## _cr08191

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### Executive summary — outlook and macro developments
- Non-oil activity—particularly in financial, transportation, and communication services—grew almost 9 percent in 2007.
- Oil production declined by 2.6 percent in 2007 in line with OPEC decisions.
- Inflation reached 7 percent y/y in October 2007; driven by domestic demand (especially rents) and higher import prices (mostly food).
- Asset prices: Kuwait Stock Exchange (KSE) index rose by 25 percent during 2007; real estate prices increased significantly.
- KD appreciated by 5.9 percent against the U.S. dollar during 2007 after abandoning the peg to the U.S. dollar in May 2007 and moving to a basket peg.
- Broad money grew by 19 percent and credit to the economy by 36 percent during 2007.
- Non-oil deficit (excluding oil and investment income and recapitalization transfers to KPISS) rose to 50 percent of non-oil GDP in 2006/07 and projected to reach 58 percent in 2007/08.
- Overall budget surplus expected to increase to 39 percent of GDP for 2007/08.
- One-time government payment: KD 2 billions to KPISS to reduce its actuarial deficit.
- Authorities cut interest rates, kept KD interbank rate below LIBOR, and tightened the 80 percent loan-to-deposit ceiling (ratio to be met on average during the month).

### Authorities’ plans and policy intentions
- Expand oil production and refining capacity; implement fiscal strategy of higher capital spending, limit expanding current expenditure, save part of oil wealth.
- Continue a basket peg regime; consolidate budget preparation in the ministry of finance.
- Structural and market reforms enacted: reduce profit tax on foreign investors from 55 percent to 15 percent; exempt capital gains from stock investment from tax; establish Sale of State Properties law and legal basis for PPPs; authorize privatization of Kuwait Airways.
- Licenses granted to three private airlines and four new private universities; privatized a number of gas stations.
- Kuwait reaffirmed commitment to join the GCC monetary union; Kuwait has met all convergence criteria as of end-2007.

### Staff findings and recommendations
- Contain inflationary pressures by:
  - Enhancing supply response in the nontradables sector.
  - Limiting government current spending to avoid overheating.
  - Slowing credit growth.
- Strengthen fiscal framework to balance intergenerational equity, contain inflation, and meet infrastructure needs.
- Under the pegged exchange regime and easing U.S. monetary stance, use available tools to:
  - Restrain credit growth.
  - Deter speculative capital flows.
  - Remain vigilant to financial system vulnerabilities.
- Support private sector-led investment by aligning capital market, companies, competition, PPP and privatization laws with best international practice.
- Enhance scope for foreign technical know-how in developing northern oil fields.
- Policy mix should contribute to domestic and external stability and help address a current moderate undervaluation of the KD.

### Medium-term policies and prospects
- Medium-term outlook described as "highly favorable."
- Non-oil GDP projected to grow at 8 percent.
- Inflation projected to increase further in 2008 due largely to supply factors before moderating to about 5 percent over the medium term.
- External current account and fiscal positions projected to remain in large surplus, albeit declining.
- Downside risks: sharp decline in oil prices; intensified domestic pressures for increased transfers; setbacks in structural reforms; shortfalls in executing planned public investments.

### Oil sector investment plan (2008–13)
- Authorities plan to increase oil production capacity from 2.7 million barrel per day (mbpd) to 4 mbpd in 2020; achieving 4 mbpd would require developing the northern field (“Project Kuwait”) and advanced foreign-provided technology.
- Downstream target: double refining capacity to about 1.4 mbpd by 2012–13.
- Total sectoral investments for 2008–13: $50 billion, largely financed internally by Kuwait Petroleum Company (KPC) with strong private sector involvement.
- Distribution of the $50 Billion Investment Plan:
  - Other upstream: 30%
  - Project Kuwait: 18%
  - New Refinery: 28%
  - Other downstream: 19%
  - Transportation: 3%
  - Petrochemicals: 2%

### Containing inflation — policy priorities
- Key requirements: growth of the nontradables sector, an appropriate fiscal policy framework, and lower credit growth.
- Structural reforms to increase supply response in services (including better access to land) are critical to reduce nontradable price pressures.
- Fiscal policy should balance supporting consumption and investment while avoiding fuelling inflation; excessive salary and transfer increases risk a wage-price spiral.
- Containing credit growth necessary to restrain demand pressures.

### Fiscal strategy and public finance priorities
- Fiscal strategy centered on:
  - higher investments in infrastructure,
  - better education and public services,
  - accumulating resources for intergenerational equity and to reduce oil dependence.
- Authorities plan sizable transfers from the budget to close the remaining KPISS actuarial deficit over next two years and consider reforming contribution and benefits rules.
- Planned improvements: better budget accounting and monitoring, adoption of GFSM 2001, anchoring one-year budgets in rolling medium-term fiscal frameworks.
- Authorities skeptical that increased transparency of KIA and KPISS would necessarily strengthen consensus for fiscal strategy; note KIA’s position is subject to parliamentary scrutiny and its investment policy is commercially driven.

### Monetary, exchange rate policy and financial sector oversight
- Authorities favor a pegged exchange rate; May 2007 move to an undisclosed basket peg to better align with trading and investment patterns and create some maneuver room vis-à-vis U.S. monetary policy.
- CBK plans to rely mainly on prudential measures to contain credit expansion.
- Banking system described as well capitalized and highly profitable; recent global turmoil appears not to have affected the system.
- CBK monitors banks via regular stress testing given rapid credit increase and exposures to domestic/international stock and real estate markets.
- Investment companies have grown significantly and are systemically important; authorities state "there will be no government bail-outs of any investment company."

### Investment companies — key statistics (2002–07)
- Number of investment companies doubled to 78.
- Balance sheet assets grew by an annual average rate of 26 percent between 2002–07.
- Investment funds manage on- and off-balance sheet assets amounting to about $160 billion.
- Capital-to-asset ratio on average exceeds 35 percent (net capital position could be smaller due to cross holdings).
- Loans from banks averaged 15 percent of investment companies' total liabilities during 2004–07.
- Foreign lines of credit made up 25 percent of liabilities in 2007.
- Investment companies accounted for a third of share volume traded in the KSE during 2007, and 16 percent of market capitalization in December 2007.
- At end 2007, the 43 listed investment companies posted on average price-earnings ratio of 7; bank stocks: 18; Kuwait market average: 12.

### Exchange rate assessment and external balance
- Staff ERER approach: KD currently moderately undervalued.
- Estimated elasticities:
  - 10 percent improvement in TOT appreciates ERER by 2 percent.
  - 1 percentage point of GDP increase in investment income appreciates ERER by 0.12 percent.
  - 1 percentage point of GDP increase in government expenditure depreciates ERER by 0.3 percent.
- From 2003, ERER on rising trend; actual REER started appreciating since 2004 with a gap to smoothed ERER of 11 percent in 2007; projected to vanish by 2009 given projected inflation-driven appreciation of actual REER.
- Macroeconomic balance (MB) approach: current account close to its “norm”; after "overshooting" in 2006, prevailing CA balance close to norm and would remain so under authorities’ investment program.

### Structural reforms, statistics, and data recommendations
- Priority reforms: broaden incentives for foreign technical participation in northern oil fields; enact companies, competition, PPP and privatization laws; approve Capital Market Law; enable further access to land for private business and individuals.
- Statistical improvements needed: address CPI production delays; adopt 1993 SNA; improve government finance reporting and classification; distinguish deposit-taking investment companies in monetary statistics; improve coverage of private sector capital flows and inward FDI data; consider subscribing to SDDS.

### Staff appraisal — key conclusions
- 2007: strong performance with prudent macroeconomic management supporting high non-oil growth.
- Short-term main challenge: contain inflation, though temporarily higher inflation may be part of fiscal spending to increase absorptive capacity.
- Plan to expand production and refining capacity will sustain favorable outlook and support global oil market stability.
- Enhancing scope for foreign technical know-how in northern oil fields critical to achieve production targets.
- Containing inflationary pressures requires supply response in nontradables, strong fiscal framework, and containing credit growth.
- Move to an undisclosed basket peg might help contain imported inflation; increasing supply of nontradables (especially housing and land) is more important for controlling inflationary pressures.
- Containing strong credit growth would help restrain demand pressures; use of interest rates involves trade-off with containing speculative inflows and is constrained by the basket peg.

### Fiscal strategy — staff recommendations (section 21)
- Resist populist pressures to increase current expenditures via non-merit based salary/benefit raises.
- Better target subsidies rather than expanding inefficient subsidy systems.
- Fiscal strategy main elements:
  - higher infrastructure investment,
  - better education and public services,
  - accumulate resources for intergenerational equity and reduced oil dependence.
- Strengthen fiscal framework by:
  - (a) reforming KPISS contribution and benefits rules to ensure viability;
  - (b) anchoring one-year budgets in rolling medium-term frameworks;
  - (c) introducing GFSM 2001 accounting;
  - (d) coordinating with GCC toward VAT introduction and tax law harmonization.
- Pegged exchange rate considered appropriate; within that regime use prudential tools and fiscal/structural policies to contain inflation and credit growth.
- Establish a unified and independent capital market regulator applying best practices to address FSAP-identified weaknesses.
- Expedite structural reforms to promote private sector; improve public sector statistics and pursue SDDS subscription.
- Commendation for substantial external assistance and support for HIPC; consider extending HIPC debt relief to claims held by KIA.

### Article IV timing and selected macro figures (2004–08, selected)
- Recommendation: next Article IV on standard 12-month cycle.
- Selected oil & national account figures (2004–08 unless indicated):
  - Total oil and gas exports (billions USD): 27.8, 44.1, 55.7, 59.7, 81.4
  - Average oil export price (USD/barrel): 34.1, 49.1, 60.2, 67.8, 91.4
  - Crude oil production (millions barrels/day): 2.29, 2.57, 2.64, 2.58, 2.60
  - Nominal GDP (KD billions): 17.5, 23.6, 28.6, 31.3, 39.6
  - Real GDP (factor cost, annual % change): 10.6, 11.5, 6.4, 4.6, 6.0
  - Real non-oil GDP: 12.9, 12.0, 9.4, 9.2, 8.6
  - CPI inflation (average): 1.3, 4.1, 3.1, 5.0, 6.5
- Money and credit (changes in percent of beginning broad money stock):
  - Broad money (annual % change): 12.1, 12.3, 21.7, 19.3, 14.3
  - Claims on nongovernment sector: 14.5, 17.6, 24.5, 35.6, 21.3
- External sector (USD billions):
  - Exports of goods: 30.1, 47.0, 58.6, 62.8, 84.7
  - Current account (USD billions): 18.2, 34.3, 51.1, 52.7, 65.6
  - Current account (percent of GDP): 30.6, 42.5, 51.7, 47.4, 45.2
  - International reserve assets (USD billions): 8.3, 9.0, 12.6, 15.5, 18.6
  - International reserve assets (months of imports): 5.2, 4.7, 6.1, 5.5, 5.7

### External sector projections and illustrative baseline (2004–13 selected)
- Current account (USD billions): 18.2 (2004), 34.3 (2005), 51.1 (2006), 52.7 (2007), 65.6 (2008), 64.7 (2009), 71.9 (2010), 73.0 (2011), 75.2 (2012), 78.0 (2013).
- Exports (total, USD billions): 30.1, 47.0, 58.6, 62.8, 84.7, 85.2, 85.6, 87.1, 88.1, 89.7.
- Imports (USD billions): -11.7, -14.2, -14.3, -16.7, -19.9, -23.2, -26.0, -29.0, -31.9, -34.9.
- Investment income (net, USD billions): 6.1, 8.9, 13.3, 15.6, 11.7, 15.6, 27.0, 31.8, 38.2, 45.2.
- Overall balance (USD billions): 0.8, 0.6, 3.6, 3.3, 3.1, 2.8, 2.5, 2.4, 2.1, 2.0.
- WEO oil price (USD/barrel, memorandum): 37.8, 53.4, 64.3, 71.0, 95.5, 94.5, 93.3, 92.8, 92.5, 92.5.

### Monetary sector and financial soundness (selected)
- Broad money levels (millions KD): 10,401 (2003), 11,655 (2004), 13,086 (2005), 15,921 (2006), 18,987 (2007), 21,695 (2008 projected).
- Broad money growth (percent): 7.8, 12.1, 12.3, 21.7, 19.3, 14.3.
- Regulatory capital to risk-weighted assets: 18.4, 17.3, 21.3, 21.8, 20.4 (2003–07).
- Ratios of banks' lending to banks' capital (selected): stock market related 37.6, 39.3, 44.6, 50.6, 48.2; real estate 71.4, 87.8, 90.7, 103.7, 115.9; total 109.0, 127.1, 135.3, 154.3, 164.1.

### Vulnerability and solvency indicators (selected)
- External debt including private sector (USD billions): 12.3, 12.2, 12.1, 16.5, 26.4, 26.3 (2002–07).
- Short-term debt (original maturity, USD billions): 4.9, 5.9, 5.9, 8.0, 12.8, 12.7.
- General government domestic debt/GDP: 29.9, 23.0, 17.3, 11.8, 8.5, 7.0.
- Interest payments/total revenue: 2.1, 1.2, 0.8, 0.6, 0.5, 0.4.
- CBK net foreign assets (USD billions): 8.4, 6.7, 7.3, 8.1, 11.8, 15.9 (2002–07).

### Data quality and dissemination — key recommendations
- National accounts: adopt 1993 SNA; improve coordination among Ministries of Planning, Oil, Finance; CBK should publish oil sector information in Quarterly Statistical Bulletin.
- Prices: develop WPI into PPI consistent with national accounts.
- Government finance: improve reporting of extrabudgetary items and reserve funds; report subannual GFS (Statement of Sources and Uses of Cash).
- Monetary and BOP: distinguish deposit-taking investment companies in monetary statistics; improve coverage of private sector capital flows and inward FDI data; disseminate IIP and participate in CPIS.
- Data dissemination: update GDDS metadata and consider SDDS subscription.

### Political/institutional update and near-term developments (since April 2008)
- Government resigned on March 17; Emir dissolved parliament and set new elections for May 17, 2008; previous government remains caretaker.
- State budget for 2008/09 approved by Council of Ministers and submitted to parliament in January 2008; will be formally issued by Amiri decree.
- Parliament elected in May will have right to review all decrees issued in absence of parliament.

### Recent inflation, exchange rate, monetary measures and market developments (as of March–April 2008)
- Inflation: declined to 6.7 percent (y/y) in November 2007, then rose to 7.5 percent (y/y) in December 2007; rents increased by 12.6 percent.
- KD/USD exchange rate had appreciated by 8.2 percent since move to basket peg in May 2007 (as of end-March 2008).
- REPO and discount rate cuts in January 2008: REPO cut by 50 basis points to 3.5 percent; discount rate cut from 6.25 to 5.75 percent.
- CBK measures of March 24, 2008 to contain consumer credit growth:
  - Reduce maximum monthly installment under consumer/installment loans from 50 to 40 percent of net salary/monthly income, and to 30 percent for pensioners.
  - Reduce maximum interest rate on such loans from 4 to 3 percent above the discount rate.
  - Fix interest rate on these loans for five years instead of allowing it to change with discount rate.
  - Prohibit banks from charging interest on these loans upfront.
  - Intensify moral suasion for prudent bank lending.
- KSE index: gained 24 percent in 2007 and gained 14 percent during Q1 2008, but fell again early 2008 as global turbulences intensified.

### Fiscal position update (FY2007/08 and FY2008/09 projections)
- Fiscal surplus estimated to have increased to 40 percent of GDP in FY2007/08 (ended March 31).
- Fiscal surplus projected to narrow in FY2008/09 due to a large transfer to KPISS and large increases in public wages, transfers, subsidies, and capital expenditure.
- Government finance indicators (percent of GDP, selected):
  - Total Revenue: 52.9 (2003), 55.7 (2004), 64.5 (2005), 64.0 (2006), 72.6 (2007), 70.3 (2008 est./proj.).
  - Total Expenditure: 36.2 (2003), 32.8 (2004), 27.4 (2005), 35.0 (2006), 32.2 (2007), 45.8 (2008 est./proj.).
  - Overall fiscal balance: 16.7 (2003), 22.9 (2004), 37.1 (2005), 29.0 (2006), 40.5 (2007), 24.5 (2008 est./proj.).

### Structural reforms, investment program and public priorities
- Five-year plan (2009–14) envisages: speed up privatization (reduce government share in land ownership from 90 percent), large infrastructure investments, rationalize welfare system.
- Legislative changes enacted/recent: profit tax on foreign investors reduced to 15 percent; capital gains from stock investments exempted; Sale of State Properties Law approved; privatization of Kuwait Airways authorized; ministry of finance consolidated budget preparation.
- Major investment program: $50 billion plan to raise production capacity to 4 mbpd by 2020 and double refining capacity to about 1.4 mbpd by 2012–13; financed essentially by KPC with strong private participation in downstream.

### Executive Board assessment and recommendations
- Directors commended prudent macroeconomic policies, structural reform efforts, and strong fiscal position.
- Priority: deal with inflation pressures near term.
- Recommended actions:
  - Fiscal policy to moderate demand pressures, address supply bottlenecks, and build financial assets for future generations.
  - Contain wage bill and subsidies through merit-based wage increases and better-targeted social spending.
  - Adopt medium-term budget preparation framework.
  - Some Directors called for greater KIA transparency and participation in sovereign wealth fund best-practice initiatives; others reserved.
  - Pegged exchange rate regime remains appropriate; basket peg may have helped contain imported inflation but peg limits active use of interest rate policy.
  - Enhance supply response in nontradables (housing and land) and contain domestic credit growth via supervisory vigilance and FSAP implementation.
  - Continue and broaden regular stress testing of financial sector.
  - Focus public expenditure on infrastructure and education to support private-sector employment for Kuwaiti nationals.
  - Improve economic statistics and consider SDDS subscription.
  - Encourage extension of HIPC debt relief to claims held by KIA.

### Authorities’ views (summary)
- Authorities emphasize using surpluses to raise growth potential via public investment and to accumulate savings to ensure intergenerational equity and reduce oil dependence.
- KIA manages two saving funds with oversight by KIA Board, internal/external auditors, and the Public Audit Office; biannual parliamentary oversight in place.
- Authorities concur with staff on adequacy of pegged exchange rate and plan to join GCC monetary union by 2010.
- Banking sector viewed as well capitalized and profitable; FSAP recommendations largely implemented except removal of ceiling on lending rates (parliamentary approval required).
- Authorities committed to statistical improvements, including CPI production.

*Source: IMF staff report and related staff statements and informational annexes for Kuwait (2008) — _cr08191_*

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

### Executive Summary

### Economic developments and outlook
- Kuwait’s macroeconomic performance has been strong and the outlook remains very favorable.
- Non-oil GDP continues to expand rapidly; non-oil activity—particularly in financial, transportation, and communication services—grew almost 9 percent.
- Oil production declined by 2.6 percent in 2007 in line with OPEC decisions.
- Both the fiscal and external current accounts remain in large surplus.
- Non-oil activities are expected to remain buoyant, spurred by rising wealth and confidence, public investment, and structural reforms to support private sector investment growth.
- Inflation reached 7 percent y/y in October 2007, driven by domestic demand pressures (especially rents) and higher import prices (mostly food).
- Asset prices surged: Kuwait Stock Exchange (KSE) index rose by 25 percent during 2007; real estate prices increased significantly.
- The KD appreciated by 5.9 percent against the U.S. dollar during 2007 after abandoning the peg to the U.S. dollar in May 2007 and moving to a basket peg.
- Broad money grew by 19 percent and credit to the economy by 36 percent during 2007.
- The non-oil deficit (excluding oil and investment income and recapitalization transfers to KPISS) rose to 50 percent of non-oil GDP in 2006/07 and is projected to reach 58 percent in 2007/08.
- The overall budget surplus is expected to increase to 39 percent of GDP for 2007/08.
- The government made a one-time payment of KD 2 billions to the public pension system (KPISS) to reduce its actuarial deficit.
- The authorities cut interest rates, keeping the KD interbank rate below LIBOR, and tightened the 80 percent loan-to-deposit ceiling (requiring the ratio to be met on average during the month rather than only at the end of the month).

### The authorities’ views and plans
- Undertake large-scale investments to expand oil production and refining capacity.
- Implement a fiscal strategy involving higher capital spending, limiting expanding current expenditure, and saving part of the oil wealth to reduce dependency on oil income for funding the budget.
- Continue a basket peg regime that has kept the Kuwaiti dinar (KD) broadly in line with fundamentals, although it constrains the ability to contain credit expansion and speculative capital movements.
- Consolidation in budget preparation: for the first time, budget preparation (including the wage bill and the capital budget) has been consolidated in the ministry of finance.
- Structural and market reforms: the National Assembly approved laws that reduce the profit tax on foreign investors from 55 percent to 15 percent, exempt capital gains from stock investment from tax, establish a sale of state properties law to provide state land to investors and a legal basis for PPPs, and authorized the privatization of Kuwait Airways.
- The government granted licenses to three private airlines and four new private universities, and privatized a number of gas stations.
- Kuwait reaffirmed its commitment to join the GCC monetary union; Kuwait has met all convergence criteria as of end-2007.

### Staff findings and recommendations
- Contain inflationary pressures by:
  - Enhancing the supply response in the nontradables sector.
  - Limiting government current spending to keep the economy from overheating.
  - Slowing credit growth.
- Strengthen further the fiscal framework to balance objectives of ensuring intergenerational equity, containing inflation, and meeting infrastructural needs of the oil and non-oil sectors.
- In the context of the pegged exchange regime and the easing monetary stance in the U.S., use available tools to:
  - Restrain credit growth.
  - Deter speculative capital flows.
  - Remain vigilant towards possible financial system vulnerabilities.
- Support private sector-led investment and growth by aligning capital market, companies, competition, public-private partnerships and privatization laws with best international practice.
- Enhance scope for involving foreign technical know-how in the development of Kuwait’s northern oil fields.
- The recommended policy mix should contribute to domestic and external stability and help address the current moderate undervaluation of the KD.

### Structural and institutional developments
- Progress on 2007 Article IV consultation recommendations:
  - A schedule to close the actuarial deficit of KPISS by 2009 was announced.
  - Strengthened fiscal framework and expanded privatization program.
  - Reduced taxes on foreign investors and priority for the capital market law.
  - Continued periodic stress-testing of banks and reaffirmation of GCC monetary union commitment.
  - Continued flexible application of Kuwaitization policy.
- Implementation of FSAP recommendations: most central bank-related recommendations implemented except removal of the ceiling on lending rates (which would require parliamentary approval).
- Regional/global integration:
  - Portfolio investment jumped sharply since 2004–05.
  - Expatriate workers rose from nearly 1 million in 2000 to 1.7 million in 2007.
  - The GCC common market agreement went into effect as of the beginning of 2008; the common market is viewed as a precondition to monetary union planned for 2010.

*Source: Executive Summary, IMF staff report on Kuwait (2008) — _cr08191 - Executive Summary_*

### 5.      Kuwait has continued a strong tradition of providing financial assistance to

### _cr08191 - 5.      Kuwait has continued a strong tradition of providing financial assistance to

### Medium-term policies and outlook
- The medium-term outlook is described as "highly favorable."
- Projected moderate growth in the oil sector will hinge upon the development of new oil and gas fields.
- Non-oil GDP is projected to grow at 8 percent.
- Inflation is projected to increase further in 2008 due largely to supply factors before moderating to about 5 percent over the medium term.
- Both the external current account and fiscal positions are projected to remain in large surplus, albeit at declining levels.
- Downside risks noted by the authorities: a possible sharp decline in oil prices; intensified domestic pressures for increasing budgetary transfers; setbacks in the implementation of structural reforms (including due to parliamentary opposition); and shortfalls in the execution of planned public investments.

### Oil sector prospects
- Authorities plan to increase oil production capacity from the current level of 2.7 million barrel per day (mbpd) to 4 mbpd in 2020.
- Achieving 4 mbpd would require developing the northern field (“Project Kuwait”) and utilizing advanced technology that may have to be provided by foreign companies.
- Parliament is debating draft legislation to allow participation of foreign companies, perhaps through enhanced technical service agreements.
- Downstream plans: double refining capacity to about 1.4 mbpd by 2012–13.
- Total sectoral investments for 2008–13 would amount to $50 billion, largely financed internally by Kuwait Petroleum Company (KPC) with strong involvement of the Kuwaiti and foreign private sector.

- Distribution of the $50 Billion Investment Plan in the Oil and Gas Sector:
  - Other upstream: 30%
  - Project Kuwait: 18%
  - New Refinery: 28%
  - Other downstream: 19%
  - Transportation: 3%
  - Petrochemicals: 2%

### Containing inflationary pressures
- Key requirements: growth of the nontradables sector, an appropriate fiscal policy framework, and lower credit growth.
- Rising oil wealth has boosted demand for nontradable items and expatriate labor, pushing up prices for housing, communication, and other services as well as asset prices (notably real estate).
- Structural reforms to enhance the supply response in the services sector (including better access to land) are critical to reduce pressures on nontradable prices.
- Fiscal policy should balance spending part of oil wealth to support consumption and investment while avoiding fuelling inflation.
- Excessive increases in salaries and transfers would add to demand pressures and increase the risk of a wage-price spiral.
- Containing credit growth will be necessary to restrain demand pressures.

### Fiscal policy strategy
- Authorities emphasize higher capital spending to support growth, limiting current expenditure, and saving part of oil revenues for future generations and to reduce dependency on oil income for funding the budget.
- Accumulation of financial assets and investments in infrastructure, education and public services are prioritized to create jobs for Kuwaitis in the private sector.
- Authorities will try to contain raises in salaries and benefits in the public sector—particularly if not closely tied to performance and merit—to contain recurrent expenditures and avoid weakening incentives to acquire marketable skills.
- Further raising already high subsidies would add to price distortions and misallocation of resources, notably in the power sector.
- Authorities plan sizable transfers from the budget to close the remaining KPISS actuarial deficit over the next two years and are considering reforming contribution and benefits rules to ensure viability.
- Planned improvements: better budget accounting and monitoring, adoption of GFSM 2001, and better anchoring of one-year budgets in rolling medium-term fiscal frameworks.
- Authorities skeptical that greater transparency of KIA and KPISS financial operations would necessarily strengthen consensus for fiscal strategy; stressed KIA’s financial position is subject to parliamentary scrutiny and that KIA’s investment policy is commercially driven and respects regulations in financial markets it invests in.

### Monetary and exchange rate policy and financial sector developments
- Authorities see merit in continuing a pegged exchange rate regime; recent move to an undisclosed basket peg is expected to create some room for maneuver vis-à-vis U.S. monetary policy.
- The undisclosed basket peg should better align the peg with Kuwait’s trading and investment pattern.
- CBK plans to rely mainly on prudential measures to keep credit expansion under control.
- Authorities remain committed to join planned GCC monetary union and recognize urgency of developing a common framework for exchange rate and monetary policy and necessary institutions if the target date of 2010 is to be met.
- Banking system: described as well capitalized and highly profitable; recent global financial turmoil appears not to have affected the financial system.
- The CBK is monitoring banks closely, including through regular stress testing, given rapid increase in credit and exposure to domestic and international stock and real estate markets.
- Investment companies have grown significantly and are considered systemically important; authorities comfortable with current regulatory framework covering disclosure, credit concentration and provisioning, anti-money laundering, and consumer/installment loan limits.
- CBK view: most investors in investment companies are high net worth individuals who should assume risks independently; "there will be no government bail-outs of any investment company."

### Investment companies—key statistics and features (Box 2)
- Between 2002 and 2007, the number of investment companies doubled to 78.
- Balance sheet assets grew by an annual average rate of 26 percent between 2002–07.
- Investment funds now manage on- and off-balance sheet assets amounting to about $160 billion.
- Capital-to-asset ratio on average exceeds 35 percent (net capital position could be smaller due to cross holdings).
- Loans from banks averaged 15 percent of investment companies' total liabilities during 2004–07.
- Foreign lines of credit made up 25 percent of liabilities in 2007.
- Investment companies accounted for a third of share volume traded in the KSE during 2007, and 16 percent of market capitalization in December 2007.
- At end 2007, the 43 listed investment companies posted on average price-earnings ratio of 7; bank stocks: 18; Kuwait market average: 12.

### Domestic and external stability; exchange rate assessment (Box 3)
- Staff ERER approach: KD currently moderately undervalued.
- Estimated elasticities: a 10 percent improvement in TOT appreciates ERER by 2 percent; a 1 percentage point of GDP increase in investment income appreciates ERER by 0.12 percent; a 1 percentage point of GDP increase in government expenditure depreciates ERER by 0.3 percent.
- From 2003, Kuwait’s ERER on a rising trend driven by TOT and investment income improvements; actual REER started to appreciate since 2004, with a gap to the smoothed ERER of 11 percent in 2007.
- This 11 percent gap is projected to vanish by 2009 given projected inflation-driven appreciation of the actual REER while the equilibrium rate remains unchanged.
- Macroeconomic balance (MB) approach: the current account (CA) is close to its “norm.” After "overshooting" the norm in 2006, the prevailing CA balance is close to that norm and would remain so in the medium term under the authorities’ investment program.

### Structural and statistical issues
- Acceleration of structural reforms is vital to support private sector-led investment and employment generation.
- Authorities working with parliament on reforms including:
  - Broadening incentives for involving foreign technical know-how in development of northern oil fields.
  - Providing a comprehensive legal framework to expand the role of the private sector through enacting companies, competition, public-private partnership and privatization laws.
  - Approving the Capital Market Law to unify and enhance the regulatory and supervisory framework for the market.
  - Enabling further access to land for private business and individuals.
- Efforts to improve macroeconomic statistics need to continue; recent delay in production of the CPI needs urgent attention.

### Staff appraisal — key conclusions
- Kuwait’s economy had strong performance in 2007 with prudent macroeconomic management supporting high growth in the non-oil economy.
- Maintaining performance and creating jobs for Kuwaitis in the private sector requires further structural reforms and public spending focused on infrastructure and education.
- Short-term main challenge: contain inflation, though temporarily higher inflation may be an inevitable part of fiscal spending to increase absorptive capacity.
- Kuwait’s plan to expand production and refining capacity will sustain favorable economic outlook and support global oil market stability.
- Enhancing scope for foreign technical know-how in developing northern oil fields is critical to achieve production targets and maximize recovery.
- Reducing inflationary pressures requires enhancing supply response in the nontradable sector, a strong fiscal policy framework, and containing credit growth.
- Move to an undisclosed basket peg might help contain imported inflation, but enhancing supply of nontradables (especially housing and land) is more important for controlling inflationary pressures.
- Containing strong credit growth would help restrain demand pressures, but use of interest rates involves a trade-off with containing speculative inflows and is constrained by the basket peg.

*Source: IMF staff report.*

### 21.      The government’s fiscal strategy is key for sustaining high job-creating growth

### 21. The government’s fiscal strategy is key for sustaining high job-creating growth

### Fiscal strategy and priorities
- The government’s fiscal strategy is key for sustaining high job-creating growth and reducing dependence on oil income over the long run, while preserving domestic and external stability.
- Staff urges the authorities to resist populist pressures to push up current expenditures by raises in salaries and benefits that are not closely tied to performance and merit.
- Rather than expanding an inefficient subsidies system, subsidies should be better targeted.
- The main element of the fiscal strategy should be centered around:
  - higher investments in infrastructure,
  - better education and public services,
  - accumulating additional resources to insure intergenerational equity and reduce dependence on oil.
- Greater transparency regarding the balance sheets, income, as well as contingent liabilities of KIA and KPISS, should support the fiscal strategy.

### Strengthening the fiscal framework
- Staff encourages the authorities to strengthen the fiscal framework further by:
  - (a) complementing plans to close the remaining KPISS actuarial deficit by reforming the contribution and benefits rules so as to ensure viability of the system;
  - (b) better anchoring of one-year budgets in rolling medium-term fiscal frameworks;
  - (c) introducing GFSM 2001 accounting; and
  - (d) furthering the ongoing coordination with other GCC countries toward the introduction of a value-added tax (VAT) and harmonization of tax laws.

### Exchange rate regime, monetary stance, and financial stability
- Staff considers the pegged exchange rate regime an appropriate choice given Kuwait’s openness, structure of financial markets, and the plans for regional monetary union.
- In the context of the pegged exchange regime and an easing monetary stance in the U.S., the authorities will need to use available prudential tools and fiscal and structural policies to help contain inflation and credit growth, and limit financial system vulnerabilities.
- The large growth in the investment companies sector calls for continued vigilance and regular stress testing for the sector.
- To address weaknesses in financial sector supervision and regulation identified in the FSAP, establishment of a unified and independent capital market regulator applying best practices will be particularly important.

### Policy mix, exchange rate valuation, and outlook
- Staff views the current and planned policy mix as contributing to external and domestic stability. Fiscal policy is key to ensure domestic and external stability, as the role of the real exchange rate in determining the current account is limited.
- Staff analysis points to a moderate undervaluation of the KD up to around 2006–07.
- However, it also suggests that the ongoing appreciation of the KD in real effective terms, set to accelerate due to relatively higher inflation in 2008, and the expansionary fiscal stance over the medium term, would bring the exchange rate in line with fundamentals over the course of 2008.

### Structural reforms to promote the private sector
- Staff urges the authorities to expedite structural reforms aimed at promoting the role of the private sector.
- Building on recent progress, staff encourages the authorities to swiftly bring capital market, companies, competition, public-private partnership and privatization laws in line with best international practice, and to further streamline business registration procedures and reduce administrative barriers to investment.
- Staff welcomes the authorities’ intention to improve public sector statistics and encourages them to develop a program aimed at subscribing to the Fund’s Special Data Dissemination System (SDDS).

### External assistance and multilateral initiatives
- Staff commends the authorities for substantial assistance extended to countries in and outside the region, active support for the HIPC initiative, and for considering ways to extend HIPC debt relief to claims held by KIA.

*Source: _cr08191 - 21.      The government’s fiscal strategy is key for sustaining high job-creating growth_*

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

### _cr08191 - 27.      It is recommended that the next Article IV consultation take place on the standard

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

### Key macroeconomic figures and projections (selected, 2004–08 unless otherwise indicated)
- Oil and gas sector
  - Total oil and gas exports (in billions of U.S. dollars): 27.8, 44.1, 55.7, 59.7, 81.4
  - Average oil export price (in U.S. dollar/barrel): 34.1, 49.1, 60.2, 67.8, 91.4
  - Crude oil production (in millions of barrels/day): 2.29, 2.57, 2.64, 2.58, 2.60
- National accounts and prices
  - Nominal GDP (market prices, in billions of Kuwaiti dinar): 17.5, 23.6, 28.6, 31.3, 39.6
  - Nominal GDP (market prices, in billions of U.S. dollars): 59.4, 80.9, 98.7, 111.3, 145.1
  - Real GDP (factor cost, annual percentage change): 10.6, 11.5, 6.4, 4.6, 6.0
  - Real oil GDP: 8.1, 11.4, 2.9, -2.3, 1.3
  - Real non-oil GDP: 12.9, 12.0, 9.4, 9.2, 8.6
  - CPI inflation (average): 1.3, 4.1, 3.1, 5.0, 6.5
- Money and credit (changes in percent of beginning broad money stock)
  - Net foreign assets: 10.3, 3.2, 12.5, 1.1, 7.6
  - Net domestic assets: 1.8, 9.1, 9.1, 18.2, 6.7
  - Claims on nongovernment sector: 14.5, 17.6, 24.5, 35.6, 21.3
  - Broad money (annual percent change): 12.1, 12.3, 21.7, 19.3, 14.3
- External sector (in billions of U.S. dollars, unless otherwise indicated)
  - Exports of goods: 30.1, 47.0, 58.6, 62.8, 84.7
  - Of which: Non-oil exports: 2.3, 2.9, 3.0, 3.1, 3.3
  - Imports of goods: -11.7, -14.2, -14.3, -16.7, -19.9
  - Current account (in billions of U.S. dollars): 18.2, 34.3, 51.1, 52.7, 65.6
  - Current account (in percent of GDP): 30.6, 42.5, 51.7, 47.4, 45.2
  - International reserve assets (in billions of U.S. dollars): 8.3, 9.0, 12.6, 15.5, 18.6
  - International reserve assets (in months of imports of goods and services): 5.2, 4.7, 6.1, 5.5, 5.7

### Fiscal accounts and budgetary projections (selected aggregates, fiscal years as indicated)
- Investment and savings (in percent of GDP)
  - Investment: 18.2, 16.4, 15.2, 20.3, 21.3
  - Public investment: 3.7, 3.0, 2.9, 6.0, 6.8
  - Private 1/: 14.5, 13.5, 12.4, 14.3, 14.5
  - Gross national savings: 48.8, 58.9, 67.0, 67.6, 66.5
- Budgetary operations (in percent of GDP at market prices)
  - Revenue: 55.7, 64.5, 64.0, 72.6, 70.3
    - Oil: 42.9, 52.1, 49.5, 56.6, 58.0
    - Non-oil, of which investment income: 12.8, 12.4, 14.5, 16.0, 12.3; investment income: 9.3, 9.8, 11.5, 13.6, 10.2
  - Expenditures and net lending: 32.8, 27.4, 35.0, 32.2, 45.8
    - Current: 28.6, 23.8, 30.9, 24.7, 37.8
    - Capital: 4.2, 3.6, 4.2, 7.4, 7.9
  - Balance: 22.9, 37.1, 29.0, 40.5, 24.5 (percent of GDP)
  - Domestic financing: -5.7, -1.2, -2.8, -3.2, -2.4
  - External financing: -17.3, -35.9, -26.1, -37.2, -22.1
  - Non-oil primary balance (in percent of non-oil GDP): -51.6, -48.2, -66.3, -58.4, -95.5
  - Total gross debt (calendar year-end): 17.3, 11.8, 8.5, 7.0, 5.5
- Summary of government finance (selected fiscal-year levels, in billions of KD)
  - Total revenue: 10.6, 16.0, 8.3, 18.8, 8.1, 24.2, 28.2 (presented across 2004/05–2008/09 rows)
  - Total expenditure: 6.2, 6.8, 10.5, 10.3, 11.1, 10.7, 18.4
  - Overall balance: 4.4, 9.2, -2.2, 8.5, -3.0, 13.5, 9.8
  - Reserve funds: -3.3, -8.9, ..., -7.7, ..., -12.4, -8.9
  - Overall balance exc. oil rev.: -3.8, -3.7, -9.9, -6.0, -10.4, -5.4, -13.4
  - Overall balance exc. oil rev. and inv. income: -5.6, -6.2, -9.9, -9.4, -10.4, -9.9, -17.5
- Memorandum (average oil export price, U.S. dollar/barrel across years reported): 37.8, 51.8, 36.0, 62.1, 36.0, 73.7, 91.2

### External sector and balance of payments (selected, 2004–13 projections)
- Current account (in billions of U.S. dollars): 18.2 (2004), 34.3 (2005), 51.1 (2006), 52.7 (2007), 65.6 (2008), 64.7 (2009), 71.9 (2010), 73.0 (2011), 75.2 (2012), 78.0 (2013)
- Goods (trade balance, in billions of U.S. dollars): 18.4, 32.7, 44.3, 46.1, 64.8, 61.9, 59.7, 58.1, 56.2, 54.8
- Exports (total): 30.1, 47.0, 58.6, 62.8, 84.7, 85.2, 85.6, 87.1, 88.1, 89.7
  - Oil exports: 27.8, 44.1, 55.7, 59.7, 81.4, 81.7, 82.0, 83.3, 84.1, 85.5
  - Non-oil exports including re-exports: 2.3, 2.9, 3.0, 3.1, 3.3, 3.5, 3.6, 3.8, 4.0, 4.2
- Imports: -11.7, -14.2, -14.3, -16.7, -19.9, -23.2, -26.0, -29.0, -31.9, -34.9
- Services: -3.8, -3.9, -3.2, -4.9, -6.0, -7.0, -7.7, -8.5, -9.2, -10.0
  - Travel: -3.5, -4.1, -5.0, -5.6, -6.6, -7.1, -7.5, -8.0, -8.4, -8.9
- Investment income (net): 6.1, 8.9, 13.3, 15.6, 11.7, 15.6, 27.0, 31.8, 38.2, 45.2
  - Receipts: 6.6, 9.4, 14.7, 17.8, 13.1, 17.2, 29.5, 34.4, 40.9, 47.9
  - General government receipts (selected): 5.2, 6.5, 9.4, 10.9, 8.1, 10.8, 18.5, 21.5, 25.6, 30.0
- Capital and financial account (in billions of U.S. dollars): -16.4, -30.4, -47.0, -52.1, -62.5, -61.9, -69.5, -70.7, -73.1, -76.0
  - Financial account (net): -16.8, -31.2, -47.9, -53.3, -63.8, -63.1, -70.7, -71.9, -74.4, -77.2
  - Direct investment (net abroad): -2.5, -5.1, -8.0, -10.4, -12.7, -9.0, -10.6, -19.3, -22.8, -28.1
  - Portfolio investment: -13.9, -10.5, -25.7, -37.3, -36.6, -35.4, -31.2, -24.2, -18.7, -16.0
- Overall balance (in billions of U.S. dollars): 0.8, 0.6, 3.6, 3.3, 3.1, 2.8, 2.5, 2.4, 2.1, 2.0
- Memorandum items
  - Current account/GDP (in percent): 30.6, 42.5, 51.7, 47.4, 45.2, 42.3, 44.6, 42.6, 41.4, 40.3
  - WEO oil price (dollars per barrel): 37.8, 53.4, 64.3, 71.0, 95.5, 94.5, 93.3, 92.8, 92.5, 92.5
  - International reserve assets (in millions of U.S. dollars): 8.3, 9.0, 12.6, 15.5, 18.6, 21.5, 23.9, 26.3, 28.4, 30.4
  - International reserves (in months of imports): 5.2, 4.7, 6.1, 5.5, 5.7, 5.9, 6.0, 6.0, 6.0, 6.0

### Monetary sector and financial soundness (selected indicators)
- Monetary survey (levels, end of period, in millions of KD)
  - Broad money: 10,401 (2003), 11,655 (2004), 13,086 (2005), 15,921 (2006), 18,987 (2007), 21,695 (2008 projected)
  - Money: 2,612, 3,174, 3,727, 3,550, 4,147, 4,738
  - Quasi money: 7,790, 8,481, 9,359, 12,370, 14,841, 17,778
- Monetary growth (change in percent of beginning broad money stock)
  - Broad money: 7.8, 12.1, 12.3, 21.7, 19.3, 14.3
  - Foreign assets (net) contribution to broad money change: -4.8, 10.3, 3.2, 12.5, 1.1, 7.6
- Financial soundness indicators (Core Set, selected, 2003–07)
  - Regulatory capital to risk-weighted assets: 18.4, 17.3, 21.3, 21.8, 20.4 (across years presented)
  - Nonperforming loans net of provisions to capital: 7.2, 5.9, ..., 15.2, 12.6
  - Return on assets: 2.0, 2.5, 3.0, 3.2, 3.4
  - Liquid assets to total assets: 14.8, 13.2, 11.1, ..., 8.1, 7.0
  - Loan provisions to nonperforming loans: 77.7, 82.5, 107.2, 95.8, 92.0 (encouraged set)
  - Ratios of banks' lending to banks' capital (stock market related, real estate, total): stock market related 37.6, 39.3, 44.6, 50.6, 48.2; real estate 71.4, 87.8, 90.7, 103.7, 115.9; total 109.0, 127.1, 135.3, 154.3, 164.1

### Vulnerability and solvency indicators (selected, 2002–07)
- External solvency
  - External debt including private sector (in billions of U.S. dollars): 12.3, 12.2, 12.1, 16.5, 26.4, 26.3
  - Short-term debt (original maturity; in billions of U.S. dollars): 4.9, 5.9, 5.9, 8.0, 12.8, 12.7
  - External debt/GDP: 32.1, 25.6, 20.4, 20.4, 26.8, 23.6
- Public sector solvency
  - General government domestic debt/GDP: 29.9, 23.0, 17.3, 11.8, 8.5, 7.0
  - Interest payments/total revenue: 2.1, 1.2, 0.8, 0.6, 0.5, 0.4
  - Oil revenue/total revenue: 74.1, 76.8, 77.1, 80.1, 78.1, 77.9
- External liquidity indicators
  - CBK net foreign assets (in billions of U.S. dollars): 8.4, 6.7, 7.3, 8.1, 11.8, 15.9
  - CBK gross foreign assets (in billions of U.S. dollars): 8.5, 6.7, 7.5, 8.5, 12.3, 16.4
  - CBK gross foreign assets (in months of imports of goods and services): 7.3, 4.9, 4.6, 4.5, 6.0, 5.8
  - Local banks' net foreign assets (in billions of U.S. dollars): 1.4, 1.7, 4.6, 5.3, 7.4, 5.1

### Illustrative macroeconomic baseline scenario (2004–13, selected trajectories)
- Nominal GDP (KD billions): 17.5 (2004), 23.6 (2005), 28.6 (2006), 31.3 (2007), 39.6 (2008), 41.7 (2009), 44.0 (2010), 46.8 (2011), 49.6 (2012), 52.9 (2013)
- Real GDP (annual percent change): 10.6, 11.5, 6.4, 4.6, 6.0, 6.1, 6.2, 6.2, 6.2, 6.0
- Kuwait crude export price (U.S. dollars per barrel): 34.1, 49.1, 60.2, 67.8, 91.4, 90.4, 89.0, 88.8, 87.8, 86.0
- Crude oil output (millions of barrels per day): 2.29, 2.57, 2.64, 2.58, 2.60, 2.65, 2.71, 2.76, 2.82, 2.87
- Fiscal balance (in percent of GDP): 22.9, 37.1, 29.0, 40.5, 24.5, 21.8, 35.6, 33.5, 31.3, 29.1
- Non-oil primary deficit/Non-oil GDP (in percent): -51.6, -48.2, -66.3, -58.4, -95.5, -93.1, -61.7, -60.5, -59.6, -58.5

### Statistical issues, data quality, and dissemination (key findings and recommendations)
- National accounts and production
  - Recent improvements: change of base year to 2000; value added estimates for subsidized goods and services of public utilities using input costs.
  - Further improvements planned: adoption of 1993 SNA, sampling frame based on 2002 establishment survey, expansion of questionnaire coverage.
  - Recommendation: dedicate adequate resources and improve coordination among Ministries of Planning, Oil, and Finance; Central Bank of Kuwait (CBK) should publish oil sector information in the Quarterly Statistical Bulletin (output, refining, domestic consumption, export price for crude and refined products, domestic price of petroleum products).
- Price statistics
  - CPI weights based on 1999-2000 household expenditure survey with reference year 2002; improved monthly CPI published with about one-month lag.
  - Recommendation: develop WPI into a Producer Price Index (PPI) consistent with national accounts and covering all domestically produced goods.
- Government finance statistics (GFS)
  - Annual GFS reported for GFS Yearbook, but major extrabudgetary items are not reported; operations of two reserve funds not fully reported.
  - Recommendation: improve reporting and classification (STA advised classifying reserve funds' operations as part of government), report subannual GFS (Statement of Sources and Uses of Cash for consolidated central government), strengthen Public Expenditure Management (PEM), and consider practices in the "Code of Good Practices on Fiscal Transparency".
- Monetary and financial statistics
  - CBK reports monetary data regularly; SRFs finalized and to be published in April 2008 IFS Supplement.
  - Recommendation: distinguish investment companies that accept deposits from those that do not and classify deposit-taking investment companies as part of depository corporations sector where appropriate.
- Balance of payments statistics
  - CBK compiles detailed annual BPM5 data and provides quarterly data to missions; data on capital flows of the nonfinancial private sector are limited, contributing to errors and omissions.
  - Improvements: dissemination of IIP data for 2001-2006 (excluding some general government external assets due to legal constraints); participation in CPIS for 2003-2006.
  - Recommendation: improve coverage of private sector capital flows and inward FDI data (surveys of direct investment enterprises).
- Data dissemination and GDDS participation
  - Kuwait is an early GDDS participant; most metadata not updated since October 2002 (except real sector and socio-demographic metadata).
  - CBK, Ministry of Planning, Ministry of Finance, and Kuwait Stock Exchange maintain public web data on monetary, BOP, GDP, public finance, CPI/WPI, and securities market indicators.

### IMF and multilateral engagement (selected)
- Fund relations
  - Membership joined September 13, 1962; Article VIII on April 5, 1963.
  - Quota: SDR 1,381.10 (100.00 percent)
  - Fund holdings of currency: 1,290.30 (93.43 percent of quota); Reserve position in Fund: 90.82 (6.58 percent of quota)
  - Outstanding purchases and loans: None; Financial arrangements: None.
  - Exchange rate arrangement: Since May 2007, Kuwaiti dinar pegged to an undisclosed currency basket; between January 1, 2003 and May 2007 pegged to U.S. dollar with a margin of 3.5 percent around parity of 299.63 fils/U.S. dollar.
  - Article IV: last Article IV consultation completed by the Executive Board on April 6, 2007; authorities decided not to publish the report.
- FSAP and technical assistance
  - FSAP: exercise conducted in September 2003; FSSA report discussed and issued May 2004, Country Report No. 04/151.
  - Technical assistance: multiple missions and seminars listed (GDDS seminar February 2000; National Accounts and Price Statistics June 2001–June 2002; Restructuring Budget Processes January/February 2002; A Program for Tax Reform December 2002; Bank Insolvency October 2004, among others).

*Source: IMF staff estimates, projections, and authorities' data as presented in the Kuwait 2008 Article IV consultation informational annex (tables and text supplied).*

### 1.      This statement summarizes information that has become available since the staff

### This statement summarizes information that has become available since the staff report on Kuwait was circulated to the Executive Board on April 3, 2008

### Political and institutional developments
- Kuwait’s Government resigned on March 17.
- Emir Sheikh Sabah Al-Ahmad dissolved the parliament and set new elections for May 17, 2008.
- The previous government remains in office as caretaker.
- The state budget for 2008/09 approved by the Council of Ministers and submitted to parliament in January 2008 has already taken effect and will be formally issued by Amiri decree to become law.
- The parliament elected in May will have the right to review all decrees issued in the absence of parliament and may approve them with or without amendment.

### Inflation, exchange rate, and monetary policy
- Inflation developments:
  - Inflation declined to 6.7 percent (y/y) in November 2007, then rose to 7.5 percent (y/y) in December 2007.
  - Inflation was fuelled by a 12.6 percent increase in rents.
- Exchange rate:
  - As of end-March 2008, the Kuwaiti Dinar/U.S. dollar exchange rate had appreciated by 8.2 percent since the move to a basket peg in May 2007.
  - Kuwait abandoned the peg to the U.S. dollar in May 2007 and pegged the Kuwaiti dinar (KD) to an undisclosed basket of currencies.
  - The real effective exchange rate (REER) of the Kuwaiti dinar appreciated by about 2 percent in 2007, largely due to a 6 percent appreciation against the U.S. dollar and relatively higher inflation.
- Central Bank of Kuwait (CBK) policy rates:
  - In January 2008, the CBK cut the REPO rate by 50 basis points to 3.5 percent and the discount rate from 6.25 to 5.75 percent.
- CBK measures of March 24, 2008 to contain consumer credit growth:
  - Reduce the maximum monthly installment under consumer and installment loans from 50 to 40 percent of clients’ net salary or monthly income, and to 30 percent for pensioners.
  - Reduce the maximum interest rate on such loans from 4 to 3 percent above the discount rate.
  - Fix the interest rate on this type of loans for five years instead of allowing it to change with changes in the discount rate.
  - Prohibit banks from charging interest on this type of loans upfront.
  - Intensify efforts through moral suasion to ensure bank lending remains prudent.

### Financial markets and external sector
- Kuwait stock market:
  - Kuwait’s stock market index gained 14 percent during the first quarter of 2008, following its 24 percent gain in 2007.
  - The KSE index gained 25 percent in 2007 (noted elsewhere in the document); it fell again in early 2008 as global turbulences intensified.
- Trade and current account:
  - Recent data indicate that imports in 2007 were higher by $3 billion than estimated in the staff report; exports were broadly in line with estimates.
  - Exports (in billions of U.S. dollars): 21.8 (2003), 30.1 (2004), 47.0 (2005), 58.6 (2006), 62.8 (2007), 84.7 (2008 est./proj.).
  - Crude oil and refined products exports (in billions of U.S. dollars): 19.6 (2003), 27.8 (2004), 44.1 (2005), 55.7 (2006), 59.7 (2007), 81.4 (2008 est./proj.).
  - Imports (in billions of U.S. dollars): -9.9 (2003), -11.7 (2004), -14.2 (2005), -14.3 (2006), -16.7 (2007), -19.9 (2008 est./proj.).
  - Current account balance (in billions of U.S. dollars): 9.4 (2003), 18.2 (2004), 34.3 (2005), 51.1 (2006), 52.7 (2007), 65.6 (2008 est./proj.).
  - Current account balance (percent of GDP): 19.7 (2003), 30.6 (2004), 42.5 (2005), 51.7 (2006), 47.4 (2007), 45.2 (2008 est./proj.).
  - International reserve assets (in billions of U.S. dollars): 7.6 (2003), 8.3 (2004), 9.0 (2005), 12.6 (2006), 15.5 (2007), 18.6 (2008 est./proj.).
  - International reserves in months of imports of goods and services: 5.5 (2003), 5.2 (2004), 4.7 (2005), 6.1 (2006), 5.5 (2007), 5.7 (2008 est./proj.).
  - Real effective exchange rate (percent change): -7.2 (2003), -5.1 (2004), 2.1 (2005), 0.8 (2006), 1.9 (2007), ... (2008).

### Fiscal position and public finance
- Fiscal outcomes:
  - The fiscal surplus is estimated to have increased to 40 percent of GDP in FY2007/08 (ended March 31).
  - The fiscal surplus is projected to narrow in FY2008/09 due to a large transfer to the Kuwait Public Institution for Social Security (KPISS), and large increases in public wages, transfers and subsidies, and capital expenditure.
- Government finance indicators (percent of GDP):
  - Total Revenue, of which: 52.9 (2003), 55.7 (2004), 64.5 (2005), 64.0 (2006), 72.6 (2007), 70.3 (2008 est./proj.).
  - Oil and gas revenue: 40.8 (2003), 42.9 (2004), 52.1 (2005), 49.5 (2006), 56.6 (2007), 58.0 (2008 est./proj.).
  - Investment income: 7.7 (2003), 9.3 (2004), 9.8 (2005), 11.5 (2006), 13.6 (2007), 10.2 (2008 est./proj.).
  - Total Expenditure: 36.2 (2003), 32.8 (2004), 27.4 (2005), 35.0 (2006), 32.2 (2007), 45.8 (2008 est./proj.).
  - Current Expenditure: 31.7 (2003), 28.6 (2004), 23.8 (2005), 30.9 (2006), 24.7 (2007), 37.8 (2008 est./proj.).
  - Capital Expenditure: 4.5 (2003), 4.2 (2004), 3.6 (2005), 4.2 (2006), 7.4 (2007), 7.9 (2008 est./proj.).
  - Overall fiscal balance: 16.7 (2003), 22.9 (2004), 37.1 (2005), 29.0 (2006), 40.5 (2007), 24.5 (2008 est./proj.).

### Monetary aggregates and credit
- Money and credit indicators (percent change):
  - Real GDP: 17.2 (2003), 10.6 (2004), 11.5 (2005), 6.4 (2006), 4.6 (2007), 6.0 (2008 est./proj.).
  - Real oil GDP: 19.8 (2003), 8.1 (2004), 11.4 (2005), 2.9 (2006), -2.3 (2007), 1.3 (2008 est./proj.).
  - Real non-oil GDP: 13.9 (2003), 12.9 (2004), 12.0 (2005), 9.4 (2006), 9.2 (2007), 8.6 (2008 est./proj.).
  - Consumer Price Index (annual average): 1.0 (2003), 1.3 (2004), 4.1 (2005), 3.1 (2006), 5.0 (2007), 6.5 (2008 est./proj.).
  - Broad money (percent change): 7.8 (2003), 12.1 (2004), 12.3 (2005), 21.7 (2006), 19.3 (2007), 14.3 (2008 est./proj.).
  - Interest Rate (Three-month Kuwaiti dinar deposit rate, period average): 1.5 (2003), 1.6 (2004), 2.9 (2005), 5.0 (2006), 5.2 (2007), ... (2008).
  - Claims on nongovernment sector (percent change): 21.4 (2003), 16.1 (2004), 18.8 (2005), 24.8 (2006), 35.1 (2007), 18.6 (2008 est./proj.).

### Structural reforms, privatization, and investment plans
- The Kuwait planning council released a five-year plan (2009–14) envisaging significant reforms to boost the non-oil economy and attract more foreign investment, including:
  - Speeding up privatization, including reducing the government share in land ownership from the present 90 percent.
  - Large investments in infrastructure.
  - Rationalization of the welfare system.
- Recent structural reforms and legislative changes:
  - Profit tax on foreign investors reduced from 55 percent to 15 percent.
  - Capital gains from stock investment exempted from tax.
  - National assembly approved the Sale of State Properties Law to provide state land to local or foreign investors and a legal basis for public-private partnerships.
  - Parliament approved a bill authorizing the privatization of Kuwait Airways.
  - Government granted licenses to three private airlines and four new private universities, and privatized a number of gas stations.
  - Budget preparation (including the wage bill and the capital budget) consolidated in the ministry of finance.
- Major investment program:
  - Kuwait launched an ambitious $50 billion investment program to expand upstream and downstream production capacity.
  - The plan aims at raising production capacity to 4 million barrels per day (mbpd) by 2020 and doubling refining capacity to about 1.4 mbpd by 2012–13.
  - The plan would be essentially financed by the Kuwait Petroleum Corporation’s own resources, with strong private participation in the downstream sector.

### Executive Board assessment and recommendations
- Overall assessment:
  - Directors commended Kuwait’s prudent macroeconomic policies, structural reform efforts, and strong fiscal position.
  - Directors agreed that dealing with inflation pressures will be a priority for the near term.
- Key recommendations and observations:
  - Fiscal policy should balance moderating demand pressures, addressing domestic supply bottlenecks, and building up financial assets for future generations.
  - Wage bill and subsidies should be contained through merit-based wage increases and better-targeted social spending.
  - Build on improvements in budget planning and execution by adopting a medium-term budget preparation framework.
  - Some Directors saw scope for greater transparency regarding the Kuwait Investment Authority (KIA) and encouraged participation in best-practice initiatives for sovereign wealth funds; others shared reservations.
  - Most Directors agreed the pegged exchange rate regime remains appropriate; the recent move to a basket peg may have helped contain imported inflation, but the peg limits the active use of interest rate policy and may warrant review.
  - Enhance supply response in the nontradables sector—particularly housing and land—to counter rising domestic inflationary pressures.
  - Contain domestic credit growth through continued supervisory vigilance and complete implementation of outstanding FSAP recommendations, including establishing a unified and independent capital market regulatory authority applying best international practices.
  - Continue and broaden regular stress testing of the overall financial sector.
  - Focus public expenditure on infrastructure and education rather than subsidies and transfers to support private-sector employment for Kuwaiti nationals.
  - Improve economic statistics and consider subscribing to the Fund’s Special Data Dissemination Standard (SDDS).
  - Encourage extension of HIPC debt relief to claims held by the Kuwait Investment Authority.

### Statement by A. Shakour Shaalan, Executive Director for Kuwait (April 18, 2008)
- Kuwait’s macroeconomic performance strengthened further in 2007, underpinned by prudent macroeconomic policies, structural reforms, a pick-up in investment, and higher oil prices.
- Non-oil economy exhibited buoyant growth, increasing private sector employment for Kuwaiti and non-Kuwaiti nationals, and substantial fiscal and external current account surpluses.
- Price pressures picked up, driven by domestic demand pressures and higher import prices, notably food.
- Fiscal reforms included a schedule to close the actuarial deficit of KPISS by 2009 and consolidation of budget preparation in the Ministry of Finance.
- Measures to facilitate foreign investment included reducing taxes on foreign investors and enabling state land provision to investors via the Sale of State Properties Law.

*Source: IMF staff statement and Public Information Notice summarizing the April 2008 Article IV consultation with Kuwait (documents circulated April–June 2008).*

### 5.      Higher oil revenues have contributed to a significant improvement in the fiscal

### _cr08191 - 5.      Higher oil revenues have contributed to a significant improvement in the fiscal

### Fiscal position and policy
- Overall fiscal surplus estimated at about 40 percent of GDP in FY2007/08, despite a substantial increase in capital spending.
- Authorities remain committed to fiscal prudence, including:
  - Containing recurrent spending by limiting increases in public sector salaries and benefits.
  - Avoiding further increases in subsidies to prevent price distortions and resource misallocation.

### Public finance structure and reform measures
- Plans to maintain focus on enhancing the structure of public finances, including:
  - Sizable transfers from the budget to close the remaining KPISS actuarial deficit over the next two years.
  - Considering reforming contribution and benefits rules to ensure the viability of the KPISS system.
  - Better anchoring of one-year budgets in rolling medium-term fiscal frameworks.
  - Introducing GFSM 2001 accounting.
  - Ongoing coordination with other GCC members on the introduction of a value-added tax and harmonization of tax laws.

### Sovereign wealth fund (KIA) transparency and oversight
- Authorities are unconvinced that greater transparency in KIA and KPISS financial operations would support their fiscal strategy or avert protectionist measures.
- Emphasis that KIA currently manages two highly efficient saving funds with safeguard arrangements:
  - Oversight by the KIA Board of Directors, internal and external auditors, and the Public Audit Office.
  - Rigorous biannual parliament oversight ensuring accountability.
- Legal constraints prohibit publication of KIA’s balance sheet and income statements, though staff note the data is widely reported in the media.

### Views on SWFs and international best practices
- Authorities agree with staff’s April 2008 Global Financial Stability Report assessment on the stabilizing role of SWFs, particularly through bank capital injections.
- KIA’s investment policy described as purely commercially driven and compliant with regulations in recipient markets.
- Authorities skeptical of the need for a code of “best practices,” arguing it could disrupt the flow of sizeable long-term capital from SWFs to institutions facing liquidity and capital needs.

### Monetary and exchange rate policies
- Under the pegged exchange regime and facing demand- and import-driven inflationary pressures, the Central Bank of Kuwait (CBK) aimed to:
  - Dampen capital inflows by reducing the Kuwaiti dinar interbank rate below LIBOR.
  - Rely on prudential measures to contain expansion of private credit.
- Authorities recognize the importance of:
  - Enhancing the supply response in the nontradable sector.
  - Further strengthening the fiscal policy framework.
  - Containing credit growth to reduce inflationary pressures.
- Authorities concur with staff on the adequacy of the pegged exchange rate given Kuwait’s openness, financial market structure, and plans for regional monetary union.
  - The recent move to a basket peg is expected to create room for maneuver relative to U.S. monetary policy and better align the peg with Kuwait’s trading and investment patterns.
  - Authorities reiterate their intention to join the planned GCC monetary union by 2010.

### External developments and policy implications
- Current and planned policy mix expected by authorities to lead to domestic and external stability over the medium term.
- Substantial external account surpluses recorded due to higher oil prices; surpluses expected to decline over the medium term as domestic demand and imports rise.
- Authorities stress the distinct nature of surpluses in oil-exporting countries and the critical need to:
  - Use surpluses to raise growth potential via public investment in infrastructure and social areas.
  - Accumulate savings through large fiscal and current account surpluses to ensure intergenerational equity, reduce dependence on oil revenues, and smooth revenue fluctuations.
- Equilibrium exchange rate calculations are said to present serious methodological weaknesses, compounded by volatility in oil prices.
- Standard notion of currency undervaluation argued not to apply since Kuwait is not gaining market share at the expense of other countries.
- Current account balances viewed as determined mostly by fiscal policy; reducing Kuwait’s current account surplus would involve either greater fiscal expansion (risking higher inflation) or reduced oil production (not desirable).

### Financial sector issues
- Kuwait’s banking sector benefits from rapid economic expansion and enjoys comfortable levels of profits and capitalization; it appears to be weathering the current financial turmoil well.
- Good progress implementing 2003 FSAP recommendations; all central bank measures implemented except removal of the ceiling on lending rates (which requires parliamentary approval).
- Periodic stress-testing of banks refined to strengthen resilience to rapid credit increase and exposures to domestic and international stock and real estate markets.
- Authorities note growth in number, size, and activities of investment companies, making that sector systemically important.
- CBK comfortable with current regulatory framework covering disclosure, credit concentration and provisioning, anti-money laundering, and consumer/installment loans limits, but will continue to monitor individual banks’ exposures to investment companies.

### Statistical and other issues
- Authorities committed to further improvements in the quality and dissemination of economic data.
- Recognize the need to improve CPI production, given the importance of current inflationary developments for economic policy.

### Development assistance
- Kuwait’s development assistance estimated at about 2 percent of GDP on average over the past 20 years, significantly exceeding the U.N. target.
- Kuwait is a strong supporter of the HIPC Initiative and is considering ways to extend HIPC debt relief to claims held by KIA.

*Source: _cr08191 - 5.      Higher oil revenues have contributed to a significant improvement in the fiscal*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08191.pdf_