual budget process.

*Prepared by Anastasia Guscina.*

### 10.3 rule

### 10.3 rule

### Rule definition
- 1/ Structura l  deficit should not exceed 8 pe rcent of nonoil GDP a nd re al 
  e xpe nditure growth should be a bove -0.75 a nd below 2.2 pe rcent.

### Chart / scope
- Title shown: Primary Expenditures Under Price-Based Structural Balance and Expenditure Rules
- Unit: (In percent of nonoil GDP)
- Series labels visible in the figure:
  - Actual
  - 5.0.0 rule
  - 5.1.5 rule
  - 10.3 rule
  - 5.1.5 price rule and expenditure rule 1/

### Time coverage in figure
- Years displayed on horizontal axis: 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

### Key parameters and thresholds
- Structural deficit cap: 8 pe rcent of nonoil GDP
- Real expenditure growth band: above -0.75 a nd below 2.2 pe rcent

*KUWAIT  INTERNATIONAL MONETARY FUND 61*

### References

### 1kwtea2020001 - References

### References cited
- Andrle, M., J. Bluedorn, L. Eyraud, T. Kinda, P. Koeva Brooks, G. Schwartz, and A. Weber. 2015. “Reforming Fiscal Governance in the European Union.” IMF Staff Discussion Note 15/09, International Monetary Fund, Washington, DC.
- Baunsgaard, T., M. Villafuerte, M. Poplawski-Ribeiro, and C. Richmond. 2012. “Fiscal Frameworks for Resource Rich Developing Countries.” IMF Staff Discussion Note 12/04, International Monetary Fund, Washington, DC.
- Bergman, U. M., and M. Hutchison. 2015. “Economic Stabilization in the Post-Crisis World— Are Fiscal Rules the Answer?” Journal of International Money and Finance 52: 82–101.
- Bornhorst, F., A. Fedelino, J. Gottschalk, and G. Dobrescu. 2011. “When and How to Adjust Beyond the Business Cycle—A Guide to Structural Fiscal Balances.” IMF Technical Notes and Manuals 2011/02, International Monetary Fund, Washington, DC.
- Bova, E., N. Carcenac, and M. Guerguil. 2014. “Fiscal Rules and the Procyclicality of Fiscal Policy in the Developing World.” IMF Working Paper 14/122, International Monetary Fund, Washington, DC.
- Fedelino, A., M. Horton, and A. Ivanova. 2009. “Computing Cyclically Adjusted Balances and Automatic Stabilizers,” IMF Technical Notes and Manuals 2009/05, International Monetary Fund, Washington, DC.
- International Monetary Fund (IMF). 2009. “Fiscal Rules— Anchoring Expectations for Sustainable Public Finances.” International Monetary Fund, Washington, DC.
- International Monetary Fund (IMF). 2012. “Macroeconomic Policy Frameworks for Resource Rich Developing Countries.” IMF Policy Paper and supplements. International Monetary Fund, Washington, DC.
- International Monetary Fund (IMF). 2018. “Second Generation Fiscal Rules: Balancing Simplicity, Flexibility, and Enforceability.” IMF Staff Discussion Notes, No. 18/04, International Monetary Fund, Washington DC.
- Schaechter, A., T. Kinda, N. Budina, and A. Weber. 2012. “Fiscal Rules in Response to the Crisis—Toward the Next-Generation Rules. A New Dataset.” IMF Working Paper 12/187, International Monetary Fund, Washington, DC.

### Kuwait — Staff Report informational annex (overview)
- Document date: March 10, 2020.
- Prepared by: Middle East and Central Asia Department with inputs from other departments and the World Bank.
- Annex sections include: FUND RELATIONS; RELATIONS WITH THE WORLD BANK; STATISTICAL ISSUES.

### Fund relations (key points, as of February 15, 2020)
- Financial Position in the Fund: Kuwait contributed to the PRGF-HIPC Trust with an interest-free deposit of SDR 4.2 million maturing in January 2024 and a grant contribution of SDR 0.1 million.
- Exchange rate arrangement: Since May 2007, Kuwait’s exchange rate arrangement is a conventional peg against an undisclosed currency basket. Kuwait has accepted the obligations of Article VIII, Sections 2 (a), 3, and 4.
- Article IV consultations: Last Article IV consultation completed on March 25, 2019 (Country report 19/95—Published April 2, 2019).
- FSAP participation: FSAP mission took place in 2018; FSAP focused on banking supervision, financial safety nets, systemic risk and liquidity, capital markets development and supervision, and SME access to finance.
- Technical Assistance since 2014 (selected entries with dates):
  - LEG Central Bank Law — January 2014
  - FAD Tax Policy and Administration — February 2014
  - MCM Macroprudential Policy — March 2014
  - FAD Fiscal Rule — February 2015
  - STA National Accounts Statistics — March 2015
  - MCM Deposit Insurance System — September 2015
  - FAD Establishing a Debt Management Office — November 2015
  - FAD Debt Management Strategy — January 2016
  - MCM Bank Stress Testing — May-June 2016
  - FAD Macro-Fiscal Unit — November 2016; May 2017
  - MCM Crisis Management and Resolution — April-May 2017
  - STA Government Finance Statistics — April-May 2018; September-October 2018; October 2019
  - LEG AML/CFT Diagnostic — October 2018
  - FAD Tax Policy and Administration — October-November 2018
  - STA National Accounts Statistics — January 2019
  - MCM Monetary Policy Operations — February 2019
- Resident Representative: None.
- Kuwait has consented to the quota increase under the Fourteenth General Review of Quotas.

### Relations with the World Bank (as of January 8, 2020)
- World Bank and Government of Kuwait developed a rolling four-year Country Partnership Strategy (CPS) aligned with the Government’s five-year plan.
- Current Reimbursable Advisory Services (RAS) program structured around four strategic themes under the 2016–20 CPS:
  - (i) Public sector performance and citizen accountability — includes support for a public expenditure and financial accountability (PEFA) project, a guidebook for public private partnerships, Public Expenditure Review (PER), State Audit Bureau support, and Public Financial Management (PFM) programmatic multi-year engagement.
  - (ii) Private sector development — includes enhancing institutional effectiveness of the Competition Protection Authority, improving the business environment, trade diversification analysis, and KDIPA engagement on investment roadmap and diversification opportunities.
  - (iii) Human development — includes a $35 million multi-year strategic partnership with the Ministry of Education for education reforms; planned strategic engagement on labor market reforms with the General Secretariat of the Supreme Council for Planning and Development.
  - (iv) Infrastructure Development and Urban Management — includes multi-year land management modernization with the Ministry of Finance and State Property Sector, disaster risk management with the Kuwait Institute for Scientific Research, and solid waste management with Kuwait Municipality.

### Ongoing World Bank activities (selected)
- Public sector performance & citizen accountability:
  - Knowledge Index for the Public Sector (P169327): develop KIPS to diagnose knowledge availability and improve workflow productivity and administrative costs.
  - Support Kuwait State Audit Bureau in Strengthening its Capacity (P169590): strengthen quality assurance, risk-based audit approach, and institutional performance measurement.
- Private sector development:
  - Support Investment Environment Reform in Kuwait Phase II (P168281) – Part 2: implement a minimum of 10 reforms measured by a broad set of actionable investment climate indicators.
  - Kuwait Competition Protection Agency Phase II (P162614): components include designing a competition framework, embedding pro-competition principles, fostering agency effectiveness, and operational setup/automation.
  - Investment Reform Map and FDI Diversification Opportunities (P171304): assist KDIPA to assess and prioritize IPP reforms to address barriers to FDI.
- Human development:
  - Kuwait Labor Market Reform (P166155): develop policies and programs to improve employment outcomes through diagnostics and policy development.
- Infrastructure and urban management:
  - Ministry of Finance Program for Modernization of Land Management in Kuwait (P151988): multi-year engagement to modernize land administration.
  - Municipality of Kuwait Solid Waste II (P122085): closure and rehabilitation of dumpsites, solid waste master plan, Solid Waste Law, establishment of a Municipal Solid Waste Agency.
  - Multi-Hazard Macro-Assessment Study and Strengthening Environmental Crisis Management in Kuwait (P162950): strengthen hazard risk understanding and Decision Support Center for Environmental Crises (DSCEC) management.

### Statistical issues (as of January 19, 2020)
- Overall assessment: Data provision has some shortcomings but is broadly adequate for surveillance; timeliness, particularly for national and fiscal accounts, remains a concern.
- National accounts and production:
  - Compiled by Central Statistical Bureau (CSB).
  - CSB started disseminating quarterly GDP series from the production side in 2018.
  - Estimates of national accounts by institutional sectors completed for 2015–17.
  - Annual GDP estimates derived from a benchmark year of 2010; IMF TA mission in January 2019 recommended a household income and expenditure survey and a new establishment census to rebase GDP.
  - CSB initiatives: (i) Household Consumption and Expenditure Survey (ongoing), (ii) Establishment Census planned for mid–2020.
  - Discussed issues: aggregation of FISIM, coverage of informal sector activities (small-scale survey recommended), and disclosure of sources/methods for GDP components.
- Price statistics:
  - CPI published monthly; CPI basket weights revised in June 2017 based on the 2013 HIES.
  - PPI covers selected mining and quarrying and manufacturing and utilities; recommended enhancements include updating weights from 2010 base year, extending coverage to services and construction, and compiling separate indexes for domestic and export markets.
- Government Finance Statistics (GFS):
  - Kuwait reclassified the budget according to GFSM 2001 starting fiscal year 2016–17.
  - STA TA assisted MoF in updating classification to GFSM 2014 and compiling annual GFS for Central Government.
  - Recommendations: increase frequency of published data, reduce release lag, expand coverage to all general government units including the Future Generations Fund (FGF) and the General Reserve Fund (GRF) managed by the Kuwait Investment Authority.
  - Data on the operations of the Public Institute for Social Security are not made available.
- Monetary and financial statistics:
  - Central Bank of Kuwait (CBK) reports sectoral balance sheet data based on Standardized Report Forms (SRFs), with some lag.
  - Kuwait reports several Financial Access Survey (FAS) indicators, including commercial bank branches per 100,000 adults and ATMs per 100,000 adults.
- Financial surveillance:
  - Kuwait started reporting Financial Soundness Indicators (FSIs) for public dissemination in 2017.
  - CBK reports 11 of the 12 core FSIs and 8 encouraged FSIs, available through the IMF website, although with some lag.
- External sector statistics:
  - CBK compiles and disseminates quarterly balance of payments (BOP) and international investment position (IIP) data, following BPM6.
  - Published IIP data are incomplete; they exclude external assets held by general government (except loans by the Kuwaiti Fund for Arab Economic Development and general government trade credits). These data are reported to the Fund by the Executive Director for Kuwait at the time of the Article IV Board meeting.
  - CBK participates in CPIS (data reported for 2003 onwards) and Coordinated Direct Investment Survey; CPIS data exclude holdings of foreign securities held by government agencies (bulk of Kuwait’s cross-border holdings).
  - Improvements noted: revision of reporting forms, separate reporting of financial transactions in the BOP and other changes in IIP volume, and improved estimation of remittances. Further coordination among government entities is needed for timely data provision to CBK.
  - Merchandise trade data compiled and disseminated monthly/quarterly/annual by the CSB.
- Data Standards and Quality:
  - Kuwait participates in the e-GDDS and is planning to fully implement it by launching a National Summary Data Page in 2020.
  - Its metadata were last updated in 2010 and 2011.

### Kuwait: Table of Common Indicators Required for Surveillance (Last updated February 20, 2020) — selected entries
- Exchange rates: Date of latest observation Jan 2020; Date received Feb 2020; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M.
- International reserve assets and reserve liabilities of the monetary authorities: Date of latest observation Dec 2019; Date received Feb. 2020; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M.
- Reserve/base money: Date of latest observation Dec 2019; Date received Feb 2019; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M.
- Broad money: Date of latest observation Dec 2019; Date received Feb 2020; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M.
- Central bank balance sheet: Date of latest observation Dec 2019; Date received Feb 2020; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M.
- Consolidated balance sheet of the banking system: Date of latest observation Dec 2019; Date received Feb 2020; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M.
- Interest rates: Date of latest observation Dec 2019; Date received Feb. 2020; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M.
- Consumer price index: Date of latest observation Dec 2019; Date received Feb 2020; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M.
- Revenue, expenditure, balance and composition of financing—general government: Date of latest observation Dec 2019; Date received Feb 2020; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M; Memo Items: Not published on Fund standards / Not published on Fund standards.
- External current account balance: Date of latest observation Q3 2019; Date received Jan 2020; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q.
- Exports and imports of goods and services: Date of latest observation Sep 2019; Date received Jan 2020; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q.
- GDP/GNP: Date of latest observation 2018; Date received Jan 2019; Frequency: A; Frequency of Reporting: A; Frequency of Publication: A.
- Gross external debt: Date of latest observation Dec 2019; Date received Feb 2020; Frequency: A; Frequency of Reporting: A; Frequency of Publication: A.
- International investment position: Date of latest observation Q3 2019; Date received Jan 2020; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q.

### Supplementary information
- The supplement provides an update to the Staff Report (SM/20/62) based on developments that took place since the issuance of report and states: "The update does not alter the thrust of the staff appraisal."

*Content based solely on the PDF chapter/section titled "1kwtea2020001 - References."*

### 1. Oil prices fell sharply on March 8 after OPEC+ talks to cut production fell

### 1. Oil prices fell sharply on March 8 after OPEC+ talks to cut production fell

### Oil price developments
- Oil prices fell sharply on March 8 after OPEC+ talks to cut production fell through; prices have since recovered somewhat but remain measurably lower than price assumptions underpinning the macroeconomic projections in the staff report.
- The average price in 2020 is now projected US$16.5 per barrel less than assumed in the staff report.
- The long end difference narrows to about US$3 per barrel by 2025.
- Oil markets remain highly unsettled reflecting supply uncertainty and concerns over the impact of the COVID-19 outbreak on global oil demand.

### COVID-19 impact and immediate policy response in Kuwait
- The number of cases reached 123 as of March 16.
- Authorities halted commercial flights, closed schools and universities, banned social gatherings, declared March 12-26 an official holiday, and reduced staffing to essential personnel in all governmental entities except those tasked with emergencies; salaries will continue to be paid to all Kuwaiti and non-Kuwaiti employees.
- Most bank branches have been closed; the Central Bank of Kuwait (CBK) is working with commercial banks to ensure uninterrupted access to financial services, including online banking, payment, settlement and electronic clearing systems, and access to disinfected banknotes.
- Following the U.S. Fed’s decision to cut interest rates to zero, the CBK reduced interest rates on all monetary policy instruments by 1 percentage point and committed to provide liquidity as needed.
- The CBK set up a KD10 million fund, funded by Kuwaiti banks, to support government efforts in combatting the virus.

### Revised projections and fiscal/external implications
- Staff assumed a slowdown in the nonoil sector in 2020 followed by a rebound in 2021.
- Staff revised the nonoil growth projection to 2 percent in 2020 and 4 percent in 2021, compared to 3 and 3.5 percent respectively in the staff report.
- Given heightened uncertainty with respect to oil output, staff has left oil output broadly unchanged.
- A $16.5 per barrel lower oil price in 2020 implies 12 and 13 percentage points of GDP worsening of Kuwait’s fiscal and external balances, translating into correspondingly higher financing needs and thus a faster drawdown of buffers than envisaged in the staff report.

### Policy recommendations and priorities
- The thrust of staff appraisal remains unchanged: ambitious medium-term fiscal adjustment and growth-enhancing structural reforms to close the intergenerational savings’ gap and reduce dependence on oil remain pressing.
- Fiscal consolidation should not start until the effects of the COVID-19 outbreak fully abate; this aligns with the fiscal policy path in the staff report which assumed that no fiscal adjustment measures could be approved until after the November 2020 elections.
- Immediate priorities:
  - Contain the spread of the virus and mitigate its economic impact.
  - Use the spending envelope in the budget to accommodate additional healthcare spending, realize savings through better procurement, and delay some capital projects through reprioritization.
  - Ensure adequate liquidity in the banking sector.
  - Provide temporary and targeted support to hard-hit but viable companies, especially SMEs.
- The sharp drop in oil prices underscores the need for a fiscal rule to insulate the economy from excessive oil price fluctuations while ensuring adequate savings for the future.

### Resilience and contingency options
- Kuwait can withstand the latest shocks from a position of strength: ample assets of the KIA and central bank reserves (435 percent of GDP), substantial borrowing space, and a well-capitalized banking sector underpin resilience.
- Despite recent market volatility, bond yields remain low.
- If parliament’s authorization to borrow is not forthcoming or tail risks materialize, the authorities could consider temporarily tapping the Future Generations Fund, with an explicit promise to replenish it once the situation normalizes anchored on a credible medium-term fiscal adjustment path.

### Selected key statistics (as presented)
- Oil price downside: US$16.5 per barrel lower in 2020; difference narrows to about US$3 per barrel by 2025.
- COVID-19 cases in Kuwait: 123 as of March 16.
- CBK policy action: reduced interest rates on all monetary policy instruments by 1 percentage point.
- KD10 million fund established by Kuwaiti banks to support government efforts.
- Nonoil growth projections: 2 percent in 2020; 4 percent in 2021 (revised from 3 and 3.5 percent).
- Fiscal/external balance impact: $16.5 per barrel lower oil price in 2020 implies 12 and 13 percentage points of GDP worsening, respectively.
- Central bank reserves: 435 percent of GDP.

*1kwtea2020001 - 1. Oil prices fell sharply on March 8 after OPEC+ talks to cut production fell*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1kwtea2020001.pdf_