## KUWAIT: STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION (content unit 1kwtea2023001) ## Source details **Canonical URL:** [KUWAIT: STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION (content unit 1kwtea2023001)](https://www.imf.org/-/media/files/publications/cr/2023/english/1kwtea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1kwtea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1kwtea2023001.pdf.json) --- ### Recent economic developments and macroeconomic outcomes - Fiscal surplus (FY2022/23) is estimated at 23.4 percent of GDP, benefiting mainly from high oil revenues and expenditure restraint. - Non-oil balance improved to about -88.3 percent of non-oil GDP (2022). - Current account surplus is estimated at 33.8 percent of GDP (2022) and projected to remain high in 2023. - Official reserve assets: US$48.2 billion (end-2022); 10.4 months of prospective imports; 106.5 percent of the IMF ARA metric. - Real GDP growth: 8.2 percent (2022); 0.1 percent (2023 projection). - Real non-oil GDP growth: 4.0 percent (2022); 3.8 percent (2023 projection). - CPI inflation (average): 4.0 percent (2022); 3.6 percent (2023 projection). - Banking system assessment: banks are well-capitalized and highly liquid; liquidity ratio 24.7 percent (2023Q1); capital adequacy ratio 19 percent; return on assets improved to 1.4 percent (2023Q1); non-performing loans sufficiently provisioned. ### Outlook and risks - Baseline projections (selected): - Real GDP Growth (percent): 2022 8.2; 2023 0.1; 2024 2.6; 2025 4.1; 2026 2.4; 2027 2.4; 2028 2.4. - Non-Oil GDP Growth: 2022 4.0; 2023 3.8; 2024 3.5; medium term around 3.0. - Inflation (percent): 2022 4.0; 2023 3.6; 2024 3.0; medium term 2.0. - CA Balance (% of GDP): 2022 33.8; 2023 25.7; 2024 22.0; 2025 19.9; 2026 17.3; 2027 15.0; 2028 12.9. - Fiscal balance (% of GDP): 2022 23.4; 2023 4.7; 2024 2.6; 2025 1.8; 2026 0.6; 2027 -1.6; 2028 -2.4. - Government debt (% of GDP): 2022 2.9; 2023 3.3; 2024 3.2; 2025 5.9; 2026 9.5; 2027 11.9; 2028 17.1. - Key external risks: - Volatility in oil prices and production; deeper global slowdown; geo-economic fragmentation. - Key domestic risks: - Delays in fiscal and structural reforms leading to procyclical fiscal policy, weakened investor confidence, and greater climate transition vulnerability. - Upside scenario: - Resolution of political gridlock could accelerate reforms, boost investor confidence, and stimulate private investment. - Overall risk assessment: elevated and tilted to the downside. ### Executive Board assessment and policy priorities - Recovery continues but risks remain substantial; Kuwait’s large fiscal and external buffers provide scope to undertake reforms from a position of strength. - Resolving political gridlock between government and Parliament is critical to accelerate reform momentum and diversify the economy. ### Fiscal policy recommendations - Pursue comprehensive and growth-friendly fiscal consolidation to reinforce sustainability and intergenerational equity. - Short term (draft FY 2023/24): fiscal expansion is appropriate given negative non-oil output gap; from next fiscal year, consolidation should: - increase non-oil revenue; and - tackle current spending rigidities while increasing capital outlays to raise potential growth. - Revenue measures suggested: - introduce the GCC-wide excises and VAT; and - expand corporate income taxation to cover domestic firms. - Expenditure measures suggested: - curtail the wage bill; and - gradually phase out energy subsidies while improving targeted income support. - Institutional reforms: - adopt a robust medium-term fiscal framework with a clear fiscal anchor (target for the non-oil structural primary balance recommended); - strengthen fiscal governance and transparency, enhance fiscal data coverage and reporting, strengthen corporate governance, enhance public procurement, and reinvigorate integrated asset-liability management. ### Growth-friendly fiscal consolidation scenario (staff recommendation) - Objective: adjustment in the structural non-oil primary balance of 0.8 percent of potential GDP relative to the baseline in FY 2024/25, with gradual increases thereafter, improving net financial assets. - Revenue composition and timing assumptions: - 5 percent VAT to be introduced in FY24/25. - Excises on tobacco and sugary drinks in FY25/26. - Expansion of the 15 percent corporate income tax to cover domestic corporates introduced gradually over the next two years (table context). - Expenditure measures: - wage bill restraint (constant number of public sector employees assumed); - gradual phase-out of untargeted energy subsidies; - reallocation of part of savings to capital spending and climate/renewables investment. - Selected fiscal figures (percent of nominal potential GDP and KD values as in staff table): - Nominal GDP (KD billions): 2023 50.1; 2024 50.6; 2025 52.2; 2026 53.5; 2027 54.8. - Output gap (percent of potential GDP): 2023 -1.0; 2024 -0.1; 2025 0.0; 2026 0.0; 2027 0.0. - Non-oil structural primary balance (percent of nominal potential GDP): 2023 -42.8; 2024 -45.0; 2025 -43.2; 2026 -42.5; 2027 -42.1. - Structural revenue components (percent of nominal potential GDP) — VAT: 2023 0.0; 2024 0.1; 2025 0.5; 2026 0.6; 2027 0.7. - Structural expenditure components (percent of nominal potential GDP) — Compensation of employees: 2023 22.6; 2024 22.1; 2025 21.8; 2026 21.5; 2027 21.2. - Fiscal adjustment relative to baseline (percent of nominal potential GDP) — Revenue adjustment: 2023 0.0; 2024 0.4; 2025 0.8; 2026 1.0; 2027 1.1; Spending adjustment: 2023 0.0; 2024 0.4; 2025 0.8; 2026 1.2; 2027 1.6. ### Public Debt Law and debt management recommendations - Pass a Public Debt Law expeditiously to permit orderly sovereign bond issuance and support domestic bond market development. - Staff recommendations for the law: avoid operational restrictions on maturities or uses of financing; prefer a debt ceiling as a share of GDP; clarify borrowing authority of public entities and relationship to debt ceiling. - Develop a Medium-Term Debt Management Strategy (MTDS) and strengthen legal, reporting, and disclosure frameworks to support debt-market development and fiscal transparency. ### Monetary and financial sector recommendations - Exchange rate regime: maintain the peg to an undisclosed basket of currencies as an appropriate nominal anchor; fiscal consolidation and structural reforms should strengthen the external position and support the peg. - Banking system: continue strong prudential framework; monitor banks’ dollar funding liquidity and credit quality. - Macroprudential policy: consider adjusting composition of capital requirements to make policy more countercyclical and activate the countercyclical capital buffer (CCyB) as credit cycle matures. - Regulatory changes recommended: - phase out the interest rate ceiling on commercial loans to support efficient risk pricing and credit supply to SMEs; - replace blanket deposit guarantee with a limited deposit insurance framework. - Digitalization and sustainable finance: continue CBK digital strategy and regulatory sandbox; follow Basel Committee principles for climate-related financial risks. ### Structural reform priorities (Annex VI) - Labor market reforms: - promote market-aligned wage structure and gradually align compensation and working conditions across public and private sectors; - harmonize labor market policies between nationals and expatriates; - clearly signal limited future public sector job availability and align public wage growth with private sector. - Social safety nets: - implement social protection and transition support in parallel with labor reforms (job search assistance, training, unemployment benefit adjustments). - Business environment and governance: - relax foreign ownership restrictions, improve public land allocation with longer lease terms, streamline procurement and PPP frameworks, enhance SOE governance, and continue anti-corruption strategy implementation. - Human capital: - invest in education quality, vocational training, and research to address skill mismatches and boost productivity. - Climate transition: - finalize mitigation plans, phase out fossil fuel subsidies (noting fossil fuel subsidies surged to 7.8 percent of GDP in 2021), and invest in renewables and adaptation projects. ### Quantified long-run gains from reform scenarios - Labor market reform package could raise non-oil output by 5.2 percent in the long run relative to baseline. - Governance reform package could raise non-oil output by 1.9 percent in the long run relative to baseline. ### External sector and reserves - Current account surplus: 33.8 percent of GDP (2022). - Financial account deficit: 32.7 percent of GDP (2022), reflecting strong foreign asset accumulation. - Official reserve assets: US$48.2 billion (end-2022); 10.4 months of next year's imports; 106.5 percent of the ARA metric. - Sovereign wealth fund assets managed by KIA: US$769 billion (end-2022). - External position assessment: 2022 external position assessed as weaker than level implied by fundamentals and desirable policies, partly reflecting inadequate public saving of oil revenue windfall. ### Sovereign risk and debt sustainability assessment (Annex IV) - Final assessment: overall risk of sovereign stress is "low". - Public debt projections (percent of GDP): 2022 2.9; 2023 3.3; 2024 3.2; 2025 5.9; 2026 9.5; 2027 11.9; 2028 17.1. - Gross financing needs (GFN, percent of GDP): 2022 -16.4; 2023 -9.9; 2024 -2.9; 2025 -1.4; 2026 -0.8; 2027 4.6; 2028 4.3. - Rationale for low risk: large financial asset buffers, projected debt stabilization in baseline, and sufficient capacity to finance needs; mechanical signals adjusted to low given financial asset buffers exceeding 75 percent of GDP and 100 percent of public debt. ### Sovereign assets and liabilities management (SALM) recommendations - Adopt a holistic SALM framework consolidating assets (SWF, government deposits, public enterprise assets, central bank FX reserves, pension assets) and liabilities (public domestic and external debt, central bank liabilities, unfunded pension schemes, contingent liabilities). - Formalize institutional collaboration among Ministry of Finance, KIA, and CBK; align SALM with fiscal framework and SWF inflow/outflow rules. - Use SALM and MTDS to balance drawdowns of buffers versus domestic and foreign debt issuance, considering impacts on GRF liquidity, central bank reserves, and domestic market development. ### Governance, transparency, and fiscal coverage - Improve fiscal reporting quality and coverage: reinstate monthly fiscal reporting; expand coverage to SOEs and entities with contingent liabilities; disclose KIA financial operations consistent with Santiago Principles and IMF Fiscal Transparency Code. - Strengthen SOE governance consistent with OECD guidelines and implement a consolidated public sector balance sheet approach to identify fiscal risks. ### Implementation, sequencing, and consultation - Broad consultation with private stakeholders, Parliament, and public is essential; consider establishing a high-level implementation follow-up unit or committee. - Reform sequencing and complementarities matter: labor market reforms work better when combined with improved access to credit and strengthened governance. - Prioritize measures that foster private investment, competitiveness, and human capital to enable sustainable non-oil private sector-led growth. _Italic: Source: IMF staff report — content unit 1kwtea2023001._ ### 90.1 percent, and fiscal financing needs fell substantially. The fiscal surplus is estimated to have ### KUWAIT: STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION ### Recent economic developments and macroeconomic outcomes - Fiscal surplus is estimated to have improved to 23.4 percent of GDP in FY2022/23, benefiting mainly from high oil revenues and expenditure restraint. - Non-oil balance improved by about 2 percentage points of non-oil GDP to about -88.3 percent. - The current account surplus is estimated to have reached 33.8 percent of GDP in 2022 and is projected to remain high in 2023. - Official reserve assets stood at US$48.2 billion as of end-2022 (10.4 months of prospective imports, 106.5 percent of the IMF Assessing Reserve Adequacy metric). - Financial soundness indicators and authorities’ stress tests suggest the banking system is stable and resilient to severe shocks: banks are well-capitalized and highly liquid, non-performing loans remain sufficiently provisioned, and profitability is recovering. ### Outlook and risks - The risks surrounding the baseline macroeconomic outlook are elevated and tilted to the downside. - External risks: - Volatility in oil prices and production—arising from global factors—poses two-sided risks to growth and inflation, and to the fiscal and current account balances. - A deeper global growth slowdown, potentially caused by further monetary policy tightening or banking sector stress in major advanced economies, would adversely impact Kuwait’s economy. - Deepening geo-economic fragmentation would reduce potential growth and could structurally worsen fiscal and current account balances. - Domestic risks: - Delays in needed fiscal and structural reforms could amplify the risk of procyclical fiscal policy and undermine investor confidence. - Such delays would hinder progress towards diversifying the economy and increase vulnerability to climate transition risks. - Upside scenario: - A resolution to political gridlock could accelerate fiscal and structural reforms, boosting investor confidence and stimulating private investment. ### Executive Board assessment and policy priorities - Recovery continues but risks remain substantial. Non-oil growth remains robust in 2023, headline inflation is declining, and there is a large current account surplus. - Given Kuwait’s large fiscal and external buffers, reforms can be undertaken from a position of strength; however, political gridlock between government and Parliament could delay reforms. Resolving the impasse is critical to accelerate reform momentum and diversify the economy. Policy recommendations — fiscal: - Comprehensive and growth-friendly fiscal consolidation is needed to reinforce fiscal sustainability and support intergenerational equity. - The fiscal expansion envisaged in the draft FY 2023/24 budget is appropriate given the negative non-oil output gap; starting next fiscal year, consolidation should: - increase non-oil revenue; and - tackle current spending rigidities while increasing capital outlays to raise potential growth. - Revenue measures could include: - introducing the GCC-wide excises and VAT; and - expanding corporate income taxation to cover domestic firms. - Expenditure measures should focus on: - curtailing the wage bill; and - gradually phasing out energy subsidies while improving targeted income support. - A robust medium-term fiscal framework with a clear fiscal anchor is recommended; a target for the non-oil structural primary balance could serve as an appropriate fiscal anchor to resist pro-cyclical spending when oil prices rise. - Strengthening fiscal governance and transparency is advised: enhance fiscal data coverage and reporting, strengthen corporate governance, enhance public procurement, and reinvigorate the integrated asset-liability management framework. Policy recommendations — monetary and financial sector: - The fixed exchange rate regime—peg to an undisclosed basket of currencies—remains appropriate for monetary policy; fiscal consolidation and structural reforms should strengthen the external position and support the peg. - The banking system is stable and systemic risk is contained, underpinned by a strong prudential framework that should continue to be enhanced. Specific measures include: - closely monitor banks’ dollar funding liquidity and credit quality to manage emerging financial stability risks from global monetary policy tightening; - consider adjusting the composition of capital requirements to make macroprudential policy more countercyclical now that pandemic-related regulatory support measures have been unwound; - phase out the interest rate ceiling on commercial loans to support efficient risk pricing and credit supply to SMEs; - replace the existing blanket guarantee on bank deposits with a limited deposit insurance framework to address moral hazard. Policy recommendations — structural reforms: - A comprehensive structural reform package is needed to boost labor productivity and non-oil private sector-led growth. Key elements: - labor market reforms to promote a market-aligned wage structure and gradually align compensation and working conditions across public and private sectors; - harmonize labor market policies between nationals and expatriates; - proceed with social safety net reforms in parallel to ensure adequate social protection for nationals during the transition; - strengthen governance and the business environment to enhance competition and promote investment, including relaxing foreign ownership restrictions and improving public land allocation for commercial development with longer lease terms; - invest in human capital to promote long-term productivity growth. - Continued forceful implementation of the anti-corruption strategy would strengthen market confidence and support other structural reforms. ### Key quantitative indicators (selected, as reported) - Fiscal surplus (Balance): 23.4 percent of GDP in 2022 (FY2022/23). - Non-oil balance excl. investment income: -88.3 percent (2022). - Current account surplus: 33.8 percent of GDP (2022). - Official reserve assets: US$48.2 billion (end-2022); 10.4 months of next year's imports; 106.5 percent of IMF ARA metric. - Real GDP growth: 8.2 percent (2022); 0.1 percent (2023 projection). - Real non-oil GDP growth: 4.0 percent (2022); 3.8 percent (2023 projection). - CPI inflation (average): 4.0 percent (2022); 3.6 percent (2023 projection). - Revenue (percent of GDP): 63.9 (2022); 57.2 (2023 projection). - Oil revenue (percent of GDP): 48.2 (2022); 37.6 (2023 projection). - Expenditures (percent of GDP): 40.5 (2022); 52.5 (2023 projection). - Non-oil output gap: -3.5 (2022); -1.7 (2023). - Total oil exports (billions of U.S. dollars): 94.0 (2022); 72.5 (2023 projection). - Average crude oil export price (U.S. dollars/barrel): 102.7 (2022); 77.7 (2023 projection). - Crude oil production (millions of barrels/day): 2.71 (2022); 2.59 (2023 projection). *Source: IMF staff report — KUWAIT: STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION.* ### 3. Growth is gaining traction. Economic recovery from the pandemic-induced deep ### 3. Growth is gaining traction. Economic recovery from the pandemic-induced deep ### Economic growth and drivers - Non-oil GDP growth: - 2021: 3.4 percent (estimated) - 2022: 4.0 percent - 2023 (projected): 3.8 percent (supported by fiscal stimulus and partial rebound in expatriate employment) - 2024 (projected): 3.5 percent - Medium term: around 3.0 percent - Overall real GDP growth: - 2022: 8.2 percent (rebound reflecting pickup in oil production) - Oil GDP growth: - 2022: strong pickup contributing to overall rebound - 2023 (projected): -2.7 percent (due to oil production cuts under the October 2022 OPEC+ agreement and the April 2023 OPEC+ announcement) - 2024 (projected): 2.0 percent - Drivers of non-oil growth identified in staff model: trading partner real GDP growth, real domestic credit growth, fiscal impulse (change in non-oil primary fiscal deficit as percent of non-oil GDP), and a crisis dummy. ### Inflation and monetary conditions - Headline inflation: - Peaked at 4.7 percent y-o-y in April 2022 - May 2023: 3.7 percent y-o-y - 2022: 4.0 percent (annual) - 2023 (projected): 3.6 percent - 2024 (projected): 3.0 percent - Medium term: 2.0 percent - Core inflation (excluding food and transport): - Trending down since 2022Q2 - May latest: 3.0 percent y-o-y - Monetary policy tightening: - CBK raised its policy rate by a cumulative 250 basis points since early 2022 - Lending rates increased less than the policy rate, in part because they apply to loans with longer maturity and hikes are not expected to persist throughout loan terms ### Credit, banking sector, and financial soundness - Private credit growth: - 2022: 7.6 percent (4.5 percent in real terms), driven by personal loans and lending to businesses - 2023Q1: 5.1 percent y/y (2.7 percent in real terms) - Banking system soundness and resilience: - Liquidity ratio (banks): 24.7 percent (2023Q1), above CBK regulatory requirement of 18 percent - Capital adequacy ratio: 19 percent (comfortably above regulatory minimum under Basel III) - Non-performing loans: sufficiently provisioned - Return on assets: improved from 0.6 percent in 2020 to 1.4 percent in 2023Q1 - Authorities’ stress tests (2022Q4 and supplementary exercises) indicate capital buffers sufficient to absorb severe scenarios, including prolonged disruption in oil production, geopolitical trade-route disruptions, and global shocks ### Fiscal position, financing, and reforms - Fiscal balances and non-oil balances: - FY2021/22 overall fiscal balance: surplus of 6.5 percent of GDP - FY2022/23 overall fiscal surplus (estimated): 23.4 percent of GDP - Non-oil balance (less investment income): - FY2021/22: improved by about 9 percentage points of non-oil GDP to -90.1 percent - FY2022/23: about -88.3 percent of non-oil GDP (improved by about 2 percentage points) - Financing constraints and practices: - Absence of a Public Debt Law to permit borrowing, and no legal authority to draw from the large Future Generations Fund, meant financing relied on drawdowns from the GRF - GRF liquid assets reached a low level in 2020 but are being replenished - Measures taken by authorities to improve fiscal position (non-legislative): - Repricing rents of state-owned land and fees of public services that do not require legal changes - Improving state revenue collection focusing on big-ticket items - Line-by-line expenditure reviews to identify low-priority items for spending cuts - Authorities’ preliminary estimates: these measures could generate fiscal savings of about 1 percent of GDP - Draft FY 2023/24 budget: - Envisages fiscal expansion given estimated negative non-oil output gap of about 1.7 percent - Contains cash allowances for unused leave during COVID-19 restrictions, settlement of delayed payments of subsidies to line ministries, larger wage bill due to higher public sector employment, and subsidies to contain inflationary pressure - Capital expenditure budgeted to decline due to delays in project execution in previous years - Recurring expenditure and capital expenditure on existing projects can continue pending parliamentary approval - Need for consolidation: - Structural non-oil primary balance under baseline projected to worsen as a share of GDP over the medium term absent further consolidation - Staff calls for a package of substantial but growth-friendly fiscal consolidation measures to strengthen sustainability and reduce vulnerabilities, noting Kuwait is not saving sufficiently for future generations in light of global decarbonization trends ### External sector, reserves, and financial account - Current account and financial account (2022): - Current account surplus: 33.8 percent of GDP (2022 estimate) - Financial account deficit: 32.7 percent of GDP (2022 estimate), reflecting strong foreign asset accumulation - Official reserve assets: - US$48.2 billion as of end-2022 - Reserve coverage: 10.4 months of prospective imports - 106.5 percent of the Assessing Reserve Adequacy (ARA) metric - External position assessment: - 2022 external position weaker than level implied by fundamentals and desirable policies, partly reflecting inadequate public saving of the oil revenue windfall ### Outlook and risks - Baseline outlook (selected projections from staff table): - Real GDP Growth (percent): 2020 -8.9; 2021 1.3; 2022 8.2; 2023 0.1; 2024 2.6; 2025 4.1; 2026 2.4; 2027 2.4; 2028 2.4 - Oil GDP Growth (percent): 2020 -9.8; 2021 -0.3; 2022 11.6; 2023 -2.7; 2024 2.0; 2025 4.8; 2026 2.0; 2027 2.0; 2028 2.0 - Non-Oil GDP Growth: 2020 -7.5; 2021 3.4; 2022 4.0; 2023 3.8; 2024 3.5; 2025 3.2; 2026 3.0; 2027 3.0; 2028 3.0 - Inflation (percent): 2020 2.1; 2021 3.4; 2022 4.0; 2023 3.6; 2024 3.0; 2025 2.4; 2026 2.0; 2027 2.0; 2028 2.0 - CA Balance (% of GDP): 2020 4.6; 2021 27.2; 2022 33.8; 2023 25.7; 2024 22.0; 2025 19.9; 2026 17.3; 2027 15.0; 2028 12.9 - International reserves in months of next year's imports: 2021 9.7; 2022 10.4; 2023 10.5; 2024 10.6; 2025 10.7; 2026 10.9; 2027 11.1; 2028 11.1 - Fiscal balance (% of GDP): 2020 -14.6; 2021 6.5; 2022 23.4; 2023 4.7; 2024 2.6; 2025 1.8; 2026 0.6; 2027 -1.6; 2028 -2.4 - Non-oil balance excl. investment income (percent of non-oil GDP): 2020 -99.3; 2021 -90.1; 2022 -88.3; 2023 -92.6; 2024 -88.0; 2025 -85.7; 2026 -83.9; 2027 -82.3; 2028 -80.6 - Government debt (% of GDP): 2020 11.7; 2021 8.6; 2022 2.9; 2023 3.3; 2024 3.2; 2025 5.9; 2026 9.5; 2027 11.9; 2028 17.1 - Note: assumes resumption of debt issuance from FY 2024/25 - Risk assessment: - Overall risks elevated and tilted to the downside - Key external risks: volatility in oil prices and production; deeper global growth slowdown due to further monetary policy tightening or banking sector stress in major advanced economies; geo-economic fragmentation reducing potential growth - Key domestic risks: delays in needed fiscal and structural reforms amplifying procyclical fiscal policy and undermining investor confidence; hindering diversification and increasing vulnerability to climate transition risks - Upside scenario: resolution to political gridlock could accelerate fiscal and structural reforms, boosting investor confidence and stimulating private investment ### Authorities’ views and policy dialogue - Authorities broadly agreed with staff on outlook, risks, external sector assessment, and debt sustainability analysis; slightly more optimistic on near-term growth prospects - Authorities noted: - Inflation primarily driven by external factors and contained - Main risks are global, transmitted via oil production and prices - Kuwait’s strong financial position would allow it to weather external shocks - Strong desire to pursue economic reforms to improve growth outlook and resilience ### Policy recommendations and priorities - Fiscal policy: - Rebuild fiscal buffers, especially when oil prices are high - Gradually reduce food subsidies as food price pressures subside, while improving targeting of fiscal support to the most vulnerable - If a significant growth slowdown materializes, deploy fiscal policy to support non-oil growth, including by frontloading investment in renewables and infrastructure - Implement a package of substantial but growth-friendly fiscal consolidation measures to strengthen sustainability and intergenerational equity - Structural and institutional priorities: - Advance reforms to diversify the economy to reduce vulnerability to oil-market and climate transition risks - Consider legislative and institutional frameworks (e.g., Public Debt Law) to broaden financing options and improve fiscal management *Source: IMF staff report content unit 1kwtea2023001 — "3. Growth is gaining traction. Economic recovery from the pandemic-induced deep" (PDF chapter).* ### 15. Staff recommended a growth-friendly fiscal consolidation scenario to the authorities. ### 1kwtea2023001 - 15. Staff recommended a growth-friendly fiscal consolidation scenario to the authorities. ### Growth-friendly fiscal consolidation scenario - Objective: adjustment in the structural non-oil primary balance of 0.8 percent of potential GDP relative to the baseline in FY 2024/25, with gradual increases thereafter, improving net financial assets. - Composition: - Revenue measures: - Introduction of a 5 percent VAT. - Excises on tobacco and sugary drinks. - Expansion of the 15 percent corporate income tax to cover domestic corporates, to be introduced gradually over the next two years. - Assumption timeline: 5-percent VAT to be introduced in FY24/25, excises on sugary drinks and tobacco in FY25/26, and expansion of the profit tax coverage to domestic companies starting from (table context). - Expected effects: VAT at the low 5 percent rate would have a temporary impact on inflation but yield stable revenue; potential adverse impacts on vulnerable households could be offset with targeted income support. - Administration: Ministry of Finance is enhancing revenue administration capacity and has requested technical assistance from the IMF. - Expenditure measures: - Curtail the wage bill: gradually align public sector wages with those in the private sector and curb public employment growth (constant number of public sector employees assumed). - Gradually phase out untargeted energy subsidies; discuss raising electricity and water tariffs and deeper reforms to phase out energy subsidies. - Protect the vulnerable while communicating budgetary costs and distributional impacts of subsidies to build consensus. - Reallocation: - Part of savings to be allocated to capital spending to improve infrastructure and to invest in climate adaptation, mitigation, and renewable energy. - Emphasis on improving project planning, selection, and execution to bolster spending efficiency. - Notes: - No fiscal consolidation measures except non-legislative measures discussed in ¶12 are assumed under the baseline. - Structural non-oil primary balance improvements reflect non-oil GDP projected to grow faster than overall GDP. ### Fiscal adjustment and key fiscal figures (selected table entries) - Fiscal years and GDP (fiscal year): 2023, 2024, 2025, 2026, 2027 - Nominal GDP (in billions of KD): 50.1 50.6 52.2 53.5 54.8 - Nominal potential GDP (in billions of KD): 50.6 50.6 52.2 53.5 54.8 - Output gap (in percent of potential GDP): -1.0 -0.1 0.0 0.0 0.0 - Non-oil structural primary balance 1/ 2/ (percent of nominal potential GDP): -42.8 -45.0 -43.2 -42.5 -42.1 - Structural non-hydrocarbon primary revenue components (percent of nominal potential GDP): - Value added tax: 0.0 0.1 0.5 0.6 0.7 - Corporate tax: 0.0 0.3 0.3 0.3 0.3 - Excises: 0.0 0.0 0.0 0.1 0.1 - Structural primary expenditure components (percent of nominal potential GDP): - Compensation of employees: 22.6 22.1 21.8 21.5 21.2 - Subsidies: 13.2 10.9 10.7 10.6 10.4 - Capital expenditure: 4.9 5.2 5.3 5.4 5.6 - Fiscal adjustment with respect to the baseline (percent of nominal potential GDP): - Revenue adjustment: 0.0 0.4 0.8 1.0 1.1 - Spending adjustment: 0.0 0.4 0.8 1.2 1.6 Notes linked to table: - 1/ Excluding investment income and transfer of profits of public entities. - 2/ Structural balance, structural revenue, and structural expenditure refer to adjustment based on the economic cycle, assuming revenue elasticity of one and expenditure elasticity of zero. - 3/ Percent of nominal potential GDP. - 4/ Assumptions include: 5-percent VAT to be introduced in FY24/25, followed by excises on sugary drinks and tobacco in FY25/26, and expansion of the coverage of the profit tax to domestic companies starting from (table context). - 5/ Assumptions on expenditure measures include: wage bill restraint (constant number of public sector employees) and reduction of water and electricity subsidies, as well as increased capital expenditure. ### Public Debt Law and medium-term fiscal framework - Public Debt Law: - Expeditiously passing the new Public Debt Law is paramount for orderly fiscal financing through sovereign bond issuance and supporting development of the domestic bond market. - Recommendations: law should not impose restrictions on sovereign bond maturities or uses of financing, nor have a predetermined expiration date. - The draft envisages a debt ceiling, either as a share of GDP or in absolute amounts; a debt ceiling as a share of GDP is preferable as it provides room for additional borrowing as the economy grows. - The law should clarify borrowing authority of public entities other than central government, including SOEs, and their relationship to the debt ceiling calculation. - Medium-term fiscal framework: - Staff recommended developing a medium-term fiscal framework with a target for the non-oil structural primary balance to support consolidation. - A fiscal rule based on the non-oil structural primary balance would support consolidation while avoiding pro-cyclicality and could be combined with limits on expenditure growth. - To operationalize the framework, enhance technical capacity for macro-modeling and forecasting at the Ministry of Finance; forthcoming IMF TA on developing a macro-framework for forecasting and policy analysis will be instrumental. ### Fiscal transparency, governance, and public financial management - Ongoing measures: - Ministry of Finance has launched measures to enhance data collection from state-owned entities and is establishing a public procurement database. - The new Public Tender Law was amended in 2019 to facilitate SME participation in public tenders. - Recommendations: - Improve quality and coverage of fiscal reporting, including reinstating monthly fiscal reporting and expanding fiscal coverage to SOEs and entities with contingent liabilities. - Strengthen transparency of oil wealth management, including disclosing information on the KIA’s financial operations, investment performance, and governance in line with the Santiago Principles and IMF Fiscal Transparency Code. - Continue implementing Kuwait’s Code of Governance for SOEs and enhance public-private partnerships by streamlining project approval. - Reinvigorate and strengthen the sovereign asset and liability management framework to identify and manage fiscal risks across the consolidated public sector balance sheet (central government, off-budget entities, and SOEs), including implications for GRF liquidity buffers, central bank reserves, domestic liquidity, and debt market development. ### Monetary and financial policies — safeguarding financial stability - Exchange rate and monetary policy: - The exchange rate peg to an undisclosed basket of currencies remains an appropriate nominal anchor and has delivered low and stable inflation. - Central bank independence should be maintained; the CBK should continue to review the peg regularly. - Measures to strengthen the monetary transmission mechanism, including deepening money and capital markets, should continue. - Banking system resilience: - Prudent regulation and supervision by the CBK helped maintain resilience; pandemic-era regulatory relaxations were phased out by January 2023. - Banks have sizeable capital and liquidity buffers above regulatory minima and are largely deposit-funded with lending focused domestically or regionally. - Staff encouraged the CBK to consider building up state contingent macroprudential policy buffers as the credit cycle matures, including activating the countercyclical capital buffer (CCyB); these buffers could be released in the event of a significant credit cycle downturn. - Regulatory improvements: - Continue risk-based supervision and stress testing. - Replace the existing blanket guarantee on bank deposits with a limited deposit insurance framework to address moral hazard. - Phase out the interest rate cap on commercial loans to support efficient risk pricing and expand credit to SMEs (note: the interest rate ceiling does not apply to Islamic banks; in practice they closely follow prevailing market lending rates). - Digitalization and sustainable finance: - CBK launched a digital strategy and regulatory sandbox since 2018; in late 2022 issued guidelines to banks on sustainable finance and asked them to follow Basel Committee principles for climate-related financial risks (June 2022). ### AML/CFT and anti-corruption - AML/CFT: - Kuwait is strengthening its AML/CFT framework and preparing for the FATF mutual evaluation scheduled for November 2023. - Priority actions: improve understanding of money laundering and terrorism financing risks; effective supervision of at-risk financial and non-financial sectors; enforce against money laundering and confiscate ill-gotten proceeds; enhance domestic collaboration among stakeholders including AML/CFT and anti-corruption agencies. - Beneficial ownership regulation: Decree No. 4 of 2023 requires entities registered in Kuwait (except those wholly owned by the Kuwaiti government) to collect and maintain information on beneficial owners, shareholders, and nominee directors and file the information with the Ministry of Commerce and Industry and/or any other regulatory authority; operational since April 1, 2023. - Anti-corruption strategy implementation (2019-24 Integrity and Anti-Corruption Strategy): - Progress made on all four pillars; specific legal developments: - Law No. 2 of 2016 was amended in January 2023 to establish liability of private legal persons in corruption offenses and covers whistleblower protection; follow-up rules issued on May 10, 2023. - Asset declaration system operating; violators transferred to Office of the Public Prosecutor. - Implementation metrics (as of end 2022): - Pillar I: 59 percent of initiatives achieved versus a target of 70 percent. - Pillar II: 66 percent achieved versus a target of 79 percent. - Pillar III: 79 percent achieved (target reached). - Pillar IV: 55 percent achieved versus a target of 72 percent. - Compliance with submitting financial disclosure statements: 99 percent. - Compliance with examination: 91 percent. - Prevention of corruption in public tenders (draft amendment to Central Agency for Public Tenders law): 25 percent achievement against a target of 75 percent. - Staff encourages publication of asset declarations and expedited implementation of remaining strategy elements. ### Authorities’ views (selected) - General agreement on the need for fiscal consolidation and stronger fiscal governance and transparency. - Ministry of Finance is identifying additional non-legislative measures to improve revenue collection and reduce spending while preparing for legislative reforms. - Authorities interested in working with staff to examine fiscal framework and fiscal rule options. - KIA stance: cannot disclose its financial performance publicly due to domestic law but reports to relevant internal stakeholders and is strengthening governance. - On monetary policy: authorities view the peg to an undisclosed basket as serving Kuwait well; central bank plans to review macroprudential toolkit coverage regularly. _Italic: Source: IMF staff content provided in content unit 1kwtea2023001._ ### 27. Broad-based reforms are needed to tackle Kuwait’s structural challenges (Annex VI). ### 27. Broad-based reforms are needed to tackle Kuwait’s structural challenges (Annex VI) ### Overview and demographic challenge - Roughly 100,000 young Kuwaitis will join the working-age population over the next five years. - Given limited scope to raise public sector employment, strong non-oil private sector-led growth is needed to absorb new labor market entrants. - A broad-based, well-sequenced reform package that tackles multiple challenges would amplify the effects of individual reforms on potential growth. ### Labor market reforms (priority) - Implement labor market reforms to incentivize young Kuwaitis to seek careers in the private sector with priority. - Key measures recommended: - Allow labor market policies to be fully market based, including by improving flexibility in hiring and firing workers. - Gradually eliminate differential labor policies for nationals versus expatriates to facilitate more efficient resource reallocation and promote a market-aligned wage structure. - Clearly signal the limited future availability of jobs in the public sector. - Ensure wage growth in the public sector does not outpace that in the private sector to keep employment incentives aligned and secure reform gains. - Harmonize labor market policies between nationals and expatriates to strengthen private sector employment of nationals and raise productivity via more efficient resource allocation. ### Social safety net and transition support - Accompany labor market reforms with social safety net reforms to ensure adequate social protection for nationals during the transition period. - Recommended supports: - Enhance job search assistance and training. - Adjust unemployment benefits and coverage periods to better fit labor force needs. - Adopt more flexible labor market policies for expatriates to facilitate resource reallocation and attract high-skilled labor. ### Business environment and governance - Strengthen the business environment to promote private investment: - Continue development and use of e-government and electronic platforms to streamline business procedures. - Improve supply of land for development with longer lease terms and enhance land allocation for commercial development. - Continue one-stop-shop coordination by the Kuwait Direct Investment Promotion Authority to facilitate foreign investment procedures. - Relax restrictions on foreign ownership of local companies and improve access to credit, especially for SMEs. - Continue implementation of the national anti-corruption strategy to enhance accountability and transparency. - Enhance public awareness and usage of the Competition Protection Agency to ensure a level playing field. - Legal and institutional context noted: - The Foreign Direct Investment Law of 2013 allowed 100 percent foreign ownership in some sectors (implemented in 2015) and introduced tax breaks and benefits tied to employment quotas for Kuwaiti nationals. - Companies Law No. 1 of 2016 simplified company registration but maintained requirement that a Kuwaiti or GCC national own at least 51 percent of a local company. ### Human capital and education - Kuwait spends more per student than the average emerging market economy, but outcomes indicate relatively lower quality of education. - Education reforms are needed to enhance quality and address curriculum–private sector skill mismatches to better prepare students for private sector job demands and support sustained productivity growth. ### Female labor force participation - Commendable efforts to encourage female labor force participation should continue. - Legal and policy features: - No legal barriers for women to work; the Constitution mandates gender equality in the workplace. - Every government entity or business with at least 50 female employees must provide free childcare by law. - Female employees in both public and private sectors are eligible for 120 days of maternity leave, with the first 60 days fully paid. - Further action: - Fully implement legal childcare requirements in the private sector to encourage greater female labor force participation and raise productivity. ### Climate change mitigation and adaptation - The National Adaptation Plan (published under UNFCCC in 2019) addresses extreme heat impacts but needs translation into investment projects and implementation following parliamentary approval. - Mitigation targets and planning: - Kuwait committed under the Paris Agreement to cut greenhouse gas emissions by 7.4 percent relative to business-as-usual by 2035. - Plans to reach net zero greenhouse gas emissions in the oil sector by 2050, and economy-wide by 2060. - To achieve targets, Kuwait needs to finish developing its mitigation plan, including phasing out fossil fuel subsidies while replacing them with targeted income support to vulnerable households and promoting investment in renewables-based electricity generation infrastructure. - Fiscal and structural implication: - Mitigating risks from the global energy transition will require fiscal reforms to ensure sustainability and intergenerational equity, as well as structural reforms to boost non-oil private sector-led growth. - Fiscal cost note: - Fossil fuel subsidies surged to 7.8 percent of GDP in 2021 due to the global rise in commodity prices. ### Implementation, consultation, and governance of reforms - Broad consultation with private stakeholders, Parliament, and the public is required to secure sustained social support and incorporate feedback; consultations and communication should be regular and particularly before major policy actions. - Consider establishing a high-level implementation follow-up unit or committee to overview and strengthen reform progress. - The authorities noted the Kuwait National Development Plan 2020-2025 lays the foundation for reform priorities. ### Statistics and data improvements - Producing timely and high-quality macroeconomic data is crucial. - The Central Statistical Bureau (CSB) completed a household consumption and expenditure survey and the 2021 establishment census, but there have been delays in national accounts compilation and publication. - Staff encouraged boosting support to the CSB and expeditious resumption of annual and quarterly GDP data publication. ### Staff appraisal — macro and financial framework - Economic outlook: - Non-oil growth remains robust in 2023, with declining headline inflation and a large current account surplus, but risks remain substantial. - Elevated risks include volatility in oil prices and production from global factors. - Fiscal policy: - Comprehensive and growth-friendly fiscal consolidation is needed to reinforce fiscal sustainability and support intergenerational equity. - The fiscal expansion envisaged in the draft FY 2023/24 budget is appropriate given the negative non-oil output gap. - From next fiscal year, consolidation should increase non-oil revenue and tackle current spending rigidities while increasing capital outlays to raise potential growth. - Revenue measures could include introducing the GCC-wide excises and VAT, and expanding corporate income taxation to cover domestic firms. - Expenditure measures should focus on curtailing the wage bill and gradually phasing out energy subsidies while improving targeted income support. - Fiscal framework: - A robust medium-term fiscal framework with a clear fiscal anchor is recommended; a target for the non-oil structural primary balance could serve as an appropriate anchor. - Monetary and financial stability: - The fixed exchange rate regime (peg to an undisclosed basket of currencies) remains appropriate and has supported low and stable inflation. - The banking system is stable with systemic risk contained; prudential framework should continue to be enhanced. - Recommendations include monitoring banks’ dollar funding liquidity and credit quality, adjusting capital requirement composition to make macroprudential policy more countercyclical, phasing out the interest rate ceiling on commercial loans, and replacing the existing blanket deposit guarantee with a limited deposit insurance framework. - Structural reform conclusion: - A structural reform package is required to boost labor productivity and non-oil private sector-led growth, including market-aligned wage structures, harmonized labor market policies, parallel social safety net reforms, governance and business environment improvements (including relaxing foreign ownership restrictions and improving public land allocation with longer lease terms), and investing in human capital. *IMF staff summary based on the content of Annex VI in the Kuwait report.* ### 41. Staff recommends that the next Article IV consultation take place on the standard 12- ### 1kwtea2023001 - 41. Staff recommends that the next Article IV consultation take place on the standard 12- ### Recommendation on Article IV Consultation - Staff recommends that the next Article IV consultation take place on the standard 12-month cycle. ### Recent Economic Developments (Figures 1–7 highlights) - GDP growth contributions shown separately for Nonoil GDP and Oil GDP; average oil export price displayed in US$/bbl. - Headline inflation decomposed into Food, Transport, Core, and Headline (year-over-year percent change; contribution). - Government spending presented as Percent of nonoil GDP and Non-oil fiscal balance to non-oil GDP (RHS). - Fiscal and current account balances presented in Percent of GDP; average oil export price shown in US$/bbl (RHS). - Contributions to GDP growth broken down: Public consumption, Private consumption, Investment, Exports. - Total International Reserves shown (Stock of CBK reserves in USD billion, RHS). - Monetary indicators include 3-month interbank rate, Central Bank Discount Rate, Interest Rates on Customers' Deposits, US federal funds rate. - Banking sector liquidity and monetary aggregates: Total Bank Reserves (In KD billion), M2 (RHS). - Deposits with Local Banks y-o-y percent: Private sector deposits and Government deposits. - Total Bank Credit to Private Sector: Year-on-year percent change and 3-month change, annualized. - Private Sector Credit Growth (Year-on-year, percent) compared: Kuwait and GCC. - Utilized Cash Credit Facilities, 2010-2023 (Percent of total) by purpose: Trade, Industry, Construction, Personal Facilities, Installment Loans, Purchase of Securities, Real Estate. ### Fiscal Developments (Figure 2 and Annex I status) Findings: - Spending, revenue, and overall balance presented as Percent of nonoil GDP. - Government revenues shown in KD billion by Oil, Investment, Other nonoil. - Nonoil revenue metrics in KD billion and ratios: Nonoil revenue/non-oil GDP (RHS); Nonoil revenue/total revenue (RHS). - Current spending composition shown as Percent of nonoil GDP: Transfers and Subsidies, Wages and salaries, Goods and Services. - Comparison of spending (2021) presented as Percent of GDP against GCC, Oil Exporters, EMs. Selected fiscal-recommendation status (Annex I): - Passing the Public Debt Law to support orderly fiscal operations: Not passed. A draft debt law has been submitted to Parliament for internal debate. - Undertaking fiscal adjustment through curtailing expenditures including via reforming public wage bills, phasing out subsidies, and diversifying the sources of revenues including via launching VAT and additional excise taxes: Limited progress. The authorities adopted measures that do not require legislative approval so far. Adjustment measures that require parliamentary approval, such as reforming the wage bill and introducing the VAT, are still pending. - Anchoring fiscal consolidation on a medium-term fiscal framework to strengthen the fiscal and external positions: Limited progress. The Ministry of Finance is planning to strengthen its macroeconomic modeling capacity. - Enhancing public financial management and fiscal governance, including via more disclosures in quarterly fiscal reports and publication of the KIA’s balance sheet: Limited progress. The Ministry of Finance launched measures to enhance data collection from state-owned entities. Other fiscal notes: - There has been no government debt issuance since October 2017 (Figure 2 note). ### Monetary and Financial Sector Developments (Figure 3–4 and Annex I status) Findings: - Interest rate series and spreads tracked from May-11 through May-23. - Total reserves, M2, deposit and credit growth dynamics presented across 2011–2023. - Banking sector indicators: Equity Prices index (10/2012 = 100), Leverage Ratio (In percent), Capital Adequacy Ratio (In percent), Return On Assets (In percent), Gross NPLs To Total Loans (In percent). - Real Estate Sales (Millions KD) by Commercial, Residential, Investment. Monetary/financial policy-status (Annex I): - Phasing out the interest rate ceiling on commercial loans: No change to the ceiling so far. - Deepening the local currency bond market after the approval and enactment of the debt law: This remains conditional on passing the new debt law. - Implementing the AML/CFT legal and regulatory frameworks: The Kuwait Anti-Corruption Authority (Nazaha) published the country’s 2019-24 strategy. Implementation is ongoing. ### External Sector Assessment (Annex II) Overall assessment: - The external position of Kuwait in 2022 was weaker than the level implied by fundamentals and desirable policies, but remains strong with high oil export revenues underpinning a large current account surplus and net foreign asset position. Policy needs: - Fiscal consolidation to support intergenerational equity and structural reforms to diversify the economy are needed to strengthen the external balance over the medium term. - The exchange rate peg remains an appropriate nominal anchor for monetary policy, supporting low and stable inflation. Foreign assets and liabilities (end-2021, exact figures): - Net foreign asset position excluding gold: US$1,081.2 billion (786.5 percent of GDP), up from US$984.2 billion (928.9 percent of GDP) at end-2020. - Total foreign assets excluding gold: US$1,167.2 billion (849.1 percent of GDP) at end-2021, up from US$1,061.7 billion (1,002.1 percent of GDP) at end-2020. - Total foreign liabilities: US$86.0 billion (62.6 percent of GDP) at end-2021, up from US$77.6 billion (73.2 percent of GDP) at end-2020. Assessment: - Kuwait’s net foreign asset position is projected to steadily increase over the medium term, in line with sustained double-digit current account surpluses as a share of GDP, reflecting high oil export revenues and investment income receipts. Current account (2021–2022 data and model results): - Current account surplus estimated: 33.8 percent of GDP in 2022, up from 27.2 percent of GDP in 2021. - Oil export revenues: estimated at 50.4 percent of GDP in 2022, up from 45.8 percent of GDP in 2021. - EBA-lite adjusted current account balance (2022): 31.4 percent of GDP; current account norm: 36.0 percent of GDP; current account gap: -4.7 percent of GDP. - Of the -4.7 percent of GDP gap, the cyclically adjusted fiscal balance accounts for -0.9 percentage points. - Real effective exchange rate gap: 13.7 percent. - Consumption-based external sustainability approach norm: 32.4 percent of GDP; implies current account gap of -1.0 percent of GDP and real effective exchange rate gap of 3.0 percent. - Staff gives somewhat more weight to the consumption-based external sustainability approach and assesses the external position to be weaker than the level implied by fundamentals and desirable policies. Real exchange rate: - Exchange rate peg to an undisclosed basket of currencies. - In 2022: nominal effective appreciation of 5.8 percent; real effective appreciation of 3.2 percent. - EBA-lite real exchange rate approach estimates a real effective exchange rate gap of 16.4 percent in 2022, implying a current account gap of -5.8 percent of GDP. Capital and financial accounts: - Capital and financial account deficit estimated at 32.4 percent of GDP in 2022, down from 35.5 percent of GDP in 2021, reflecting strong capital outflows as the KIA invested high oil revenues abroad. - Capital flow analysis hindered by stock-flow inconsistencies between official balance of payments and international investment position data; sovereign wealth funds excluded from some coverage. - Strong external position limits the risk of a capital outflow surge and vulnerabilities to it. FX intervention and reserves level (end-2022 and end-2021): - Official reserve assets: US$48.2 billion (10.4 months of prospective imports, 106.5 percent of ARA metric) at end-2022, up from US$45.2 billion (9.7 months of prospective imports, 126.8 percent of ARA metric) at end-2021. - Sovereign wealth fund assets under management by the KIA on behalf of the government: US$769 billion (412.1 percent of GDP) at end-2022, up from US$693 billion (505.7 percent of GDP) at end-2021. Assessment: - Official reserve assets provide sufficient import coverage and lie within the adequate range of 100-150 percent of the ARA metric. They are projected to remain stable in terms of import coverage over the medium-term. Official reserve assets are complemented by large sovereign wealth fund assets. Selected model table (Kuwait: Model Results, 2022; in percent of GDP): - CA-Actual: 33.8 - Adjusted CA: 31.4 - CA Norm (from model): 36.0 (EBA-lite) and 32.4 (ES model) - CA Gap: -4.7 (EBA-lite) and -1.0 (ES model) - REER Gap (in percent): 13.7 (EBA-lite), 14.4 (alternative), 3.0 (ES model) ### Risk Assessment Matrix (Annex III) Global risks (selected): - Commodity price volatility — Likelihood: Medium; Economic Impact: High. - Impact: Changes in global oil prices affect Kuwait’s growth, inflation, fiscal and current account balances. - Policy response: Use fiscal consolidation/stimulus as appropriate; accelerate structural reforms to diversify away from oil. - Abrupt global slowdown or recession — Likelihood: Medium; Economic Impact: High. - Impact: Lower oil demand/prices reduce growth and worsen fiscal/current account balances; banking system liquidity could be affected. - Policy response: Use fiscal stimulus to mitigate reductions in growth and inflation; release macroprudential buffers if needed. - Systemic financial instability — Likelihood: Medium; Economic Impact: Low. - Impact: Higher interbank funding costs could constrain credit supply; overall effects expected to be mild given limited cross-border exposures and strong sovereign backstop. - Policy response: Release macroprudential buffers to support credit supply if needed. - Deepening geo-economic fragmentation — Likelihood: High; Economic Impact: Medium. - Impact: Lower global potential growth and oil prices; structural worsening of fiscal and current account balances. - Policy response: Accelerate fiscal and structural reforms to boost potential growth; maintain strong capital adequacy requirements. Domestic risks: - Delayed fiscal and structural reforms — Likelihood: Medium; Economic Impact: High. - Impact: Procyclical fiscal policies, weaker investor confidence, slower diversification, higher vulnerability to climate transition risks. - Policy response: Government should explain reform benefits to Parliament and public, raise fiscal transparency, and strengthen the social safety net. - Resolution of political gridlock accelerates reforms — Likelihood: Low; Economic Impact: Medium. - Impact: Boost investor confidence and private investment. - Policy response: Raise fiscal transparency and strengthen social safety net to support adversely affected groups. *Source: Excerpts from IMF staff report content for Kuwait (figures, tables, Annex I–III as provided in the supplied content).* ### Annex IV. Sovereign Risk and Debt Sustainability Analysis ### Annex IV. Sovereign Risk and Debt Sustainability Analysis ### Overall assessment - Final assessment: The overall risk of sovereign stress is "low". - Horizon assessments: - Near-term: Low (note: near-term assessment not applicable when there is a disbursing IMF arrangement; in surveillance-only cases it is performed but not published). - Medium-term: Low. - Long-term: Low; "Long-term risks are low with aging-related expenditures on health and social security fed into debt dynamics." - Key rationale: - Public debt is projected to decline to about 2.9 percent of GDP in 2022 and rise gradually to about 17.1 percent of GDP in 2028. - Kuwait has large buffers that can support fiscal financing. - The debt increase is mainly driven by the need to develop a local debt market after the approval of Kuwait new debt law. - Assessment of low debt and financing risks over the medium term and long term informs a final assessment of low risk. - Note on distinction: "The risk of sovereign stress is a broader concept than debt sustainability. Unsustainable debt can only be resolved through exceptional measures (such as debt restructuring). In contrast, a sovereign can face stress without its debt necessarily being unsustainable, and there can be various measures—that do not involve a debt restructuring—to remedy such a situation, such as fiscal adjustment and new financing." ### DSA summary assessment and mechanical signal - Sustainability assessment: "Not required for surveillance countries." - Mechanical signal: (present in source but deleted before publication in surveillance-only cases; qualitative summary retained) The mechanical signal from the debt sustainability assessment was adjusted to low given large financial asset buffers exceeding 75 percent of GDP and 100 percent of public debt. - Debt stabilization in the baseline: Yes. - Comment: "The assessment of low debt and financing risks over the medium term and long term inform a final assessment of low risk." ### Debt coverage and disclosures - Coverage in SRDSA focuses on the general government and includes: - Budgetary central government: Yes - Extra budgetary funds (EBFs): Yes - Social security funds (SSFs): Yes - State governments: No (there is no state or local government) - Local governments: No - Public nonfinancial corporations: No - Central bank: Yes - Other public financial corporations: No - Commentary: Data on the broader public sector is unavailable at this stage. "Staff continues to work together with the authorities on expanding fiscal data coverage to include the broader public sector." - Reporting and recording notes captured in the SRDSA: references to cash basis vs. non-cash basis, nominal value, face value, market value distinctions, and use of stock of arrears as proxy where accrual data absent (as presented in the source). ### Public debt structure indicators (selected datapoints from figures and notes) - Perimeter shown: general government. - Debt by currency, by holder, by governing law, by instrument, and by maturity are presented on calendar-year basis (and differ from fiscal-year calculations). - Residual maturity (projection): 6. years (as shown). - Public debt composition (selected numbers from the projection table, percent of GDP unless indicated otherwise): - Actual public debt: 2.9 (2022); 3.3 (2023); 3.2 (2024); 5.9 (2025); 9.5 (2026); 11.9 (2027); 17.1 (2028); 18.5 (2029); 20.0 (2030); 21.0 (2031); 21.3 (2032). - Change in public debt: -5.7 (2022); 0.4 (2023); -0.1 (2024); 2.7 (2025); 3.6 (2026); 2.4 (2027); 5.2 (2028); 1.4 (2029); 1.5 (2030); 1.0 (2031); 0.3 (2032). - Contribution of identified flows (percent of GDP): -9.3 (2022); 0.0 (2023); -2.8 (2024); 1.6 (2025); 1.9 (2026); -0.2 (2027); 2.4 (2028); -0.5 (2029); 0.5 (2030); -0.3 (2031); 1.2 (2032). - Primary deficit: -18.5 (2022); -10.1 (2023); -3.2 (2024); -2.0 (2025); -1.1 (2026); 0.7 (2027); 1.7 (2028); 5.3 (2029); 7.0 (2030); 6.4 (2031); 6.6 (2032). - Noninterest revenues: 57.1 (2022); 60.3 (2023); 54.3 (2024); 52.1 (2025); 51.3 (2026); 49.7 (2027); 48.8 (2028); 44.8 (2029); 42.4 (2030); 42.7 (2031); 42.3 (2032). - Noninterest expenditures: 38.5 (2022); 50.2 (2023); 51.1 (2024); 50.1 (2025); 50.2 (2026); 50.4 (2027); 50.5 (2028); 50.1 (2029); 49.5 (2030); 49.2 (2031); 49.0 (2032). - Automatic debt dynamics: -1.8 (2022); 0.2 (2023); 0.1 (2024); 0.0 (2025); 0.1 (2026); 0.1 (2027); 0.2 (2028); 0.1 (2029); 0.2 (2030); 0.2 (2031); 0.2 (2032). - Real GDP growth (memo): 8.2 (2022); 0.1 (2023); 2.6 (2024); 4.1 (2025); 2.4 (2026); 2.4 (2027); 2.4 (2028); 2.3 (2029); 2.5 (2030); 2.5 (2031); 2.6 (2032). - Inflation (GDP deflator; percent): 27.4 (2022); -12.3 (2023); -2.6 (2024); -0.6 (2025); 0.1 (2026); -0.1 (2027); 0.2 (2028); 1.2 (2029); 1.2 (2030); 1.2 (2031); 1.2 (2032). - Nominal GDP growth (percent): 37.8 (2022); -12.3 (2023); 0.0 (2024); 3.5 (2025); 2.5 (2026); 2.3 (2027); 2.6 (2028); 3.5 (2029); 3.7 (2030); 3.7 (2031); 3.8 (2032). - Effective interest rate (percent): 4.5 (2022); 6.6 (2023); 5.6 (2024); 6.4 (2025); 5.2 (2026); 4.9 (2027); 4.9 (2028); 4.8 (2029); 5.3 (2030); 5.2 (2031); 5.2 (2032). - Gross financing needs (GFN): -16.4 (2022); -9.9 (2023); -2.9 (2024); -1.4 (2025); -0.8 (2026); 4.6 (2027); 4.3 (2028); 8.8 (2029); 11.6 (2030); 11.5 (2031); 12.8 (2032). - Of which debt service: 2.1 (2022); 0.2 (2023); 0.3 (2024); 0.6 (2025); 0.3 (2026); 3.9 (2027); 2.6 (2028); 3.5 (2029); 4.5 (2030); 5.1 (2031); 6.1 (2032). - Local currency component of debt service: 0.2 (2022); 0.1 (2023); 0.2 (2024); 0.6 (2025); 0.2 (2026); 1.2 (2027); 2.5 (2028); 3.2 (2029); 3.7 (2030); 3.9 (2031); 4.2 (2032). - Foreign currency component of debt service: 2.0 (2022); 0.1 (2023); 0.1 (2024); 0.1 (2025); 0.1 (2026); 2.7 (2027); 0.2 (2028); 0.3 (2029); 0.8 (2030); 1.2 (2031); 1.9 (2032). ### Medium-term risk analysis and fanchart/GFN indices (selected metrics) - Debt fanchart and GFN financeability indexes (percent of GDP unless otherwise indicated): - Fanchart width: 146.72.1 (as shown in table). - Probability of debt not stabilizing (pct): 95.60.8. - Terminal debt level x institutions index: 9.80.2. - Debt fanchart index: ...3.1 (ellipsis reported as in source). - Average GFN in baseline: -1.0-0.3 (displayed). - Bank claims on government (pct bank assets): 0.30.1. - Change in claims on govt. in stress (pct bank assets): 9.13.0. - GFN financeability index: ...2.8. - Medium-term index: - Prob. of missed crisis, 2023-2028 (if stress not predicted): 27.3 pct. - Prob. of false alarm, 2023-2028 (if stress predicted): 15.9 pct. - Staff guidance note adjustment: "Following the Staff Guidance Note on Sovereign Risk and Debt Sustainability Framework for Market Access Countries, the mechanical signal from the debt fanchart index has been adjusted to low as the government holds large financial asset buffers exceeding 75 percent of GDP and 100 percent of public debt." - Stress tests: Several stress tests shown; many stress-test panels not activated in gray in the source. Financing provided by banks is measured as the difference of financing needs between baseline and stress scenario, relative to nominal GDP under stress scenario. ### Sovereign assets and liabilities (Annex V summary material extracted in same document) - Sovereign wealth fund (SWF) composition: - SWF consists of the General Reserve Fund (GRF) and the Future Generations Fund (FGF). - Managed by the Kuwait Investment Authority (KIA), which also manages the government’s external borrowing. - As of end-2021, FGF is estimated to have over US$700 billion assets ("about 5 times the size of nominal GDP in 2021"), while GRF was near depletion at that time. - KIA invests globally (Americas, Europe, Asia-Pacific). - GRF and FGF roles: - General Reserve Fund: "main repository of all the state’s oil revenues and income earned from GRF investments; it acts as the state’s treasury account and a stabilization fund." - Future Generations Fund: "an intergenerational savings vehicle. A transfer to the FGF can be made when the budget registers a surplus." Investment income reinvested; no withdrawal allowed from the FGF unless sanctioned by law. - On August 19, 2020, Parliament passed legislation to mandate the transfer of 10 percent of revenues (net of investment income) to the FGF, only in the case of a budget surplus during the same fiscal year. - FX reserves and deposits: - Kuwait’s FX reserves were about 33 percent of GDP (US$45 billion) at end-2021. - Government deposits with commercial banks increased from an average of 10 percent of GDP (2011-2014) to an average of 20 percent (2015-2021). - Government deposits with CBK remained low at around 4 percent of GDP on average (2015-2021). - Pension fund assets (managed by Public Institution for Social Security, PIFSS) estimated at 100 percent of GDP as of 2021. - State-owned enterprises (SOEs) and contingent liabilities: - SOEs, particularly in the energy sector, contributed about 70 percent of government revenue in recent years (2015-19). - The government issued domestic and external debt until 2017. Gross public debt rose from 4.6 percent of GDP in 2011 to 20.5 percent in 2017, and then declined to 8.7 percent in 2021 as debt was repaid when it matured. - Law context: Law No. 50 (1987) authorized borrowing for 10 years; amended by Law No. 3 (1997) to extend to 2017. Restrictions included a debt limit of KD 10 billion; debt issuance maturities maximum 10 years; borrowing operations authorized until 2017. Foreign borrowing allowed by Ministerial Decree No 21 of 2009 with limit KD 5 billion equivalent. Ministerial Decree No. 63 of 2015 authorized CBK and KIA to carry out borrowing on behalf of the ministry of finance (CBK for domestic, KIA for external). - The government issued US$3.5bn 5-year and US$4.5bn 10-year bonds in 2017 and the first tranche of US$3.5bn was repaid in March 2022. - Contingent liabilities from SOEs can be explicit or implicit; adverse shocks to SOEs can increase government liabilities, reduce public net worth, and affect public revenues. - Source sample for SOE performance: S&P IQ corporate data; sample includes 143 publicly listed firms, among which there are 36 SOE firms. SOEs broadly performed well in terms of return to assets (figure presented). ### Key staff commentary points and projections methodology notes - Calendar-year basis: Indicators and projections are calculated on calendar-year basis and differ from fiscal-year cycle calculations (fiscal year runs from April 1 to March 31 of the second year). - Other flows definition: "Other flows include savings into sovereign wealth funds and withdrawals from them." - Residual and other transactions: Other transactions and residual contributions are reported in the public debt projection table (selected values shown above). *Source: Fund staff.* ### 7. The management of sovereign assets and liabilities would best be done under a holistic ### 1kwtea2023001 - 7. The management of sovereign assets and liabilities would best be done under a holistic ### Sovereign Assets and Liabilities Management (SALM) framework: purpose and scope - A Sovereign Assets and Liabilities Management (SALM) framework has significant advantages over separate management of assets and liabilities, helping detect sovereign risk exposures by identifying sources of costs and risks and their linkages from a consolidated public sector portfolio perspective. - A sovereign balance sheet can be constructed for analytical purposes to include: - Assets: SWF, government deposits in the banking system, assets in public enterprises, the foreign exchange reserves of the central bank, and pension fund assets. - Liabilities: public domestic and external debt, central bank liabilities, any unfunded pension schemes, and contingent liabilities. - Example risk insight: individual government entities, including SOEs, may not have large foreign currency debt exposure separately, but the aggregate could warrant risk mitigation measures. ### Implementation, institutional coordination, and alignment with fiscal framework - Implementation requires close collaboration among institutions involved and alignment with the fiscal framework. - Current institutional interactions cited: - The Ministry of Finance (MoF) and the CBK are represented in the KIA Board of Directors. - KIA and CBK are represented at the debt management committee in MoF. - Operational improvements recommended: - Formalize collaboration arrangements at the operational level. - Share data and information across MoF, KIA, and CBK. - Align asset allocation with debt strategies. - Coordinate cash and debt management between MoF, KIA, and CBK. - Fiscal alignment specifics: - SALM must be consistent with the fiscal framework. - The inflow and outflow rules of the SWF should be made consistent with the fiscal rule (Background Note II). - Rules should clearly specify how oil revenue windfalls, when oil prices surprise on the upside, would be spent or saved under the SALM framework. ### Public Debt Law, domestic debt issuance, and debt market development - Enacting a Public Debt Law is essential for orderly fiscal operations and developing the local debt market. - Expected contributions of passing the debt law: - Contribute to a balanced financing mix—allow weighing borrowing versus drawing from GRF, reduce drawdowns from the GRF, allowing it to replenish from its historic low level over the past three years and thus last longer, and help refinance maturing obligations. - The debt law should be passed without an expiration date to avoid interruption to debt management; it can be updated and amended as the situation evolves. - The law should provide sufficient flexibility for adequate debt management and avoid legislating restrictions such as on debt maturities, and size or use of financing, which are best managed at the operational level. - Issuing domestic debt could help catalyze the development of a liquid local-currency debt market, facilitating government funding, improving monetary policy efficiency, creating price references for private sector issuances, and boosting the financial industry. - Medium-term debt management framework needs: - A Medium-Term Debt Management Strategy (MTDS) to link borrowing with macroeconomic policy and outline how the government manages its debt to achieve a portfolio reflecting cost and risk preferences while meeting financing needs. - Strengthen the public debt management legal framework by clarifying: - Scope and coverage of public debt computed toward the debt ceiling. - Borrowing authority of public entities and SOEs that intend to issue debt instruments. - Responsibility for preparing and publishing an MTDS and annual borrowing plans. - Reporting and disclosure requirements to enhance debt transparency. - Additional considerations: - Issuance of domestic debt should consider the cost of debt relative to the expected risk and return on the GRF, impact on the central bank’s foreign exchange reserves, and the capacity of the banking system to absorb government debt without crowding out private credit. - Foreign currency debt abroad could constitute an additional option. - A mix of drawdown of buffers and issuance of domestic and foreign debt likely best balances tradeoffs between costs and benefits. ### Expanding fiscal coverage, SOE governance, and fiscal transparency - Expanding fiscal coverage beyond the central government will promote greater fiscal discipline and transparency and provide a more comprehensive picture of fiscal risks and sustainability of the broader public sector. - Rationale: - Transparency promotes accountability and discipline, improving decision-making. - Incomplete coverage of SOEs in fiscal accounts weakens fiscal analysis and creates incentives to shift fiscal pressures to SOEs, or vice versa, increasing fiscal risks. - Institutional and governance needs: - Develop capacity and governance frameworks to monitor and mitigate fiscal risks from SOEs. - Strengthen corporate governance and prepare a Code of Governance for SOEs based on the OECD guidelines on Corporate Governance of SOEs. - Ensure oversight and reporting mechanisms, strong coordination between entities, and a clear SOE ownership policy that guides the mandate of these SOEs. - Incentive considerations: - Create the right incentives for managers to perform and for government agencies to conduct effective oversight through greater disclosure of data and information. ### Annex VI — Structural reforms for strong and sustainable growth: overview and key challenges - Context: - Kuwait’s abundant oil resources have yielded rapid economic development and social welfare, but growth momentum supported by oil production could dim over the longer term due to global decarbonization. - With ample financial assets, Kuwait can embark on reforms from a position of strength. - Key facts and statistics: - Oil and oil related production accounts for more than 50 percent of real GDP. - The share of the non-oil sector rose from 44 percent of real GDP in 2010 to 46 percent in 2020. - Oil and its related materials dominate total exports with a share of about 84 percent of total exports of goods and services. - Nearly half of the non-oil goods exports are chemicals. - FDI inflows have been lower than 1 percent of GDP through 2020. - There were about 1.5 million expatriate workers in Kuwait by the end of 2022, accounting for 80 percent of total employment. - Nationals accounted for 80 percent of public sector employment as of 2022. - The government wage bill has risen to over 20 percent of GDP in 2022, relative to about 10 percent in 2011. - Based on population structure and participation rates, in a five-year horizon roughly 100,000 young Kuwaitis would be added to the working-age population, and taking account of replacement of retirees, about 64,000 new jobs will need to be created. - The non-oil sector needs to grow by about 7 percent annually—double the IMF baseline forecast—to offer sufficient opportunities to job seekers. - Main economic and structural challenges (three priorities): - Unlock the creative potential of Kuwaitis and incentivize them to seek private sector jobs by addressing the skewness of national labor distribution toward public sector employment and reorienting public resources from large public sector wage bills and complex subsidies toward productive spending on human capital and innovation. - Promote private investment—domestic and foreign—and foster a dynamic private sector to create sufficient high-quality jobs; current constraints include weak competitiveness, a segmented labor market, and restrictions on ownership of local companies that could discourage foreign investment. - Lift competitiveness to support the takeoff of the overall economy by producing high quality goods at relatively lower cost via lower labor costs and/or higher productivity. *IMF staff compiled material in this chapter on sovereign asset-liability management, debt law, public debt management, fiscal coverage, SOE governance, and structural reform priorities as presented in the source document.* ### 10. Implementation of growth-enhancing structural reforms would require broad ### 1kwtea2023001 - 10. Implementation of growth-enhancing structural reforms would require broad ### Need for broad consultation and implementation governance - Consultation with private stakeholders, Parliament, and the public is needed to secure social support and ensure understanding of the necessity, benefits, and the nature of planned reforms. - Consultation and communication should take place regularly, and particularly before major policy actions. - Consideration can be given to establishing a high-level implementation follow-up unit or committee to overview and strengthen reform progress. - Persistent efforts are needed to fully implement comprehensive reforms, which will likely take several years. - No reform design is perfect; focus is required on resolving problems and unexpected challenges as they manifest, while reflecting core principles and objectives of the reform agenda. - Initial reform impacts should be allowed to work their way through the system, addressing new issues as they emerge and utilizing tailwinds for more and deeper reforms. ### Principles for an effective reform agenda - Broad-based reform that tackles challenges from multiple areas within a coherent reform agenda is more effective than a piecemeal approach. - Proper sequencing of policy measures is core to successful reform. - Harmonizing labor market policies should be prioritized alongside reforms to promote private investment, strengthen governance, and improve the business environment. - Labor market reform must be accompanied by social safety net reform to ensure adequate social protection for nationals during the transition period. - Over the medium term, establishing a robust medium-term fiscal framework is needed to avoid procyclical fiscal policies and anchor needed spending rationalization, including greater emphasis on investing in research and development, fostering innovation, and enhancing education. ### Short-term labor market and social safety net reforms (policy recommendations) - Strengthen transparent public sector performance metrics and link them to pay scale and promotion to foster creativity and better job performance; establish clear accountability frameworks. - Gradually align the public sector wage structure with that in the private sector and incentivize nationals to seek private sector jobs; ensure wage growth in the public sector does not outpace that of the private sector. - Gradually eliminate factors that hinder market efficiency and segment private and public labor markets, including limitations on hiring and firing and differential policies for nationals versus expatriates. - Build a social incentive structure that encourages entrepreneurship, private sector employment, and recognition of private-sector career achievements; clearly signal limited future public sector job availability. - Adopt more flexible labor market policies for expatriates to facilitate resource reallocation, attract high-skilled labor, increase productivity, and generate positive spillovers through skills transfer, consumption, and investment. - Deploy temporary policy measures as needed to alleviate transition costs (skills upgrading, retraining, job search assistance); adjust unemployment benefits and coverage periods to labor force needs. - Further encourage women to participate in the workforce and support female entrepreneurs under SME initiatives. ### Social safety net and private investment measures - Streamline and enhance efficiency of social assistance programs; potential savings from fiscal consolidation could support vocational training, job searching, and temporary unemployment benefits. - Reforms to stimulate private investment and job creation should run in parallel with social safety net and labor market reforms. - With a pegged exchange rate, competitiveness hinges on keeping labor cost low relative to productivity; labor market reforms and market-aligned wage structures can contain labor cost and boost competitiveness. ### Measures to strengthen private sector performance and access to finance - Reinforce ease of entry and exit for firms to release resources to more productive uses and establish a transparent level playing field with robust competition policy. - Strengthen market-driven restructuring mechanisms to allow non-viable firms to exit efficiently. - Further develop the Kuwait stock market and local debt market to diversify corporates’ funding sources and support non-oil private sector development. - For SMEs: provide better business incubation support and improved access to credit to facilitate growth and start-up formation; gradually relax the interest rate ceiling on commercial loans while considering development and usage of the credit information database and strengthening lending from the National Fund for SME Development. - Consider a well-designed SME Credit Guarantee Scheme (CGS) to provide third-party credit risk mitigation to lenders and stimulate debt financing to SMEs. ### Governance and business environment reforms - Steadfast implementation of the national anti-corruption strategy would help address corruption and boost market confidence; the anti-corruption authority (Nazaha) established in 2016 is implementing the Kuwait Integrity and Anti-Corruption Strategy 2019-2024. - Strengthening governance supports reform efforts and economic growth by incentivizing productive firms to invest and recruit and by magnifying payoffs from other reforms. - For SMEs, provide incubation support and training on business management for viable firms with limited capacity to grow. ### Medium-term reforms to attract private investment and boost productivity - Consider relaxing restrictions on ownership of local companies to foster greater private investment in the non-oil economy. - Promote development in renewables and green projects to narrow technological gaps and create high value-added jobs. - Build infrastructure and human capital in strategically important industries to enhance attractiveness to private investment. - Improve supply of land for development by introducing market-based and transparent mechanisms for land allocation, aggregating land functions under one agency, developing a complete inventory of land, recovering allocated but unused land, and timely implementing the road map for reform of the land sector. - Invest in human capital: improve spending efficiency in education, enhance education outcomes, expand vocational training, diversify college specializations toward information technology, data science, climate issues and renewable energy, and strengthen research institutions and university–industry collaboration. ### Role of industrial policies - International experience shows diversification away from oil is difficult; GCC countries have used special economic zones, SME funds, development banks, and export promotion agencies with limited results so far. - Industrial policy risks include information asymmetry and rent-seeking; a process of economic self-discovery with strategic cooperation between private and public sectors can elicit information on opportunities and constraints. - Public goods provisioning (public R&D, health, infrastructure, vocational and technical training) is central to successful industrial policy. - Key principles for sustained high growth: (i) support domestic producers in sophisticated industries beyond initial comparative advantage; (ii) export orientation; (iii) pursue fierce competition with strict accountability. ### Quantified long-run gains from structural reform scenarios - Implementing a labor market reform package focused on eliminating restrictions on hiring and firing workers, aligning incentives between public and private sector jobs, linking pay and promotion with performance, and adopting more flexible expatriate policies could raise non-oil output by 5.2 percent in the long run relative to baseline. - Implementing a governance reform package focused on strengthening governance, accelerating the national anti-corruption strategy, ensuring more transparent and streamlined public spending and tax administration procedures, and strengthening protection of property and contractual rights could raise non-oil output by 1.9 percent in the long run relative to baseline. *Source: IMF staff summary of chapter content.* ### 22. It is important to note that the packaging and sequencing of reforms also matter. The ### 1kwtea2023001 - 22. It is important to note that the packaging and sequencing of reforms also matter. The ### Reform packaging, sequencing, and complementarities - Reforms can generate dynamic feedback loops; the above analyses do not factor in dynamic feedback loops among reforms that could potentially amplify output gains. - Reforms that incentivize firm growth (for example, easier labor regulations) tend to work better when accompanied by: - better access to credit, and - strong governance. - Implementing a comprehensive reform package that tackles multiple challenges in the right order could likely generate bigger impacts than the total impacts from a piecemeal approach (see ¶11 of Annex VI). - The model in the empirical analysis represents an ideal reform scenario while average empirical estimates could reflect cases of imperfect reform implementation. ### Conclusion: priorities for diversification and competitiveness - Key policy priorities to promote export diversification and economic complexity: - investing in infrastructure, - investing in education, - investing in R&D, - facilitating bank credit to productive companies, - increasing openness to trade. - Given the recent rapid development of advanced technology, additional priorities include: - adopting and investing in digital technologies, - improving education to prepare and facilitate economic diversification. - Properly sequenced and fully implemented reforms would create a positive feedback loop between: - strengthening competitiveness, - attracting more investment, - generating more job opportunities. - Kuwait’s ample financial assets provide scope to undertake these reforms from a position of strength. ### Key fiscal, monetary, and institutional facts and recent developments - Central Bank policy: - The Central Bank of Kuwait increased the policy interest rate by 25 basis points to 4.25 percent on July 27, 2023. - This action resulted in a cumulative increase of 275 basis points since the global monetary policy tightening cycle began in early 2022. - Fiscal outcomes and budget: - Kuwait registered an overall fiscal surplus (prior to transfer to Future Generations Fund and excluding investment income) of 11.6 percent of GDP in FY 2022/23. - This compares with the estimated 11.4 percent of GDP in the staff report, benefiting mainly from lower-than-estimated current expenditure partially offset by higher-than-estimated capital expenditure. - Parliament approved the FY 2023/24 budget on August 2; it remains largely unchanged relative to the draft budget discussed in the staff report. - IMF membership and quota data (General Resources Account / SDR Department): - Quota: 1933.50 - Percent of Quota: 100.00 - Fund holdings of currency: 1363.02 (70.49) - Reserve position: 570.82 (29.52) - Net cumulative allocation (SDR Department): 3168.75 (100.00) - Holdings (SDR Department): 3203.76 (101.10) - Overdue obligations / forthcoming charges (SDR Million; based on existing use of resources and present holdings of SDRs): - Charges/Interest: 0.04 0.04 0.04 0.04 (Forthcoming 2023 2024 2025 2026 2027) - Kuwait contributions: - Interest-free deposit of SDR 4.2 million maturing in January 2024 to the PRGF-HIPC Trust. - Grant contribution of SDR 0.1 million to the PRGF-HIPC Trust. - Exchange rate arrangement: - De facto: other managed arrangement. - Since May 2007, de jure: conventional peg against an undisclosed currency basket. - Kuwait has accepted the obligations under Article VIII, Sections 2 (a), 3, and 4. - Article IV consultations and FSAP: - Last Article IV consultation completed March 14, 2022 (Country report 22/89—Published March 28, 2022). - FSAP mission took place in 2018; covered banking supervision, financial safety nets, managing systemic risk and liquidity, capital markets development and supervision, and SME access to finance. - Technical assistance since 2014 includes missions on Central Bank Law (January 2014), Tax Policy and Administration (February 2014; September 2015; October–November 2018), Macroprudential Policy (March 2014), Fiscal Rule (February 2015), National Accounts Statistics (March 2015; January 2019), Deposit Insurance System (September 2015), and multiple other FAD/STA/MCM/LEG activities. ICD: Macroeconomic Modelling Forthcoming in 2023. ### Statistical issues, data gaps, and planned improvements - General: Data provision has some shortcomings but is broadly adequate for surveillance. COVID-19 affected compilation and dissemination of national accounts. - National accounts and production: - Annual GDP estimates are derived from a benchmark year of 2010. - IMF TA in January 2019 recommended a household income and expenditure survey and a new establishment census to update the benchmark year and rebase GDP. - CSB completed the household consumption and expenditure survey and the Registration Census of 2021 and plans to use these data to update the benchmark year and rebase the GDP series. - The COVID-19 pandemic affected compilation and dissemination of national accounts—with 2019 being the last annual GDP data and 2020 the last quarterly GDP data. - The CSB is studying methodology to retrieve historical national account data and plans to resume work on collecting and compiling national account data for the missing periods. - GDP by income has reportedly been discontinued. - Areas for improvement discussed with IMF staff include: - methodology for aggregating FISIM into GDP and distribution to activities/sectors, - improving coverage to capture informal sector activities (authorities encouraged to conduct a small-scale survey to measure the non-observed economy in services), - disclosing sources and methods used to estimate individual GDP components. - Price statistics: - CPI published monthly; CPI basket weights revised in June 2017 based on the 2013 HIES. - CSB stopped CPI compilation/publication after April 2021 CPI and resumed publication from September 2021. - PPI covers selected mining and quarrying, manufacturing industries, and utilities; recommended enhancements include updating weights from the 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 and has TA assistance to update classification to GFSM 2014. - Staff encourages expanding coverage of GFS to all general government units—including the Future Generations Fund (FGF) and the General Reserve Fund (GRF) managed by the Kuwait Investment Authority—and resuming timely publication of monthly fiscal accounts data (not published since April 2022). - Data on operations of the Public Institute for Social Security are not made available. - Monetary and financial statistics: - CBK reports sectoral balance sheet data to the Fund based on SRFs, although with some lag. - Kuwait reports several Financial Access Survey 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 BOP and IIP data following BPM6. - CBK expanded coverage of external transactions from 68 percent of entities in 2021 to 83 percent in 2022, achieved consistency between quarterly and annual BOP data starting in 2022, and is expanding remittance coverage. - Published IIP data are incomplete: they exclude external assets held by the general government (except loans by the Kuwaiti Fund for Arab Economic Development and trade credits) because external assets of the FGF and GRF are not reported. - Data on total KIA assets are reported to the Fund by the Executive Director for Kuwait at the time of the Article IV Board meeting. - CBK participates in the CPIS (data from 2003 onwards) and the Coordinated Direct Investment Survey; CPIS data exclude holdings of foreign securities held by government agencies, which comprise the bulk of Kuwait’s cross-border holdings. - e-GDDS and metadata: - In September 2021, Kuwait fully implemented the e-GDDS by launching a National Summary Data Page. Metadata for most data categories were updated in 2021. *Source: KUWAIT — STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (as provided).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1kwtea2023001.pdf_