## _cr05231 - Executive Summary

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### Current setting
- Real GDP grew at an average rate of 8.5 percent during 2003–04.
- Real non-oil GDP growth: 5.5 percent in 2004.
- Inflation: less than 2 percent.
- Per capita income increased by 34.5 percent during 2003–04 to $19,560 in 2004.
- Unemployment rate: about 3.5 percent.
- Kuwaiti stock price index: more than doubled in 2003 and increased by 34 percent in 2004.
- Population (June 2004): 2.6 million; labor force: 1.6 million; foreign workers: nearly two-thirds of population and four-fifths of labor force.
- Immigrant labor force increased by about 30 percent during 2000 to end-June 2004.

### Policy discussions — key messages and recommendations
- Fiscal stance and long-term sustainability:
  - Overall fiscal position projected to remain in comfortable surplus over the medium term; staff cautions about sustainability of rapid budgetary spending increases.
  - Recommend strengthening budget structure through containment of the wage bill and rationalization of transfers.
  - Managing large and growing savings for future generations will be key to long-term fiscal viability.
- Non-oil sector and external orientation:
  - Non-oil exports surged post-Iraq war, but sustainability from a low base remains a challenge.
  - Authorities aim to position Kuwait as a regional trading hub, increase petrochemical investment, and pursue GCC integration.
- Monetary and financial sector:
  - Monetary management succeeded in maintaining price stability and the exchange rate peg.
  - Credit expansion outpaced deposit growth; an 80 percent ceiling on the ratio of bank loans to deposits was imposed in July 2004 to manage systemic risk.
  - Authorities intend to abolish the ceiling once domestic credit expansion stabilizes.
  - Significant progress in strengthening financial sector institutions and implementing FSAP recommendations.
- Structural reforms and labor market:
  - Progress on structural reform has been made but at a slow pace.
  - Kuwaitization policy: sector-specific quotas and training of unemployed Kuwaitis.
  - Staff calls for limiting public sector hiring to essential areas, linking public sector wages to productivity, and rationalizing public sector benefits.
- Data and statistics:
  - Progress in dissemination of financial and fiscal data; further efforts needed to address weaknesses in national accounts, customs data, CPI/WPI timeliness, and other areas.

### Real sector indicators (2003–04)
- Real GDP growth: average 8.5 percent for 2003–04.
- Real non-oil GDP growth: 5.5 percent in 2004.
- Per capita income: increased by 34.5 percent over 2003–04 to $19,560 in 2004.
- Unemployment rate: about 3.5 percent.
- Inflation: less than 2 percent.
- Stock market: index more than doubled in 2003 and rose 34 percent in 2004.

### Fiscal developments
- Central government budgetary position:
  - Annual fiscal surpluses around 20 percent of GDP.
  - Oil revenues increased by 33 percent during 2003–04.
  - Non-oil domestic revenues declined in nominal terms, mainly due to declining Gulf war-related U.N. compensation payments.
- Fiscal stance and composition:
  - Expansionary in 2003/04 and 2004/05; much of higher oil revenue spent on government programs.
  - In 2003/04, almost 90 percent of the increase in hydrocarbon revenues were spent on goods and services, subsidies and transfers, wages and salaries, and capital projects.
  - Half of the increase in hydrocarbon revenues expected to be saved in 2004/05.
  - Wages and salaries, and subsidies and transfers estimated to have accounted for almost 70 percent of current expenditures.
  - Non-oil primary deficit as a percent of non-oil GDP increased by 8.3 percentage points during 2003–04 to 59.3 percent in 2004.
- Reserves and saving:
  - Most fiscal surplus transferred to the Reserve Fund for the Future Generation (RFFG) and the General Reserve Fund (GRF), enabling rapid asset buildup since the 1990 Gulf war.

### External sector developments
- Current account and trade:
  - External current account surplus more than doubled in relation to GDP over 2003–04.
  - Exports grew at an annual rate of 33.6 percent due to surge in oil and non-oil exports; non-oil exports and re-exports to Iraq increased sharply.
  - Imports increased sharply, driven by accelerating domestic activity and re-exports to Iraq.
  - Services account deficit widened but was more than offset by higher investment income.
- Capital flows and reserves:
  - Much of the current account surplus invested abroad by public and private sectors, contributing to large capital account outflows.
  - CBK external reserves: declined by $1.7 billion in 2003, then increased by $0.7 billion to about $8.4 billion (5.7 months of imports) by end-December 2004.
- Exchange rate and competitiveness:
  - Depreciation of the U.S. dollar and low domestic inflation contributed to a 9 percent depreciation of the dinar in real effective terms during January 2003–October 2004.

### Monetary and financial developments
- Monetary policy and interest rates:
  - CBK discount rate stable at 3.25 percent in 2003; later raised on five occasions since July 2004 by 150 basis points to 4.75 percent by end-December 2004; further raised by 25 basis points to 5.25 percent on March 23, 2005.
  - Interest rates on three-month KD deposits stable at about 1.5 percent in 2003; spread between KD and U.S. dollar deposit rates at domestic banks remained in the range of 60–80 basis points.
- Liquidity and credit:
  - Record low interest rates, abundant liquidity, and increased trade with Iraq facilitated a 21 percent increase in credit to the private sector in 2003.
  - Credit expansion outpaced deposit growth; average net credit to deposits ratio as of end-September 2004 was 78.6 percent.
  - Ceiling on credit(net of provisions) to deposits at 80 percent imposed in July 2004; banks given until June 2005 to comply fully.
  - Introduction of ceiling contributed to deceleration of credit expansion to 15.3 percent over the 12-month period through end-December 2004.
  - Credit to the private sector grew 18.9 percent since the introduction of the ceiling (compared with an annual rate of 9.4 percent in the previous 19 months).
  - Ratio of credit to the private sector to total deposits declined from 87 percent in July 2004 to 81.3 percent in March 2005.
  - Banks shifted toward foreign assets; NFA of commercial banks increased by 107 percent since the introduction of the ceiling to more than US$5 billion by end-March 2005.
  - Interbank deposits declined by 78 percent during August 2004 through March 2005 because interbank funding is not eligible for meeting the new ceiling.
- Banking sector soundness:
  - 2003 FSSA conclusion: Kuwaiti banks were well capitalized and liquid.
  - Capital adequacy ratio (CAR) as of end-September 2004: 17.3 percent. Minimum regulatory CAR: 12 percent.
  - CAR declined by 2.4 percentage points between January 2003 and September 2004, primarily due to credit expansion.
  - Nonperforming loans ratio fell from 7.8 percent as of end-2002 to 5.4 percent by end-September 2004.
  - Net profits increased by 21.2 percent in 2003 and a further 10 percent in the first three quarters of 2004; return on equity 20.4 percent as of end-September 2004.
- Institutional reforms:
  - Blanket guarantee on bank deposits removed in April 2004; CBK started discussions to introduce a limited deposit insurance scheme.
  - Legal amendment to Law 32/1968 passed January 2004 allowing branches of foreign banks.
  - Minimum capital for local banks increased from KD 3 million to KD 75 million.
  - Limit of 5 percent on a bank’s capital ownership concentration established.
  - CBK supervisory authority extended to Islamic banks; regulatory framework strengthened in consultation with the Islamic Financial Services Board.
  - Draft Capital Markets Law and new Insurance Law under review; RTGS payment system fully operational since August 2004.
  - AML/CFT: National Committee reorganized April 2004; amendments to Law 32/1968 enabled information sharing with foreign AML/CFT authorities.

### Structural reforms and labor market measures
- Foreign Investment Law (2003): allows foreigners to own up to 100 percent of Kuwaiti companies (in listed sectors).
- Draft Privatization Law and amendment to Tax Law (lower foreign corporate income tax from 55 percent to 25 percent) awaiting parliamentary approval.
- Private sector participation allowed in sectors previously dominated by public sector; entities for privatization being identified.
- Kuwaitization policy (since October 2003):
  - 3,000 Kuwaitis trained; 25 percent of them hired by the private sector.
  - Enforcement of new sector-specific quotas resulted in 8,000 Kuwaitis being hired by the private sector (equivalent to 0.6 percent of the total labor force and about 3 percent of the total Kuwaiti labor force in 2003; total labor force in Kuwait was 1.45 million in 2003).
- Staff recommendations:
  - Encourage market-based pricing of publicly provided goods and services.
  - Foster FDI inflows; treat domestic and foreign companies equally for tax purposes.
  - Appropriate pricing of electricity, petroleum products, and water; consider targeted subsidies for low-income families.
  - Reform FDI law to reduce discretion and expedite approvals; make Foreign Investment Bureau independent and operational.
  - Apply Kuwaitization cautiously; limit public sector hiring to essential areas; link wages to productivity; rationalize benefits; continue sector-specific quotas flexibly.

### Oil sector and investment plans
- Authorities plan medium-term investments to boost capacity, including rehabilitation of existing refineries, adding a new refinery, and increasing oil production capacity to 4 million barrels per day by 2020.
- North Fields development expected to add some 480,000 barrels per day to capacity; draft law to be submitted to parliament with approval expected in 2005.
- Production trajectory noted:
  - Production of crude oil increased to 2.5 million barrels per day in recent months.
  - Capacity expected to increase to 2.6 million barrels per day in 2005 and steadily to 3 million barrels per day by 2009.
- Projects noted to increase export capacity: Equate II project, and aromatics and styrene plants by 2008.
- IMF staff update (April 25, 2005):
  - WEO oil price projection revised upward by $9–11 per barrel over the medium term (2005–09) relative to staff report assumptions.
  - Resulting projections:
    - Overall fiscal surplus projected to be 34 percent of GDP in 2005/06 (compared with 24.7 percent of GDP reported in the staff report).
    - External current account surplus projected to be more than 40 percent of GDP in 2005 (8.5 percentage points higher).
  - Kuwait produced 2.6 million barrels per day in March 2005; authorities indicate possible increase to 2.75–2.8 million bpd by end-2005.

### Near- and medium-term outlook and risks
- 2005 projections:
  - Real GDP projected to slow to about 3 percent.
  - Gross national income expected to increase, boosted by higher investment income from abroad (10 percent of GDP).
- Medium term (2006–09) projections:
  - Economic and financial positions projected to remain strong; external current account and fiscal positions to remain in large surplus but at declining levels, mainly reflecting projected fall in oil prices.
  - Baseline envisages modest pickup in gross domestic investment, supported by higher private investment, but insufficient to create jobs at required pace.
  - Investment income outlook to improve significantly because of higher interest rates, contributing an additional 1.5–2 percent of GDP to projected gross disposable income each year.
- Downside risks:
  - Substantial volatility and downside risks to oil price projection.
  - Staff scenario: on assumption of an oil price $5 per barrel below the present WEO medium-term oil price projection (about one standard deviation below baseline), fiscal surplus in relation to GDP would be 6 percentage points lower than baseline in 2005/06, steadily declining to a surplus of only 6 percent of GDP by 2009/10.
  - Current account surplus would decline by 5–7 percentage points in relation to GDP over the medium term to reach 17.8 percent.

### Fiscal sustainability concerns and recommended adjustments
- Fiscal strategy observed: part distribution of oil wealth to current generation while building financial assets for future generations (10 percent of all government revenue set aside for the RFFG; fiscal surpluses saved in the GRF).
- Public sector employment and expenditure:
  - Employment in the public sector accounted for more than 80 percent of Kuwaiti labor force in 2003.
  - Wages, salaries, subsidies, and transfers estimated at 59 percent of government expenditure in 2003/04.
- Non-oil deficit concerns:
  - Current high non-oil deficit is unsustainable; unchanged fiscal stance risks exhausting accumulated reserves within the next 25 years and buildup of debt afterward.
  - Non-oil deficit noted at 60 percent of non-oil GDP.
- Staff recommendations:
  - Strengthen budget structure through expenditure containment, rationalization of transfers, and revenue measures along the baseline medium-term fiscal scenario.
  - Medium-term fiscal stance envisages reduction in non-oil primary deficit in relation to non-oil GDP by 11 percentage points to historically normal levels.
  - Allow greater flexibility for higher allocations to health, education, and infrastructure, while permitting accelerated accumulation of financial assets for future generations.
  - Implement stricter controls on new public hiring and rationalize subsidies and transfers (which accounted for more than 25 percent of total expenditure in 2003/04), targeting them to low-income families.
  - Complete deliberations on utility tariff rationalization in the next two years.
  - Implement FAD technical assistance recommendations to improve public expenditure management and formulate fiscal policy in the context of a macroeconomic framework and a three-year rolling budget (authorities hoped to have rolling budget in place by 2006/07).
  - Consider harmonization of tax structures among GCC countries and introduction of a VAT at a low basic rate in coordination with other GCC countries.
- Sustainability analyses:
  - PIH and standard debt sustainability analysis indicate that unchanged fiscal policy stance is unsustainable under reasonable assumptions.
  - Under PIH, the net primary deficit starts exceeding permissible levels from 2009 onwards if expenditure relative to non-oil GDP remains unchanged.
  - Debt sustainability analysis: net financial asset position positive for first 20 years of simulation but rapidly declines after 2012 and turns into net debt by 2030.
  - Staff’s possible fiscal adjustment scenario: 1½ percentage points of non-oil GDP in discretionary measures each year over the long term to ensure a stable debt to GDP ratio.

### RFFG assets and asset management
- Kuwait has built up sizable investment abroad; assets likely to build up faster due to higher oil revenue.
- Investment income of the RFFG is already significant and will assume greater importance over time.
- Safeguard arrangements: internal and external audits, oversight by KIA Board of Directors, and parliamentary oversight.
- Authorities and staff concur that efficient management of these assets will be key to Kuwait’s long-term fiscal sustainability.

### External sector policy and regional integration
- External balance comfortable over medium term but heavily dependent on oil exports; domestic non-oil exports about 3 percent of GDP.
- Post-Iraq-war surge in non-oil exports driven by petrochemical products and re-exports to Iraq.
- Regional integration:
  - GCC common external tariff at 5 percent since early 2003.
  - GAFTA tariff cuts accelerated: in 2004 tariff rates cut further by 20 percent; all import duties eliminated in January 2005.
  - Preparations for envisaged monetary union include common data standard and common fiscal accounting framework to facilitate convergence criteria by 2005.

### Statistical issues and recommendations
- Data adequacy:
  - Monetary, financial, and fiscal data (non-GFS format) updated regularly and widely disseminated.
  - Weaknesses and delays identified in national income and customs data, CPI, and WPI.
  - CBK uses its own foreign trade estimates to publish BOP statistics due to customs data delays.
- Staff recommendations:
  - Expedite collection and computerization of customs data for national accounts and BOP compilation.
  - Improve coverage of fiscal data relating to investment income, transfers of profits of public institutions, and interest payments on treasury bills and bonds.
  - Adopt common data standards across sectors in collaboration with GCC countries for planned monetary union convergence criteria.
  - Fund technical assistance, possibly on a GCC-wide basis, would be beneficial.

### Staff and Executive Board appraisal — findings and recommendations
- Commended authorities for strong economic rebound, record expansion since the 1990 Gulf war, large fiscal and current account surpluses, and price stability.
- Major medium-term challenges: generating employment for fast-growing Kuwaiti labor force and diversifying the economy.
- Recommended actions (selected):
  - Accelerate structural reforms and expedite passage of Privatization Law and Tax Law amendment.
  - Broaden private sector participation and allow private sector lead in infrastructure projects.
  - Target subsidies better; impose strict controls on new hiring; avoid using public sector as employer of last resort.
  - Reduce significantly the non-oil fiscal deficit.
  - Implement efficient management of savings funds and protect investments for long-term fiscal sustainability.
  - Implement a three-year rolling budget by 2006/07 and strengthen public expenditure management.
  - Consider tax reforms in context of GCC union, including eventual introduction of VAT.
  - Keep exchange rate peg unchanged until GCC monetary union established; remain open to regime choice under union.
  - Abolish loans-to-deposits ceiling once credit stabilizes; strengthen risk-based prudential ratios; secure legal basis for supervisory authorities.
  - Continue AML/CFT progress and improve information sharing.
  - Apply Kuwaitization flexibly and promote market-based wage flexibility.
  - Improve timeliness and transparency of national income, price indices, customs, and petroleum-related data; adopt common data standards with GCC countries.

### Selected quantitative indicators (preserved exactly as in source, selected)
- Real GDP: average 8.5 percent (2003–04).
- Real non-oil GDP: 5.5 percent in 2004.
- Per capita income: $19,560 in 2004 (34.5 percent increase over 2003–04).
- Non-oil primary deficit (in percent of non-oil GDP): 59.3 percent in 2004.
- Central government budgetary surpluses: around 20 percent of GDP.
- CBK external reserves: about $8.4 billion (5.7 months of imports) by end-December 2004; international reserve assets listed as 8,359; 8,923 (annual series).
- CAR as of end-September 2004: 17.3 percent (regulatory minimum 12 percent).
- Banks’ nonperforming loans ratio: 5.4 percent by end-September 2004.
- Banks’ return on equity: 20.4 percent as of end-September 2004.
- Credit growth:
  - Private sector credit increased by 21 percent in 2003.
  - Credit expansion decelerated to 15.3 percent (12-month through end-December 2004).
  - Credit to private sector grew 18.9 percent since introduction of the ceiling (compared with an annual rate of 9.4 percent in the previous 19 months).
  - Credit to private sector annual rate averaged 7.4 percent during August 2004–March 2005 (IMF update).
- Oil and gas exports (US$ billions, 2000–05): 18.2; 15.0; 14.1; 19.0; 26.0; 28.4.
- Average oil export price (US$/barrel, 2000–05): 25.0; 21.2; 22.9; 25.5; 31.8; 34.5.
- Crude oil production (millions of barrels/day, 2000–05): 1.98; 1.95; 1.75; 2.11; 2.30; 2.32.
- Share of oil GDP in total GDP (percent, 2000–05): 53.4; 47.5; 45.2; 51.2; 55.7; 56.4.
- Nominal GDP (market prices, KD billions, 2000–05): 11.3; 10.4; 10.7; 12.4; 15.3; 16.5.
- Broad money growth (percent change): 6.3; 12.8; 4.8; 7.8; 10.8; 4.4 (annual series).
- Current account (US$ millions, 2000–05): 14,671; 8,328; 4,250; 7,318; 15,098; 17,825.
- Current account/GDP (percent, 2000–05): 39.8; 24.5; 12.1; 17.5; 29.1; 31.8.
- Memorandum exchange rate parity: 0.29963 KD/US$ (3.33745 US$/KD) within a margin not exceeding 3.5 percent on both sides of this parity exchange rate.

*Source: _cr05231 - Executive Summary.*

### Executive Summary ......................................................................................................

### _cr05231 - Executive Summary

### Current Setting
- Reflecting sharply higher oil prices and production, economic conditions improved significantly in 2003 and 2004.
- Real GDP grew at an average rate of 8.5 percent during 2003–04, the highest pace in the preceding decade and a half.
- Non-oil GDP growth increased to 5.5 percent in 2004, supported by spillover effects of renewed trade relations with Iraq.
- Inflation remained low at less than 2 percent.
- Per capita income increased by 34.5 percent during 2003–04 to $19,560 in 2004.
- The Kuwaiti stock price index more than doubled in 2003 and increased further by 34 percent in 2004.
- Kuwait’s population was 2.6 million and labor force 1.6 million in June 2004; foreign workers comprised nearly two-thirds of the population and four-fifths of the labor force.
- The immigrant labor force increased by about 30 percent during 2000 to end-June 2004.

### Policy Discussions — Key Messages and Recommendations
- Fiscal stance and long-term sustainability:
  - Overall fiscal position projected to remain in comfortable surplus over the medium term, but staff cautions about sustainability of rapid budgetary spending increases.
  - Recommend strengthening the structure of the budget through containment of the wage bill and rationalization of transfers.
  - Managing large and growing savings for future generations will be key to long-term fiscal viability.
- Non-oil sector and external orientation:
  - Non-oil exports surged post-Iraq war, but sustainability from a low base remains a challenge.
  - Authorities aim to position Kuwait as a regional trading hub, increase petrochemical investment, and pursue GCC integration to sustain non-oil output and exports.
- Monetary and financial sector:
  - Monetary management succeeded in maintaining price stability and the exchange rate peg.
  - Credit expansion outpaced deposit growth; authorities imposed a ceiling on the ratio of bank loans to deposits at 80 percent in July 2004 to manage systemic risk.
  - Authorities intend to abolish the ceiling once domestic credit expansion stabilizes.
  - Significant progress achieved in strengthening financial sector institutions and implementing FSAP recommendations.
- Structural reforms and labor market:
  - Progress on structural reform has been made but at a slow pace.
  - Kuwaitization policy: sector-specific quotas and training of unemployed Kuwaitis.
  - Staff calls for limiting public sector hiring to essential areas, establishing links between public sector wages and productivity, and rationalizing public sector benefits.
- Data and statistics:
  - Progress made in dissemination of financial and fiscal data; further efforts needed to address data weaknesses in a number of areas.

### Background and Recent Developments
- Structural reform objectives since 2000:
  - (a) accelerate non-oil GDP growth;
  - (b) generate employment for Kuwaiti nationals at a fast pace;
  - (c) ensure fiscal surpluses to maintain intergenerational equity.
- Progress and implementation:
  - Financial sector institutional framework strengthened; implementation of some FSAP recommendations.
  - Preparations underway to implement a three-year rolling budget by 2006/07 in line with FAD mission recommendations.
  - Efficient mechanisms for transferring oil wealth and strengthened public expenditure management highlighted as key for long-term fiscal sustainability.
- Historical context and strategy (Box 1 highlights):
  - 1990 invasion shifted economy toward a larger public sector, reduced non-oil exports and private investment, and contributed to secular declines in productivity measures including TFP.
  - Authorities’ policy response includes opening the economy, improving investment climate, reestablishing Kuwait as a regional trading hub, developing petrochemical industry, developing North Fields oil reserves with possible private participation, increasing oil sector investment, and phasing structural reforms including updating laws and regulations.

### Real Sector Indicators (2003–04)
- Real GDP growth: average 8.5 percent for 2003–04.
- Real non-oil GDP growth: estimated 5.5 percent in 2004.
- Per capita income: increased by 34.5 percent over 2003–04 to $19,560 in 2004.
- Unemployment rate: about 3.5 percent during the period.
- Inflation: less than 2 percent.
- Stock market: index more than doubled in 2003 and rose 34 percent in 2004.

### Fiscal Developments
- Central government budgetary position:
  - Annual fiscal surpluses around 20 percent of GDP.
  - Oil revenues increased by 33 percent during 2003–04.
  - Non-oil domestic revenues declined in nominal terms, mainly due to declining Gulf war-related U.N. compensation payments.
- Fiscal stance:
  - Expansionary in 2003/04 and 2004/05; much of higher oil revenue spent on government programs.
  - In 2003/04, almost 90 percent of the increase in hydrocarbon revenues were spent on goods and services, subsidies and transfers, wages and salaries, and capital projects.
  - Half of the increase in hydrocarbon revenues expected to be saved in 2004/05, but growth in spending projected to be higher than in the preceding year.
  - A portion of spending increase attributable to security-related outlays and a one-time transfer to citizens.
  - Wages and salaries, and subsidies and transfers estimated to have accounted for almost 70 percent of current expenditures.
  - Non-oil primary deficit as a percent of non-oil GDP increased by 8.3 percentage points during 2003–04 to 59.3 percent in 2004.
- Reserves and saving:
  - Most fiscal surplus transferred to the Reserve Fund for the Future Generation (RFFG) and the General Reserve Fund (GRF), enabling rapid asset buildup since the 1990 Gulf war.

### External Sector Developments
- Current account:
  - External current account surplus more than doubled in relation to GDP over 2003–04.
  - Exports grew at an annual rate of 33.6 percent due to surge in oil and non-oil exports; non-oil exports and re-exports to Iraq increased sharply.
  - Imports increased sharply, driven by accelerating domestic activity and re-exports to Iraq.
  - Services account deficit widened due to higher travel and transportation payments but was more than offset by higher investment income.
- Capital flows and reserves:
  - Much of the current account surplus invested abroad by public and private sectors, contributing to large capital account outflows.
  - Central Bank of Kuwait (CBK) external reserves: declined by $1.7 billion in 2003 (due to banks drawing down excess remunerated reserves at CBK), then increased by $0.7 billion to about $8.4 billion (5.7 months of imports) by end-December 2004.
- Exchange rate and competitiveness:
  - Depreciation of the U.S. dollar and low domestic inflation contributed to a 9 percent depreciation of the dinar in real effective terms during January 2003–October 2004, correcting prior appreciation (1995–2002) and enhancing non-oil export competitiveness.

### Monetary and Financial Developments
- Monetary policy:
  - Consistent with maintaining the exchange rate peg and price stability.
  - CBK discount rate stable at 3.25 percent in 2003.
  - Interest rates on three-month KD deposits stable at about 1.5 percent.
  - Spread between KD and U.S. dollar deposit rates at domestic banks remained in the range of 60–80 basis points.
- Liquidity and credit:
  - Record low interest rates, abundant liquidity, and increased trade with Iraq facilitated a 21 percent increase in credit to the private sector.
  - Credit expansion continued at a pace much faster than growth of the deposit base, prompting the 80 percent loan-to-deposit ceiling imposed in July 2004.
  - Broad money growth accelerated by 3 percentage points to 7.8 percent in 2003, as private sector credit demand was only partially offset by a decline in net credit to government.
- Financial sector reforms:
  - Authorities underscored need for firm actions on financial stability and intend to remove loan-to-deposit ceiling once credit expansion stabilizes.
  - Significant progress reported in strengthening financial sector institutions and implementing FSAP recommendations.

*Source: _cr05231 - Executive Summary.*

### 7.      Monetary conditions tightened in the second half of 2004, as a consequence of

### 7.      Monetary conditions tightened in the second half of 2004, as a consequence of

### Monetary conditions and credit policy
- The CBK raised the discount rate on five occasions since July 2004, by 150 basis points to 4.75 percent by end-December 2004.
- In July 2004, the authorities imposed a ceiling on the ratio of credit (net of provisions) to deposits at 80 percent.
- Banks have until June 2005 to comply fully with the ceiling.
- The average net credit to deposits ratio as of end-September 2004 was 78.6 percent.
- The introduction of the ceiling contributed to a gradual deceleration of credit expansion to 15.3 percent over the 12-month period through end-December 2004.
- Policy motivation: in response to the rise in the U.S. Federal Funds rate and to widen the interest rate spread in favor of the KD to attract KD deposits.

### Banking sector soundness and financial sector institutional reforms
- 2003 FSSA conclusion: Kuwaiti banks were well capitalized and liquid, with no imminent threat to the stability of the banking system.
- Capital adequacy ratio (CAR) as of end-September 2004: 17.3 percent.
- Minimum regulatory CAR: 12 percent.
- CAR decline: declined by 2.4 percentage points between January 2003 and September 2004, primarily due to the expansion of credit.
- Asset quality: nonperforming loans ratio fell from 7.8 percent as of end-2002 to 5.4 percent by end-September 2004.
- Profitability: net profits of banks increased by 21.2 percent in 2003 and a further 10 percent in the first three quarters of 2004, raising return on equity to 20.4 percent as of end-September 2004.
- Banking system size and structure (as of end-2004): asset base KD19 billion (125 percent of GDP); accounts for about 75 percent of the assets of the financial system; eleven banks operating; one state-owned (2 percent market share), one foreign-owned (about 1 percent market share), and two Islamic banks (the second largest bank accounting for 6 percent of market share, and a new bank licensed in October 2004).

Institutional developments (salient measures implemented)
- General: blanket guarantee on bank deposits removed in April 2004; CBK started discussions to introduce a limited deposit insurance scheme.
- Banking law and supervision:
  - Legal amendment to Law 32/1968 passed January 2004 allowing establishment of branches of foreign banks; BNP Paribas authorized to open a branch.
  - Legal changes enable CBK to exchange information with foreign supervisors; CBK supervisory staff inspected foreign subsidiaries of Kuwaiti banks.
  - Minimum capital for local banks increased from KD 3 million to KD 75 million.
  - A limit of 5 percent on a bank’s capital ownership concentration was established, beyond which CBK authorization is needed.
  - CBK’s supervisory authority extended to Islamic banks; regulatory framework strengthened in consultation with the Islamic Financial Services Board.
  - Authorities’ self-assessment: Kuwait’s financial regulation and supervision is currently compliant or largely compliant with all Basel Core Principles (BCP).
- Securities: draft Capital Markets Law creating a single, independent and accountable authority is under review by the Ministry of Finance.
- Insurance: new Insurance Law drafted and submitted to the Ministry of Finance; training of about 20 insurance supervisors has begun.
- Payment system: RTGS payment system fully operational since August 2004; exposure limits assigned to participating institutions.
- AML/CFT: National Committee for AML/CFT reorganized in April 2004; amendments to Law 32/1968 enabled sharing information with foreign AML/CFT authorities; draft executive order extending AML/CFT oversight onto the broad financial sector prepared and under review by the Ministry of Finance.

### Structural reforms and labor market measures
- Foreign Investment Law (allows foreigners to own up to 100 percent of Kuwaiti companies) came into effect in 2003.
- Draft Privatization Law and an amendment to the Tax Law (lower the corporate income tax that applies only to foreign companies from 55 percent to 25 percent) awaiting parliamentary approval.
- Private sector participation allowed in sectors previously dominated by the public sector; entities for privatization being identified under existing laws.
- Kuwaitization policy (in place since October 2003): training of unskilled Kuwaiti nationals and enforcing quotas by imposing penalties.
  - 3,000 Kuwaitis have been trained; 25 percent of them have been hired by the private sector.
  - Enforcement of new sector-specific quotas resulted in 8,000 Kuwaitis being hired by the private sector (equivalent to 0.6 percent of the total labor force and about 3 percent of the total Kuwaiti labor force in 2003; total labor force in Kuwait was 1.45 million in 2003).

### Near- and medium-term outlook and risks
- 2005 projections:
  - Real GDP projected to slow to about 3 percent.
  - Gross national income expected to increase, boosted by higher investment income from abroad (10 percent of GDP).
- Medium term (2006–09) projections:
  - Economic and financial positions projected to remain strong; external current account and fiscal positions to remain in large surplus but at declining levels, mainly reflecting projected fall in oil prices.
  - Baseline envisages modest pickup in gross domestic investment, supported by higher private investment, but still insufficient to create jobs at required pace.
  - Investment income outlook to improve significantly because of higher interest rates, contributing an additional 1.5–2 percent of GDP to projected gross disposable income each year.
- Downside risks:
  - Outlook based on historically high oil price and output assumptions; substantial volatility and downside risks to oil price projection.
  - Staff scenario: on assumption of an oil price that is $5 per barrel below the present WEO medium-term oil price projection (equivalent to about one standard deviation below the baseline), fiscal surplus in relation to GDP would be 6 percentage points lower than in the baseline scenario in 2005/06, steadily declining to a surplus of only 6 percent of GDP by 2009/10.
  - Current account surplus would decline by 5–7 percentage points in relation to GDP over the medium term to reach 17.8 percent.

### Fiscal policy, sustainability concerns, and recommended adjustments
- Fiscal strategy: distribution of part of oil wealth to current generation (public employment, subsidies, transfers) combined with building financial assets for future generations (10 percent of all government revenue set aside for the Reserve Fund for Future Generations (RFFG); fiscal surpluses saved in the General Reserve Fund).
- Public sector employment and expenditure:
  - Employment in the public sector accounted for more than 80 percent of Kuwaiti labor force in 2003.
  - Wages, salaries, subsidies, and transfers estimated at 59 percent of government expenditure in 2003/04.
- Non-oil deficit concerns:
  - Current high level of the non-oil deficit cannot be sustained long term; unchanged fiscal stance risks exhausting accumulated reserves within the next 25 years and buildup of debt afterwards.
  - Non-oil deficit noted at 60 percent of non-oil GDP (very high by international and historical Kuwaiti standards).
- Staff recommendations:
  - Strengthen the structure of the budget through expenditure containment, rationalization of transfers, and revenue measures along the baseline medium-term fiscal scenario.
  - Medium-term fiscal stance envisages a reduction in the non-oil primary deficit in relation to non-oil GDP over the medium term by 11 percentage points to historically normal levels.
  - Allow greater flexibility for higher allocations to health, education, and infrastructure, while permitting accelerated accumulation of financial assets for future generations.
  - Implement stricter controls on new public hiring and rationalize subsidies and transfers (which accounted for more than 25 percent of total expenditure in 2003/04), targeting them to low-income families.
  - Complete deliberations on utility tariff rationalization in the next two years.
  - Implement FAD technical assistance recommendations to improve public expenditure management and formulate fiscal policy in the context of a macroeconomic framework and a three-year rolling budget (authorities hoped to have rolling budget in place by 2006/07).
  - Consider harmonization of tax structures among GCC countries and introduction of a VAT at a low basic rate in coordination with other GCC countries.
- Sustainability analyses:
  - Permanent Income Hypothesis (PIH) and standard debt sustainability analysis indicate that the unchanged fiscal policy stance is unsustainable with reasonable assumptions on global oil prices, growth rates, inflation rates, and nominal rates of return on financial assets.
  - Under PIH, the net primary deficit starts exceeding permissible levels from 2009 onwards if expenditure relative to non-oil GDP remains unchanged.
  - Debt sustainability analysis: net financial asset position positive for first 20 years of simulation but rapidly declines after 2012 and turns into net debt by 2030.
  - Staff’s possible fiscal adjustment scenario: 1½ percentage points of non-oil GDP in discretionary measures each year over the long term to ensure a stable debt to GDP ratio.

*Source: Data provided by the Kuwaiti authorities; and Fund staff estimates and projections.*

### 18.      Proper safeguard arrangements and efficient management of RFFG assets will

### _cr05231 - 18.      Proper safeguard arrangements and efficient management of RFFG assets will

### RFFG assets and fiscal sustainability
- Kuwait has built up a sizable investment abroad despite the 1990 Gulf war; assets are likely to be built up at a faster pace in the coming years because of higher oil revenue.
- Investment income of the RFFG is already significant and is likely to assume greater importance over time.
- Safeguard arrangements in place: internal and external audits of the investment accounts, oversight by the Board of Directors of the Kuwait Investment Authority, and oversight by parliament.
- Authorities and staff concur that efficient management of these assets will be key to Kuwait’s long-term fiscal sustainability.

### Monetary policy, financial sector policy, and exchange system
- The Kuwaiti dinar has been officially pegged to the U.S. dollar since January 2003.
- Authorities did not foresee a change in the exchange rate policy in the period leading up to the establishment of the GCC monetary union by 2010.
- Staff view: the peg is sustainable; recent real effective exchange rate depreciation and surge in non-oil exports indicate competitiveness is maintained.
- Limit on loans to deposit ratio:
  - Introduced for prudential considerations due to growth in loans to deposits ratio during the past three years.
  - Expected to be abolished once domestic credit expansion stabilizes at a sustainable pace.
  - Staff endorsed the measure’s effectiveness in containing systemic risk but warned of medium-term negative implications for financial sector profitability and resource allocation.
  - Staff recommended addressing prudential concerns via strengthening of risk-based prudential ratios once credit expansion stabilizes.
  - Authorities concurred that the ceiling should be abolished once required ratios are achieved and domestic credit expansion stabilizes.
- Sector-specific lending rate ceilings:
  - Staff concerned they could be binding and interfere with efficient resource allocation, particularly combined with the credit-to-deposit ceiling.
  - Authorities noted ceilings were mandated by law and were not binding for corporate lending rates after recent rate increases.
- Legal and institutional reform:
  - Staff underscored importance of two draft laws to provide legal basis for independence of the Capital Markets Authority and Insurance Supervision Authority and hoped for speedy legislation by parliament.

### Structural reform
- Authorities pursuing a multi-pronged strategy to accelerate implementation of structural reforms and open the economy further, including public awareness programs.
- Staff recommendations:
  - Encourage market-based pricing of publicly provided goods and services.
  - Foster FDI inflows into Kuwait and improve the investment climate to boost private investment.
  - Treat domestic and foreign companies equally for tax purposes.
  - Appropriate pricing of electricity, petroleum products, and water to encourage private sector growth, ensure efficient allocation of resources, and reduce budget burden; targeted subsidies could be considered to protect low-income families from increases in cost of living.
  - Establish regulatory framework and institutional arrangements to protect against monopolies.
  - Reform current FDI law which stipulates a high degree of discretion and a lengthy approval process; the law lacks a clear “negative list.”
  - Make the Foreign Investment Bureau independent and fully operational.
- Kuwaitization and labor market:
  - Staff called for cautious application of Kuwaitization policy and intensified efforts to raise skills of the Kuwaiti labor force.
  - Current policy of guaranteed public sector employment raises reservation wages and disincentivizes private-sector skill acquisition.
  - Staff recommended: limit public sector hiring to essential areas; establish links between public sector wages and productivity; rationalize public sector benefits; continue sector-specific quotas flexibly.

### Oil sector and investment plans
- Authorities plan medium-term investments to boost capacity in response to higher global demand for oil.
- Plans include rehabilitation of existing refineries, adding a new refinery, and increasing oil production capacity to 4 million barrels per day by 2020.
- North Fields development expected to add some 480,000 barrels per day to Kuwait’s production capacity; a draft law for this was to be submitted to parliament with approval expected in 2005.
- Staff encouraged timely and transparent data on petroleum reserves, production, exports, and inventories, including participation in the Joint Oil Data Initiative.
- Production trajectory noted:
  - Production of crude oil increased to 2.5 million barrels per day in recent months.
  - Capacity expected to increase to 2.6 million barrels per day in 2005 and steadily to 3 million barrels per day by 2009.
- Projects noted to increase export capacity: Equate II project, and aromatics and styrene plants by 2008.

### External sector policy and regional integration
- External balance of payments outlook comfortable over the medium-term but heavily dependent on oil exports; non-oil export base is very narrow.
- Much of post-Iraq-war surge in non-oil exports due to petrochemical products and re-exports to Iraq; domestic non-oil exports about 3 percent of GDP.
- Authorities view potential for further export growth as strong due to new petrochemical investments and efforts to be a regional trading link; regional trade and economic integration prioritized.
- Regional integration progress:
  - GCC common external tariff at 5 percent rate in effect since early 2003.
  - Negotiations ongoing among GCC countries to prepare a common prohibited-items list for security and religious reasons.
  - Preparations for envisaged monetary union include identifying issues for a common central bank, establishing a common data standard and common fiscal accounting framework to facilitate adoption of macroeconomic convergence criteria by 2005, and identifying other harmonization needs.
  - GAFTA tariff cuts accelerated: in 2004 tariff rates were cut further by 20 percent; all import duties were eliminated in January 2005.
- External assistance and debt initiatives:
  - Kuwait Fund for Arab Economic Development (KFAED) made loan commitments of KD 126.3 million (1.1 percent of GDP) in 2002/03 to finance 15 projects in 14 countries.
  - Authorities agreed in principle to cut Iraqi debt owed to Kuwait (estimated at $8.2 billion, excluding the U.N. war compensation) by 80 percent in line with Paris Club terms.
  - Kuwait committed to provide $500 million to Iraq in 2004 for infrastructure projects and an additional $60 million for health and education projects.
  - Kuwait committed $100 million to victims of the recent tsunami in Asia and disbursed the full amount of its commitment to the HIPC Trust Fund (SDR 4.3 million).
  - Kuwait announced a freeze on repayment of about $763 million of loans extended to six Asian countries affected by the tsunami.

### Statistical issues
- Kuwait’s data are adequate for surveillance purposes, with monetary, financial, and fiscal data (non-GFS format) updated regularly and widely disseminated.
- Weaknesses and delays identified:
  - Reporting delays on national income and customs data, the consumer price index, and the wholesale price index.
  - CBK uses its own estimates of foreign trade data to publish balance of payments statistics due to customs data delays.
  - Authorities are preparing to expedite collection and computerization of customs data for national accounts and balance of payments compilation.
- Staff recommended:
  - Improve coverage of fiscal data relating to investment income, transfer of profits of public institutions, and interest payments on treasury bills and bonds.
  - Adopt common data standards across all sectors in collaboration with other GCC countries to ensure compliance with convergence criteria for the planned monetary union.
  - Fund technical assistance, perhaps on a GCC-wide basis, would be particularly beneficial.

### Staff appraisal — macroeconomic and policy assessment
- Economic rebound and macro position:
  - Kuwait recorded a strong economic rebound and strengthened its macroeconomic position due to higher oil output and prices.
  - Highest pace of economic expansion since the 1990 Gulf-war, boosted per capita income and asset accumulation for future generations at a record pace.
  - Large external current account and fiscal surpluses, rapid public sector asset buildup, and continued price stability support potential private sector-led non-oil activity.
  - Major remaining challenge: generating employment opportunities for the fast-growing Kuwaiti labor force in the domestic private sector, requiring faster private-led non-oil growth over the medium term.
- Fiscal outlook and recommendations:
  - Fiscal position projected to remain comfortable over the medium term with continued sizeable surpluses, but sharp increase in the non-oil deficit in recent years is a concern.
  - Recent pace of expenditure growth unsustainable; increasing relative size of public sector and wage bill undermines objective to increase private sector role.
  - Recommended cornerstone of medium- and longer-term fiscal strategy: strengthen budget structure through expenditure containment and rationalization of transfers to reduce significantly the non-oil deficit.
  - To reduce non-oil primary deficit in relation to non-oil GDP to historically normal levels and move to a long-term adjustment path, require: better targeting of subsidies; strict controls on new hiring; not using the public sector as “employer of last resort.”
  - Emphasized need for efficient management of Kuwait’s large and fast-growing savings funds and protection of investments for long-term fiscal sustainability.
- Financial sector and supervision:
  - Prudent monetary policy supported the exchange rate peg and price stability.
  - Strong non-oil export growth and recent significant real effective depreciation indicate competitiveness is not a problem.
  - Continued rapid expansion of credit for three successive years and strong surge in stock prices pose some risks; authorities implemented steps to stem unsustainable credit expansion.
  - Limit on loans to deposit ratio should help contain credit expansion in line with deposit base, but administrative ceilings constrain market-based operations; staff recommends abolishing ceiling once credit stabilizes and strengthening risk-based prudential ratios.
  - Kuwaiti banking system judged financially sound, well managed, and effectively supervised; staff commended progress in liberalization and prudential regulation, including implementation of some FSAP recommendations.
  - Staff hopes for secured legal basis for independence of the capital market authority, the insurance supervision authority, and CBK’s supervisory authority soon.
- Structural and labor market reform:
  - Accelerating structural reform and reducing relative size of public sector to support private sector-led non-oil expansion is critical but politically challenging.
  - Reform initiative following the Prime Minister’s East Asia trip is encouraging; expeditious passage of Privatization Law and broadening private sector participation in public-sector-dominated activities are critical.
  - Staff emphasized training and incentives to develop private-sector skills, flexible application of Kuwaitization quotas, and promotion of market-based wage flexibility to integrate segmented labor markets.
- Statistical improvements:
  - Progress noted in compilation and dissemination, but delays in customs data collection/computerization hinder regular and accurate national accounts and balance of payments compilation.
  - Staff recommends expedited collection and compilation of customs data and coordination with GCC countries to adopt common data standards as a step toward convergence criteria for the planned monetary union; Fund technical assistance on a GCC-wide basis could be beneficial.

*IMF staff report content*

### 37.      It is recommended that the next Article IV consultation take place on the standard

### _cr05231 - 37.      It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Recommendation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Oil and gas sector (2000–05)
- Total oil and gas exports (in billions of U.S. dollars): 18.2, 15.0, 14.1, 19.0, 26.0, 28.4
- Average oil export price (in U.S. dollar/barrel): 25.0, 21.2, 22.9, 25.5, 31.8, 34.5
- Crude oil production (in millions of barrels/day): 1.98, 1.95, 1.75, 2.11, 2.30, 2.32
- Share of oil GDP in total GDP (in percent): 53.4, 47.5, 45.2, 51.2, 55.7, 56.4

### National accounts and prices (annual percentage change, unless otherwise indicated)
- Nominal GDP (market prices, in billions of Kuwaiti dinar): 11.3, 10.4, 10.7, 12.4, 15.3, 16.5
- Nominal GDP (market prices, in billions of U.S. dollars): 36.9, 34.1, 35.2, 41.7, 51.8, 56.1
- Real GDP: 1.9, 0.7, -0.5, 9.7, 7.2, 3.2
- Real oil GDP: 2.2, -3.3, -7.9, 19.8, 9.5, 0.7
- Real non-oil GDP: 1.9, 3.6, 4.3, 4.8, 5.5, 4.7
- Real Gross Disposable Income (GDI): 19.4, -4.5, 2.1, 11.8, 14.1, 6.0
- CPI inflation (average): 1.6, 1.4, 0.8, 1.0, 1.8, 1.8
- Unemployment rate (Kuwaiti nationals): 1.0, 2.5, 3.6, 3.4, ......

### Investment and savings (in percent of GDP at market prices)
- Investment: 7.7, 8.7, 9.2, 8.7, 11.2, 12.3
  - Public: 1.8, 2.2, 3.0, 2.8, 4.5, 4.4
  - Private: 5.9, 6.6, 6.2, 5.8, 6.7, 7.9
- Gross national savings: 47.1, 33.2, 21.2, 26.8, 40.4, 44.1
  - Public: 43.2, 24.1, 27.5, 26.6, 29.0, 29.6
  - Private: 3.9, 9.1, -6.3, 0.2, 11.3, 14.5
- Savings/investment balance 1/: 39.4, 24.4, 12.1, 18.1, 29.1, 31.8

### Budgetary operations 2/ (in percent of GDP at market prices)
- Revenue: 80.2, 63.1, 65.2, 60.6, 61.9, 62.5
  - Oil: 55.5, 43.1, 49.4, 46.8, 49.0, 48.8
  - Non-oil, of which: 24.7, 20.0, 15.8, 13.8, 12.9, 13.7
    - Investment income: 20.3, 13.2, 10.5, 8.8, 9.4, 10.1
- Expenditures and net lending: 39.4, 45.6, 43.9, 41.5, 39.8, 37.8
  - Of which: current: 36.2, 40.8, 38.8, 36.3, 34.4, 33.0
  - capital: 3.2, 4.0, 4.7, 4.8, 4.5, 4.5
- Balance: 40.8, 17.5, 21.3, 19.1, 22.1, 24.7
- Domestic financing: -2.8, -1.3, -3.2, -0.9, -5.2, -2.6
- External financing: 0.0, 0.0, 0.0, 0.0, 0.0, 0.0
- Non-oil primary balance (in percent of non-oil GDP): -25.0, -44.6, -51.0, -56.9, -59.3, -52.8
- Total gross debt (calendar year-end): 35.0, 36.0, 32.5, 26.4, 19.5, 17.1

### Money and credit (changes in percent of beginning broad money stock)
- Net foreign assets: 11.5, 6.5, -4.1, -4.8, 10.9, 2.3
- Net domestic assets: -5.1, 6.3, 8.8, 12.6, -0.1, 2.1
- Claims on government (net): -7.3, -4.1, 0.2, -2.8, -7.8, -3.8
- Claims on nongovernment sector: 3.9, 11.1, 10.5, 17.2, 13.8, 6.4
- Broad money: 6.3, 12.8, 4.8, 7.8, 10.8, 4.4
- Velocity of broad money: 1.4, 1.1, 1.1, 1.2, 1.3, 1.4
- Kuwaiti dinar 3-month deposit rate (average in percent): 5.4, 3.7, 2.2, 1.5, 2.0, ...
- U.S. dollar 3-month deposit rate (average in percent): 6.0, 3.3, 1.3, 0.7, 1.3, ...
- Stock market index (annual percent change): -6.5, 26.8, 39.0, 101.7, 33.8, ...

### External sector (in millions of U.S. dollars, unless otherwise indicated)
- Exports of goods and services: 21,298; 17,910; 17,012; 22,611; 30,352; 33,017
  - Of which: Oil and refined products: 18,182; 14,977; 14,057; 19,004; 25,951; 28,385
- Annual percentage change in volume (exports): 9.0, -0.3, -12.1, 20.0, 8.2, 0.0
- Imports of goods and services: -11,369; -12,406; -13,959; -16,239; -17,328; -18,207
- Annual percentage change in volume (imports): -4.1, 7.0, 6.9, 11.4, 5.5, 4.7
- Current account: 14,671; 8,328; 4,250; 7,318; 15,098; 17,825
  - In percent of GDP 1/: 39.8, 24.5, 12.1, 17.5, 29.1, 31.8
- External public and publicly guaranteed debt: 0.4, 0.4, 0.6, 0.5, ...... 
- International reserve assets, of which: 7,186; 10,000; 9,314; 7,685; 8,359; 8,923
  - Central Bank of Kuwait: 6,577; 9,268; 8,455; 6,744; 7,451; 8,015
- In months of imports of goods and services: 7.6, 9.7, 8.0, 5.7, 5.8, 5.9

### Memorandum items (percentage change; unless otherwise noted)
- Exchange rate (US$ per KD, period average) 3/: 3.26, 3.26, 3.29, 3.36, 3.39, ...
- Nominal effective exchange rate 4/: 4.7, 5.8, -0.7, -6.9, -6.9, ...
- Real effective exchange rate 4/: 4.2, 5.1, -0.9, -7.7, -5.4, ...
- Credit rating (S&P): ............A+...

*Sources: Data provided by the authorities; and Fund staff estimates.*

### 0.29963 KD/US$ (3.33745US$/KD) within a margin not exceeding 3.5 percent on both sides of this parity exchange rate.

### _cr05231 - 0.29963 KD/US$ (3.33745US$/KD) within a margin not exceeding 3.5 percent on both sides of this parity exchange rate.

### Government finance: Summary (2000/01–2004/05)
- Coverage: budgetary operations includes the operation of the KIA; data on an accrual basis.
- Total revenue (In millions of Kuwaiti dinars): 8,722 (2000/01); 6,630 (2001/02); 7,256 (2002/03); 7,966 (2003/04); 3,167 (2004/05); Budg.Proj. 9,649 (2004/05).
- Revenue composition (In millions of Kuwaiti dinars):
  - Oil and gas: 6,037; 4,525; 5,499; 6,150; 2,735; Budg.Proj. 7,634.
  - Investment income and transfer of profits of public entities 2/: 2,208; 1,386; 1,164; 1,161; 01; Budg.Proj. 1,461.
  - Other current revenue 3/: 476; 718; 567; 618; 407; Budg.Proj. 529.
  - Capital revenue: 2; 12; 6; 37; 25.
- Total expenditure (In millions of Kuwaiti dinars): 4,283; 4,796; 4,890; 5,454; 6,145; Budg.Proj. 6,207.
  - Current expenditure: 3,939; 4,290; 4,318; 4,773; 5,150; Budg.Proj. 5,363.
    - Wages and salaries: 1,573; 1,637; 1,709; 1,825; 1,939; Budg.Proj. 1,939.
    - Goods and services: 985; 1,061; 1,196; 1,436; 1,448; Budg.Proj. 1,355.
    - Interest on domestic debt 5/: 254; 203; 121; 81; 37; Budg.Proj. 117.
    - Transfers abroad: 919; 782; 638; 383.
    - Subsidies and transfers: 1,036; 1,292; 1,210; 1,368; 1,644; Budg.Proj. 1,870.
  - Capital expenditure: 344; 506; 572; 681; 995; Budg.Proj. 844.
- Overall balance (In millions of Kuwaiti dinars): 4,439; 1,834; 2,366; 2,512; -2,978; Budg.Proj. 3,442.
- Overall balance excluding oil revenue (In millions of Kuwaiti dinars): -1,598; -2,691; -3,133; -3,638; -5,713; Budg.Proj. -4,192.
- Financing (In millions of Kuwaiti dinars): -4,439; -1,834; -2,366; -2,512; 2,978; Budg.Proj. -3,442.
  - Domestic (net): -303; -134; -351; -122; ....; Budg.Proj. -813.
    - Banks: -438; -169; -196; -66; ....; Budg.Proj. -813.
    - Nonbanks: 135; 35; -156; -55; ....; Budg.Proj. 0.
  - Reserve funds 7/: -4,136; -1,700; -2,014; -2,390; ....; Budg.Proj. -2,629.
- Fiscal ratios (In percent of GDP): Revenue 80.2; 63.1; 65.2; 60.6; 20.3; 61.9.
  - Oil and gas: 55.5; 43.1; 49.4; 46.8; 17.6; 49.0.
  - Investment income: 20.3; 13.2; 10.5; 8.8; ....; 9.4.
  - Expenditure: 39.4; 45.6; 43.9; 41.5; 39.4; 39.8.
  - Current expenditure: 36.2; 40.8; 38.8; 36.3; 33.0; 34.4.
  - Capital: 3.2; 4.8; 5.1; 5.2; 6.4; 5.4.
- Memorandum items:
  - Overall balance (excluding investment income and profit transfers) (In millions of Kuwaiti dinars): 2,231; 448; 1,202; 1,351; -2,978; 1,982.
  - (In percent of GDP): 20.5; 4.3; 10.8; 10.3; -19.1; 12.7.
  - Average oil export price (US dollar/barrel): 23.1; 21.6; 23.5; 27.1; 15.0; 32.5.
- Notes:
  - 4/ Includes the KD 121 million supplementary budget for the emergency spending.
  - 5/ Covers interest payments on the treasury bills and bonds, and on the DCP bonds. Only the latter is included in the national budget presentation.
  - 6/ Includes KD 192 million one-time transfer of the oil windfall to Kuwaiti nationals.
  - 7/ The Reserve Fund for Future Generations (RFFG) and the General Reserve Fund (GRF).

### Balance of payments: Summary (2000–05)
- Current account (In millions of U.S. dollars): 14,671 (2000); 8,328 (2001); 4,250 (2002); 7,318 (2003); 15,098 (2004); 17,825 (2005).
- Goods (trade balance) (In millions of U.S. dollars): 13,025; 9,196; 7,241; 11,012; 17,843; 19,754.
  - Exports: 19,476; 16,246; 15,363; 20,695; 28,310; 30,864.
    - Oil exports: 18,182; 14,977; 14,057; 19,004; 25,951; 28,385.
    - Non-oil exports including re-exports: 1,294; 1,269; 1,306; 1,691; 2,359; 2,479.
      - Re-exports (of which): 209; 203; 216; 416; 780; 820.
      - Petrochemicals 1/: 761; 752; 751; 865; ....; ....
  - Imports: -6,451; -7,050; -8,123; -9,683; -10,468; -11,110.
- Services (In millions of U.S. dollars): -3,097; -3,693; -4,188; -4,640; -4,818; -4,944.
  - Transportation: -153; -372; -618; -634; -650; -561.
  - Travel: -2,396; -2,740; -2,902; -3,231; -3,340; -3,525.
  - Other services: -548; -581; -668; -775; -828; -858.
- Investment income (In millions of U.S. dollars): 6,698; 4,903; 3,342; 3,325; 4,632; 5,768.
  - Receipts: 7,315; 5,428; 3,708; 3,610; 5,041; 6,504.
    - General government 2/: 4,704; 3,673; 2,780; 2,795; 4,033; 5,376.
    - Other sectors 3/: 2,611; 1,755; 928; 815; 1,008; 1,129.
  - Payments: -616; -525; -365; -285; -409; -736.
    - General government: -16; -52; -13; -10; -14; -26.
    - Other: -600; -473; -352; -275; -395; -710.
- Current transfers 4/ (In millions of U.S. dollars): -1,956; -2,078; -2,145; -2,379; -2,558; -2,753.
- Capital and financial account (In millions of U.S. dollars): -11,555; -3,383; -3,490; -9,901; -14,424; -17,261.
  - Capital account 5/: 2,217; 2,933; 1,671; 1,429; 500; 100.
  - Financial account: -13,772; -6,316; -5,162; -11,330; -14,924; -17,361.
    - Direct investment: 319; -512; 161; 492; 2; -300; -50.
    - Portfolio investment: -12,667; -7,448; -3,263; -13,042; -12,000; -14,579.
      - Assets: -12,921; -7,369; -3,425; -13,377; -12,426; -14,953.
      - Liabilities: 254; -781; 613; 364; 263; 74.
    - Other investment: -1,424; 1,644; -2,059; -3,211; -2,624; -2,733.
      - Trade credits: -274; 470; -405; -278; -342; -425.
      - Loans: -489; -42; -270; -225; -503; -594.
      - Currency and deposits: -1,040; 2,055; -1,503; -2,355; -1820; -1763.
- Net errors and omissions 6/: -858; -2,131; -1,446; 954; 00; 00.
- Overall balance (In millions of U.S. dollars): 2,258; 2,814; -686; -1,629; 674; 564.
- International reserve assets (-increase) (In millions of U.S. dollars): -2,258; -2,814; 686; 1,629; -674; -564.
- Memorandum items:
  - Current account/GDP: 39.8; 24.5; 12.1; 17.5; 29.1; 31.8.
  - Overall balance/GDP: 6.1; 8.3; -2.0; -3.9; 1.3; 1.0.
  - International reserve assets (US$ millions)7: 7,186; 10,000; 9,314; 7,685; 8,359; 8,923.
  - Total reserves minus gold: 7,082; 9,897; 9,208; 7,577; 8,251; 8,815.
  - Gold (national valuation): 103.9; 103.1; 105.9; 107.6; 107.6; 107.6.
  - In months of imports of goods and services: 7.6; 9.7; 8.0; 5.7; 5.8; 5.9.

### Monetary survey (2000–04)
- Broad money (end of period, In millions of Kuwaiti dinars): 8,163 (2000); 9,209 (2001); 9,646 (2002); 10,401 (2003); 11,522 (2004).
  - Money: 1,468; 1,641; 2,067; 2,612; 2,983.
  - Quasi money: 6,695; 7,567; 7,580; 7,790; 8,539.
    - Of which: Foreign currency deposits: 895; 892; 904; 991; 1,169.
- Foreign assets (net, In millions of Kuwaiti dinars): 2,778; 3,306; 2,930; 2,467; 3,603.
  - Central bank: 2,005; 2,850; 2,521; 1,966; 2,165.
  - Local banks: 773; 456; 409; 500; 1,438.
- Domestic assets (net, In millions of Kuwaiti dinars): 5,385; 5,902; 6,716; 7,935; 7,919.
  - Claims on government (net): 2,911; 2,573; 2,595; 2,323; 1,510.
    - Central bank (net): -532; -598; -354; -413; -662.
      - Deposits: 532; 598; 354; 413; 662.
    - Local banks (net): 3,443; 3,171; 2,949; 2,735; 2,172.
      - Claims: 3,628; 3,402; 3,248; 3,050; 2,750.
        - Government debt bonds: 1,491; 1,294; 1,006; 818; 604.
        - Public debt instruments: 2,137; 2,108; 2,242; 2,232; 2,146.
      - Deposits: 185; 231; 299; 315; 578.
  - Claims on nongovernment sector: 5,848; 6,753; 7,723; 9,379; 10,814.
    - Credit facilities: 5,230; 6,027; 6,854; 8,419; 9,808.
    - Local investments: 619; 726; 870; 959; 1,006.
  - Other items (net): -3,375; -3,423; -3,602; -3,767; -4,405.
- Annual percentage change (selected):
  - Broad money: 6.3; 12.8; 4.8; 7.8; 10.8.
  - Foreign assets (net): 46.3; 19.0; -11.4; -15.8; 46.1.
  - Claims on nongovernment sector: 5.4; 15.5; 14.4; 21.4; 15.3.
- Memorandum:
  - Net domestic credit (annual percentage change): -3.0; 6.5; 10.6; 13.4; 5.3.

### Selected economic indicators and illustrative baseline scenario (2000–09)
- Nominal GDP (KD millions): 11,312 (2000); 10,446 (2001); 10,691 (2002); 12,441 (2003); 15,267 (2004); 16,536 (2005); 16,425 (2006); 16,455 (2007); 16,778 (2008); 17,183 (2009).
- Real GDP (percent change): 1.9; 0.7; -0.5; 9.7; 7.2; 3.2; 3.2; 3.1; 3.1; 2.5.
- Real oil GDP (percent change): 2.2; -3.3; -7.9; 19.8; 9.5; 0.7; 1.0; 1.0; 1.3; 0.7.
- Real non-oil GDP (percent change): 1.9; 3.6; 4.3; 4.8; 5.5; 4.7; 4.5; 4.3; 4.0; 3.5.
- Kuwait crude export price (US$ per barrel): 25.0; 21.2; 22.9; 25.5; 31.8; 34.5; 32.0; 30.0; 29.0; 28.5.
- Crude oil output (millions of barrels per day): 1.98; 1.95; 1.75; 2.11; 2.30; 2.32; 2.35; 2.37; 2.39; 2.42.
- Public finance (percent of GDP, selected):
  - Revenue: 80.2; 63.1; 65.2; 60.6; 61.9; 62.5; 60.5; 59.0; 58.1; 57.5.
    - Oil and gas: 55.5; 43.1; 49.4; 46.8; 49.0; 48.8; 45.9; 43.3; 41.6; 40.2.
    - Investment income 2/: 20.3; 13.2; 10.5; 8.8; 9.4; 10.1; 10.8; 11.7; 12.4; 12.9.
  - Expenditure: 39.4; 45.6; 43.9; 41.5; 39.8; 37.8; 39.6; 41.2; 42.2; 43.2.
  - Fiscal balance (deficit -): 40.8; 17.5; 21.3; 19.1; 22.1; 24.7; 20.9; 17.9; 15.9; 14.3.
  - Fiscal balance excluding investment income (deficit -): 20.5; 4.3; 10.8; 10.3; 12.7; 14.6; 10.1; 6.2; 3.5; 1.3.
- Non-oil fiscal balance (percent of non-oil GDP): -30.0; -48.2; -53.0; -58.2; -61.0; -54.4; -52.9; -51.1; -49.5; -48.6.
- Balance of payments (percent of GDP, selected):
  - Investment income (net): 18.2; 14.4; 9.5; 8.0; 8.9; 10.3; 12.6; 14.5; 16.3; 17.8.
  - Current account: 39.8; 24.5; 12.1; 17.5; 29.1; 31.8; 28.8; 26.5; 25.1; 24.1.
- Saving-investment balance (percent of GDP, selected):
  - Final consumption: 65.8; 75.1; 82.2; 75.5; 63.7; 61.3; 66.5; 70.9; 74.3; 78.5.
  - Gross domestic investment: 7.7; 8.7; 9.2; 8.7; 11.2; 12.3; 11.7; 11.3; 10.7; 9.0.
  - Savings: 47.1; 33.2; 21.2; 26.8; 40.4; 44.1; 40.5; 37.7; 35.8; 33.1.

### Vulnerability indicators (2000–04)
- External solvency indicators (selected):
  - REER (CPI based, period average): 4.2; 5.1; -0.9; -7.7; -5.4 (11/ Average for January to October 2004).
  - External debt including private sector (US$ millions): 9,956; 11,094; 12,368; 12,404; 12,772.
  - Short-term debt (original maturity): 4,199; 5,255; 4,901; 5,863; 6,185.
  - External debt/GDP: 27.0; 32.6; 35.2; 29.7; 24.7.
  - External debt/total exports of goods and services: 46.7; 61.9; 72.7; 54.9; 42.1.
  - Short-term debt/total exports of goods and services: 19.7; 29.3; 28.8; 25.9; 20.4.
- Public sector solvency indicators:
  - General government domestic debt/GDP 3/: 35.0; 36.0; 32.5; 26.4; 21.1 (12/ As of end-June 2004).
  - Interest payments/total revenue: 2.9; 3.1; 1.7; 1.0; 1.2.
  - Distribution of public domestic debt by holders (percent): Local commercial banks 86.4; 85.6; 91.0; 90.7; 88.7. Other (including nongovernment public institutions) 13.6; 14.4; 9.0; 9.3; 11.3 (12/).
  - Oil revenue/total revenue: 69.2; 68.3; 75.8; 77.2; 79.1.
- External liquidity indicators:
  - CBK net foreign assets (US$ millions): 6,564; 9,257; 8,415; 6,672; 7,346.
  - CBK gross foreign assets (US$ millions)4/: 6,577; 9,268; 8,455; 6,744; 7,451.
  - In months of imports of goods and services: 6.9; 9.0; 7.3; 5.0; 5.2.
  - Relative to short-term external debt: 156.6; 176.4; 172.5; 115.0; 120.5.
  - Local banks' net foreign assets (US$ millions): 2,532; 1,481; 1,366; 1,698; 4,879.
- Financial sector indicators (selected, percent or index):
  - Increase in net bank profits: 20.9; 9.9; 0.6; 21.2; 16.8 (13/ As of end-September 2004).
  - Ratio of net profits to total bank assets: 2.0; 2.0; 1.8; 2.0; 2.3.
  - Ratio of net profits to total shareholders' equity: 17.6; 18.2; 17.4; 18.6; 20.4.
  - Banks' capital-asset ratio: 11.5; 11.2; 10.4; 10.7; 11.3.
  - Banks' risk-weighted capital-asset ratio: 22.2; 22.0; 19.7; 18.4; 17.3.
  - Banks' leverage 5/: 8.7; 9.0; 9.6; 9.4; 9.1.
  - Banks' liquidity ratio 6/: 16.3; 14.8; 14.0; 12.9; 15.7.
  - Ratio of nonperforming loans to total loans: 19.2; 10.3; 7.8; 6.1; 5.4 (13/).
    - Nonperforming loans from before invasion: 12.8; 5.1; 4.8; 3.6; 3.1.
    - Nonperforming loans since liberation: 6.4; 5.2; 3.0; 2.5; 2.3.
  - Loan provisions as a proportion of nonperforming loans: 50.1; 53.7; 64.3; 72.4; 72.4 (13/).
- Sectoral lending concentration (percent):
  - Ratio of bank lending to total domestic credit facilities — stock market-related: 4.8; 6.4; 5.8; 9.0; 8.5.
  - Real estate: 16.3; 19.3; 18.9; 17.0; 16.4.
  - Total (stock market, real estate): 21.1; 25.7; 24.8; 26.0; 24.9.
  - Ratio of bank lending to banks' own funds — total (stock market, real estate): 69.6; 92.2; 95.8; 109.0; 115.9.
- Market and other memorandum items:
  - Banks' interest rate spread 8/: -0.6; 0.4; 0.9; 0.8; 0.6 (14/ Average January-September 2004).
  - Net foreign assets of local banks (In millions of Kuwaiti dinars): 773.3; 456.1; 409.3; 500.4; 1,437.7.
  - Net foreign assets of investment companies (In millions of Kuwaiti dinars): 794.8; 667.1; 709.0; 699.0; 902.8 (13/).
  - Open foreign exchange position of banks: 38.9; -34.9; 74.6; 84.9; 72.2 (13/).

### Fund relations (Appendix I, as of December 31, 2004)
- Membership: Joined September 13, 1962. Article VIII on April 5, 1963.
- Quota and holdings (SDR Million): Quota 1,381.10 (100.00%); Fund holdings of currency 922.16 (66.77%); Reserve position in Fund 458.94 (33.23%).
- SDR Department: Net cumulative allocation 26.74 (100.00%); Holdings 117.07; 437.74.
- 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.
  - The 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 0.29470 as of end-October 2004.
- Article IV Consultations:
  - Latest consultation completed by the Executive Board on February 9, 2004.
  - Staff report and Statistical Appendix issued in July 2004, Country Report No. 04/186 and 04/197.
- FSAP Participation:
  - FSAP exercise conducted in September 2003 to assess banking, securities, and AML/CFT standards.
  - FSSA report discussed by the Executive Board and issued in May 2004, Country Report No. 04/151.
- Technical assistance (selected missions and dates):
  - 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 payment 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 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 A Program for Tax Reform December 2002.
  - MFD/LEG Bank Insolvency October 2004.
- Resident Representative: None.
- 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 (Appendix II, as of January 13, 2005)
- Technical Cooperation Program:
  - Annual Technical Cooperation Program Agreement first signed spring 2002, renewed June 2003 for another year.
  - Agreement expired last March and was not renewed due to organizational changes within the government; technical cooperation program slowed considerably.
  - Currently, two projects are ongoing.

*Source: IMF staff report and annexed tables contained in the provided PDF content.*

### 1. Kuwait Education Indicators and Assessment Project (KEIAP): The Ministry of

### _cr05231 - 1. Kuwait Education Indicators and Assessment Project (KEIAP): The Ministry of

### Kuwait Education Indicators and Assessment Project (KEIAP) — accomplishments and scope
- KEIAP launched in September 2003; this is the second year of a six-year program.
- Main accomplishments to date:
  - An Education Indicators Report, the first of its kind in Kuwait, has been completed and is being published.
  - Testing instruments for the national assessment for grades 4 and 8 have been developed and pilot testing has been completed.
  - Participation in the 5-year cycle of the international Program in Reading Literacy Studies (PIRLS) started on time.
  - Preparations are well underway for rejoining the Trends in Mathematics and Science Studies (TIMSS) (starting February 2005).
  - The development of an Education Information Management System (EMIS) has been launched.
- These accomplishments provide a sound basis for diagnosing issues in the education system, designing education reform, and monitoring progress.

### World Bank past and ongoing activities and technical assistance — sectoral summary
- Post-war reconstruction:
  - January 1991: 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 delegations from the National Assembly and the KIA (1994–97).
  - Provided assistance on the draft privatization law and advised the Kuwait Investment Authority (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 the draft Five-Year Plan (1996) and advice on the draft reform plan (1998–99).
  - Study “Energizing the Private Sector” completed early March 2001 (collaboration with Higher Planning Council and Kuwait University).
  - 2002 missions in land policy, power sector reform, telecommunications, transportation, and tourism to identify technical assistance needs.
- Reform implementation:
  - Government requested World Bank assistance in implementing reform initiatives and institutional set-up for an implementation agency; mechanisms for more World Bank technical assistance are being explored.
- Investment environment:
  - Technical assistance on FDI law, policy and administrative impediments to investment, and development of a competition law and policy.
  - Presentation on investment promotion, investment climate, and FDI regulations in 2002.
  - Initiated the FDI Bylaw and provided technical assistance on the negative restricted list.
- Public awareness:
  - Began managing a Public Awareness Campaign for the Economic Reform Program in April 2001.
- Transparency and anti-corruption:
  - Scoping mission in September 2002 to develop TORs and identify key institutions.
  - Council of Ministers assigned development of Transparency and Anti-Corruption Strategy to the Citizens Services and Governmental Bodies Assessment Agency; a working group formed on Bank recommendation.
  - Bank mission produced “Toward a Comprehensive Transparency and Anti-Corruption Strategy in Kuwait.” Next step: high-level workshop on international experience planned for early 2004.
- Small business promotion:
  - Technical assistance led to establishment of the Kuwait Small Projects Development Company (KSPDC); Bank advising KSPDC on operations.
- Labor market and employment:
  - Labor market study in partnership with Kuwait Institute for Scientific Research (KISR), including household and employee/employer surveys; completed January 1999.
  - Presentation of main recommendations in March 1999 attended by ministers of Finance, Planning, and Education; some recommendations proposed for legislative approval.
  - Follow-up: government requested Bank support for private sector job creation for Kuwaitis; Bank mission visited in late August 2003 to develop TORs.
- Education Sector Reform:
  - After “Education Expenditure Analysis,” government sought Bank assistance to implement recommendations focusing on: (i) indicators for general education system; (ii) introducing program budgeting; and (iii) in-depth analysis on financing issues and school-level costs.
  - Four-phase program; Phase one (development of indicators) started; missions visited in June and September 2003 to continue indicator development and begin work on program budgeting.
- Health sector:
  - Government requested Bank support to assess performance and identify reform areas; missions in October 2002 and January 2003.
  - Study (June 2003) provided overview and special coverage of five priority areas: (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:
  - 2002 request to develop Sector Reform Strategy and implementation action plan; both completed.
  - Government appointed KMPG as advisor on sector reform; Bank to continue advising on strategic sector reform issues and help supervise advisors.
- Power and water strategy:
  - Two draft reports (LNG options and reforms in the power and waters sector) submitted to government in early August.
  - Next steps: (i) develop government vision for electricity and water sectors; (ii) key principles for legal and regulatory framework and role for an independent regulatory agency; (iii) options for industry restructuring; (iv) stakeholder consultations; and (v) implementation plan.
- Concessions/BOT and PPP:
  - Concessions Study (early 2002) led to implementation steps for Build-Operate-Transfer (BOT); identified required decisions, responsibilities, TORs for BOT Manager and Value-for-Money Committee.
  - Public private partnerships project in early definition; 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 in two phases.
  - Phase I completed August 2002 addressed policy, strategy, regulations, and service shortcomings.
  - Phase II completed August 2003 recommended interventions, establishment of 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 and completed in September 2003.
- Land policy and housing:
  - Review of land and real estate prepared and action plan submitted October 2002; identified barriers to productive and efficient use of urban land.
  - Study on housing subsidies: draft report “A Study of the Housing Benefits Program” delivered to government for comments last May.
- Competition policy:
  - Work began July 2002: preliminary assessment of laws/policies and draft outline for a competition law/policy; report finalized October 2002; letter of invitation and TOR for law firms sent January 2003.
- General public reform:
  - Advice and ad hoc technical assistance on various reform initiatives.
  - November 2000: Evaluation of the Offset Program in Kuwait finalized.
  - Presentation to high-level decision makers on WTO issues and benefits of WTO membership.

### Statistical issues — national accounts, prices, fiscal and monetary statistics, balance of payments, and dissemination
- National Accounts and Production:
  - CSO prepared GDP estimates at current and constant prices through 2003 (2003 estimates still provisional).
  - Recent improvements include: change of base year for constant price data from 1984 to 1995; improvements in estimates of value-added for subsidized-goods and services of the public utilities sector through use of input costs (previously used the household expenditure survey).
  - Estimates of GDP published at the Central Statistical Office website.
  - Starting from final 2002 data, further improvements will reflect adoption of the 1993 SNA, a sampling frame based on the establishment survey (2002), and expanded coverage of questionnaires.
  - Continued progress in estimation of value-added for the oil sector requires adequate resources and improved coordination between the Ministries of Planning, Oil, and Finance.
  - STA provided technical assistance to the Ministry of Planning; a resident statistics expert was attached to the Ministry of Planning from June 2001 to June 2002.
  - Recommendation: Central Bank of Kuwait (CBK) should publish oil sector information in the Quarterly Statistical Bulletin on output, refining, domestic consumption, export price for crude and refined products and the domestic price of petroleum products (data available from Ministry of Oil).
- Price Statistics:
  - Household expenditure survey (2000) completed; revised basket for the consumer price index (CPI) 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 data on wage rates and developments in the private sector.
- Government Finance Statistics (GFS):
  - Kuwait reports annual GFS data for Government Finance Statistics Yearbook (GFSY) and monthly GFS data for IFS.
  - GFSY data reported with substantial lag (latest data reported in 2004 is for 1999).
  - Major components not reported: extrabudgetary revenues (investment income and transfers of profits of public institutions), extrabudgetary expenditures (interest on foreign debt and treasury paper), and financing operations conducted by two reserve funds.
  - Data on investment income and interest on foreign debt and treasury paper usually provided to Article IV consultation missions.
  - Lack of suitable classification of data on budget execution constrains fiscal monitoring during the year; operations of the Public Institute for Social Security not made available.
  - Weaknesses stem from limitations on information sharing between government agencies.
  - STA indicated operations of the two reserve funds should be classified as part of government.
  - Authorities briefed on IMF’s “Code of Good Practices on Fiscal Transparency”; encouraged to adopt recommended practices.
  - FAD report “Restructuring Budget Processes” (finalized March 2002) concluded 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 of data on deposit money banks and other banking institutions from January 1981 onward was revised per recommendations of the 1994 STA multi-sector mission.
  - Clarification: Savings and Credit Bank (SCB) does not accept transferable deposits from the public.
- Balance of Payments (BOP) Statistics:
  - Substantial improvements in coverage and methodology.
  - Since beginning of 1997, CBK compiles and disseminates detailed annual data per BPM5; quarterly balance of payments and an annual statement of Kuwait’s international investment position (IIP) compiled since 1997 and provided to Article IV missions.
  - Partial IIP data submitted to STA exclude foreign assets of other government agencies and are not in BPM5 format.
  - Capital flows of nonfinancial private sector (including foreign direct investment abroad and portfolio investment abroad) not currently compiled; measures underway (collaboration between CBK and Tax Department of Ministry of Finance) to correct omission that led to large “errors and omissions” item in BOP statistics.
  - Enhancements made in estimation of travel services; further improvements needed for several service items and private transfers.
  - Agreement during October 2004 discussions between STA and CBK that Kuwait should aim to participate in the Fund’s 2004 Coordinated Portfolio Investment Survey (CPIS) with coverage limited to the financial sector.
- Data dissemination:
  - Kuwait is an early GDDS participant; most metadata last updated in Fund’s DSBB in October 2002.
  - CBK webpage publishes: 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 data monthly); CPI and WPI (monthly with about a three-month lag); and securities market indicators (quarterly).
  - Ministry of Planning webpage (CSO) publishes national accounts, prices, and related statistics.
  - Ministry of Finance webpage includes elaborated data for actual and estimated budget.
  - KIA webpage provides data on stock market indices, volume and value of securities traded, privatization schedules, and related information.

### Table of Common Indicators Required for Surveillance — data snapshot (as of January 31, 2005)
- Exchange Rates: Date of latest observation 01//05; Date received 02/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities2: Date of latest observation 12/04; Date received 01/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Reserve/Base Money: Date of latest observation 01/05; Date received 02//05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M, Q.
- Broad Money: Date of latest observation 01/ 05; Date received 02/ 05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M, Q.
- Central Bank Balance Sheet: Date of latest observation 01/ /05; Date received 02 /05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M, Q.
- Consolidated Balance Sheet of the Banking System: Date of latest observation 12/04; Date received 02/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Interest Rates: Date of latest observation 01/05; Date received 02/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Consumer Price Index: Date of latest observation 09/04; Date received 01/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Fiscal year data only; see entries for central government below.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government3: Date of latest observation FY2003/04; Date received 12/04; Frequency of Data A4; Frequency of Reporting A; Frequency of publication Not published on Fund standards.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 12/04; Date received 01/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- External Current Account Balance: Date of latest observation 2003; Date received 08/04; Frequency of Data A; Frequency of Reporting A; Frequency of publication A.
- Exports and Imports of Goods and Services: Date of latest observation 09/03; Date received 10/04; Frequency of Data M; Frequency of Reporting M; Frequency of publication Q.
- GDP/GNP: Date of latest observation 2003; Date received 12/04; Frequency of Data A; Frequency of Reporting A; Frequency of publication A.
- Gross External Debt5: Date of latest observation 2003; Date received 12/04; Frequency of Data A; Frequency of Reporting A; Frequency of publication A.

Notes from the table:
- Frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); NA: Not Available.
- Central Bank of Kuwait only for international reserves entry.
- Fiscal year data only for central government fiscal entries; higher frequency data available only in national format.
- Gross External Debt primarily private sector; except for a small volume of trade credits, Kuwait has no public external debt.

### IMF staff update — April 25, 2005 (new information since staff report of March 8, 2005)
- Oil price:
  - WEO oil price projection revised upward after issuance of the staff report; upward revision to the oil price projection used in the staff report is significant, ranging between $9–11 per barrel over the medium term (2005–09).
  - Resulting projections:
    - Overall fiscal surplus now projected to be 34 percent of GDP in 2005/06, compared with 24.7 percent of GDP reported in the staff report.
    - External current account surplus projected to be 8.5 percentage points higher at more than 40 percent of GDP in 2005.
    - On assumption that oil prices remain firm over the medium term, average fiscal and current account surpluses are projected to be close to 30 percent of GDP and 40 percent of GDP, respectively, during 2006–09.
- Oil production and investment:
  - Kuwait produced 2.6 million barrels per day (bpd) in March 2005, about 0.4 million bpd above its current OPEC output quota.
  - Authorities indicate actual production could be increased to 2.75–2.8 million bpd by the end of 2005, if warranted by market conditions.
- Monetary developments:
  - Credit to the private sector decelerated to an average annual rate of 7.4 percent during August 2004–March 2005, compared with an average annual growth rate of 23.2 percent during January 2003–July 2004.
  - The slowdown followed the introduction in July 2004 of the 80 percent ceiling (to be fully effective in July 2005) on the credit (net of provisions) to deposits ratio.
  - Commercial banks’ deposit base increased at an annual rate of [text truncated in source at this point].

*Source: IMF staff report excerpts and appendices as provided in the content unit.*

### 18.9 percent since the introduction of the ceiling (compared with an annual rate of

### _cr05231 - 18.9 percent since the introduction of the ceiling (compared with an annual rate of

### Monetary and banking developments
- Credit to the private sector grew 18.9 percent since the introduction of the ceiling (compared with an annual rate of 9.4 percent in the previous 19 months).
- Ratio of credit to the private sector to total deposits declined from 87 percent in July 2004 to 81.3 percent in March 2005.
- Banks shifted asset composition toward foreign assets; net foreign assets (NFA) of commercial banks increased by 107 percent since the introduction of the ceiling to more than US$5 billion by end-March 2005.
- Interbank deposits declined by 78 percent during August 2004 through March 2005 because interbank funding is not eligible for meeting the new ceiling.
- The Central Bank of Kuwait raised its discount rate by 25 basis points to 5.25 percent on March 23, 2005.

### Stock market developments
- The Kuwait stock exchange index increased by 33 percent in 2005 (by April 17, 2005), continuing a five-year bull market.
- Drivers cited: continued growth in corporate profitability, record high oil prices, improved economic outlook, and higher budgetary outlays.

### Recent macroeconomic performance (2003–2004)
- Real GDP grew at an average annual rate of 8.5 percent during 2003–2004.
- Per capita income increased by 34.5 percent over the two-year period (after terms-of-trade gains).
- Inflation remained below 2 percent; unemployment around 3.5 percent.
- Kuwaiti stock price index more than doubled in 2003 and increased by 34 percent in 2004.
- Broad money growth accelerated to 7.8 percent in 2003.
- Private sector credit increased by 21 percent in 2003.

### Fiscal position and government saving
- Annual fiscal surpluses about 20 percent of GDP in 2003/04 and 2004/05.
- Most fiscal surplus transferred to the Reserve Fund for the Future Generation and the General Reserve Fund.
- Fiscal stance described as expansionary due to significant spending of higher oil revenue.

### External sector
- External current account surplus more than doubled over the two-year period to 29 percent of GDP in 2004.
- Exports grew at an annual rate of 33.6 percent.
- Central Bank of Kuwait external reserves remained at comfortable levels.
- Real effective dinar depreciation of 9 percent during January 2003–October 2004.

### Structural reforms and labor market
- Foreign Investment Law and by-laws allow foreigners to own up to 100 percent of Kuwaiti companies in listed sectors.
- Draft Privatization Law and amendment to Tax Law (lower corporate income tax for foreign companies from 55 percent to 25 percent) awaiting parliamentary approval.
- Kuwaitization policy in place since October 2003 with targets for increasing proportion of Kuwaitis employed in private sector.
- Progress on financial-sector institutional framework noted; further legal basis needed for independence of capital market authority, insurance supervision authority, and Central Bank supervisory authority.

### Executive Board assessment — findings and recommendations
- Commended authorities for strong economic rebound, record pace of expansion since 1990 Gulf war, and large fiscal and current account surpluses.
- Major medium-term challenges: generating employment for fast-growing Kuwaiti labor force and diversifying the economy.
- Recommended actions:
  - Accelerate structural reforms to open economy for private sector investment.
  - Expedite passage of the Privatization Law and Tax Law amendment.
  - Broaden private sector participation in activities dominated by public sector.
  - Allow private sector lead role in infrastructure projects.
  - Target subsidies better, impose strict controls on new hiring, and avoid using public sector as “employer of last resort.”
  - Reduce significantly the non-oil fiscal deficit.
  - Implement efficient management of savings funds and protect investments for long-term fiscal sustainability.
  - Implement a three-year rolling budget by 2006/07 and strengthen budget and expenditure management.
  - Consider tax reforms in context of planned Gulf Cooperation Council union, including eventual introduction of a value added tax.
  - Keep exchange rate peg unchanged until GCC monetary union established; remain open to choice of regime under the union.
  - Abolish the ceiling on banks’ loans to deposit ratio once domestic credit expansion stabilizes.
  - Strengthen risk-based prudential ratios and secure legal foundations for supervisory authorities.
  - Continue AML/CFT progress and improve information sharing with foreign counterparts.
  - Apply Kuwaitization flexibly to avoid adverse effects on private sector competitiveness; promote market-based wage flexibility.
  - Improve timeliness and transparency of national income, price indices, customs, and petroleum-related data; adopt common data standards with GCC countries.

### Financial system soundness
- Banks are well capitalized and liquid.
- Capital adequacy ratio: 17.3 percent as of end-September 2004 (regulatory minimum 12 percent).
- Asset quality improved; net bank profits and returns on equity increased.
- Authorities introduced a ceiling on credit to deposit ratio to contain credit expansion; intended to be abolished once credit stabilizes.

### Selected economic indicators (selected, values preserved exactly as in source)
- Real GDP (percent change): 1999 -1.8; 2000 1.9; 2001 0.7; 2002 -0.5; 2003 9.7.
- Real oil GDP (percent change): 1999 -6.5; 2000 2.2; 2001 -3.3; 2002 -7.9; 2003 19.8.
- Real non-oil GDP (percent change): 1999 2.1; 2000 1.9; 2001 3.6; 2002 4.3; 2003 4.8.
- Consumer price index (percent change): 1999 3.1; 2000 1.6; 2001 1.4; 2002 0.8; 2003 1.0.
- Total revenue (percent of GDP): 1999 68.9; 2000 80.2; 2001 63.1; 2002 65.2; 2003 60.6.
- Oil and gas (percent of GDP): 1999 46.8; 2000 55.5; 2001 43.1; 2002 49.4; 2003 46.8.
- Investment income (percent of GDP): 1999 19.3; 2000 20.3; 2001 13.2; 2002 10.5; 2003 8.8.
- Total expenditure (percent of GDP): 1999 39.9; 2000 39.4; 2001 45.6; 2002 43.9; 2003 41.5.
- Current expenditure (percent of GDP): 1999 36.4; 2000 36.2; 2001 40.8; 2002 38.8; 2003 36.3.
- Capital expenditure (percent of GDP): 1999 3.5; 2000 3.2; 2001 4.0; 2002 4.7; 2003 4.8.
- Overall fiscal balance (percent of GDP): 1999 29.0; 2000 40.8; 2001 17.5; 2002 21.3; 2003 19.1.
- Change in broad money supply (in percent): 1999 1.6; 2000 6.3; 2001 12.8; 2002 4.8; 2003 7.8.
- Interest rate (Three–month Kuwaiti dinar deposits, in percent): 1999 5.3; 2000 5.4; 2001 3.7; 2002 2.2; 2003 1.5.
- Exports, f.o.b. (US$ millions): 1999 12,225; 2000 21,298; 2001 17,910; 2002 17,012; 2003 22,611.
- Crude oil and refined products exports (US$ millions): 1999 11,029; 2000 18,182; 2001 14,977; 2002 14,057; 2003 19,004.
- Imports, c.i.f. (US$ millions): 1999 -11,880; 2000 -11,369; 2001 -12,406; 2002 -13,959; 2003 -16,239.
- Current account balance (US$ millions): 1999 5,010; 2000 14,671; 2001 8,328; 2002 4,250; 2003 7,318.
- Current account balance (percent of GDP): 1999 16.6; 2000 39.8; 2001 24.5; 2002 12.1; 2003 17.5.
- Central Bank of Kuwait’s international reserves (US$ millions): 1999 4,928; 2000 7,186; 2001 10,000; 2002 9,314; 2003 7,685.
- Reserves in months of imports of goods and services: 1999 5.0; 2000 7.6; 2001 9.7; 2002 8.0; 2003 5.7.
- Real effective exchange rate (percent change): 1999 0.9; 2000 4.2; 2001 5.1; 2002 -0.9; 2003 -7.7.

*IMF Public Information Notice (PIN) No. 05/63 — IMF Executive Board Concludes 2005 Article IV Consultation with Kuwait (May 13, 2005).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05231.pdf_