## _cr04186 ## Source details **Canonical URL:** [_cr04186](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04186.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04186.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04186.pdf.json) --- ### Present setting - Objective: accelerate non-oil growth with financial and monetary stability and maintain intergenerational equity. - Core strategy elements: reduction in the role of the public sector, promotion of private investment, deepening and widening of the financial sector, reform of the labor market, and expenditure restraint. - 2002–03 developments: - Real non-oil GDP growth rose sharply, in part due to reconstruction activity in Iraq. - Overall fiscal surplus rose in 2002/03 to 25 percent of GDP mainly because of higher oil revenues and expenditure restraint. - Overall surplus projected to fall but expected to remain at 19 percent of GDP in 2003/04. - Underlying fiscal stance described as expansionary. - External current account surplus fell in 2002 before rising to about 19 percent of GDP in 2003. - Net foreign assets of the Central Bank of Kuwait (CBK) fell to the equivalent of about eight months of imports in 2002 and are expected to fall further in 2003 due to larger portfolio investments abroad. ### Staff appraisal and policy recommendations - Accelerate implementation of the official reform program to strengthen the fiscal position and create institutional and legal environment for private investment under an appropriately sequenced timetable. - Staff welcomes authorities’ intention to accelerate privatization. - Recommended measures: - Market pricing of publicly supplied goods and services. - Reduction in and targeting of subsidies. - Flexible wages with a cautious Kuwaitization policy. - Steps to increase financial efficiency and strengthened regulation of the securities market. - Fiscal policy guidance: - Fiscal tightening aimed at significant improvement in non-oil deficits through current expenditure restraint and buildup of non-oil revenues. - Strengthen counter-cyclicality of fiscal policy by casting the budget in a medium-term macroeconomic framework with a well-defined fiscal rule. - Data and statistics: - More progress needed in the collection and dissemination of economic data, especially aggregate expenditure, nonfinancial private capital flows, and labor and employment. ### Recent economic developments — key indicators and facts - Oil dependence: - Oil GDP about 45 percent of real total GDP. - Oil constitutes about 90 percent of total exports. - About 70 percent of total revenue derived from the oil sector; 23 percent of total revenue represents investment income. - 2002 outcomes: - Real non-oil GDP growth rose to 5 percent from 3.4 percent in 2001. - Real oil GDP fell by 8 percent because of a 10 percent decline in oil production. - Inflation and unemployment remained low. - Stock market index rose by 39 percent in 2002 after a 27 percent increase in 2001. - 2003 short-term indicators: - Real non-oil GDP growth estimated about 6.5 percent in 2003. - Stock market increase of 80 percent in first nine months of 2003. - Broad money estimated to have risen by about 13 percent in 2003. - Imports increased by 26 percent partly for re-exports to Iraq. - External current account surplus estimated close to 20 percent of GDP in 2003; oil export receipts estimated to have increased by 34 percent. - CBK’s net foreign assets estimated to have declined to the equivalent of less than six months of imports. - Foreign assets of the RFFG projected to have increased by about $8 billion. - Budget surplus in 2003/04 projected to moderate: overall surplus projected to decline to about 19 percent of GDP with an 11 percent increase in expenditures. - Non-oil fiscal deficit expected to rise to about 46 percent of non-oil GDP. - Market capitalization increased by end-September 2003 to over 250 percent of non-oil GDP. - Budget for 2003/04 (based on a low oil price assumption (US$15 per barrel) and excludes investment income) projected a deficit equivalent to 18 percent of GDP. ### Medium-term outlook (2004–08) and risks - Projected macroeconomic position manageable over 2004–08 under current oil price expectations and a cautious policy stance. - Projections: - Overall fiscal surplus expected to decline gradually to about 7 percent of GDP in 2008/09. - External current account surpluses projected to decline gradually to about 9 percent of GDP in 2008. - Growth of real non-oil GDP projected to decelerate to trend levels of about 3 percent per annum effective 2005. - Demographics and labor: - Kuwaiti labor force estimated to increase by about 6 percent per year over the medium term. - Population and labor force as of end-June 2003: population 2.48 million including 914,000 Kuwaitis (37 percent); labor force 1.42 million including 272,000 Kuwaitis (19 percent); 90 percent of Kuwaiti labor force employed in the public sector; unemployment at end-June 2003 at 3.6 percent of total Kuwaiti labor force. - Forecast sensitivity: - Projections highly sensitive to oil price developments and behavior of transfers under the UN Compensation Program; alternative WEO price assumptions could alter projected surpluses and CBK net foreign asset equivalents. ### Fiscal policy: medium-term challenges and measures - Fiscal position projected manageable but must be strengthened to ensure steady increase in wealth per capita; continuation of projected medium-term trends would imply declining wealth per capita effective 2014. - Need to curtail dependence on oil revenues, strengthen counter-cyclicality of expenditures, and improve non-oil growth prospects. - 2003/04 policies: - Expenditure as percentage of GDP contained at 43 percent. - Domestic non-oil revenues small at 4.5 percent of non-oil GDP. - Non-oil deficit relative to non-oil GDP expected to rise to about 46 percent. - Medium-term measures under consideration: - Reduce subsidies through price increases for publicly supplied water and electricity and services including health and education. - Introduce a uniform Corporate Income Tax; planned amended tax law would reduce tax on foreign corporations to 25 percent from 55 percent. - Contain current expenditures by restricting increase in government employment and incentivizing new Kuwaiti entrants to seek private sector jobs. - Strengthen efficiency and productivity of capital spending through clearer priorities. - Consider early introduction of the value-added-tax to strengthen non-oil revenue and facilitate fiscal coordination among GCC members toward planned monetary union by 2010. - Staff estimates: under current policies and assumptions (baseline scenario), unchanged wealth per capita would require additional fiscal effort to shift non-oil deficit/non-oil GDP ratio to about 36 percent in 2008/09 as against 40 percent under the baseline. ### Financial sector soundness and FSAP recommendations - FSAP findings: - Banking sector sound, well regulated, and supervised. - Risk-adjusted capital/assets ratio remained 20 percent. - Total nonperforming loans declined to 7 percent by June 2003 from 10.3 percent in 2001. - Stress tests indicate the banking system could withstand significant shocks. - Key near- and medium-term concerns: financial efficiency, modernization, increased competition, and introduction of new financial products. - Priority FSAP recommendations (selected): - Reduce moral hazard by eliminating blanket deposit guarantees and bailouts. - Enhance CBK independence and powers; conduct consolidated supervision; monitor stock market and real estate lending risks; develop stress testing. - Enact new Capital Markets Law, prohibit insider trading and market manipulation, diversify product lines, liberalize foreign intermediary participation. - Enact new insurance law with modern supervision; strengthen AML/CFT coverage and criminalize financing of terrorism. - Monetary operations: reintroduce marketable central bank paper, simplify liquid asset requirements, broaden government debt instruments for open-market operations. - Payment system: implement RTGS system in compliance with Core Principles. ### Regulatory, supervisory, and liquidity policy changes - Amended Banking Law will strengthen CBK powers including extension of external auditors’ role, authorization for sharing supervisory information, CBK approval for changes in bank ownership, and stiff penalties for noncompliance. - Blanket deposit guarantee to be discontinued over the next three to four months (from time of report). - Liquidity management strengthened effective November 2003: banks required to maintain liquidity ratios within a range of 25–35 percent consistent with each bank’s CAMELS rating. - Mission recommendation: establish a limited deposit insurance scheme to protect small savers for social reasons. ### Structural reforms, privatization, FDI, and labor market policies - Privatization: - Privatization Law awaiting full National Assembly approval; interim privatization where legislative approval not required encouraged. - Accelerated privatization expected to generate demand for long-term financing and deepen capital markets. - FDI: - FDI Law approved allowing full foreign ownership; bylaws for implementation awaited to clarify areas open to foreign investment and 100 percent foreign ownership. - Clarify the “negative list” and ensure level playing field for domestic and foreign investors. - Labor market reforms: - Kuwaitization quotas established September 2002 with ranges from 1 percent (agriculture and construction) to 39 percent (banks); effective October 2003 enforcement measures include fines of KD 100 per excess non-Kuwaiti worker renewing permits and restrictions on doing business with the government. - Off-the-job vocational training financed by a 2.5 percent tax on all share-holding companies operating in Kuwait. - Job search allowances for up to one year for unemployed Kuwaitis registered at least six months. - Extension of social allowances to Kuwaitis employed in the private sector. - Recommendations: - Apply Kuwaitization quotas flexibly to avoid harming private sector competitiveness. - Promote market-based wage flexibility and civil service reforms linking wages to productivity. - Gradual reduction of benefits in a well-defined timetable to reduce fiscal burden. ### Data, transparency, and technical assistance needs - Progress made: - National accounts revised for 1995 and beyond; adoption of SNA 1993. - New CPI based on Household Expenditure Survey for 2000 in place. - CBK and other agencies publishing data online; Kuwait participates in GDDS. - Full functioning of credit bureau Ci-Net since April 2002. - Remaining needs: - Further improvements in aggregate expenditure, nonfinancial private capital flows, FDI, consistency between national accounts and balance of payments, fiscal data coverage and currentness, labor and employment data. - Classification and disclosure of operations of the two reserve funds recommended. - Technical assistance: - Multiple missions and advisory inputs listed across fiscal, monetary, statistical, banking supervision, and reform areas (1992–2002). - Delays in implementing fiscal technical assistance recommendations partly due to regional security concerns; additional assistance conditional on implementation of earlier recommendations. ### Policy priorities and mission recommendations (summary) - Speed up privatization where feasible under existing laws and clarify FDI rules including the “negative list”. - Enact a non-discriminatory corporate income tax and ensure equal access for domestic and foreign investors to domestic financial markets. - Strengthen fiscal position by significant reduction in non-oil deficits via current expenditure restraint and buildup of non-oil revenues; contain wage bill growth and subsidies. - Cast the budget in a medium-term macroeconomic framework with a well-defined fiscal rule and a three-year rolling budget (intended effective 2005/06). - Promote private sector job creation through skills development, early labor market integration, and flexible wages; encourage private sector assumption of allowances and gradual reduction of benefits. - Modernize financial infrastructure, increase competition, introduce new instruments (including Islamic instruments), and accelerate development of corporate bond market linked to privatization. *Source: IMF staff report content as provided in the supplied document.* ### Executive Summary ...................................................................................................... ### _cr04186 - Executive Summary ...................................................................................................... ### Present Setting - Kuwait pursues structural reforms and fiscal strengthening to (a) accelerate non-oil growth with financial and monetary stability and (b) maintain intergenerational equity. - Core elements of the strategy: reduction in the role of the public sector, promotion of private investment, deepening and widening of the financial sector, reform of the labor market, and expenditure restraint. - 2002–03 macro developments: - Real non-oil GDP growth rose sharply, in part due to reconstruction activity in Iraq. - The overall fiscal surplus rose in 2002/03 to 25 percent of GDP mainly because of higher oil revenues and expenditure restraint. - The overall surplus is projected to fall but is expected to remain at 19 percent of GDP in 2003/04. - The underlying fiscal stance will be expansionary. - The external current account surplus fell in 2002 before rising to about 19 percent of GDP in 2003. - Net foreign assets of the Central Bank of Kuwait (CBK) fell to the equivalent of about eight months of imports in 2002 and are expected to fall further in 2003 due to larger portfolio investments abroad. - Medium-term outlook under current oil price expectations and a cautious policy stance: - Projected macroeconomic position weakens but is not expected to pose sustainability issues. - Growth is expected to decelerate and be insufficient to address employment needs. - A steady increase in wealth per capita over the longer term will necessitate stronger fiscal effort. ### Staff Appraisal and Policy Recommendations - Accelerate implementation of the official reform program to strengthen the fiscal position and create the institutional and legal environment for private investment under an appropriately sequenced timetable. - Staff welcomes authorities’ intention to accelerate privatization. - Recommended measures: - Market pricing of publicly supplied goods and services. - Reduction in and targeting of subsidies. - Flexible wages with a cautious Kuwaitization policy. - Steps to increase financial efficiency and strengthened regulation of the securities market. - Fiscal policy guidance: - Fiscal tightening aimed at significant improvement in non-oil deficits through current expenditure restraint and buildup of non-oil revenues. - Strengthen counter-cyclicality of fiscal policy by casting the budget in a medium-term macroeconomic framework with a well-defined fiscal rule. - Data and statistics: - More progress needed in the collection and dissemination of economic data, especially aggregate expenditure, nonfinancial private capital flows, and labor and employment. ### Background and Recent Developments — Introduction - Policy objectives over recent years: - Accelerate non-oil growth and address unemployment pressures via structural reforms in a stable monetary and financial environment. - Further strengthen the fiscal position to maintain intergenerational equity. - Strategy elements reiterated: reduce public sector role via restructuring and privatization; promote private investment including FDI; reform labor market; strengthen fiscal position. - Implementation challenges: - Differences between staff and authorities on the pace of adjustment. - Progress hampered by political consensus difficulties between government and parliament, administrative constraints, and regional uncertainties. - Implementation of Fund technical assistance for public expenditure management and medium-term fiscal planning has lagged partly because of regional security concerns. - The FSAP exercise has been completed. - Political and regional context: - 2003 consultation coincided with accelerating non-oil growth due to Iraqi developments. - New Cabinet installed in August 2003 after July parliamentary elections. - Authorities see improved prospects for accelerating reforms but political consensus building remains time-consuming. - Kuwait committed to providing $500 million to Iraq in 2004, in addition to about $1 billion disbursed in 2003. - Kuwait’s economic assistance to developing countries has amounted to about 2 percent of GDP per year. ### Recent Economic Developments — Key Facts and Indicators - Oil dependence: - Oil GDP is about 45 percent of real total GDP. - Oil constitutes about 90 percent of total exports. - About 70 percent of total revenue is derived from the oil sector, while 23 percent of total revenue represents investment income. - 2002 outcomes: - Real non-oil GDP growth rose to 5 percent from 3.4 percent in 2001, partly due to increased demand associated with Iraqi developments. - Real oil GDP fell by 8 percent because of a 10 percent decline in oil production in line with OPEC-mandated cuts. - Overall real GDP declined slightly. - Inflation and unemployment remained low. - Stock market: index rose by 39 percent in 2002 after a 27 percent increase in 2001. - Fiscal performance 2002/03: - Overall surplus rose to about 25 percent of GDP, reflecting favorable oil market developments in late fiscal year and a decline in current expenditures equivalent to 2.5 percent of GDP. - Wage bill declined slightly as a percent of GDP. - Expenditure on subsidies fell by 1.6 percent of GDP, returning to trend levels after a one-time increase for the housing agency in 2001/02. - Underlying fiscal position weakened slightly: non-oil deficit rose to 44 percent of non-oil GDP because of lower non-oil revenues. - External sector 2002: - External current account surplus fell to about 12 percent of GDP from 24 percent in 2001. - Net investment income declined by 31 percent. - Imports rose by about 15 percent, partly for inventory build up in anticipation of the Iraq conflict. - Overall balance of payments registered a small deficit; CBK net foreign assets declined by 7 percent but remained over eight months of imports. - In addition to CBK assets, substantial official foreign assets are managed by the Reserve Fund for Future Generations (RFFG). - Monetary and financial developments: - Broad money growth decelerated to about 5 percent in 2002. - Net foreign assets declined; credit growth to the private sector remained robust at 11 percent of the beginning stock of broad money. - Much credit expanded into personal consumer loans, real estate, and securities trading. - CBK reduced its discount rate twice in 2002. - Kuwaiti dinar deposit rate differential over the U.S. dollar deposit rate rose to 63 basis points from the historical 50 basis points. - CBK policy instruments include deposit facilities, liquidity ratios, and ceilings on lending rates; unsecured overnight lending facility penalty rate is 10 percent presently; liquid asset requirement: banks required to hold government securities at least equal to 20 percent of private Kuwaiti dinar deposits. - Financial sector soundness: - FSAP confirms banking sector is sound, well regulated, and supervised. - Risk-adjusted capital/assets ratio remained 20 percent. - Total nonperforming loans declined to 7 percent by June 2003 from 10.3 percent in 2001. - About 3 percent of loans extended since the 1991 invasion were nonperforming and fully provisioned. - Banking regulation broadly conforms to the Basel Core Principles (BCP); anti-money laundering law (AML) is in effect. - A credit bureau is now in place. - Stress tests indicate the banking system could withstand significant shocks. - Exchange rate regime and movements: - Kuwaiti dinar depreciated in real effective terms during 2002 and first 10 months of 2003 in line with the depreciating U.S. dollar. - Effective January 2003, Kuwait shifted from pegging to a basket of currencies to a peg with the U.S. dollar with margins of plus/minus 3.5 percent as a step toward the planned GCC monetary union. - External vulnerability indicators remained strong. - Structural reforms and policy measures: - Progress limited due to political consensus constraints. - Privatization Law remains to be approved by the National Assembly. - Private sector encouraged to invest where National Assembly approval is not required, including telecommunications, health, and education. - Foreign Direct Investment law approved allowing full foreign ownership of companies; bylaws required for implementation including clarification of areas open to foreign investment and for 100 percent foreign ownership. - Proposed corporate income tax law lowering tax from 55 percent to 25 percent remains under consideration. - Administered prices of publicly supplied goods and services have remained unchanged. - Effective October 2003, authorities formally implemented Kuwaitization policy to generate employment opportunities for Kuwaiti workers in the private sector. *Executive Summary (_cr04186).* ### 11. Transparency, quality, currentness, and availability of economic data have ### _cr04186 - 11. Transparency, quality, currentness, and availability of economic data have ### Data transparency, quality, and availability - National accounts data revised for 1995 and beyond. - A new consumer price index based on the Household Expenditure Survey for 2000 has been put in place. - Authorities expect to develop a data warehouse in 2004 as an extension of the General Data Dissemination System (GDDS) to allow easy access for users. - More detailed data are now available on nonfinancial private capital flows. ### Structural reforms (Box 2) — objectives and scope - Objective: reduce the role of government, encourage private sector activity, and provide employment for a growing labor force. - Key reform areas: privatization, promotion of foreign direct investment, labor market reform, financial sector deepening. Measures already implemented - National Assembly approved the Foreign Direct Investment (FDI) Law (April 2001) allowing foreigners to own up to 100 percent of Kuwaiti companies subject to certain conditions (previous maximum 49 percent) and offering various incentives to foreign investors. - National Assembly approved the Labor Market Law (May 2000); establishment of Manpower and Government Restructuring Program providing vocational training, job-placement services, and job search allowances to unemployed Kuwaitis. - Social allowance extended to Kuwaitis employed in the private sector. Enforcement of the “Kuwaitization” went into effect in October 2003. - CBK issued instructions to local banks to enhance management and monitoring of operational risks (October 2003), requiring banks to establish a framework to manage operational risks and to disclose information on operational risk management. - Islamic Banking Law approved (June 2003); Islamic banking to be brought under CBK’s supervision effective December 2003. - Full functioning of a credit bureau, Ci-Net, took place in April 2002. - Regulatory and supervisory AML framework developed and strengthened: law criminalizing money laundering (March 2002); AML/CFT regulations to banks and exchange companies; establishment of the Kuwait Financial Intelligence Unit at the CBK (July 2003). - Capital markets measures: opening of a parallel stock exchange; cross-listing agreements with Bahrain, Egypt, and Lebanon; establishment of a guaranteed fund to cover default by brokers (June 2002). - Amendment to the Banking law approved by the National Assembly in January 2004 to allow establishment of foreign banks in Kuwait. Measures to be implemented - Introduction of new products in the stock market planned, including bond trading and derivatives and convertible bonds, expected to be introduced by end-2003. - Lifting of the implicit blanket guarantee on bank deposits is planned. Liquidity ratio modified into a range (25–35 percent) to be applied differentially to banks according to their financial strength. Measures still under consideration or pending - Bylaws for implementation of the FDI Law are awaited. - Government proposed to amend the Tax Law to lower corporate income tax for foreign companies from 55 percent to 25 percent. - Comprehensive Privatization Law approved by the Finance Committee of the National Assembly and awaiting full National Assembly approval; privatization of state enterprises (electricity, water, telecommunications, port) under consideration and will require legislative approval. - Amended Labor Law under consideration; Civil Service Law being revised to streamline public sector employment. - Government considering introducing on-the-job vocational training. - Capital markets: further expansion of cross-listing agreements planned; consideration of liberalizing rules governing nonresident participation and upgrading electronic trading system for real time transactions. ### Labor market reforms (Box 3) I. Kuwaitization - Council of Ministers established quotas (September 2002) for percentages of Kuwaiti workers to be employed by individual non-government entities depending on activity. - Owners of projects may stipulate higher percentages than Council-established quotas. - Quotas range from 1 percent for agriculture and construction to 39 percent for banks. - Starting October 2003, non-government entities not complying with the quota are: - subject to an annual fine of KD 100 for each non-Kuwaiti worker renewing the work permit or obtaining an authorization of a residency, in excess of the permitted maximum percentage; - not allowed to conclude contracts, do business, or negotiate directly with the government; - not eligible for financial or material support provided by government entities (such as disposition, leasing, or allocation of government property). - Exemptions for non-compliance if best efforts unable to hire requisite Kuwaitis or existing long-term contracts prevent changes (examples: education, medical services, agriculture, certain services such as cleaning). - Most companies are complying with the quota requirements. II. Other labor market reforms - Off-the-job vocational training financed by a 2.5 percent tax on all share-holding companies operating in Kuwait. - Job search allowances for a maximum period of one year to unemployed Kuwaiti nationals registered for at least six months as job seekers for private sector jobs. - Extension of social allowances to Kuwaiti workers employed in the private sector, equalizing allowance levels. - Enhanced job-placement services providing matching services for job vacancies and job seekers. ### 2003 macroeconomic conditions and short-term indicators - Real non-oil GDP growth estimated to have picked up briskly to about 6.5 percent in 2003 (spillover effects of developments in Iraq and improved domestic confidence; sharply higher private sector investment). - Stock market registered an increase of 80 percent in the first nine months of the year. - Credit expansion brisk and broad money estimated to have risen by about 13 percent. - Imports increased by 26 percent partly for re-exports to Iraq. - External current account surplus estimated to remain high at close to 20 percent of GDP as oil export receipts estimated to have increased by 34 percent owing to higher prices and output. - CBK’s net foreign assets are estimated to have declined to the equivalent of less than six months of imports. - Foreign assets of the RFFG are projected to have increased by about $8 billion. - Budget surplus in 2003/04 projected to moderate under an expansionary fiscal stance: with oil prices projected to weaken in the last quarter of the fiscal year and an 11 percent increase in expenditures, the overall surplus projected to decline to about 19 percent of GDP. - The non-oil fiscal deficit expected to rise further to the equivalent of about 46 percent of non-oil GDP. - Market capitalization increased by end-September 2003 to over 250 percent of non-oil GDP. - Budget for 2003/04 (based on a low oil price assumption (US$15 per barrel) and excludes investment income) projected a deficit equivalent to 18 percent of GDP (Table 2). ### Medium-term outlook (2004–08) and risks - Macroeconomic position projected to remain manageable over the medium-term (2004–08). - On current expectations for declining oil prices, official foreign asset position, and authorities’ intentions to follow a cautious fiscal policy, budget and external current account surpluses projected to contract. - Overall fiscal surplus expected to decline gradually to about 7 percent of GDP in 2008/09. - External current account surpluses projected to decline gradually to about 9 percent of GDP in 2008. - Growth of real non-oil GDP projected to decelerate gradually effective 2005 to trend levels of about 3 percent per annum as transitory positive impact of Iraqi developments wears out. - Kuwaiti labor force estimated to increase by about 6 percent per year over the medium term. - Population and labor force data as of end-June 2003: population stood at 2.48 million including 914,000 Kuwaitis or 37 percent of total population; labor force totaled 1.42 million including 272,000 Kuwaitis (19 percent of total); 90 percent of Kuwaiti labor force employed in the public sector; unemployment at end-June 2003 stood at 3.6 percent of total Kuwaiti labor force. - Forecasts highly sensitive to oil price developments and behavior of transfers under the UN Compensation Program; alternative WEO price assumptions could alter projected surpluses and CBK net foreign asset equivalents. ### Policy priorities and mission recommendations - Authorities agree twin challenges: accelerate sustained non-oil growth to address unemployment and ensure steady increase in wealth per capita over the longer term; call for speeding up structural reforms and strengthening the fiscal position in a socially acceptable fashion without exacerbating short-term unemployment. - Government announced a three-pronged, four-year Action Program to address structural labor market imbalances, strengthen fiscal position, and enhance private sector role. - Mission emphasized: - Speed up privatization where feasible under existing laws to signal commitment to private sector-led growth. - Clarify rules governing FDI under the Foreign Investment Law, identify the “negative list”, enact a non-discriminatory corporate income tax, and ensure equal access for domestic and foreign investors to domestic financial markets. - Greater focus on skills development, early labor market integration with flexible wages, encourage private sector assumption of allowances and gradual reduction of benefits, and more concerted civil service reforms linking wages to productivity. - Financial sector: continued development of financial infrastructure, modernization of legal and regulatory institutions, increased competition, and introduction of new financial products. ### Financial sector policies and FSAP recommendations (Box 4) - FSAP: no immediate threats to financial stability; stress tests show banking system could withstand significant shocks including stock market-related risks. - Major near- and medium-term concern: financial efficiency rather than stability; need for modernization, increased competition, and new financial products. - Expected implications of amended Banking Law (to be implemented in 2004): - Further deepen financial sector; open market to foreign banks to increase competition and efficiency. - Introduce new instruments including mortgage financing and Shariah-compliant bonds; Islamic instruments to be tradable and marketable and could be used in open market operations under new prudential regulations. - Promote development of corporate bond market alongside government bond market to deepen financial market and provide flexible financing options for private sector; faster growth of corporate bond market linked to accelerated privatization. Priority FSAP recommendations (selected) - General: reduce moral hazard by eliminating blanket deposit guarantees, bank bailouts, and bailouts of investors in stock and real estate markets. - Banking: enhance CBK independence and powers; conduct consolidated supervision; monitor stock market and real estate lending risks; develop stress testing; ease/remove ceiling on lending rates; allow sharing confidential supervisory information with appropriate authorities. - Securities: enact new Capital Markets Law, prohibit insider trading and market manipulation, define entry standards, develop unified prudential code, diversify product lines, liberalize foreign intermediary participation. - Insurance: enact new insurance law with modern supervision framework; strengthen insurance department capacity. - AML/CFT: formally extend Law 35/2002 to cover broad financial sector; enhance ownership control; strengthen international cooperation procedures; criminalize financing of terrorism. - Monetary operations: reduce reliance on banks’ deposits with CBK, use marketable instruments, simplify liquid asset requirements, consider flexibility in the 20 percent liquid asset requirement. - Payment system: continue high priority implementation of RTGS system ensuring compliance with Core Principles. *IMF staff report content.* ### 22. The regulatory, supervisory, and licensing powers of the CBK will be ### _cr04186 - 22. The regulatory, supervisory, and licensing powers of the CBK will be ### Banking regulatory, supervisory, and licensing powers - Amended Banking Law will strengthen CBK powers to include: - extension of the role of external auditors; - authorization for sharing information with other regulatory agencies for supervisory purposes; - approval of the CBK for changes in bank ownership; - stiff financial penalties for noncompliance with laws and regulations. - The blanket deposit guarantee will be discontinued over the next three to four months. - Liquidity management strengthened effective November 2003, requiring banks to maintain liquidity ratios (within a range of 25–35 percent) consistent with each bank’s CAMELS rating. - Purpose of enlarged liquidity ratio range: - contain credit growth; - give less secure banks a larger liquidity margin to meet potential deposit withdrawal resulting from the planned abolition of the blanket guarantee. - Mission recommendation: establish a limited deposit insurance scheme to reinforce liquidity management and to protect small savers for social reasons. - CAMELS methodology: capital adequacy, asset quality, management soundness, earnings, liquidity, and sensitivity to market risk. ### Capital markets and securities regulation - Mission called for a new Capital Markets Law to establish a single independent and accountable authority with full powers to develop and regulate the securities market. - Agreed measures to reduce impact of potential shocks and deepen markets: - introduce bond trading to complement share trading; - encourage development of new products such as derivatives, options, and convertible bonds; - liberalize rules governing nonresident participation under appropriate safeguards against speculative activities. - Authorities will closely monitor bank lending for securities trading to minimize stock market-related risks. - Accelerated privatization of state enterprises expected to generate demand for long-term financing and help deepen the market. - Notes on corporate bond market: equivalent of KD 600 million or 10 percent of non-oil GDP at end-2002 (reflecting limited private sector scope of about 25 percent of GDP). ### Fiscal policy: medium-term challenges and measures - Fiscal position projected to remain manageable over the medium term but must be strengthened to ensure a steady increase in wealth per capita over the longer term; continuation of projected medium-term trends would imply declining wealth per capita effective 2014. - Dependence on oil revenues needs to be curtailed to reduce vulnerability to oil price fluctuations, strengthen counter-cyclicality of expenditures, and improve non-oil growth prospects. - Need for structural strengthening of the budget through reduction in expenditures and an increase in non-oil revenues. - 2003/04 policies: - expenditure as a percentage of GDP will be contained at 43 percent or about the same as in 2002/03; - domestic non-oil revenues will remain small at 4.5 percent of non-oil GDP; - non-oil deficit relative to non-oil GDP is expected to rise to about 46 percent, implying an expansionary fiscal stance. - Medium-term measures under consideration: - Reduce subsidies by increases in prices of publicly supplied water and electricity and services, including health and education. - Introduce a uniform Corporate Income Tax; planned amended tax law would reduce the tax on foreign corporations to 25 percent from the present 55 percent. - Contain current expenditures by restricting the increase in government employment in conjunction with incentives for new Kuwaiti job entrants to seek employment in the private sector. - Strengthen the efficiency and productivity of capital spending based on more clearly defined priorities so as to contain such outlays. - Civil service reform: expedited reduction in current expenditures would entail reduction in public sector employment under a comprehensive civil service reform as an integral part of overall labor policy. - Consideration should be given to an early introduction of the value-added-tax to strengthen non-oil revenue and facilitate fiscal coordination among GCC member countries toward the planned monetary union by 2010. - Authorities intend to target the fiscal position net of exogenous factors through the implementation of a three-year rolling budget effective 2005/06. - Staff estimates: under current policies, population growth rate, and oil price expectations (the baseline scenario), wealth per capita will start to decline from 2014. - Unchanged wealth per capita would require additional fiscal effort to shift the path of non-oil deficit/non-oil GDP ratio to about 36 percent in 2008/09 as against 40 percent under the baseline scenario. ### Monetary policy and exchange system - Authorities intend to follow a cautious monetary policy in 2004 to maintain stability of the exchange rate under an open and free exchange and trade system. - Broad money expected to slow down in 2004 to about 7 percent from about 13 percent in 2003. - Net foreign assets projected to increase somewhat while growth of credit to the private sector would be limited to about 6 percent of the beginning stock of broad money as growth of non-oil GDP starts to return to trend levels. - Money supply will be regulated mainly by adjustments in domestic interest rates and the use of direct bank deposits with the CBK. - Mission recommendations: - reintroduce market-oriented central bank paper for open-market operations, in conjunction with the direct deposits facility, to provide greater flexibility in managing liquidity; - broaden the range of government debt instruments for use in open-market operations to support development of the secondary market; - discontinue lending rate ceilings or adjust them to reflect differential risks to ensure a better allocation of resources. - Outstanding amount of government paper used primarily for monetary management stood at 22 percent of GDP in 2002 and is declining. - Regional integration: - Tariff rates raised slightly to 5 percent effective 2003 in line with the Common External Tariff (CET). - GCC Common Market targeted to come into effect in 2007; steps being taken for policy coordination and convergence for an orderly transition to a planned monetary union by 2010. - Kuwait aims to eliminate duties on imports from other Arab countries by 2005 as part of the Greater Arab Free Trade Agreement. ### Statistical issues and technical assistance - Progress in improving the quality, currentness, and dissemination of economic data: - Monetary, financial, and balance of payments data are timely and adequate for surveillance purposes; - Improvements in national accounts for 2002 with adoption of System of National Accounts (SNA) 1993 and a new establishment survey (2002); - CPI quality and coverage improved with new weights from the household expenditure survey (2000). - Remaining needs for further improvements in statistics, particularly: - aggregate expenditure, nonfinancial sector private capital flows, FDI, and national accounts’ consistency with balance of payments data; - fiscal data coverage and currentness, particularly major components of extra-budgetary revenues and extra-budgetary expenditures; - collection and sharing of labor market data to improve policy formulation for unemployment pressures. - Authorities indicated delays in implementing fiscal technical assistance recommendations due to uncertainties relating to the war in Iraq; staff emphasized that additional technical assistance would be conditional on implementation of earlier recommendations. ### Staff appraisal: priorities and policy advice - Main medium-term challenge: generate sustained increase in non-oil growth and create productive employment for the rapidly growing indigenous labor force while maintaining intergenerational equity. - Required actions: key structural reforms and prudent financial policies to diversify the economy, reduce the role of the public sector, eliminate rigidities (particularly in the labor market), and promote transparency. - Without significant structural reforms, growth rate of non-oil GDP likely to decelerate as transitory impacts wear off, and would be insufficient to meet employment needs. - Authorities should take advantage of strengthened macroeconomic position and private sector buoyancy to step up reforms, focusing on: - further strengthening the fiscal position; - creating the institutional and legal environment to increase private investment under prudent monetary policies with a stable exchange rate; - proper planning, increased coordination, and appropriate sequencing of policies under a well-defined timetable; - wider dissemination of policy imperatives and likely gains of reform measures to aid the reform process. - Privatization and FDI: - Passage of the Privatization Law should be expedited to define the domain for the private sector and establish the legal and institutional framework; - In the interim, identify activities not requiring explicit legislative approval for privatization and pursue early divestiture; - Clarify rules governing FDI under the Foreign Investment Law and establish a level playing field for domestic and foreign investors in access to domestic financial markets and tax treatment; - Early initiation of the North Kuwait oil field development would promote FDI in related sectors. - Structural focus: given limited size of the nontradable sector, prioritize development in the tradable sector including upstream oil and petrochemicals as well as the service sector. - Competitiveness measures: ensure flexible wages and maintain a stable real effective exchange rate. - Prices and subsidies: early transition to full market pricing of publicly supplied goods and services, including water and electricity, recommended to ensure efficient resource allocation and reduce budget burden; targeted subsidies could protect vulnerable groups from increases in cost of living. *Source: IMF staff report content as provided in the supplied document.* ### 39. It is important to ensure continued effective regulation and supervision of the ### _cr04186 - 39. It is important to ensure continued effective regulation and supervision of the ### Financial system regulation, supervision, and crisis preparedness - Findings: - The authorities have succeeded in maintaining financial system stability. - Sound macroeconomic policies, effective banking regulation and supervision, and ongoing efforts to prevent a repetition of earlier bailouts of private investors have been key to this achievement. - The most critical elements of systemic liquidity and crisis management policies are in place. - Stress tests indicate that the banking system could withstand significant shocks. - Some institutions are sensitive to price declines in the equity and property markets, but exposures seem to be manageable. - Kuwait’s regulatory and supervisory framework for anti-money laundering and combating the financing of terrorism (AML/CFT) has recently been strengthened, including through enactment of new legislation, but vulnerabilities remain. - Policy recommendations / ongoing actions: - Authorities have begun to take the necessary corrective steps where institutions show sensitivity to market price declines. - Early action to strengthen regulation and supervision of the securities markets is highly desirable to ensure market integrity, enhance development prospects, and help mitigate large boom and bust cycles. - An improved regulatory infrastructure would also be helpful in the insurance sector. - Remaining AML/CFT vulnerabilities should be addressed promptly. ### Labor market pressures, Kuwaitization, and social benefits - Findings: - Emerging unemployment pressures are being addressed through training to create skills needed by the private sector. - Policy recommendations: - Quotas under the Kuwaitization policy should be applied flexibly to avoid adversely affecting private sector competitiveness. - Gradually reduce benefits to both the public sector and the private sector under a well-defined timetable to reduce burden on the budget. - Promote market-based flexibility in wages for the Kuwaiti workforce to aid integration of segmented labor markets. - Link labor market reforms closely with state enterprise reform and private investment so that private sector job creation aligns with potential public sector job losses, minimizing budgetary costs. ### Fiscal consolidation and structural reform priorities - Findings: - Strengthening fiscal policy is needed to underpin structural reforms. - Stemming the projected decline in budgetary surpluses over the medium term is critical to ensure a steady increase in wealth per capita over the longer term. - Wages and subsidies account for about 60 percent of total expenditures. - Policy recommendations: - Strengthen the structure of the budget to significantly reduce the non-oil deficit. - Reduce outlays on wages and subsidies. - Early implementation of Fund technical assistance recommendations to improve expenditure management is encouraged. - Implement tighter rules governing wage increases associated with civil service reforms. - Upward adjustment in prices of electricity and water toward cost recovery to strengthen the budget and improve resource allocation. - Continue political consensus building to mobilize revenue through introduction of a VAT and a revamped corporate income tax applicable to both foreign and Kuwaiti companies. ### Medium-term fiscal framework and fiscal rule - Findings / recommendations: - Strengthen fiscal counter-cyclicality by casting the budget in a medium-term macroeconomic framework with a well-defined fiscal rule. - Authorities intend to introduce a three-year rolling budget in the period ahead. - The medium-term framework should be based on realistic oil price assumptions and should target a declining non-oil deficit relative to non-oil GDP as a fiscal rule to cushion the impact of oil revenue variability. - The fiscal rule and accompanying medium-term framework should be reviewed periodically given oil price uncertainties. ### Exchange rate regime and monetary policy - Findings: - The authorities’ policy of maintaining a pegged exchange arrangement with the U.S. dollar under an open and liberal exchange and trade system is appropriate as a first step toward the GCC-wide monetary union. - Planned cautious monetary policy stance in 2004 to moderate liquidity growth, consistent with projected growth in the non-oil sector, is appropriate. - Policy recommendations: - Keep CBK’s discount rate in line with those prevailing in the global market and continue using direct bank deposits with CBK to regulate liquidity. - Expand the variety of debt instruments available for open market operations to allow increased flexibility. - Given ceilings on lending rates cannot be eliminated because of difficulties in amending the relevant law, consider adjusting these rates to reflect differential risks. - Consider introducing a limited deposit insurance scheme to at least cover small depositors for welfare reasons. ### Data development and regional coordination - Findings: - Improvements in national accounts and balance of payments data and their reporting are welcomed. - Further improvements are needed on data for aggregate expenditure, nonfinancial private capital flows, FDI, labor and employment, and consistency between national accounts and the balance of payments. - Policy recommendations: - Steps will be needed in coordination with other GCC member countries to develop common and transparent data series as a step toward establishing convergence criteria for the planned monetary union. - Fund technical assistance, perhaps on a GCC-wide basis, would be particularly beneficial. *Source: IMF staff assessment in the specified chapter.* ### 45. It is recommended that the next Article IV consultation take place on the standard ### _cr04186 - 45. It is recommended that the next Article IV consultation take place on the standard ### Article IV scheduling - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Real sector indicators (1997–2003) - Figures presented: Real non-oil GDP; Real oil GDP; Real GDP; Real GDI; Consumer Price Index; Import Prices. - Annual percentage change series plotted for 1997–2003 across the above indicators (graphs provided in source). ### Central government fiscal indicators (1997/98–2003/04) - Fiscal series presented (in millions of Kuwaiti Dinars, unless otherwise indicated): Total Revenue; Total Expenditure; Non-oil revenue; Investment income; Oil revenue; Interest payments; Capital expenditure; Non-interest current expenditure. - Fiscal balance series shown as: Current Balance; Overall Balance (In percent of GDP). - Gross Domestic Debt presented (In percent of GDP). - Time coverage: 1997/98–2003/04. ### External sector developments (1997–2003) - Series presented (In millions of U.S. dollars): Current Account Balance; Trade Balance; Overall Balance; Exports of Goods (Oil Exports; Other Exports); Investment Income; Services (net); Income. - Time coverage: 1997–2003. ### Monetary and financial developments (1997–2003) - Series presented (In millions of Kuwaiti Dinars; unless otherwise indicated): Money and Quasi Money (M3); Quasi Money; Demand Deposits; Currency in Circulation; Claims on Nongovernment; Net Claims on Government; Net Foreign Assets. - Interest rates series: 3-Months Deposit Interest Rates on Kuwaiti Dinars and U.S. Dollars (In percent per anum), with U.S. dollar rates available until 2003, third quarter. - Time coverage: 1997–2003. ### Exchange rate movements - Figure: Exchange Rate Movements, January 1995–October 2003 (1990 = 100). - Series: Nominal Effective Exchange; Real Effective Exchange Rate; U.S. Dollar Per Dinar. - Sources: IMF Information Notice System; Central Bank of Kuwait. ### Stock market indicators (1997–2003) - Indicators (In Percent): Market capitalization/GDP (left scale); Turnover (value of shares traded divided by market capitalization) (left scale); Market index (December 29, 1993 = 1000) (right scale). - Note: 2003 covers January to September. ### Oil prices, fiscal expenditure, and non-oil balance (1982/83–2002/03) - Series (Percent changes): Oil Export Price; Total Expenditure; Non-oil Balance. - Time coverage: 1982/83–2002/03. ### Projected fiscal developments and real per capita wealth (2004–33) - Charts present: Projected Fiscal Balances — Baseline and Adjustment Scenarios Required for Constant Real Wealth Per Capita and Growing Wealth Per Capita (In percent of GDP); Non-oil fiscal deficit (In percent of GDP) — Baseline and Adjustment; Real Wealth Per Capita under Baseline and Adjustment Scenarios (Percent Change). - Time coverage: 2004–33. - Source: Fund staff projections. ### Selected economic indicators, 1998–2003 (Table 1 highlights) - Nominal GDP (market prices, US$ millions): 25,945; 30,077; 37,017; 34,236; 35,333; 42,372 (1998–2003). - Crude oil production (millions barrels per day): 2.05; 1.87; 1.98; 1.95; 1.75; 2.03. - Kuwait crude export price (US$ per barrel): 10.3; 16.1; 25.0; 21.2; 22.9; 25.6. - Real GDP (percent changes): 3.6; -1.7; 1.9; 0.6; -0.4; 9.9. - Consumer price index: 0.1; 3.0; 1.8; 1.7; 1.4; 2.0. - Broad money (percent changes): -0.8; 1.6; 6.3; 12.8; 4.8; 12.5. - Kuwaiti dinar three-month deposits (percent): 5.9; 5.3; 5.4; 3.7; 2.2; 1.5. - Exports (US$ millions): 9,616; 12,225; 19,476; 16,246; 15,365; 20,992. - Imports (US$ millions): -7,715; -6,708; -6,451; -7,049; -8,118; -10,241. - Current account (US$ millions): 2,215; 5,013; 14,672; 8,328; 4,190; 8,046 — In percent of GDP: 8.5; 16.6; 39.6; 24.3; 11.9; 19.0. - International reserve assets (US$ millions): 4,034; 4,928; 7,170; 9,997; 9,256; 7,348 — In months of imports of goods and services: 3.7; 5.0; 7.4; 9.7; 8.3; 5.6. - Total external debt (incl private sector) (US$ millions): 9,938; 10,057; 9,955; 11,095; 12,939; 12,480 — In percent of GDP: 38.3; 33.4; 26.9; 32.4; 36.6; 29.5. ### Public finance summary (selected fiscal-year numbers and projections) - Total revenue (In millions of Kuwaiti dinars) 2000/01–2008/09: 8,505; 6,995; 7,707; 3,397; 7,747; 7,175; 6,837; 6,640; 6,633; 6,714. - Oil and gas revenue (In millions of Kuwaiti dinars): 6,037; 4,525; 5,499; 2,971; 5,340; 4,761; 4,393; 4,158; 4,115; 4,156. - Total expenditure (In millions of Kuwaiti dinars): 4,279; 4,729; 4,848; 5,666; 5,390; 5,487; 5,578; 5,672; 5,758; 5,847. - Overall balance (In millions of Kuwaiti dinars): 4,226; 2,266; 2,765; -2,270; 2,357; 1,688; 1,258; 968; 875; 867. - Overall balance (In percent of GDP): 3.8; 2.1; 24.6; -18.0; 18.6; 13.6; 10.1; 7.7; 6.8; 6.5. - Non-oil deficit/Non-oil GDP (In percent): -33.8; -40.2; -44.0; ...; -46.4; -45.1; -43.7; -42.3; -41.1; -39.8. ### Balance of payments summary and projections (2000–08) - Current account (US$ millions): 14,672; 8,328; 4,190; 8,046; 6,482; 5,973; 5,826; 4,789; 3,957 (2000–08 estimates/projections). - Exports (US$ millions): 19,476; 16,246; 15,365; 20,992; 19,045; 17,107; 16,303; 16,106; 16,296. - Oil exports (US$ millions): 18,184; 14,976; 14,058; 18,784; 16,736; 15,501; 14,632; 14,375; 14,502. - Imports (US$ millions): -6,451; -7,049; -8,118; -10,241; -10,896; -9,950; -10,463; -10,949; -11,458. - Investment income (US$ millions): 6,699; 4,903; 3,359; 4,414; 6,109; 7,013; 8,852; 8,956; 9,055. - Overall balance (US$ millions): 2,241; 2,827; -741; -1,907; 840; 1,003; 1,167; 1,276; 1,286. - International reserve assets (US$ millions): 7,170; 9,997; 9,256; 7,348; 8,188; 9,191; 10,358; 11,634; 12,920. - Current account/GDP (percent): 39.6; 24.3; 11.9; 19.0; 15.6; 14.4; 14.0; 11.3; 9.0. - Overall balance/GDP (percent): 6.1; 8.3; -2.1; -4.5; 2.0; 2.4; 2.8; 3.0; 2.9. ### Monetary survey (1998–2004) — selected levels and growth rates - Broad money (end of period, millions of Kuwaiti dinars): 7,557; 7,678; 8,163; 9,209; 9,646; 10,856; 11,653 (1998–2004). - Foreign assets (net, millions of Kuwaiti dinars): 1,784; 1,899; 2,778; 3,307; 2,930; 2,600; 3,001. - Domestic assets (net, millions of Kuwaiti dinars): 5,773; 5,780; 5,386; 5,902; 6,716; 8,256; 8,652. - Claims on nongovernment sector (millions of Kuwaiti dinars): 5,303; 5,572; 5,871; 6,851; 7,824; 9,613; 10,222. - Broad money (annual percentage change): -0.8; 1.6; 6.3; 12.8; 4.8; 12.5; 7.3. ### Illustrative baseline scenario and selected indicators (1998–2008) - Nominal GDP (KD millions): 7,907; 9,170; 11,357; 10,496; 10,738; 12,696; 12,471; 12,410; 12,482; 12,746; 13,162 (1998–2008 baseline). - Real GDP (percent change): 3.6; -1.7; 1.9; 0.6; -0.4; 9.9; 1.9; 2.7; 2.7; 2.3; 2.4. - Kuwait crude export price (US$ per barrel): 10.3; 16.1; 25.0; 21.2; 22.9; 25.6; 23.5; 21.5; 20.0; 19.5; 19.5. - Fiscal balance (deficit -) (percent of GDP): -2.3; 29.3; 38.7; 21.5; 24.6; 18.6; 13.6; 10.1; 7.7; 6.8; 6.5. - Fiscal balance excluding investment income (deficit -) (percent of GDP): -18.9; 10.0; 20.5; 4.9; 10.2; 4.4; -1.2; -4.9; -7.4; -8.2; -8.2. - Non-oil fiscal balance (in percent of non-oil GDP): -48.7; -34.3; -33.8; -40.2; -44.0; -46.4; -45.1; -43.7; -42.3; -41.1; -39.8. - Current account (percent of GDP): 8.5; 16.6; 39.6; 24.3; 11.9; 19.0; 15.6; 14.4; 14.0; 11.3; 9.0. ### Vulnerability indicators (1998–2003) — selected metrics - REER (CPI based, period average): 3.0; 0.9; 4.1; 5.1; -1.0; -6.8. - External debt including private sector (US$ millions): 9,938; 10,057; 9,955; 11,095; 12,939; 12,480. - External debt/GDP (percent): 38.3; 33.4; 26.9; 32.4; 36.6; 29.5. - Short-term debt (original maturity, US$ millions): 2,600; 2,000; 2,000; 2,000; 2,000; 2,000. - External debt service/total exports of goods and services (percent): 11.5; 7.1; 2.9; 2.6; 2.0; 1.5. - General government domestic debt/GDP (percent) 2/: 54.0; 46.5; 34.9; 35.8; 32.3; 26.4. - Oil revenue/total revenue (percent): 56.9; 70.0; 71.0; 64.7; 71.4; 68.9. - CBK net foreign assets (US$ millions): 3,545; 4,336; 6,535; 9,297; 8,295; 6,508. - CBK gross foreign assets (US$ millions): 3,552; 4,344; 6,547; 9,308; 8,334; 6,575. - In months of imports of goods and services (CBK reserves): 3.2; 4.4; 6.8; 9.0; 7.6; 5.4. - Total official net foreign assets/M3 (percent): 14.3; 17.2; 24.6; 30.9; 26.1; 18.0. - Banks' capital-asset ratio (percent): 11.4; 11.6; 11.5; 11.2; 10.4; 10.8. - Ratio of banks' nonperforming loans to total loans (percent): 10.3; 12.8; 19.2; 10.3; 7.8; 7.0. - Banks' liquidity ratio (percent): 15.5; 17.6; 16.3; 14.8; 14.0; 13.0. - Investment companies' capital and reserve/total assets (percent): 38.6; 39.5; 37.4; 31.5; 31.4; ... ### Fund relations and exchange rate arrangement (Appendix I, as of October 31, 2003) - Membership Status: Joined September 13, 1962; Article VIII on April 5, 1963. - Quota (SDR Million): 1,381.10 (100.00). Fund holdings of currency: 855.36 (61.93). Reserve position in Fund: 525.74 (38.07). - SDR Department: Net cumulative allocation 26.74 (100.00). Holdings 105.33 (393.84). - Outstanding Purchases and Loans: None. - Financial Arrangements: None. - Projected Obligations to Fund: None. - Exchange rate arrangement: - Since January 1, 2003, the Kuwaiti dinar has been pegged to the U.S. dollar. - Previously pegged to a U.S. dollar-dominated basket of currencies. - Central bank normally maintains buying/selling rates for the U.S. dollar at one-sixteenth of 1 percent on either side of the Kuwaiti dinar exchange rate: US$1=KD 0.29387 as of end-October 2003. ### Article IV consultations (timing and status) - The latest Article IV consultation was completed by the Executive Board on December 13, 2002. - The staff report and the associated Selected Issues and Statistical... (text continues in source). *Source: IMF staff report content provided in the supplied PDF excerpt.* ### Appendix were issued in November 2002, Country Report No. 03/13. ### _cr04186 - Appendix were issued in November 2002, Country Report No. 03/13 ### IX. FSAP Participation - A FSAP exercise was conducted in September 2003 to assess three international standards and codes (banking, securities, and AML/CFT). - A FSSA report is currently under preparation and will be discussed by the Executive Board along with the staff report for the 2003 Article IV consultation. ### X. Technical Assistance - Summary: Multiple technical assistance missions and advisory inputs were provided by IMF departments and other entities across fiscal, monetary, statistical, banking supervision, and reform areas between April 1992 and December 2002. - Missions and advisory inputs (agency — topic — timing as listed): - FAD — Advisory mission — April 1992 - MAE — Advice on bank report forms — October 1992 - FAD — Advice on fiscal reform — February–March 1993 - STA — Multi-topic statistics mission — April–May 1994 - FAD — Budget advisor — September 1993–October 1994 - MED — Macroeconomic model — September 1996 - MAE — Early warning system and banks supervision — May 1997 - STA — Balance of payments statistics — November 1998 - MAE — Monetary policy instruments — November 1998 - MAE — Early warning system — December 1998 - MAE — Monetary policy issues — March 1999 - MAE — Bank supervision — April 1999 - INS — Financial programming — April 1999 - MAE — Bank deposit insurance scheme — October/November 1999 - STA — Seminar on GDDS — February 2000 - STA — National Accounts and Price Statistics — June 2001–June 2002 - FAD — Restructuring Budget Processes — January/February 2002 - FAD — Kuwait: A Program for Tax Reform — December 2002 ### XI. Resident Representative - None ### XII. Quota and Articles of Agreement - Kuwait has consented to the quota increase under the Eleventh General Review of Quotas; it has accepted the Fourth Amendment of the Articles of Agreement. ### Relations with the World Bank Group (As of November 30, 2003) — Areas of World Bank technical assistance and engagement - Post-war reconstruction: - In January 1991, the Bank submitted "Kuwait: Emergency Relief Program" including action plans and a framework for reconstruction following liberation. - Privatization: - World Bank study: "Kuwait: A Privatization Strategy, Washington, 1993". - Assisted National Assembly and KIA delegations in 1994-97; advised on draft privatization law; advised KIA on the divestiture phase. - Development strategy: - Country Economic Memorandum (CEM) prepared in 1995 focused on: (i) the role of government and public sector productivity; (ii) fiscal policies and public saving; (iii) welfare and subsidization; and (iv) the labor market and employment policies. - Provided views on draft Five-Year Plan (1996); advised on draft reform plan over 1998–99. - Completed "Energizing the Private Sector" study in early March 2001 with Higher Planning Council and Kuwait University. - In 2002, missions in land policy, power sector reform, telecommunications, transportation, and tourism to identify technical assistance needs. - Reform implementation: - Government requested Bank assistance in implementation and institutional set-up for an implementation agency; exploring mechanisms for more Bank involvement. - Investment environment: - Work on the FDI law; identification of policy and administrative impediments; development of competition law and policy. - Initiated FDI Bylaw and provided technical assistance on the negative restricted list. - Public awareness: - Bank managed a Public Awareness Campaign for the reform agenda beginning April 2001. - Transparency and anti-corruption: - Scoping mission in September 2002 to develop TORs and identify institutions. - Council of Ministers assigned Citizens Services and Governmental Bodies Assessment Agency responsibility for the Transparency and Anti-Corruption Strategy; a working group formed on Bank recommendation. - June (year implied 2003) Bank mission produced "Toward a Comprehensive Transparency and Anti-Corruption Strategy in Kuwait." - Next step: organize a high-level workshop on international experience and strategies currently planned for early 2004. - Small business promotion: - Assistance led to establishment of Kuwait Small Projects Development Company (KSPDC); Bank advising KSPDC on operations. - Labor market and employment generation: - Labor market study (with KISR) completed January 1999; presentation March 1999 to government ministers; some recommendations proposed for legislative approval. - As follow-up, Bank mission in late August 2003 to develop TORs for creating private sector jobs for Kuwaitis. - Education Sector Reform: - Following "Education Expenditure Analysis," agreed focus: (i) indicators for general education system; (ii) introducing program budgeting; (iii) more in-depth financing and school-level cost analysis. - Phase one started; mission visited in late June (year implied 2003); larger mission visited in September 2003. - Health sector: - Missions in October 2002 and January 2003; study (June 2003) covered: (i) developing the National Health Accounts (NHA) and financing the expatriate health insurance system; (ii) hospital accreditation and quality; (iii) regulation of private health insurance; (iv) assessing hospital efficiency; and (v) program budgeting for the health sector. - Telecommunications: - Request in 2002 to develop Sector Reform Strategy and implementation action plan; both completed; government appointed KMPG as advisor on sector reform. - Power and water strategy: - Two draft reports on possible LNG options and reforms in power and water submitted early August (year implied 2003). - Next steps: develop government vision, legal and regulatory framework principles, options for industry restructuring, stakeholder discussions, implementation plan. - Concessions/BOT and Public Private Partnerships: - Concessions Study (early 2002) led to implementation steps and TORs for BOT Manager and Value-for-Money Committee. - PPP project in early definition stages; government considering combining Concessions/BOT activity with planned PPP project. - Land Transport Reform: - Initiative launched July 2002; requested Bank assistance for a Land Transport Sector Reform project with two phases. - Phase I completed August 2002; Phase II completed August 2003 recommended a "Land Transport Regulatory Authority" and private sector participation. - Next steps: finalize regulatory strategy and decrees; structure future industry including Public Transport Corporation (KPTC); prepare transition package for privatization. - Bubyan Port Strategic Assessment: - Pre-feasibility study requested in July (year implied 2003); draft final report provided August 8; project completed September 2003. - Land Policy and Housing Policy: - Land management review submitted October 2002 with action plan. - Housing subsidies study: draft report "A Study of the Housing Benefits Program" delivered last May (year implied 2003). - Competition Policy: - Work began July 2002; report finalized October 2002; letter of invitation and TOR for law firms sent January 2003. - General public reform: - Evaluation of the Offset Program finalized November 2000; ad hoc presentations on WTO issues provided. ### Statistical Issues (Appendix III) - National Accounts and Production: - Central Statistical Office prepared GDP estimates at current and constant prices through 2002 (2002 estimates still provisional). - Improvements: change of base year for constant price data from 1984 to 1995; improved estimates of value-added for subsidized goods and services of public utilities using input costs instead of household expenditure survey. - Estimates published on the Central Statistical Office website. - From final 2002 data, further improvements planned reflecting adoption of SNA 1993 data collection system, a sampling frame based on the establishment survey (2002), and expansion of questionnaire coverage. - Continued progress, especially for oil sector value-added, requires adequate resources and coordination between Ministries of Planning, Oil, and Finance. - STA provided Ministry of Planning technical assistance including a resident expert to evaluate and enhance national accounts and price data. - Recommendation: Central Bank of Kuwait (CBK) should publish oil sector information in the Quarterly Statistical Bulletin (output, refining, domestic consumption, export price for crude and refined products, domestic price of petroleum products) — data available from Ministry of Oil. - Price Statistics: - Household expenditure survey (2000) completed; revised CPI basket finalized by end of 2001. - Improved monthly CPI based on revised basket published in monthly CPI bulletins with about a two months lag. - Wholesale price index (WPI) needs revision to a more modern measure such as a producer price index (PPI). - Consider compiling wage rates and developments in the private sector. - Government Finance Statistics (GFS): - Kuwait reports annual GFS data for GFSY and monthly GFS data for IFS. - Since 1987, Kuwait has not reported major components of extrabudgetary revenues (investment income and transfers of profits of public institutions), extrabudgetary expenditures (interest on foreign debt and treasury paper), and financing operations of two reserve funds. - Data on investment income and on interest on foreign debt and treasury paper are usually provided to Article IV missions. - Lack of suitable classification of budget execution data constrains fiscal monitoring during the year. - Operations of the Public Institute for Social Security are not made available. - Weaknesses stem from limitations on sharing information between government agencies. - STA indicated to authorities that operations of the two reserve funds should be classified as part of government as they perform public policy activities (management of debt and assets, financing of the budget). - Authorities were briefed on IMF’s "Code of Good Practices on Fiscal Transparency" and encouraged to adopt recommended practices. - FAD "Restructuring Budget Processes" (finalized March 2002) found the weakest part of Kuwaiti Public Expenditure Management (PEM) system is the accounting system. - Money and Banking Statistics: - Money and banking data are reported regularly and timely. - Coverage in IFS for deposit money banks and other banking institutions for January 1981 onward was revised per 1994 STA multisector mission recommendations. - Clarification: Savings and Credit Bank (SCB) does not accept transferable deposits from the public; SCB sectorization status remains to be ascertained. - Balance of Payments Statistics: - Substantial improvement in coverage and methodology. - Since beginning of 1997, CBK compiled and disseminated detailed annual data in accordance with BPM5. - Quarterly balance of payments and detailed annual international investment position compiled since 1997 and provided to Article IV missions. - Capital flows of nonfinancial private sector (including foreign direct investment abroad and portfolio investment abroad) are not currently compiled; measures being taken including CBK and Tax Department collaboration to correct omission (large "errors and omissions" item in BOP). - Enhancements made in estimation of travel services; further improvements needed for several service items and private transfers. - Data Dissemination: - Kuwait is a participant in the GDDS; metadata last updated in DSBB in October 2002. - CBK established its own webpage with online public data: money and banking (monthly); balance of payments (annually); trade balance (monthly); exchange rate (average, monthly); GDP by sector and expenditure at current and constant prices (annually); public finance (selected monthly data); CPI and WPI (monthly with about a three-month lag); securities market indicators (quarterly). - Ministry of Planning webpage corresponding to CSO publishes national accounts, prices, and related statistics. - Ministry of Finance webpage includes elaborated data for actual and estimated budget. - KIA webpage provides stock market indices, volume and value of securities traded, privatization schedules, and related information. ### Kuwait: Core Statistical Indicators (as of December 11, 2003) — selected metadata fields - Date of latest observation: - Exchange Rates — 11/03 - International Reserves 1/ — 11/03 - Central Bank Balance Sheet — 11/03 - Reserve/Base Money — 11/03 - Broad Money — 11/03 - Interest Rates — 11/03 - Consumer Price Index — 07/03 - Exports/Imports — 09/03 - Current Account Balance — 2002 - Overall Government Balance 2/ — FY2002/03 - GDP/GNP — 2002 - External Debt/Debt Service 7/ — ... - Date received: - Exchange Rates — 12/03 - International Reserves 1/ — 12/03 - Central Bank Balance Sheet — 12/03 - Reserve/Base Money — 12/03 - Broad Money — 12/03 - Interest Rates — 12/03 - Consumer Price Index — 10/03 - Exports/Imports — 10/03 - Current Account Balance — 10/03 - Overall Government Balance 2/ — 10/03 - GDP/GNP — 10/03 - External Debt/Debt Service 7/ — ... - Frequency of data and reporting: predominantly M (monthly) for monetary series; A (annual) for national accounts and fiscal aggregates; sources include Central Bank of Kuwait (CBK), Central Statistical Office (CSO), and Ministry of Finance. - Notes and confidentiality: - 1/ Central Bank of Kuwait only. Government external assets are confidential. - 2/ Fiscal year data only. - 3/ Higher frequency data available only in national format. - 4/ QSB — Quarterly Statistical Bulletin. - 5/ MMS — Monthly Monetary Statistics. - 6/ U stands for Unrestricted. - 7/ Except for a small volume of trade credits, Kuwait has no public external debt. *Statement by A. Shakour Shaalan, Executive Director for Kuwait February 9, 2004 — Appendix content from Country Report No. 03/13.* ### 1. The Kuwaiti economy has once again coped well with a difficult regional situation and ### 1. The Kuwaiti economy has once again coped well with a difficult regional situation and ### Overview and main findings - Kuwait coped well with regional instability and swings in oil prices due to stability-oriented policies and reforms to diversify the productive base. - Prudent fiscal policy, expenditure restraint, and a sound, well-supervised banking system helped the economy withstand fluctuating oil-related revenues and maintain confidence through the regional conflict period. - Authorities remained committed to structural reforms (labor market reform, privatization, strengthening the financial sector) despite slower-than-expected implementation. ### Growth and sectoral developments - Significant decline in oil GDP growth in 2002 was largely offset by robust, broad-based non-oil sector growth continuing in 2003. - Drivers: stable exchange rate, low interest rates, strong consumer and investor confidence, and resumption of trade relations with Iraq. - Asset market developments: boom in real estate prices, acceleration of the stock market, and sharp increase in domestic credit demand indicate enhanced confidence. - IMF staff estimates/projections and relevant figures: - Real non-oil GDP growth: 5 percent in 2002 (up from 3.4 percent in 2001); about 6.5 percent in 2003 (picked up briskly). - Inflation: about 1.5 percent in 2002. - Stock market index: rose 39 percent in 2002 after a 27 percent increase in 2001. ### Fiscal developments and policy stance - Fiscal prudence anchored by expenditure restraint; current spending-to-GDP ratio broadly unchanged over three years. - In 2002/03, oil revenue increased by some 6 percentage points of GDP while total current spending was reduced by over 2 percentage points of GDP. - Overall fiscal outcomes: - Overall fiscal surplus rose to 25 percent of GDP in 2002/03. - The overall fiscal surplus for 2003/04 is projected to decline to about 19 percent of GDP. - Authorities accumulating foreign assets in the Reserve Fund for Future Generations. - Priority reforms: significant reduction in current spending, improve efficiency of capital outlays, control wage bill by limiting public employment, and better define capital spending priorities. ### Fiscal reform strategy and revenue measures - Ambitious fiscal reform strategy to accelerate financial asset accumulation for future generations and reduce budget vulnerability to oil price shocks. - Key reform elements: - Introduction of a three-year rolling budget effective 2005/06 targeting the fiscal position net of exogenous factors. - Gradual implementation to build broad support. - Policies to reduce public employment and diversify revenue base including eventual introduction of a value added tax. - Consideration of raising tariffs of publicly supplied goods and services for expatriates and Kuwaitis. - Reform corporate income tax to extend coverage to domestic companies and eventual introduction of the value added tax. - Planning to strengthen budget and expenditure management in line with Fund technical assistance. ### Monetary policy and exchange rate - Monetary policy remained prudent, aimed at maintaining exchange rate stability under an open exchange and trade system. - Deposit auctions used by the Central Bank of Kuwait (CBK) to manage domestic liquidity. - Authorities moved to a peg with the US dollar as a step toward establishing a Gulf Cooperation Council monetary union in 2010. - CBK policy actions and stance: - CBK will monitor domestic interest rates and adjust its discount rate in line with global developments to maintain an interest rate differential on domestic currency-denominated assets. - CBK maintained a cautious monetary stance in 2004 to align money and credit growth with non-oil activity expansion. - CBK reduced its discount rate twice in 2002, down to 3.25 percent. - Kuwaiti dinar-U.S. dollar deposit rate differential rose slightly to 63 basis points compared with the historical 50 basis points. - Real effective exchange rate: depreciated by about 1.5 percent. ### Financial sector soundness and capital markets - Banking system: highly liquid, well capitalized, regulated, and supervised; improved financial soundness indicators (notably decline in non-performing loans and increased provisioning). - 2003 supervisory and regulatory improvements: - Adoption of a comprehensive regulatory and supervisory system in accordance with international standards and practices. - Enhanced risk management and information disclosure; establishment of a credit bureau. - Legislation enacted to bring all Islamic banks under CBK supervision, including licensing. - Amended Banking Law (approved January) to strengthen CBK licensing power, deepen the financial sector with new instruments, enhance efficiency and competition, and allow establishment of foreign banks in Kuwait. - Capital markets: - Deepening through opening of a parallel stock market. - Consideration being given to introducing options, derivatives, and convertible bonds. - Financial Sector Assessment Program (FSAP) completed; FSAP highlighted systemic liquidity and crisis management elements in place. - Authorities strengthened regulatory and supervisory framework for combating money laundering and terrorism financing. ### Structural reforms, privatization, and FDI - Four-year action plan to reduce state role and create a business environment to attract private investment and FDI. - Privatization law (awaiting National Assembly approval) will provide framework to divest major state enterprises including water, electricity, telecommunications, and ports. - In the interim, authorities promote private sector participation in activities not requiring National Assembly approval (oil sector areas, health, communications, education). - Foreign direct investment law approval allows 100 percent foreign ownership in Kuwaiti companies and provides incentives for foreign investors (implementation requires clarification, including the “negative list”). - Proposed corporate tax reform: reduce corporate income tax from 55 to 25 percent on foreign businesses and apply it uniformly on Kuwaiti and foreign companies. ### Labor market reform - Labor reform is a pillar to reduce state role and absorb growing labor force. - Measures to encourage private employment: - Extension of social allowances to the private sector to integrate the labor market and make private jobs more attractive. - Program for vocational training, job search allowances for the unemployed, and enhanced job placement services. - Kuwaitization policy (effective October 2003): quotas for percentages of Kuwaiti workers in non-government entities to generate private-sector employment. - Directors urged flexible application of Kuwaitization to avoid adverse competitiveness effects and emphasized market-based wage flexibility and civil service reforms linking wages to productivity. - Recommendation to rationalize benefits in both public and private sectors and link labor market reforms to state enterprise restructuring. ### Data, transparency, and dissemination - Improvements made: - Adoption of the System of National Accounts. - Revision of the consumer price index to reflect new weights from a recent household expenditure survey. - Shortened lag for releasing national accounts and CPI data. - Ministry of Finance, Ministry of Planning, and the Central Bank publishing economic data on their web sites. - Authorities committed to continue data development per Fund technical assistance recommendations. ### Executive Board assessment and recommendations - Directors commended cautious macroeconomic policies that produced sizeable fiscal and external current account surpluses, comfortable net foreign reserves, and low inflation. - Main challenges identified: - Accelerate non-oil growth to absorb the growing labor force and maintain intergenerational equity. - Reduce budgetary dependence on oil revenue. - Directors’ recommendations included: - Accelerate reforms to reduce state involvement, promote private investment, and improve labor market functioning. - Early passage of the Privatization Law; in the meantime, divest activities not requiring explicit legislative action. - Clarify FDI rules (including the “negative list”) and establish level playing field for domestic and foreign investors (access to domestic financial markets and tax treatment). - Early enactment of a non-discriminatory corporate income tax. - Apply Kuwaitization flexibly and promote market-based wage flexibility; pursue civil service reform linking wages to productivity. - Rationalize worker benefits to minimize budgetary burden. - Strengthen capital market regulation and supervision (including creation of a single, independent regulatory agency). - Encourage development of new financial products and liberalize nonresident participation rules. - Continue to strengthen central bank independence to boost credibility. - Adjust lending rate ceilings to reflect differential risks and consider a limited deposit insurance scheme for social welfare reasons. - Work with regional partners toward introduction of the value added tax to boost non-oil revenue. - Implement fiscal policy within a medium-term macroeconomic framework using a three-year rolling budget and target a declining non-oil deficit relative to non-oil GDP based on realistic oil price assumptions. ### Selected economic indicators and key statistics (as presented) - Real GDP (percent change): 1998: 3.6; 1999: -1.7; 2000: 1.9; 2001: 0.6; 2002: 1.8 - Real oil GDP (percent change): 1998: 1.8; 1999: -6.5; 2000: 2.3; 2001: -3.2; 2002: 5.2 - Real non-oil GDP (percent change): 1998: 5.2; 1999: 2.2; 2000: 1.8; 2001: 3.4; 2002: 5.0 - Consumer price index (percent change): 1998: 0.1; 1999: 3.0; 2000: 1.8; 2001: 1.7; 2002: 1.5 - Total revenue (in percent of GDP): 1998: 46.4; 1999: 68.7; 2000: 77.8; 2001: 66.3 - Oil and gas revenue (in percent of GDP): 1998: 26.4; 1999: 46.7; 2000: 55.3; 2001: 42.9 - Total expenditure (in percent of GDP): 1998: 48.7; 1999: 39.5; 2000: 39.2; 2001: 44.8 - Overall fiscal balance (in percent of GDP): 1998: -0.8; 1999: 1.6; 2000: 6.3; 2001: 12.8; 2002/03: 25 percent of GDP - Change in broad money supply (in percent): 1998: -0.4; 1999: -8.0; 2000: 5.0; 2001: 1.4; 2002: 5.0 - Interest rate (three-month Kuwaiti dinar deposits, in percent): 1998: 5.9; 1999: 5.3; 2000: 5.4; 2001: 3.7; 2002: 3.25 percent (discount rate reduced twice in 2002 to present 3.25 percent) - External sector (in millions of U.S. dollars): - Exports, f.o.b.: 1998: 9,616; 1999: 12,225; 2000: 19,476; 2001: 16,246; 2002: 15,365 - Crude oil and refined products: 1998: 8,470; 1999: 11,027; 2000: 18,184; 2001: 14,976; 2002: 14,058 - Imports, c.i.f.: 1998: -7,715; 1999: -6,708; 2000: -6,451; 2001: -7,049; 2002: -8,118 - Current account balance: 1998: 2,215; 1999: 5,013; 2000: 14,672; 2001: 8,328; 2002: 4,190 - Current account balance (in percent of GDP): 1998: 8.5; 1999: 16.6; 2000: 39.6; 2001: 24.3; 2002: 11.9 - Central Bank of Kuwait’s international reserves (millions USD): 1998: 4,034; 1999: 4,928; 2000: 7,170; 2001: 9,997; 2002: 9,256 - Reserves in months of imports: 1998: 3.7; 1999: 5.0; 2000: 7.4; 2001: 9.7; 2002: 8.3 - Real effective exchange rate (percent change): 1998: 3.1; 1999: 0.9; 2000: 4.2; 2001: 5.1; 2002: -1.5 _International Monetary Fund — Public Information Notice (PIN) No. 04/12 — IMF Concludes 2003 Article IV Consultation with Kuwait_ --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04186.pdf_