## 1kwtea2022001

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### Recent economic developments — context and public health
- Political environment
  - Political gridlock impeded progress on fiscal risks and structural reforms; several reform bills, including a new debt law, await parliamentary approval.
  - New cabinet formed in late 2021 with three opposition legislators and the former Prime Minister reappointed.
  - Program of Action for the Sixteenth Legislative Term (2021/2022–2024/2025) aims to: enhance economic growth; foster private sector development; reinforce fiscal sustainability; promote social and human capital development via education and healthcare reforms; develop infrastructure and renewable energy.
  - High-level efforts led by the Amir may help alleviate the political impasse and accelerate reform momentum.
- COVID-19 and public health measures
  - Measures: suspending inbound commercial flights; closing schools and universities; banning public gatherings; suspending nonessential work in governmental entities; curfews; stringency adapted over time.
  - Vaccination (as of mid-January 2022): about 80 percent of the target population at least partially vaccinated and about 75 percent fully vaccinated.
  - Late 2021: began vaccinating children and administering booster shots to adults.
  - Early 2022 (Omicron): cases reached record highs; authorities moderately tightened measures (e.g., prohibiting large indoor gatherings); mobility indicators declined slightly but remain above 2020 and 2021 levels.

### Monetary, fiscal, and financial support measures
- Monetary and prudential actions
  - CBK discount rate lowered from 2.75 to 1.5 percent (from March 2020).
  - Prudential/liquidity measures included:
    - permitting a six-month deferral of loan repayments;
    - lowering minimum capital adequacy ratio from 13 to 10.5 percent;
    - lowering the liquidity ratio from 18 to 15 percent and liquidity coverage ratio from 100 to 80 percent;
    - raising loan to value (LTV) ratios by 10 percentage points for real estate and construction.
- Fiscal support
  - Direct fiscal support in FY 2020/21 estimated at almost 1.5 percent of GDP (spending on healthcare and support for firms and households through wage subsidies and cash transfers).
  - FY 2021/22 measures included:
    - another six-month loan deferral for Kuwaiti citizens financed by government;
    - tax deferrals;
    - loan guarantees to SMEs (80 percent of loans) amounting to KD 500 million (1.3 percent of GDP);
    - KD 600 million (1.6 percent of GDP) of bonuses for public sector workers involved in the COVID-19 response.

### Macroeconomic and labor market developments
- GDP and sectoral performance
  - Real GDP contracted 8.9 percent in 2020.
  - Non-oil growth: -7.5 percent in 2020.
  - Oil growth: -9.8 percent in 2020.
  - Recovery signals in H2 2021: private credit growth, imports and exports of goods, and point-of-sale transactions point to gradual recovery with rising oil prices and vaccination.
- Labor market and inflation
  - Employment of expatriates reduced by 12.3 percent by 2021Q2 (y/y).
  - CPI trended up since 2020H2, mostly due to higher food prices stemming from supply chain disruptions.

### Fiscal position and public finances
- FY 2020/21 and FY 2021/22
  - Fiscal deficit increased to an estimated 16.6 percent of GDP in FY 2020/21.
  - Financing need rose to 31.1 percent of GDP; the compulsory 10 percent transfer to the Future Generations Fund (FGF) was suspended.
  - Financing relied on drawdown of the General Reserve Fund (GRF), which neared depletion and prompted swaps of illiquid GRF assets for liquid assets from the FGF.
  - FY 2021/22: rebound in oil revenues, announced spending cuts (August 2021), and higher nominal GDP expected to improve headline fiscal balance by 20.3 percentage points to a surplus of 3.7 percent of GDP.
- FY 2022/23 budget and staff projection
  - FY 2022/23 budget intentions:
    - contain spending below KD 22 billion;
    - public wage bill: 1.7 percent nominal increase vs previous year’s budget;
    - subsidies: 12.4 percent lower;
    - public investment: 16.4 percent lower;
    - budget oil price assumption: US$65 per barrel;
    - non-oil revenues expected to increase by about 15 percent.
  - Staff projection (assuming average oil price of US$78.9): surplus of 12.3 percent of GDP (including investment income and transfers of profits of public entities) for FY 2022/23.
  - Medium-term projection: fiscal balance declines to a deficit of 1.2 percent of GDP, leaving a sizable fiscal sustainability gap.

### External sector and reserves
- Current account and trade
  - Current account surplus declined by 9.3 percentage points to 3.2 percent of GDP in 2020 (mainly due to 40 percent fall in oil exports, partially offset by import compression).
  - H1 2021: non-oil goods exports grew by 18 percent; imports of goods rose by 16 percent.
  - 2021 projection: current account surplus projected to increase to 16.1 percent of GDP, supported by higher oil exports.
- Reserves and external assessment
  - Official international reserves: increased by about US$8.4 billion to US$48.3 billion in 2020 (11.4 months of imports and 130 percent of ARA metric); declined by about US$3.2 billion to US$45.1 billion in 2021 (9.0 months of prospective imports) due to net outflows, partly offset by a new SDR allocation of about US$2.6 billion.
  - Staff assesses external position in 2021 as weaker than implied by fundamentals and desirable policies.

### Financial sector and credit conditions
- Credit growth and bank soundness
  - Credit growth: 3.6 percent (y/y) in 2020; 6.2 percent y/y in December 2021, driven mostly by household borrowing; lending to business remained muted.
  - Banking sector (as of 2021Q3 unless noted):
    - Capital adequacy ratio: 18.6 percent.
    - Nonperforming loans (NPLs) net of specific provisions: 1.4 percent.
    - Total provisions to gross NPL: over 200 percent.
    - Return on average assets: fell from 1.2 percent in 2019 to 0.6 percent in 2020Q4; recovered to 0.9 percent as of 2021Q3.
    - NSFR and LCR: 110% and 174.5%, respectively, as of 2021Q1.
  - CBK stress tests with three severe scenarios indicate banking system resilience under adverse shocks.

### Real estate
- Residential market recovered quickly after initial pandemic stall, driven by favorable financing conditions.
- Investment and commercial real estate lag in volume and value of transactions.
- Average transaction value volatile but trending up in recent months.

### Outlook and projections
- Growth and inflation
  - Non-oil GDP growth: estimated 3.4 percent in 2021; projected 3.5 percent in 2022.
  - Overall GDP: projected to grow around 2.7 percent over the medium term.
  - Inflation: average 3.4 percent in 2021; projected 4.4 percent in 2022; projected to decline to about 2.4 percent over the medium term.
- Oil and fiscal outlook
  - Oil production projected to rebound as OPEC+ quotas are relaxed and return to pre-pandemic level in 2022.
  - FY 2022/23 draft budget projects fiscal deficit (excluding investment income and transfers of profits of public entities) to narrow to KD 3.1 billion (6.6 percent of GDP).
  - Staff projects a surplus of 12.3 percent of GDP for FY 2022/23 (including investment income and transfers of profits of public entities, assuming average oil price of US$78.9).
  - Medium-term: fiscal balance reduces to deficit of 1.2 percent of GDP.

### Risks and uncertainties
- Balance of risks tilted to the downside (Annex IV).
- Key downside risks:
  - Prolonged COVID-19 pandemic could weigh on recovery; Omicron underscores renewed challenges.
  - Delays in fiscal and structural reforms could amplify procyclicality, undermine investor confidence, hinder diversification and competitiveness, and foster social pressures.
  - Oil price volatility would significantly impact outlook and macro balances.
- Upside risks:
  - Stronger-than-anticipated global rebound could boost oil revenues.
  - Resolution of political gridlock and strong fiscal consolidation could improve investor sentiment.

### Authorities’ views and policy priorities
- Authorities broadly agreed with staff’s assessment of the outlook, risks, and external sector assessment.
- Emphasized upside potential from rebounding oil prices and Kuwait’s strong financial position.
- Will continue to monitor COVID-19 impacts while maintaining macroeconomic sustainability and supporting recovery.
- Policy discussion focus areas: supporting short-run recovery; reinforcing fiscal and external sustainability; safeguarding financial stability; comprehensive structural reforms to reinvigorate non-hydrocarbon GDP and employment growth.

### Near-term policy recommendations (findings and recommendations)
- Economic scarring modest so far but could worsen if pandemic prolonged; oil sector resilient.
- Policy support measures contained bankruptcies and supported the vulnerable; some measures (e.g., bonuses to public sector COVID-19 workers) could have been better targeted.
- With recovery strengthening, support measures are being phased out; loan moratoria expired.
- Recommendations:
  - Closely monitor health and economic situation and plan coordinated withdrawal of remaining support measures.
  - Deploy additional targeted, temporary support if warranted, focusing on viable firms and the most vulnerable.
  - Passing the public debt law is essential for the issuance of government debt and orderly fiscal operations.
    - Draft debt law envisages a debt ceiling of 60 percent of GDP.
    - Debt law should provide flexibility for debt management, avoid legislating restrictions on maturities/sizes/uses, and clarify borrowing authorities of public entities (e.g., SOEs) and their relation to the debt ceiling calculation.
- Monetary and financial policy stance:
  - CBK focuses on supporting the economy while containing financial stability risks.
  - Given expected U.S. monetary tightening in 2022, Kuwaiti monetary policy may need modest tightening to mitigate capital outflows, though the peg to an undisclosed basket allows additional autonomy.
  - CBK to monitor credit risk, ensure adequate capital buffers, and remain vigilant and agile.

### Reinforcing fiscal and external sustainability — findings and projections
- Baseline fiscal path inconsistent with long-run sustainability; buffers decline significantly over medium term.
- Projection highlights:
  - Non-oil primary balance (NOPB) projected to improve from –98.7 percent of non-oil GDP in FY2020/21 to –84.5 percent of non-oil GDP in FY2027/28, below permanent income hypothesis (PIH) scenarios.
  - Kuwait not saving sufficiently for future generations with a gap averaging at least 5 percent of non-oil GDP between 2021 and 2027.
  - Government debt projected to rise to 42.2 percent of GDP by 2027.

### Fiscal consolidation options and illustrative adjustment scenario
- Staff illustrative scenario (Text Table 1) assumptions:
  - Revenue measures over medium term: introduction of a 5-percent VAT; excises on tobacco; expansion of corporate tax to cover domestic corporates; adoption of property tax.
  - Expenditure measures: social benefit reform based on implementing a UBI; steady reduction of public wages; reduction of subsidies to fuel, electricity, and water; reduction of wage subsidies to nationals in private sector; streamlining existing social schemes.
- Fiscal impact of scenario:
  - Estimated additional revenues of 6.4 percent of GDP by 2027/28.
  - Estimated expenditure savings of 4.1 percent of GDP by 2027/28.
  - Adjustment would exceed the 5-percent NOPB gap relative to the PIH-real perpetuity case in the medium run and converge toward a more ambitious PIH-perpetuity balance target.
- Authorities broadly concurred; Program of Action consistent but detailed time-bound measures lacking.

### Public financial management, governance, and transparency
- Recommendations and observations:
  - More disclosures in quarterly fiscal reports and publication of the balance sheet of KIA needed to improve fiscal transparency.
  - Strengthen implementation of public procurement law (2017); government plans review with World Bank assistance (eProcurement, framework contracts, performance-based service contracts).
  - Develop sovereign asset and liability management framework to consolidate assets/liabilities and detect sovereign risk exposures early.
  - Governance indicators: Kuwait perceived to have weaker government effectiveness and regulatory quality.

### Monetary and macroprudential frameworks, AML/CFT, and financial modernization
- Exchange rate and institutional developments
  - Peg to an undisclosed basket remains appropriate anchor; provides monetary policy autonomy relative to single-currency pegs.
  - Monetary Stability Committee (MSC) established June 2021 to strengthen policy management and toolkit; CBK extended liquidity forecasting horizon to six months.
- Macroprudential and supervisory measures
  - Toolkits appear adequate; recommend finalizing Countercyclical Capital Buffer and Domestic Systemically Important Banks frameworks.
  - CBK supplemented bottom-up stress testing with top-down exercises; Financial Stability Committee and centralized Shariah Board established.
  - Draft bank resolution law submitted; work on deposit insurance underway.
- Financial inclusion and modernization
  - CBK promotes financing for green projects, Fintech; recommends gradual relaxation of interest rate ceiling on commercial loans to expand credit access, conditioned on enhancements to credit information database and SME finance expansion.
- AML/CFT
  - Updated regulations to exchange companies published June 2020; national risk assessment in progress; Kuwait expected to undergo AML/CFT mutual evaluation in 2022.

### Strengthening non-oil growth, employment, and structural reforms
- Labor market needs and targets
  - Over medium term, "over 100,000 young persons will enter the labor force."
  - Accounting for retirements, "about 64,000 new jobs would need to be created."
  - To meet job creation needs, "non-oil GDP growth would need to double."
- Recommended reforms
  - Social benefit reforms and harmonizing labor market policies across sectors.
  - Enhance expatriate labor mobility to attract higher skilled workers.
  - Institutional steps taken: New Bankruptcy Law (2020); Disciplinary Board under Competition Protection Agency; Kuwait Direct Investment Promotion Authority.
  - Business environment: streamline procedures, promote electronic platforms, road map for land reform, further business incubation support.
- Governance and anti-corruption
  - Implement 2019-24 Integrity and Anti-Corruption Strategy and action plan.
  - Recent steps: executive regulation on access to information (Law No.12) January 2021; draft bills on conflict of interest, bribery in private sector, and whistleblower protection submitted to parliament; implementation plan prepared by Nazaha; high-level committee established.

### Climate change, energy transition, and green investment
- Government committed to low-carbon, climate-resilient development (National Adaptation Plan 2019-30).
- Shifted most power generation plants from oil to natural gas to reduce electricity-related emissions.
- Recommendations: accelerate fossil fuel subsidy reforms; support green infrastructure; strengthen energy efficiency standards to reduce emissions and attract private investors.

### Data, statistics, and technical assistance
- Data gaps and needs
  - Strengthen staffing, resources, and mandate of Central Statistics Bureau.
  - Notable issues: CPI data collection paused May–August 2021; Q1 2021 GDP data not published by end-2021; long lags in annual GDP by expenditure; GDP by income reportedly discontinued.
- Statistical recommendations and status
  - Update benchmark year and rebase GDP series; conduct Household Consumption and Expenditure Survey and Establishment Census.
  - Enhance PPI coverage and update weights; improve government finance, monetary, and external sector statistics; report external assets held by general government (FGF and GRF).
  - Kuwait implemented e-GDDS National Summary Data Page September 2021; metadata for most categories updated in 2021.
- Technical assistance: multiple TA engagements since 2014 across central bank law, tax policy, macroprudential policy, public financial management, statistics, AML/CFT, and other areas.

### Annex V — Public Debt Sustainability Analysis (as of January 27, 2022)
- Sovereign spreads and ratings (2022): EMBIG (bp) 3/179; 5Y CDS (bp) 52.
- Ratings (Foreign / Local): Moody's A1 / A1; S&Ps A+ / A+; Fitch AA- / AA.
- Key projected series (percent of GDP unless noted) — nominal gross public debt:
  - 2020: 8.5; 2021: 11.7; 2022: 8.8; 2023: 13.2; 2024: 13.6; 2025: 17.9; 2026: 25.0; 2027: 33.7; 2042: 42.2.
- Public gross financing needs (selected series): 2020: -15.1; 2021: 13.0; 2022: 0.6; 2023: -7.4; 2024: -9.8; 2025: -7.0; 2026: -3.6; 2027: -0.3; 2028: 6.9.
- Real GDP growth (percent): 2020: 2.1; 2021: -8.9; 2022: 1.3; 2023: 8.2; 2024: 2.6; 2025: 2.6; 2026: 2.6; 2027: 2.6; 2028: 2.7.
- Effective interest rate (percent): 2020: 2.7; 2021: 3.4; 2022: 3.2; 2023: 3.1; 2024: 4.1; 2025: 4.5; 2026: 4.6; 2027: 4.9; 2028: 6.7.
- Contributions to change in gross public debt (percent of GDP, selected):
  - Change in gross public sector debt: 2020: 0.6; 2021: 0.1; 2022: -2.9; 2023: 4.4; 2024: 0.4; 2025: 4.3; 2026: 7.1; 2027: 8.7; 2028: 8.5; cumulative: 33.4.
  - Identified debt-creating flows (cumulative): 23.4; primary deficit (cumulative): -45.2.
- Debt-stabilizing primary balance:
  - With asset accumulation of 10.4 percent of GDP in 2027: 11.5 percent.
  - Under no asset accumulation: 1.1 percent of GDP.
- Policy implication: primary balance dynamics and asset accumulation are key drivers of projected gross public debt and gross financing needs.

### External sector sustainability and REER assessment
- Investment income: US$15.7 billion (14.8 percent of GDP) in 2020; US$18.9 billion (14.0 percent of GDP) in 2021.
- Consumption-based external sustainability estimates:
  - Current account gap under constant real per capita annuity: -11.9 percent.
  - Current account gap under constant real annuity: -2.3 percent.
  - EBA-lite current account gap: -25.4 percent of GDP in 2021.
- Staff judgment: consumption-based model (constant real annuity) preferred; staff assesses external position weaker than implied by fundamentals and desirable policies.
- REER and reserves
  - REER movements: depreciated 3.2 percent May–December 2020; appreciated 2.4 percent in 2021.
  - CBK gross reserves: US$45.1 billion (9.0 months of imports, 37 percent of broad money) at end-2021; 116 percent of the Fund’s ARA metric.
  - KIA assets estimated over 500 percent of GDP at end–2021.

### Policy implications and reform priorities — staff appraisal
- Key conclusions and recommendations
  - Political gridlock has hobbled reforms and increased vulnerabilities; new high-level effort offers hope.
  - Authorities responded swiftly to COVID-19; economic scarring appears modest overall and gradual recovery underway.
  - Comprehensive fiscal consolidation needed despite higher oil prices. Recommended revenue measures:
    - introduction of a 5 percent VAT;
    - excises on tobacco;
    - expanding corporate tax to cover domestic corporates;
    - implementing a property tax or personal income tax on the wealthy.
  - Spending-side recommendations: curtail wage bill; consolidate subsidies and social benefits.
  - Need sustained outreach and broader consultation to secure public support for reforms.
  - Establish a robust medium-term fiscal framework with a clear fiscal anchor; target for non-oil structural primary balance could help limit procyclicality.
  - Reinvigorate structural reform agenda to enhance inclusive growth; "growth of the non-oil economy would need to double" to meet job creation needs.
  - Continue CBK measures to safeguard banking system resilience; "interest rate ceiling on commercial loans should be removed or significantly relaxed" while enhancing credit information infrastructure and SME finance support.
  - Address climate challenges through green infrastructure and energy efficiency to contribute to non-oil growth and diversification.
  - Recommendation: "the next Article IV consultation take place on the standard 12-month cycle."

*Source: IMF staff report text (1kwtea2022001).*

### 1. Recent Economic Developments  ______________________________________________________________  23

### 1. Recent Economic Developments

### Context and political environment
- Political gridlock has impeded progress in addressing fiscal risks and implementing growth enhancing structural reforms.
- Several important reform bills, including a new debt law, await parliamentary approval with no clear timeline.
- A new cabinet was formed in late 2021 with three opposition legislators and the former Prime Minister reappointed.
- The cabinet has prepared the Program of Action for the Sixteenth Legislative Term (2021/2022–2024/2025) which aims to:
  - enhance economic growth,
  - foster private sector development,
  - reinforce fiscal sustainability,
  - promote social and human capital development via education and healthcare reforms,
  - develop infrastructure and renewable energy.
- High-level efforts led by the Amir may help alleviate the political impasse and accelerate reform momentum.

### COVID-19 developments and public health measures
- Measures included suspending inbound commercial flights, closing schools and universities, banning public gatherings, suspending nonessential work in governmental entities, and curfews; stringency adapted over time.
- Vaccination progress (as of mid-January 2022): about 80 percent of the target population at least partially vaccinated and about 75 percent fully vaccinated.
- In late 2021 authorities began vaccinating children and administering booster shots to adults.
- As Omicron drove cases to record highs in early 2022, authorities moderately tightened public health measures (e.g., prohibiting large indoor gatherings); mobility indicators declined slightly but remain above 2020 and 2021 levels.

### Monetary, fiscal, and financial support measures
- Central Bank of Kuwait (CBK) lowered its discount rate from 2.75 to a historic low of 1.5 percent (from March 2020).
- Prudential and liquidity measures included:
  - permitting a six-month deferral of loan repayments,
  - lowering the minimum capital adequacy ratio from 13 to 10.5 percent,
  - lowering the liquidity ratio and liquidity coverage ratio from 18 to 15 percent, and from 100 to 80 percent, respectively,
  - raising loan to value (LTV) ratios by 10 percentage points for real estate and construction.
- Direct fiscal support in FY 2020/21 is estimated at almost 1.5 percent of GDP (spending on healthcare and support for firms and households through wage subsidies and cash transfers).
- FY 2021/22 measures included:
  - another six-month loan deferral for Kuwaiti citizens financed by government,
  - tax deferrals,
  - loan guarantees to SMEs (80 percent of loans) amounting to KD 500 million (1.3 percent of GDP),
  - KD 600 million (1.6 percent of GDP) of bonuses for public sector workers involved in the COVID-19 response.

### Recent macroeconomic developments
- Economic impact of the pandemic:
  - Real GDP contracted 8.9 percent in 2020.
  - Non-oil growth: -7.5 percent in 2020.
  - Oil growth: -9.8 percent in 2020.
- Labor market: employment of expatriates reduced by 12.3 percent by 2021Q2 (y/y).
- Inflation: CPI trended up since 2020H2, mostly due to higher food prices stemming from supply chain disruptions.
- Recovery signals in H2 2021: private credit growth, imports and exports of goods, and point-of-sale transactions point to gradual recovery with rising oil prices and vaccination.

### Fiscal developments
- Fiscal deficit: increased to an estimated 16.6 percent of GDP in FY 2020/21.
- Drivers: fiscal stimulus, a 13.9 percent of GDP decline in oil revenues, and slump in economic activity.
- Financing need rose to 31.1 percent of GDP; the compulsory 10 percent transfer to the Future Generations Fund (FGF) was suspended with the emergence of a fiscal deficit.
- In absence of a public debt law or authority to draw from the FGF, financing relied on drawdown of the General Reserve Fund (GRF), which neared depletion and prompted swaps of illiquid GRF assets for liquid assets from the FGF.
- FY 2021/22: rebound in oil revenues, announced spending cuts (August 2021), and higher nominal GDP (from higher oil prices) are expected to improve the headline fiscal balance by 20.3 percentage points to a surplus of 3.7 percent of GDP.
- FY 2022/23 budget intentions:
  - steps to contain spending below KD 22 billion,
  - moderate nominal increase in public wage bill (1.7 percent compared to previous year’s budget),
  - 12.4 percent lower subsidies,
  - 16.4 percent lower public investment,
  - budget assumes US$65 per barrel oil price,
  - non-oil revenues expected to increase by about 15 percent.
- Staff projection (assuming an average oil price of US$78.9): a surplus of 12.3 percent of GDP (including investment income and transfers of profits of public entities) for FY 2022/23 on the basis of stronger oil revenues and spending containment.
- Medium-term projection: continued expenditure pressures and expected decline in oil prices reduce the fiscal balance to a deficit of 1.2 percent of GDP, leaving a sizable fiscal sustainability gap.

### External sector developments
- Current account:
  - Estimated current account surplus declined by 9.3 percentage points to 3.2 percent of GDP in 2020 (mainly due to 40 percent fall in oil exports, partially offset by import compression).
  - H1 2021: non-oil goods exports grew by 18 percent; imports of goods rose by 16 percent.
  - 2021 projection: current account surplus projected to increase to 16.1 percent of GDP, supported by higher oil exports.
- Official international reserves:
  - increased by about US$8.4 billion to US$48.3 billion in 2020 (11.4 months of imports and 130 percent of ARA metric),
  - declined by about US$3.2 billion to US$45.1 billion in 2021 (9.0 months of prospective imports) due to net outflows of portfolio and other investments, partly offset by a new SDR allocation of about US$2.6 billion.
- External sector assessment: indicates an external position in 2021 weaker than implied by fundamentals and desirable policies.

### Credit and financial sector
- Credit growth:
  - Rebounded to 3.6 percent (y/y) in 2020,
  - Strengthened to 6.2 percent y/y in December 2021, driven mostly by household borrowing.
  - Lending to business (excluding non-bank financial institutions) remained muted.
- Banking sector soundness (as of 2021Q3 unless noted):
  - Capital adequacy ratio: 18.6 percent.
  - Nonperforming loans (NPLs) net of specific provisions: 1.4 percent.
  - Total provisions to gross NPL: over 200 percent.
  - Return on average assets: fell from 1.2 percent in 2019 to 0.6 percent in 2020Q4; recovered to 0.9 percent as of 2021Q3.
  - Net Stable Funding Ratio (NSFR) and Liquidity Coverage Ratio (LCR): stood at 110% and 174.5%, respectively, as of 2021Q1.
- CBK stress tests: three severe scenarios calibrated (real estate market collapse; extreme fiscal contraction; prolonged global COVID-19 crisis) indicate the banking system remains resilient under challenging adverse shocks.

### Real estate
- Residential real estate market quickly recovered after initial pandemic stall, driven by favorable financing conditions.
- Investment and commercial real estate continue to lag in both volume and value of transactions.
- Average transaction value has been volatile but trending up in recent months.

### Outlook and projections
- Non-oil GDP growth:
  - Estimated at 3.4 percent in 2021.
  - Projected to rise slightly to 3.5 percent in 2022.
- Overall GDP: projected to grow around 2.7 percent over the medium term.
- Inflation:
  - Expected to average 3.4 percent in 2021.
  - Projected at 4.4 percent in 2022.
  - Projected to decline to about 2.4 percent over the medium term.
- Oil production: projected to rebound as OPEC+ quotas are relaxed and return to pre-pandemic level in 2022.
- Fiscal balance:
  - FY 2022/23 draft budget projects the fiscal deficit (excluding investment income and transfers of profits of public entities) to narrow to KD 3.1 billion (6.6 percent of GDP).
  - Staff projects a surplus of 12.3 percent of GDP for FY 2022/23 (including investment income and transfers of profits of public entities and assuming an average oil price of US$78.9).
  - Medium-term: fiscal balance reduces to a deficit of 1.2 percent of GDP.

### Risks and uncertainties
- Balance of risks tilted to the downside (Annex IV).
- Key downside risks:
  - A prolonged COVID-19 pandemic could weigh on the nascent recovery; rapid spread of Omicron underscores renewed challenges.
  - Delays in fiscal and structural reforms could amplify procyclical fiscal policies, undermine investor confidence, hinder economic diversification and competitiveness, and foster social pressures.
  - Volatility in oil prices would have significant impact on outlook and macro balances.
- Upside risks:
  - Stronger rebound in global activity than anticipated could boost oil revenues.
  - Resolution of political gridlock and strong fiscal consolidation could considerably improve investor sentiment.

*Source: IMF staff compilation from "1. Recent Economic Developments" (Kuwait chapter).*

### 13.      Authorities’ views. The authorities broadly agreed with staff’s assessment of the outlook and

### 13.      Authorities’ views. The authorities broadly agreed with staff’s assessment of the outlook and

### Authorities’ overall assessment
- The authorities broadly agreed with staff’s assessment of the outlook and risks and the external sector assessment.
- They saw significant upside potential for rebounding oil prices to help boost oil revenues and alleviate the short-run budget pressures.
- They emphasized that Kuwait’s strong financial position would allow Kuwait to weather external shocks and cover financing needs in the case of delayed approval of the amended public debt law.
- They will continue to closely monitor the development of COVID-19 pandemic and its impact on the economy, while maintaining macroeconomic sustainability and supporting the nascent recovery.

### Policy discussions (focus areas)
- The policy discussions focused on:
  - supporting economic recovery in the short run;
  - reinforcing fiscal and external sustainability;
  - safeguarding financial stability; and
  - comprehensive structural reforms to reinvigorate non-hydrocarbon GDP and employment growth.

### A. Near-Term Policies — findings and recommendations
- Economic scarring appears modest so far, though this could change if the pandemic is prolonged.
- The oil sector has been resilient.
- Available information suggests that the policy support measures have contained bankruptcies in hard-hit sectors and supported the most vulnerable.
- While the policy support measures were generally well-targeted and well-calibrated, bonuses to public sector workers involved in COVID-19 response could have been better targeted.
- Exit of expatriates appears reversible as COVID-19 containment measures are gradually relaxed.
- With the recovery strengthening, the fiscal, monetary, and financial sector support measures are being gradually phased out.
  - Notably loan moratoria have expired, and the FY 2022/23 budget appropriately focuses on streamlining expenditures.
- Recommendations:
  - Closely monitor the health and economic situation while planning for coordinated withdrawal of the remaining support measures to help ensure a smooth return to normalcy.
  - Additional supportive measures can be deployed if the situation warrants but these could increasingly target those hard-hit but viable firms and the most vulnerable, while being temporary to avoid permanently increasing the fiscal deficit.
- Passing the public debt law is essential for the issuance of government debt and to support orderly fiscal operations.
  - The draft debt law currently before parliament envisages a debt ceiling of 60 percent of GDP, which allows for room for additional borrowing as the size of the economy expands and appears appropriate.
  - The debt law should provide sufficient flexibility for adequate debt management and avoid legislating restrictions such as on debt maturities, sizes or uses of financing.
  - The law should also clarify the borrowing authorities of public entities other than the central government—e.g., State Owned Enterprises (SOEs)—referencing their statutory authority if it exists, and their relationship to the debt ceiling calculation.
- Monetary and financial policy stance:
  - The CBK continues to focus monetary and financial policy responses on supporting the economy while containing risks to financial stability.
  - Given expected tightening of U.S. monetary policy in 2022, Kuwaiti monetary policy may need to be tightened somewhat to mitigate capital outflows.
  - However, the peg to an undisclosed basket of currencies provides an additional margin of monetary policy autonomy relative to single-currency pegs and therefore the CBK could take a more accommodative position to support activity.
  - The two 6-month loan moratoria granted in 2020 and 2021 both expired with minimal impact as most beneficiaries are public employees who have been receiving their salaries normally throughout the pandemic.
  - A prolonged pandemic could further intensify vulnerabilities in the corporate sector.
  - The CBK continues to monitor credit risk closely with a forward-looking assessment of bank asset quality and continues to ensure adequate capital buffers to withstand credit risks if they materialize.
- Authorities’ stated positions:
  - The authorities are pressing forward with efforts to pass the debt law.
  - They concurred with the need to continue supporting vulnerable households and affected sectors as needed and to keep such support temporary to avoid permanently increasing the fiscal deficit.
  - The CBK will remain vigilant and agile in calibrating its policies, detecting early signs of potential deterioration in asset quality, and ensuring adequate buffers.

### B. Reinforcing Fiscal and External Sustainability — findings and projections
- The baseline fiscal path is inconsistent with long run sustainability and intergenerational equity, and buffers decline significantly over the medium term.
- Projection details:
  - Absent additional consolidation efforts the non-oil primary balance (NOPB) is projected to improve from –98.7 percent of non-oil GDP in FY2020/21 to –84.5 percent of non-oil GDP in FY2027/28, well below the levels estimated under various permanent income hypothesis (PIH) scenarios.
  - This shows that Kuwait is not saving sufficiently for future generations with a gap averaging at least 5 percent of non-oil GDP between 2021 and 2027.
  - Government debt is projected to rise to 42.2 percent of GDP by 2027. 

*Source: IMF staff and Kuwaiti authorities views contained in the chapter text.*

### 8.8 percent currently, though net financial

### 1kwtea2022001 - 8.8 percent currently, though net financial

### Fiscal sustainability and oil-wealth redistribution
- Kuwait faces substantial fiscal consolidation needs to strengthen sustainability and reduce vulnerabilities to future shocks, "notably considering the dimming long run outlook for oil markets given climate change."
- Net financial assets will remain high, while headline fiscal pressures persist (Annex V referenced).
- Current mechanisms for oil wealth redistribution to citizens ("the return to citizenship") rely on:
  - guaranteed public sector jobs with above-market salaries,
  - wage subsidies to Kuwaitis working in the private sector,
  - general subsidies on food, petroleum products, electricity, water, etc.,
  - generous social benefits.
- Consequences:
  - "about 80 percent of Kuwaiti workers have jobs in the public sector,"
  - private sector employment is largely based on low-skilled expatriates,
  - major misallocation of human resources and intensified fiscal strains.
- Reform principle: "clearly separating the return to citizenship from the return to labor (wages)."
  - Options for reforming the return to citizenship include a Universal Basic Income (UBI) scheme or a Norwegian style social safety net based on open access by citizens rather than need (or wage) based targeting.
  - Broad public consultations are required to settle on the right scheme for Kuwait.

### Illustrative adjustment scenario and fiscal measures
- Staff discussed an illustrative adjustment scenario with the authorities (Text Table 1).
- Assumed revenue measures over the medium term:
  - introduction of a 5-percent VAT,
  - excises on tobacco,
  - expansion of corporate tax to cover domestic corporates,
  - adoption of property tax.
- Assumed expenditure measures:
  - social benefit reform based on implementing a UBI,
  - steady reduction of public wages,
  - reduction of subsidies to fuel, electricity, and water,
  - reduction of wage subsidies to nationals working in the private sector,
  - streamlining existing social schemes.
- Fiscal impact of the scenario:
  - estimated additional revenues of 6.4 percent of GDP by 2027/28,
  - estimated expenditure savings of 4.1 percent of GDP by 2027/28.
- Relative targets:
  - "The adjustment would exceed the 5-percent non-oil primary balance gap with respect to the PIH-real perpetuity case in the medium run and converges toward a more ambitious PIH-perpetuity balance target."
- Authorities: "The authorities broadly concurred with the analysis." Government’s Program of Action is consistent with these reforms though "detailed time-bound measures are still lacking."

### Public financial management, governance, and transparency
- Enhancing public financial management and fiscal governance is needed to improve accountability and effectiveness and to strengthen consolidation efforts.
- Specific measures and observations:
  - "More disclosures in quarterly fiscal reports and publication of the balance sheet of KIA, are needed to improve fiscal transparency."
  - Strengthen implementation of the public procurement law adopted in 2017; government plans to review procurement practices and enhance processes with World Bank assistance (including eProcurement, framework contracts, performance-based service contracts, needs identification, and cost estimation).
  - Develop a sovereign asset and liability management framework to consolidate assets/liabilities, detect sovereign risk exposures early, and design mitigation measures.
- Governance indicators: Kuwait is persistently perceived to have weaker government effectiveness and regulatory quality.

### Monetary and financial policies
- Exchange rate and monetary anchor:
  - "The current exchange rate peg to an undisclosed basket of currencies remains an appropriate policy anchor, delivering low and stable inflation while providing significant monetary policy autonomy."
  - A move away from the peg would have limited near-term benefits for competitiveness and would remove an effective nominal anchor.
- Central bank institutional developments:
  - Monetary Stability Committee (MSC) established in June 2021 to strengthen monetary policy management, revise and upgrade the monetary policy toolkit, improve data quality and granularity, ensure proper digitization, and coordinate with other CBK committees (e.g., Financial Stability Committee).
  - CBK extended liquidity management forecasting horizon up to six months.
- Macroprudential, regulatory, and supervisory measures:
  - Macroprudential and regulatory toolkits appear adequate; regular reviews recommended.
  - Finalizing the Countercyclical Capital Buffer and Domestic Systemically Important Banks frameworks would strengthen oversight.
  - CBK supplemented bottom-up stress testing with a top-down exercise.
  - Financial Stability Committee established; centralized Shariah Board established in late 2020.
  - Draft bank resolution law submitted; work ongoing on deposit insurance scheme.
  - CBK promotes financing for green projects and Fintech.
- Interest rate ceiling:
  - Recommendation: gradually relax the interest rate ceiling on commercial loans to expand credit access to a wider segment of corporate sector and SMEs, with timing and pace conditioned on enhancements to the credit information database and expansion of SME loans from the National Fund for SME Development.
- AML/CFT:
  - Implementation of AML/CFT frameworks is critical; updated regulations to exchange companies published in June 2020.
  - National risk assessment in progress; Kuwait expected to undergo AML/CFT mutual evaluation in 2022.

### Strengthening non-oil growth, employment, and structural reforms
- Labor market and employment needs:
  - Over the medium term, "over 100,000 young persons will enter the labor force."
  - Accounting for retirements, "about 64,000 new jobs would need to be created."
  - With fiscal strains limiting public employment, "non-oil GDP growth would need to double to offer sufficient private sector opportunities to job seekers."
- Reforms recommended:
  - Social benefit reforms and harmonizing labor market policies across sectors in line with market conditions.
  - Enhance expatriate labor mobility (e.g., reduce practical difficulties changing employment, extend residency limits) to attract higher skilled labor and increase productivity.
  - Enactments and institutional steps noted:
    - New Bankruptcy Law in 2020 to strengthen corporate bankruptcy procedures and emphasize early debt restructuring.
    - Disciplinary Board under Competition Protection Agency established to handle business complaints.
    - Kuwait Direct Investment Promotion Authority established to address foreign investor challenges, including relaxation of restrictions on foreign ownership and access to land.
- Business environment and other measures:
  - Streamline procedures and promote electronic platforms.
  - Road map for land reform needed, including market-based transparent mechanisms for land allocation and public information.
  - Consider further business incubation support (training on business management and marketing).
- Corruption and governance:
  - Forceful implementation of the 2019-24 Integrity and Anti-Corruption Strategy and its action plan is critical.
  - Recent steps: executive regulation on access to information under Law No.12 issued in January 2021; draft bills on conflict of interest, bribery in private sector, and whistleblower protection submitted to parliament; implementation plan being prepared by Nazaha; high-level committee established to oversee progress.
- Education and vocational training:
  - Scope to improve quality of education and expand vocational training; public spending per student is similar to advanced economies but TIMSS scores are lower than averages in advanced economies.
  - Education reforms in the Program of Action focus on quality and relevance.
- Climate change and energy transition:
  - Government committed to harmonize economic growth with low-carbon, climate-resilient development in the National Adaption Plan 2019-30.
  - To reduce electricity-related emissions, authorities shifted most power generation plants from oil to natural gas.
  - Accelerating fossil fuel subsidy reforms, supporting green infrastructure, and strengthening energy efficiency standards recommended to reduce carbon emissions and attract private investors.

### Statistics, data quality, and staff appraisal
- Data gaps and improvements needed:
  - Strengthen staffing, resources, and mandate of the Central Statistics Bureau.
  - Notable issues: collection of inflation data ceased from May-August 2021; Q1 2021 GDP data not published by end-2021; long lags in annual GDP by expenditure; GDP by income reportedly discontinued.
- Staff appraisal: key conclusions and recommendations
  - Political gridlock has hobbled reforms and increased macroeconomic vulnerabilities, though a new high-level effort offers hope.
  - Authorities responded swiftly to COVID-19; "economic scarring appears modest overall" and gradual recovery is underway.
  - Comprehensive fiscal consolidation is needed despite higher oil prices. Recommended revenue measures include:
    - introduction of a 5 percent VAT,
    - excises on tobacco,
    - expanding corporate tax to cover domestic corporates,
    - implementing a property tax or personal income tax on the wealthy.
  - Recommended spending-side actions include curtailing the wage bill and consolidating subsidies and social benefits.
  - Need for sustained outreach and broader consultation with stakeholders to ensure public support for reforms.
  - Establish a robust medium-term fiscal framework with a clear fiscal anchor; a target for the non-oil structural primary balance could be appropriate to limit procyclicality.
  - Reinvigorate structural reform agenda to enhance inclusive growth; "growth of the non-oil economy would need to double" to meet job creation needs.
  - Continue CBK measures to safeguard banking system resilience; "interest rate ceiling on commercial loans should be removed or significantly relaxed" while enhancing credit information infrastructure and SME finance support.
  - Address climate challenges through green infrastructure and energy efficiency to contribute to non-oil growth and diversification.
  - Recommendation: "the next Article IV consultation take place on the standard 12-month cycle."

*Source: IMF staff report text (1kwtea2022001).*

### Annex I. Key Policy Responses to COVID-19 Crisis

### Annex I. Key Policy Responses to COVID-19 Crisis

### Fiscal Measures
- Mar-20–March/21: Allocation of KD 500 million (or 1.5 percent of GDP) additional funds to support efforts in fighting the spread of COVID-19.
- Mar-20–October/20: Increasing the Manpower Budget by KD240.5 million to cover the support for national workers for 6 months.
- Mar-20–October/20: Postponing social security contributions for 6 months for private sector companies.
- Mar-20–March/21: Removing government fees on selected sectors provided that savings are passed on to customers.
- Mar-21–March/21: Allocation of KD600 million bonus to frontline staff battling against Covid-19 in recognition of their efforts.

### Monetary Measures
- Mar-20–TBD: Discount rate reduced two times from 2.75% to 1.5% (a historic low).
- Mar-20–TBD: Repo rates, overnight, one-week and one-month reduced to 1 percent, 1.25 percent, and 1.75 percent respectively.
- Oct-20–TBD: The Central Bank of Kuwait lowered the prices of other monetary policy instruments, by 0.125% for the entire interest rate yield curve up to the ten-year period. This includes repurchase operations (REPO), CBK bonds, term deposit system, direct intervention instruments and debt instruments.

### Financial and Prudential Measures
- Mar-20–June/20: CBK issued a circular to all banks to postpone data submission for Q1 2020, instead to only provide the regular supervisory reports.
- Apr-20–TBD: Capital adequacy ratio lowered from 13% to 10.5% (by allowing banks to utilize the capital conservation buffer).
- Apr-20–TBD: Risk weight for SMEs lowered from 75% to 25% with a new definition matching KNF definition.
- Apr-20–TBD: Maximum lending limit increased from 90% to 100%.
- Apr-20–TBD: LCR reduced from 100% to 80%.
- Apr-20–TBD: NSFR reduced from 100% to 80%.
- Apr-20–TBD: Regulatory liquidity ratio (RLR) reduced from 18% to 15%.
- Apr-20–TBD: Maturity Ladder Limits Increased by 10% for all buckets as follows: From 10% to 20% for 7 days; From 20% to 30% for 1 month; From 30% to 40% for 3 months; From 40% to 50% for 6 months.
- Apr-20–June/21: Loan to Value (LTV) ratio to be increased for properties as follows: Financing the Purchase of Land: from 50% to 60%; Financing Real Estate Purchase: from 60% to 70%; Financing Construction of RE: from 70% to 80%.
- Apr-20–TBD: A circular was sent to banks to relax the financing concentration limits of clients in assessing a credit proposal that includes economically important projects, which add value to the local economy.
- May-20–n.a.: A circular was issued to all banks to organize the repurchase, and sale of banks’ stocks. As banks are required to provide CBK of a detailed description of each transaction on a weekly basis.
- Jul-20–2024: A circular was issued to all banks based on IFRS-9 guidelines to account for losses incurred due to household loans moratorium period of six months. As losses would be held against banks retained earnings, and for the purpose of calculating capital base (Basel III) banks may gradually account for losses (25% per year during 2021 to 2024).
- Jul-20–October/20: A circular was issued to banks regarding the postponement of scheduled payments of clients impacted by the pandemic, as it stipulates not to charge interest on the accrued/unpaid interest during the moratorium period.
- Feb-21–TBD: Extend the period whereby banks adhere to the relaxed regulatory requirements in terms of liquidity and capital adequacy (which includes: LCR, NSFR, RLR, maturity ladder, and the capital conservation buffer) that were eased during April 2020 for a period of 6 months ending in June 2021.
- Apr-21 (Dependent on the full settelments of loans): In light of article (20) of law(2) 2021, which stipulates a relief package directed to small and medium enterprises (SMEs) that endured an adverse impact due to Covid-19 crisis, CBK issued the guidelines and terms concerning the implementation of the law.
- Apr-21–October/21: In accordance to article (2) of law (3) 2021, CBK issued the respective guidelines and terms concerning the implementation of the law which stipulates the postponement of financial obligations on Kuwaiti citizens such as loans (consumer and installment), in addition to obligations to investment and financing companies for a period of six months based on their request.
- Jun-21–TBD: CBK issued a circular to all banks to extend the period whereby banks adhere to the relaxed regulatory requirements in terms of liquidity and capital adequacy (which includes: LCR, NSFR, RLR, maturity ladder, and the capital conservation buffer) until the end of December 2021 with the exception of the LTV ratio which reverts to the limits set prior to April 2020.

### Financial Stability Measures
- Mar-20–June/20: The Central Bank of Kuwait continues to perform its tasks related to the main operations, security procedures, payment and settlement systems and electronic clearing of checks during the leave period approved by the distinguished cabinet.
- Mar-20–TBD: Increasing limit on contactless payments from KD10 to KD25.
- Mar-20–October/20: No charges or fees for Point of Sale transactions, ATM withdrawals and Online banking for 6 months.
- Mar-20–October/20: Kuwait Banking Association announced a moratorium period up to 6 months on bank loans including waiver of interest and charges (if any for postponement) for retail clients (citizens and expats) and SMEs.
- Apr-20–July/20: Banks were instructed to adequately review the portfolio of each client, and all investment portfolios in addition to performing stress tests to assess their viability.
- Jul-20–TBD: A circular was provided to banks requiring a quarterly audited reporting of the cost of financing corporates and SMEs impacted by the pandemic. The report should audited by external auditors and signed by the CEO.

*Source: 1kwtea2022001 - Annex I. Key Policy Responses to COVID-19 Crisis*

### Annex V. Public Debt Sustainability Analysis

### Annex V. Public Debt Sustainability Analysis

### Overview
- Date: As of January 27, 2022
- Public sector defined as general government.
- Based on available data.
- Sovereign spreads indicators (2022): EMBIG (bp) 3/179; 5Y CDS (bp) 52.
- Ratings (Foreign / Local): Moody's A1 / A1; S&Ps A+ / A+; Fitch AA- / AA.

### Key Indicators and Projections (selected series, in percent of GDP unless otherwise indicated)
- Nominal gross public debt: 2020: 8.5; 2021: 11.7; 2022: 8.8; 2023: 13.2; 2024: 13.6; 2025: 17.9; 2026: 25.0; 2027: 33.7; 2042: 42.2 (note: series as presented across columns).
- Public gross financing needs: 2020: -15.1; 2021: 13.0; 2022: 0.6; 2023: -7.4; 2024: -9.8; 2025: -7.0; 2026: -3.6; 2027: -0.3; 2028: 6.9 (series as presented).
- Real GDP growth (in percent): 2020: 2.1; 2021: -8.9; 2022: 1.3; 2023: 8.2; 2024: 2.6; 2025: 2.6; 2026: 2.6; 2027: 2.6; 2028: 2.7.
- Inflation (GDP deflator, in percent): 2020: 1.4; 2021: -13.9; 2022: 25.1; 2023: 11.1; 2024: -3.6; 2025: -2.5; 2026: -0.8; 2027: 0.2; 2028: 0.6.
- Nominal GDP growth (in percent): 2020: 3.6; 2021: -21.5; 2022: 26.7; 2023: 20.2; 2024: -1.1; 2025: 0.1; 2026: 1.8; 2027: 2.9; 2028: 3.3.
- Effective interest rate (in percent), defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year: 2020: 2.7; 2021: 3.4; 2022: 3.2; 2023: 3.1; 2024: 4.1; 2025: 4.5; 2026: 4.6; 2027: 4.9; 2028: 6.7.

### Contribution to Changes in Public Debt (percent of GDP; projections and cumulative)
- Change in gross public sector debt: 2020: 0.6; 2021: 0.1; 2022: -2.9; 2023: 4.4; 2024: 0.4; 2025: 4.3; 2026: 7.1; 2027: 8.7; 2028: 8.5; cumulative: 33.4.
- Identified debt-creating flows: 2020: -0.4; 2021: 3.2; 2022: -2.5; 2023: -2.3; 2024: 1.1; 2025: 4.0; 2026: 5.8; 2027: 6.6; 2028: 8.3; cumulative: 23.4.
  - Primary deficit: 2020: -15.7; 2021: 12.3; 2022: 0.0; 2023: -10.9; 2024: -11.0; 2025: -8.4; 2026: -6.8; 2027: -4.9; 2028: -3.2; cumulative: -45.2.
  - Primary (noninterest) revenue and grants: cumulative 317.3; series: 2020: 62.5; 2021: 52.8; 2022: 51.8; 2023: 54.3; 2024: 55.7; 2025: 54.2; 2026: 52.9; 2027: 51.0; 2028: 49.2.
  - Primary (noninterest) expenditure: cumulative 272.1; series: 2020: 46.8; 2021: 65.0; 2022: 51.8; 2023: 43.4; 2024: 44.7; 2025: 45.8; 2026: 46.1; 2027: 46.1; 2028: 46.0.
- Automatic debt dynamics (derived formula in footnote): 2020: -0.2; 2021: 3.7; 2022: -2.2; 2023: -1.3; 2024: 0.7; 2025: 0.6; 2026: 0.5; 2027: 0.5; 2028: 1.1; cumulative: 2.1.
  - Interest rate/growth differential: same series as Automatic debt dynamics.
  - Of which: real interest rate: 2020: -0.1; 2021: 2.4; 2022: -2.0; 2023: -0.7; 2024: 1.0; 2025: 1.0; 2026: 1.0; 2027: 1.1; 2028: 2.0; cumulative: 5.4.
  - Of which: real GDP growth: 2020: -0.1; 2021: 1.3; 2022: -0.1; 2023: -0.6; 2024: -0.3; 2025: -0.4; 2026: -0.5; 2027: -0.6; 2028: -0.9; cumulative: -3.3.
- Exchange rate depreciation contribution: series shown as 0.0 for presented years.
- Other identified debt-creating flows: 2020: 15.5; 2021: -12.8; 2022: -0.2; 2023: 9.9; 2024: 11.4; 2025: 11.8; 2026: 12.0; 2027: 11.0; 2028: 10.4; cumulative: 66.4.
  - Privatization/Drawdown of deposits: 0.0 across presented years.
  - Contingent liabilities: 0.0 across presented years.
  - Asset accumulation requirement: same series as Other identified debt-creating flows.
- Residual, including asset changes: 2020: 1.0; 2021: -3.1; 2022: -0.4; 2023: 6.7; 2024: -0.7; 2025: 0.4; 2026: 1.3; 2027: 2.1; 2028: 0.2; cumulative: 10.0.

### Debt-Stabilizing Primary Balance and Scenario Assumptions
- Debt-stabilizing primary balance under assumed asset accumulation of 10.4 percent of GDP in 2027 is equal to 11.5 percent.
- Under no asset accumulation, the debt-stabilizing primary balance would have been 1.1 percent of GDP.
- Assumption for sensitivity tests (footnote 9): key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

### Alternative Scenarios and Underlying Assumptions (selected)
- Baseline Scenario (selected indicators):
  - Real GDP growth: 2022: 8.2; 2023: 2.6; 2024: 2.6; 2025: 2.6; 2026: 2.6; 2027: 2.7.
  - Inflation: 2022: 11.1; 2023: -3.6; 2024: -2.5; 2025: -0.8; 2026: 0.2; 2027: 0.6.
  - Primary Balance: 2022: 10.9; 2023: 11.0; 2024: 8.4; 2025: 6.8; 2026: 4.9; 2027: 3.2.
  - Effective interest rate: 2022: 3.1; 2023: 4.1; 2024: 4.5; 2025: 4.6; 2026: 4.9; 2027: 6.7.
- Historical Scenario (selected indicators):
  - Real GDP growth: 2022: 8.2; 2023: -0.6; 2024: -0.6; 2025: -0.6; 2026: -0.6; 2027: -0.6.
  - Inflation: same series as Baseline for 2022–2027.
  - Primary Balance: 2022: 10.9; 2023–2027: 7.0 (constant at 7.0 for 2023–2027).
  - Effective interest rate: 2022: 3.1; 2023: 4.4; 2024: 2.0; 2025: 5.3; 2026: 7.3.
- Constant Primary Balance Scenario (selected indicators):
  - Real GDP growth and Inflation: same as Baseline.
  - Primary Balance: constant at 10.9 for 2022–2027.
  - Effective interest rate: 2022: 3.1; 2023: 4.1; 2024: 4.5; 2025: 5.1; 2026: 6.0; 2027: 10.1.

### Composition of Public Debt and Market Indicators (figures summarized)
- Charts present:
  - Gross Nominal Public Debt (in percent of GDP) by scenario and over 2020–2027.
  - Public Gross Financing Needs (in percent of GDP) projection for 2020–2027.
  - Composition by maturity (short-term vs. medium and long-term) over 2011–2027.
  - Composition by currency (local currency-denominated vs. foreign currency-denominated) over 2011–2027.

### Policy Implications (implied by analysis)
- Maintaining asset accumulation at the projected level (10.4 percent of GDP in 2027) implies a substantially higher debt-stabilizing primary balance (11.5 percent of GDP) compared with no asset accumulation (1.1 percent of GDP).
- Primary balance dynamics and asset accumulation are key drivers of projected changes in gross public debt and gross financing needs.

*Sources: CBK, MOF, and IMF staff estimates.*

### 16.1 percent of GDP in 2021 as the oil price increases and then gradually declines mostly reflecting public

### 1kwtea2022001 - 16.1 percent of GDP in 2021 as the oil price increases and then gradually declines mostly reflecting public

### External sector sustainability and model estimates
- Investment income: "about US$15.7 billion (14.8 percent of GDP) in 2020" and "about US$18.9 billion (14.0 percent of GDP) in 2021."
- Consumption-based external sustainability assessment:
  - Current account gap under the constant real per capita annuity approach: "-11.9 percent"
  - Current account gap under the constant real annuity approach: "-2.3 percent"
  - Negative CA gaps imply the CA surplus is too small to provide equitable per capita consumption for future generations and suggest the need for larger fiscal savings of hydrocarbon revenues.
- EBA-lite current account approach: estimates a current account gap of "about -25.4 percent of GDP in 2021."
  - Policy gap explains "0.4 percentage points" of the estimated gap; the remaining is residual.
- Staff preference and judgment:
  - The consumption-based model is deemed better suited for a commodity exporter such as Kuwait; staff gives most weight to the constant real annuity rule and assesses the external position to be weaker than implied by fundamentals and desirable policies.
- Kuwait: Model Estimates for 2021 (In percent of GDP) — selected figures preserved from source table:
  - CA-Actual: "16.1"
  - Adjusted CA: "12.8"
  - CA Norm (from model): "38.2" (constant annuity), "15.1" (constant annuity per capita), "24.7" (CA-Actual column)
  - CA Gap: "-25.4" (constant annuity), "-2.3" (constant annuity per capita), "-11.9" (CA-Actual)
  - Elasticity: "-0.35"
  - REER Gap (in percent): "72.6" (constant annuity), "6.6" (constant annuity per capita), "34.0" (CA-Actual)
  - Cyclical contributions (from model): "(-)2.2"
  - COVID-19 adjustor: "(+) 1/-1.2"
  - Additional temporary/statistical factors: "(+)0.0"
  - Natural disasters and conflicts: "(-)-0.1"
  - Notes: "2/ Cyclically adjusted, including multilateral consistency adjustments." and "1/ Additional cyclical adjustment to account for the temporary impact of the pandemic on tourism (-1.16 percent of GDP)."

### Real exchange rate (REER) and competitiveness
- Exchange rate arrangement: pegged to an undisclosed basket of currencies; de jure conventional peg since May 2007.
- REER movements:
  - REER depreciated "3.2 percent" from May to December in 2020 and appreciated "2.4 percent" in 2021.
  - NEER depreciated by "3.2 percent" in 2020 and appreciated by "3.7 percent" as of end-2021.
- Staff assessment: 2021 REER gap about "6.6 percent."
- Background on competitiveness: short-term exchange rate movement has limited impact due to the large share of hydrocarbon exports and limited substitutability between imports and domestically produced products (which have significant imported labor and intermediate material).

### Capital and financial accounts; FX intervention and reserves
- Financial flows:
  - Net financial outflows continued in 2020-2021 as the KIA invested abroad.
  - Equity market experienced some outflows in early 2020 but rebounded later in the year.
- Data limitations: analysis complicated by lack of detailed information on the nature of financial flows.
- Reserves and adequacy:
  - CBK gross reserves stood at "US$45.1 billion (9.0 months of imports, 37 percent of broad money) at end-2021."
  - These reserves correspond to "116 percent of the Fund’s Assessing Reserve Adequacy (ARA) metric" and are above the suggested adequate range of "100-150 percent."
  - Assessment: foreign reserves are adequate for covering prospective imports and adequate in terms of IMF’s ARA metric; reserves expected to remain broadly stable in terms of import coverage ratio.
  - CBK’s reserves are complemented by government’s large foreign assets held by the KIA, estimated to have reached "over 500 percent of GDP at end–2021."
- Selected projections and levels (in billions of USD and percent metrics from table):
  - External short-term debt (projection series): "21.2", "21.4", "21.5", "22.1", "22.6", "24.6", "28.5", "31.4", "35.6"
  - Other liabilities (portfolio and other investment liabilities less short-term debt): "61.0", "64.9", "62.4", "67.8", "66.1", "68.2", "74.9", "79.2", "86.6"
  - Broad Money: "125.6", "129.2", "127.6", "136.1", "143.7", "151.8", "160.6", "169.2", "178.4"
  - Exports of goods and services: "73.3", "46.9", "71.2", "93.8", "90.1", "87.6", "87.3", "89.1", "90.3"
  - CBK Gross International Reserves: "39.9", "48.3", "45.1", "50.5", "54.0", "57.9", "61.8", "65.2", "67.8"
  - KIA Assets (staff estimates): "587.0", "633.1", "737.5", "768.5", "800.9", "834.6", "870.0", "902.7", "934.3"
  - ARA metric: "38", "37", "39", "43", "43", "45", "48", "51", "55"
  - Foreign Reserves as a % of the ARA metric (in percent): "104", "130", "116", "117", "125", "129", "128", "128", "124"
  - Foreign Reserves (including KIA) as a % of the ARA metric (in percent): "163", "118", "4120", "160", "1896", "1970", "1985", "1929", "1894" (values reproduced exactly as in source table)
  - Foreign Reserves in percent of broad money: "32", "37", "35", "37", "38", "38", "39", "38", "38"
  - Foreign Reserves in months of next year's imports: "11.5", "11.3", "9.0", "9.6", "9.9", "10.1", "10.4", "10.5", "10.5"
- Note: "1/ Based on the IMF's calculation of reserves recommended for fixed exchange rate regimes." and "2/ As a rule of thumb, reserves within 100-150 percent of the new ARA metric are considered adequate."

### Fiscal policy and outlook
- Recent and projected fiscal balances:
  - Staff projects headline fiscal balance to register a budget surplus of "about 12 percent in FY 22/23", up from "3.7 percent of GDP in FY 21/22."
  - Fiscal budget deficit after excluding investment income expected to narrow to "0.3 percent of GDP in FY 22/23" from "about 10 percent of GDP in FY21/22."
- Oil price assumption for budget: authorities' FY22/23 budget projections based on an oil price of "$65."
- Policy priorities and measures:
  - Use of revenue windfalls to shore up buffers.
  - Need for structural fiscal adjustment over the medium term: address fiscal expenditure pressures, boost non-oil revenues, support private-sector-led growth.
  - Plans to increase non-oil revenues, reprice services, modernize tax policy and administration, improve revenue collection.
  - Fiscal measures under consideration that require legislative approval: value-added tax law, excise tax law, harmonized taxation measures law (integral to Program of Action for the Sixteenth Legislative Term 2021/2022 – 2024/2025).
  - Strengthening fiscal frameworks: introduction of budget expenditure ceilings in FY22/23, top-down budgeting, plan to introduce 3-year rolling expenditure ceilings, reforms to rationalize non-priority expenditure, and improve spending efficiency.
  - Passing of the debt law viewed as near-term priority to allow utilization of indebtedness capacity and support orderly fiscal operations.
  - Debt management strengthening; asset-liability management committee to strengthen coordination.

### Monetary and financial sector policies
- CBK performance and system soundness:
  - CBK continued skillful management; financial system remained sound, liquid, and well-capitalized.
  - Bank capital adequacy ratio is well above the required minimum level.
  - Nonperforming loans (NPLs) are among the lowest in the region.
  - CBK stress tests show banking system remains resilient under adverse shocks.
- Macroprudential and regulatory developments:
  - Continued improvements: establishing the Monetary and Financial Stability Committee; draft bank resolution law submitted to cabinet; plans for deposit insurance legal framework.
  - Centralized Shariah Board established to ensure consistent interpretation in Islamic banks.
- Financial sector modernization and inclusion:
  - CBK initiatives: promote financing for green projects, Fintech for financial inclusion, framework for digital banking, cybersecurity requirements.
  - Credit Information Network working to develop an integrated credit bureau.
  - Upgrades to payments system infrastructure.
- Exchange rate stance:
  - Authorities and staff concur that exchange rate peg continues to serve Kuwait well; peg to a basket allows CBK more flexibility than single currency pegs.
- AML/CFT:
  - New AML/CFT regulations issued to banks; updated regulations to exchange companies.
  - National risk assessment in line with FATF standards; preparation for mutual evaluation progressing.

### Structural reforms and business environment
- Government program: Kuwait Vision 2035 and Program of Action aimed at promoting private sector development, diversification, and job creation.
- Objectives and measures:
  - Create private-sector employment opportunities for Kuwaiti youth; contain future public employment and wage growth; reduce public-private wage gap.
  - Strengthen Anti-Corruption Agency capacity and independence.
  - Accelerate procurement law implementation and introduce e-procurement to promote competition and budget savings.
  - Improve efficiency of courts in commercial cases, expedite contract enforcement, streamline customs clearance.
- Business environment progress:
  - Insolvency law passed to modernize bankruptcy proceedings.
  - Streamlining of commercial license processes and online registration.
  - Digitalization improved service delivery for electricity and property registration.
  - Reforms to improve access to credit and promote cross-border trading.
  - Continued support for SMEs and startups.

### Data, statistical issues, and technical assistance
- Data adequacy: data provision has shortcomings but is broadly adequate for surveillance; COVID-19 affected timely compilation and dissemination in 2021.
- National accounts:
  - Compiled by Central Statistical Bureau (CSB); progress made with quarterly GDP series from production side since 2018.
  - Annual GDP estimates derived from benchmark year 2010; CSB undertaking Household Consumption and Expenditure Survey and Establishment Census.
  - CPI publication paused after April 2021 and resumed in September 2021.
  - Long lags and delays in publication of GDP by expenditure and 2021 quarterly GDP data; GDP by income reportedly discontinued.
  - Recommendations: update benchmark year, rebase GDP series, conduct small-scale surveys to capture informal services sector, disclose sources and methods for GDP components.
- Price statistics:
  - CPI published monthly; basket weights revised in June 2017 based on 2013 HIES.
  - PPI covers selected mining, manufacturing, utilities; recommended enhancements: update weights from 2010 base year, extend coverage to services and construction, compile separate domestic/export indexes.
- Government finance statistics:
  - Reclassified to GFSM 2001 starting fiscal year 2016–17; updates to GFSM 2014 and compilation of annual GFS for Central Government.
  - Need to increase frequency of published data, reduce release lag, expand coverage to Public Institute for Social Security and general government units including FGF and GRF managed by KIA.
- Monetary, financial, and external sector statistics:
  - CBK reports sectoral balance sheet data using SRFs with some lag; reports FSIs (11 of 12 core FSIs and 8 encouraged FSIs).
  - BOP and IIP compiled quarterly following BPM6; published IIP incomplete—external assets held by general government (FGF and GRF) not reported.
  - Participation in CPIS and coordinated direct investment survey; CPIS excludes government agency holdings that comprise bulk of cross-border holdings.
  - Further improvements needed in coordination among government entities to ensure timely data provision.
- Implementation: In September 2021, Kuwait fully implemented the e-GDDS by launching a National Summary Data Page; metadata for most data categories updated in 2021.
- Technical assistance since 2014: multiple TA topics listed with dates (e.g., Central Bank Law January 2014; Tax Policy and Administration February 2014; Macroprudential Policy March 2014; etc.), reflecting sustained IMF engagement.

*Staff Report for the 2021 Article IV Consultation — Informational Annex (February 18, 2022).*

### Conclusion

### Conclusion

### Macroeconomic stability and recovery
- The Kuwaiti authorities are committed to maintaining macroeconomic stability.
- The authorities are committed to supporting a robust economic recovery.

### Health and employment protection
- The authorities are committed to protecting the health and employment of the citizens.

### Reform agenda and policy implementation
- The authorities remain firmly committed to continuing their reform agenda aimed at bolstering medium-term economic outlook.
- To this end, they will continue implementing appropriate fiscal, monetary, and structural policies.

### Engagement with the Fund
- The authorities very much value the policy discussions with the Fund and look forward to further close engagement with the institution.

*Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1kwtea2022001.pdf*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1kwtea2022001.pdf_