## _cr09152

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### Economic developments and outlook
- Real GDP growth: estimated at 6.4 percent in 2008, up from 2.5 percent in 2007; projected to contract by about 1 percent (staff later projection: contract by 1.2 percent in 2009).  
- Non-oil GDP growth: about 7.3 percent in 2008.  
- Oil production: 2.68 million barrels per day (mbpd) in 2008; output reduced to about 2.5 mbpd in February 2009.  
- Inflation: peaked at 11.6 percent in August 2008 (year-on-year), reached 10.4 percent in November 2008; projected to moderate from an estimated 10 percent in 2008 to 6 percent in 2009.  
- Exchange rate/REER: KD appreciation and return to a basket peg (May 2007) led to a 7 percent appreciation in the REER in 2008.  
- Fiscal balances: overall budget surplus reached 40 percent of GDP in 2007/08 and is estimated at 26 percent in 2008/09; recapitalization of the pension fund amounted to 10.5 percent of GDP.  
- Non-oil deficit (definition excluding oil revenue, investment income, and recapitalization transfers): rose by 2 percentage points to 61 percent of non-oil GDP in 2008/09.  
- Current account: estimated surplus of $70 billion (45 percent of GDP) in 2008.  
- Money and credit: broad money growth declined from 19 percent (y-o-y) in 2007 to 16 percent in 2008; credit growth declined from 36 percent (y-o-y) in 2007 to 19 percent in 2008.  
- Financial market events: KSE index fell by 50 percent since the deepening of the global crisis after Lehman Brothers; October 2008: third largest bank lost $1.4 billion mostly on derivative transactions; December 2008: largest investment company defaulted on most of its $3 billion debt obligations; a large Islamic investment company sought to refinance up to $1 billion in debt.

### Authorities’ views and policy stance
- Financial stability plan under preparation; draft legislation under debate in parliament.  
- Objectives of the financial plan: restructure systemically important institutions that are under stress but solvent; facilitate exit of insolvent ones; encourage lending to productive activities.  
- Fiscal stance: fiscal prudence—lower transfers and current expenditure while maintaining capital spending—recommended given sharp revenue decline and oil price uncertainty.  
- Exchange rate: basket peg adopted May 2007 enhances monetary flexibility; KD broadly aligned with fundamentals.  
- Oil sector: authorities will continue an ambitious investment plan despite sharp oil price decline.

### Staff’s findings, projections, and risks
- Medium-term growth: 4–5 percent range conditional on global oil market developments, implementation of government investment plans, and structural reforms to promote private investment.  
- Major risks: rapid deterioration in financial institutions’ balance sheets; prolonged global recession with oil prices significantly below fiscal and current account breakeven points.  
- Fiscal/current account breakeven points for 2009: $33 and $30 per barrel, respectively.  
- Alternative scenario: illustrative 50 percent reduction in oil prices relative to baseline would initially plunge fiscal and current account balances into deficit with gradual recovery thereafter.

### Financial stability measures and market support (actions taken)
- Restored liquidity and stabilized interbank market; CBK eased credit conditions—especially for ICs.  
- Recapitalization of the third largest bank: shareholders provided 68 percent of the new capital and KIA the rest.  
- Law guaranteeing customer deposits at local banks passed.  
- Government established a long-term fund to invest in the KSE with initial capital of about $5.5 billion funded by KIA and other public entities.

### Financial Stability Law (FSL) — draft features and fiscal implications
- Draft adopted by cabinet and submitted to parliament; draft under debate.  
- Stated objectives: restructure stressed-but-solvent systemic institutions; facilitate exit of insolvent institutions; encourage lending to productive domestic activities.  
- Authorities’ estimated upfront fiscal cost for initial FSL draft: about $5 billion (cost likely higher for final draft).  
- FSL conditionality: potential help subject to conditions including right to merge institutions; provides resolution framework for insolvent financial institutions.  
- Political dynamics: some parliamentarians sought changes tying approval to public assistance for household debt; such requests were rejected by government.

### Restoring credit access and CBK measures
- CBK measures:
  - Raised loan-to-deposit ratio from 80 percent to 85 percent.  
  - Increased bank-specific caps on credit growth by 5 percentage points.  
  - Encouraged maintaining/renewing credit lines to deserving ICs and avoiding sale of collateral shares.  
- FSL envisages partial loan guarantees to encourage lending to productive domestic activities.  
- Authorities emphasize balancing credit support with preserving banks’ asset quality.

### Investment Companies (ICs): scale, vulnerabilities, and crisis impact
- ICs expanded to 99 since 2005.  
- IC assets: $65 billion (on-balance sheet) and $95 billion (off-balance sheet).  
- Structural vulnerabilities: (i) highly leveraged positions; (ii) dependence on external financing; (iii) maturity mismatch; (iv) large exposure to equity and real estate; (v) weak disclosure; (vi) fragmentation (average KD 0.40 billion of assets per IC).  
- Crisis impact: foreign lines of $16 billion difficult to maintain/renew; IC assets contracted by $30 billion to $148 billion between August and December 2008; preliminary nine-month results for 46 listed ICs show a 27 percent decline ($1 billion) in investment income and $0.3 billion of unrealized losses.  
- Transmission to banks: bank loans to ICs represent 12 percent of banks’ total loans; ICs and banks account for 13 percent and 34 percent of KSE market capitalization, respectively.  
- Example exposures: end-September 2008, 35 real estate companies with total assets of $20 billion had invested up to $4 billion in the KSE; bank loans to individuals for investing in stocks represent 12 percent of banks’ total loans.

### Banking sector stress test — scenarios, assumptions, and results
- Scenario framework: varying severity (baseline, 5%, 10%, 15%, 20% default/loss rates) with larger global slowdown lowering oil revenues, constraining credit (esp. for ICs), depressing asset prices, and raising defaults mainly in construction, real estate, securities-investing individuals, and ICs.  
- Key assumptions: CAR = 16 percent (Sept 2008 level); no credit portfolio growth in 2009; decline in risk weighted assets equivalent to increase in NPLs; 75 percent loss-given-default; regulatory capital = owners’ equity in Dec 2008; other technical assumptions on default and loss transmission.  
- Results (tabular figures preserved):
  - Banks regulatory capital (in million KD): 4,425; 3,643; 2,861; 2,080; 1,298  
  - Banks risk weighted assets (in million KD): 27,658; 26,275; 24,892; 23,509; 22,126  
  - Capital adequacy ratio (CAR) (in percent): 16.0; 13.9; 11.5; 8.8; 5.9  
  - NPLs to total loans (in percent): 3.1; 5.9; 8.6; 11.4; 14.2  
  - Recapitalization needs (in million U.S. dollars) 1/: 0.0; 0.0; 443.2; 2,617.8; 4,792.5  
  - Recapitalization needs (in percent of 2009 GDP): 0.0; 0.0; 0.4; 2.6; 4.8  
- Interpretation:
  - 5–10 percent scenarios: system remains adequately capitalized though some banks become undercapitalized.  
  - 15–20 percent scenarios: system becomes undercapitalized.  
  - Recapitalizing to a 12 percent CAR under the 20 percent scenario would require injection of at least $5 billion, equivalent to 5 percent of GDP.  
- Banks' 2008 exposures (shares of total assets / capital / total loans, in percent): lending to construction 4.3; 38.4; 7.2 — lending to real estate 14.5; 130.2; 24.4 — lending for purchase of securities 6.8; 63.1; 11.8 — lending to investment companies 7.0; 64.7; 12.1 — total exposure 42.0; 382.8; 141.8.

### Principles guiding the financial stability strategy
- Do not delay necessary consolidation and restructuring.  
- Favor upfront recognition of losses.  
- Recapitalization should rely on participation of existing shareholders or new private investors where possible.  
- Keep measures relatively simple to reduce monitoring costs, enhance transparency, and speed implementation.  
- Implement an effective communication and coordination plan detailing actions and communications at each stage.

### Regulatory oversight, stress testing, and FSAP plans
- Authorities plan to tighten oversight, especially of ICs.  
- Emphasis on comprehensive stress tests for the financial system, including ICs, to assess pronounced real estate and further stock market losses.  
- CBK appointed international experts to address difficulties assessing some ICs’ foreign assets.  
- Authorities requested an FSAP update in late 2009.

### Macroeconomic policy mix and fiscal considerations
- 2009/10 budget: capital expenditures to be maintained; current expenditures could be cut; previously-planned transfer of KD 5.5 billion to pension fund postponed.  
- Non-oil deficit as share of non-oil GDP estimated to fall by 3 percentage points to 58 percent in 2009/10.  
- Fiscal stimulus debate: staff urged complementing financial stability package with fiscal stimulus focused on infrastructure to increase demand and shore up confidence; authorities emphasized fiscal prudence citing revenue decline, uncertainty, remittance/import leakages, and capacity constraints.  
- Possible adjustment measures if oil prices remain low: reduce subsidies for fuel/electricity/water (noted fiscal cost: 9.5 percent of GDP and 25 percent of total government expenditures), reform pension system, link public sector salaries/benefits to performance, step up efforts to introduce VAT in coordination with GCC countries.  
- Recommendation: formulate fiscal policy within a medium-term framework; IMF technical assistance provided detailed recommendations.

### Monetary policy and exchange rate
- Monetary stance: easing and supportive measures (liquidity injections, loan-to-deposit relaxation) appropriate to support macro and financial stability; real interest rates should return to positive territory as inflation declines.  
- Exchange rate regime: move to a basket peg (May 2007) enhanced flexibility; KD considered broadly consistent with domestic and external stability.  
- CGER-type findings:
  - ERER: KD moved from undervaluation in 2007 to a small overvaluation (6 percent) by end-2008; KD depreciation in early 2009 should help close this gap.  
  - Macro Balance (MB): CA surplus slightly below its “norm”; gap expected to close by 2013 with KD slightly undervalued by 2013.  
  - External Sustainability (ES): projected CA surplus is too low relative to norm derived from annuity financing a constant per capita non-oil CA deficit.  
- Projected Current Account and Norms (in percent of GDP): 2008: Estimated/Projected CA 44.7; MB norm 45.4; ES norm 51.1 — 2013: Estimated/Projected CA 38.8; MB norm 34.6; ES norm 53.0.  
- CGER ES assumptions include: reserves of 102 billion barrels; 64 percent recovery rate; production peaking at 2.9 mbd in 2030 then declining by 2 percent per annum; beyond 2013 oil prices and GDP deflator increasing by 3.5 percent a year; real GDP by 2.8 percent; population by 2 percent; nominal discount rate and rate of return on assets of 6.5 percent; initial financial wealth of $0.3 trillion.

### Oil and gas sector prospects and investment plan
- Authorities reaffirmed that decline in oil prices would not affect upstream and downstream investment plans.  
- Production capacity targets: current 2.7 mbpd; plan to increase to 3.0 mbpd in 2010; plan to increase to 3.2 mbpd in 2013–14.  
- Gas production stages: first stage completed producing 150 million cubic feet (mcf); second stage (2011–12) to 400 mcf; third stage (2015–16) to 1.0 billion cubic feet.  
- $84 Billion Investment Plan distribution in Oil and Gas Sector: Upstream 46%; Other downstream 32%; New Refinery 18%; Petrochemicals 1%; Transportation and other 3%.  
- Projects will not involve IOCs; projects would be self-financed though borrowing may be needed if oil prices decline or remain low for prolonged periods. Political consensus lacking for IOC involvement.

### Structural reforms, AML/CFT, and data issues
- Structural reform progress slow; little progress on companies, competition, PPP, and privatization laws (except capital market law).  
- Corporate tax: marginal corporate tax rate on foreign companies reduced from 55 percent to 15 percent in 2008; implementing regulations information lacking.  
- AML/CFT law revision: draft with Ministry of Finance to align with international standards.  
- Data weaknesses: CPI, national accounts, and trade data released with considerable lags; more progress needed.

### Recent political developments and implementation risks
- Political events: cabinet resignation on March 16, 2009 (fourth in two years); Emir dissolved parliament and elections to be held in two months; political stalemate has significantly hampered economic reform pace and may delay key legislation, including the financial stability plan.

### Executive Board assessment, Amiri decree (March 2009), and policy priorities
- Executive Board commended prudent macro policy and proactive financial stability measures (liquidity injections, FSL).  
- Board recommendations emphasized consolidation/restructuring, upfront loss recognition, private investor participation in recapitalizations, strengthened risk oversight, IC sector restructuring, FSAP update, and speeded AML/CFT reform.  
- Fiscal guidance: support for maintaining capital spending while containing current spending; some Directors encouraged fiscal stimulus while others cautioned on absorptive capacity and leakages; medium-term fiscal reform to reduce oil dependence urged (including VAT in coordination with GCC).  
- Structural reform priorities: enact capital markets, companies, competition, PPP, and privatization laws; streamline business registration; enhance access to land.  
- Amiri decree (March 26, 2009) approved Financial Stability measures including: addressing possible bank undercapitalization through capital injections and government guarantees; guaranteeing 50 percent of new loans to solvent, viable ICs; government guarantees for 50 percent of new local bank loans to productive sectors (maximum KD 4 billions in two years) with restrictions (no speculative equity/real estate use or repayment of existing loans); legal framework for resolution of insolvent financial institutions.  
- 2009/10 Budget (Amiri decree March 29, 2009): broadly in line with mission information; capital budget allocation declines by 24 percent; cancellation of one-off payment of KD 5.5 billion (about 13 percent of 2008 GDP) to pension fund.

### Key selected indicators (2004–09; preserved series highlights)
- Oil and gas exports (billions of U.S. dollars): 27.8, 44.1, 55.7, 60.1, 84.1, 35.2.  
- Average oil export price (U.S. dollars/barrel): 34.1, 49.1, 60.2, 67.8, 92.4, 40.0.  
- Crude oil production (millions of barrels/day): 2.29, 2.57, 2.64, 2.58, 2.68, 2.56.  
- Nominal GDP (billions KD): 17.5, 23.6, 29.5, 31.8, 42.5, 28.1.  
- Real GDP (percent): 10.2, 10.7, 5.2, 2.5, 6.4, -1.2.  
- Real non-oil GDP (percent): 12.1, 10.6, 8.3, 7.8, 7.3, 1.0.  
- CPI inflation (average): 1.3, 4.1, 3.1, 5.5, 10.5, 6.0.  
- Investment (percent of GDP): 18.2, 16.4, 16.2, 19.4, 17.6, 14.7.  
- Gross national savings (percent of GDP): 48.7, 58.9, 66.1, 64.2, 62.2, 33.9.  
- Revenue (percent of GDP): 53.8, 75.6, 67.0, 67.8, 65.5, 48.1.  
- Expenditures and net lending (percent of GDP): 32.8, 27.2, 34.2, 27.9, 39.7, 39.2.  
- Current account (in billions / percent of GDP): 18.2 (30.6), 34.3 (42.5), 50.6 (49.8), 50.0 (44.7), 70.6 (44.7), 19.0 (19.2).  
- Broad money (annual percent change): 12.1, 12.3, 21.7, 19.3, 15.6, 8.4.  
- KSE unweighted index (annual percent change): 33.8, 78.6, -12.0, 23.6, -37.5, -11.0.  
- Financial soundness (Regulatory capital to risk-weighted assets): 17.3, 21.3, 21.8, 18.5, 16.0 (2004–08).  
- Vulnerability (REER CPI-based, period average): -5.1, 2.0, 0.9, 0.4, 7.2 (2004–08).

*IMF staff report and Public Information Notice (PIN) No. 09/56 — IMF Executive Board Concludes 2009 Article IV Consultation with Kuwait (Informational Annex prepared March 25, 2009).*

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

### _cr09152 - Executive Summary

### Economic developments and outlook
- Real GDP growth is estimated at 6.4 percent in 2008, up from 2.5 percent in 2007.  
- Non-oil GDP growth was about 7.3 percent in 2008.  
- Real GDP is projected to contract by about 1 percent (staff later projection: contract by 1.2 percent in 2009) reflecting lower oil production and weaker non-oil activity.  
- Oil production was 2.68 million barrels per day (mbpd) in 2008; output was reduced to about 2.5 mbpd in February 2009, in line with OPEC’s decisions.  
- Inflation: peaked at 11.6 percent in August 2008 (year-on-year), reached 10.4 percent in November 2008; projected to moderate from an estimated 10 percent in 2008 to 6 percent in 2009.  
- Exchange rate: KD appreciation and a return to a basket peg in May 2007 led to a 7 percent appreciation in the real effective exchange rate (REER) in 2008.  
- Fiscal balances: overall budget surplus reached 40 percent of GDP in 2007/08 and is estimated at 26 percent in 2008/09; recapitalization of the pension fund amounted to 10.5 percent of GDP.  
- Non-oil deficit (excluding oil revenue, income from investments, and recapitalization transfers to the pension fund) rose by 2 percentage points to 61 percent of non-oil GDP in 2008/09.  
- Current account: estimated surplus of $70 billion (45 percent of GDP) in 2008.  
- Money and credit: broad money growth declined from 19 percent (y-o-y) in 2007 to 16 percent in 2008; credit growth declined from 36 percent (y-o-y) in 2007 to 19 percent in 2008.  
- Financial markets: Kuwait Stock Exchange index fell by 50 percent since the deepening of the global crisis after Lehman Brothers; October 2008: third largest bank lost $1.4 billion mostly on derivative transactions; December 2008: largest investment company defaulted on most of its $3 billion debt obligations; a large Islamic investment company sought to refinance up to $1 billion in debt.

### Authorities’ views and policy stance
- Authorities are preparing a comprehensive plan to preserve financial stability and support economic activity; legislation is under debate in parliament.  
- Objectives of the financial plan: restructure systemically important financial institutions that are under stress but solvent; facilitate exit of insolvent ones; encourage lending to productive activities.  
- Fiscal stance: fiscal prudence through lower transfers and current expenditure while maintaining capital spending is necessary given the sharp decline in revenues and uncertainty about future oil prices.  
- Exchange rate: return to a basket peg has enhanced monetary policy flexibility and kept the Kuwaiti dinar broadly in line with fundamentals.  
- Oil sector: authorities will continue an ambitious investment plan in the oil sector despite the sharp decline in oil prices.  

### Staff’s findings and projections
- Medium-term growth to reach the 4–5 percent range depends on global oil market developments, implementation of government investment plans, and progress with structural reforms to promote private investment.  
- Major risks: rapid deterioration in financial institutions’ balance sheets and a prolonged global recession that keeps oil prices significantly below fiscal and current account breakeven points.  
- Fiscal/current account breakeven points for 2009 are estimated at $33 and $30 per barrel, respectively.  
- Alternative scenario: an illustrative 50 percent reduction in oil prices relative to the baseline would initially plunge fiscal and current account balances into deficit and lead to gradual recovery thereafter.

### Staff recommendations — financial stability and fiscal policy
- Financial stability plan should:
  - Not prevent necessary consolidation and restructuring of the financial sector.  
  - Favor upfront recognition of losses.  
  - Avoid rewarding excessive risk taking.  
  - Minimize fiscal cost.  
- Central Bank of Kuwait (CBK) should:
  - Strengthen oversight of risk management practices.  
  - Conduct comprehensive stress tests to assess impact of further asset price declines and prolonged low growth; use results to determine the need for intervention.  
- Fiscal policy:
  - Complement the financial stability plan with a fiscal stimulus package focused on key infrastructure projects.  
  - Pursue fiscal reform to reduce dependence on oil revenue and preserve long-term sustainability.  
- Exchange rate policy: KD is broadly aligned with fundamentals and the basket peg remains appropriate in the run up to the GCC monetary union.  
- Structural reforms: expedite implementation of reforms critical to private-sector led growth.

### Recent developments affecting policy implementation
- Political developments: cabinet resignation on March 16, 2009 (the fourth in two years); the Emir dissolved parliament and elections to be held in two months. Political stalemate has significantly hampered the pace of economic reforms and may delay key legislation, including a financial stability plan.  
- Financial system vulnerabilities:
  - Banking sector indicators (selected): Capital Adequacy Ratio 17.3 (2004), 21.1 (2005), 21.8 (2006), 18.5 (2007), 16 (Sept 2008); NPLs to total loans 5.3 (2004), 5.0 (2005), 3.9 (2006), 3.2 (2007), 3.1 (2008); Provisions for NPLs 82.5 (2004), 107.2 (2005), 95.8 (2006), 92.0 (2007), 85 (Sept 2008); Return on Assets 2.5 (2004), 3.0 (2005), 3.2 (2006), 3.4 (2007), 3.2 (2008).  
  - Investment companies (ICs) almost doubled in number to 99 since 2005; their on- and off-balance sheet assets represent more than 100 percent of banking system assets, making them systemically important; IC leverage and refinancing difficulties are a key vulnerability that could affect banks directly through lending exposures and indirectly through asset price effects and confidence channels.

*IMF staff report: Executive Summary (2009 Article IV Consultation with Kuwait).*

### 10.      The authorities have taken several measures to preserve financial stability.

### _cr09152 - 10.      The authorities have taken several measures to preserve financial stability.

### Financial stability measures and market support
- Restored liquidity and stabilized the interbank market.
- Central Bank of Kuwait (CBK) eased credit conditions—especially for ICs.
- Recapitalization of the third largest bank: shareholders provided 68 percent of the new capital and KIA the rest.
- Law guaranteeing customer deposits at local banks was passed.
- Government established a long-term fund to invest in the KSE with an initial capital of about $5.5 billion funded by the KIA and other public entities.

### Financial Stability Law (FSL) — draft and objectives
- A draft Financial Stability Law was adopted by the cabinet and submitted to parliament; draft still under debate.
- Stated objectives:
  - Restructure systemically important financial institutions that are under stress but solvent.
  - Facilitate the exit of insolvent institutions.
  - Encourage lending to productive economic activities.
- Fiscal implications and conditionality:
  - Authorities estimated the upfront fiscal cost for the initial FSL draft at about $5 billion (cost likely higher for the final draft).
  - Potential help to distressed institutions will carry conditionality, including the right to merge institutions.
  - The draft provides a resolution framework for insolvent financial institutions.
- Political dynamics:
  - Some parliamentarians have sought major changes and tied approval requests to providing public assistance for household debt; such requests were rejected by the government.

### Restoring credit access and CBK measures
- CBK measures to facilitate credit growth:
  - Raised the loan-to-deposit ratio from 80 percent to 85 percent.
  - Increased bank-specific caps on credit growth by 5 percentage points.
  - Encouraged banks to maintain and renew credit lines to deserving ICs and avoid selling collateral shares in their possession.
- FSL envisages providing partial loan guarantees to encourage lending to productive domestic activities.
- Authorities emphasize balancing credit growth encouragement with preserving banks’ asset quality.

### Investment Companies (ICs): activities, vulnerabilities, and crisis impact (Box 1)
- Activities and scale:
  - ICs provide asset management and financial services (brokerage, portfolio management, forward trading, IPOs, fund management, corporate finance advisory, private equity).
  - Number of ICs almost doubled to 99 since 2005.
  - ICs have $65 billion and $95 billion of on- and off-balance sheet assets, respectively, higher than the banking system’s assets.
- Structural sources of vulnerability:
  - (i) highly leveraged positions
  - (ii) significant dependence on external financing
  - (iii) maturity mismatch between assets and liabilities
  - (iv) large exposure to asset markets (equity and real estate)
  - (v) weak disclosure
  - (vi) fragmentation of the industry (an average of KD 0.40 billion of assets per investment company).
- Global crisis impact:
  - Foreign lines amounting to $16 billion were difficult to maintain/renew; some ICs defaulted or were on the brink of default.
  - IC assets contracted by $30 billion to $148 billion between August and December 2008.
  - Preliminary nine-month results for 46 listed ICs show a 27 percent decline ($1 billion) in investment income and $0.3 billion of unrealized losses.
- Transmission channels to the banking system:
  - Bank loans to ICs represent 12 percent of banks’ total loans.
  - ICs and banks account respectively for 13 percent and 34 percent of KSE market capitalization.
  - Deterioration in IC solvency would directly affect banks’ asset quality and indirectly depress equity prices, weakening household and non-financial corporate balance sheets.
- Example: at end-September 2008, 35 real estate companies with total assets of $20 billion had invested up to $4 billion in the KSE.
- Bank loans to individuals for investing in stocks represent 12 percent of banks’ total loans.

### Banking sector stress test (Box 2) — scenarios, assumptions, and results
- Scenario summary:
  - Scenarios differ by severity; more severe global slowdown lowers oil revenues, investor and consumer confidence, constrains credit (especially for ICs), depresses asset prices, and increases loan defaults/losses primarily in construction, real estate, securities-investing individuals, and ICs.
  - Severity reflected in percent of default in loans and percent of losses in investments.
- Key assumptions:
  - Capital adequacy ratio (CAR) for the banking sector is 16 percent (September 2008 level).
  - No growth in the credit portfolio in 2009.
  - Decline in risk weighted assets equivalent to the increase in NPLs.
  - 75 percent loss-given-default ratio.
  - Default rate in loans to other sectors equal to ¼ of the default rate of loans to risky sectors.
  - Loss in investment equal to the default rate of loans to risky sectors.
  - Regulatory capital equal to owners’ equity in December 2008.
- Results (tabular figures preserved):
  - Baseline and scenarios (5%, 10%, 15%, 20%):
    - Banks regulatory capital (in million KD): 4,425; 3,643; 2,861; 2,080; 1,298
    - Banks risk weighted assets (in million KD): 27,658; 26,275; 24,892; 23,509; 22,126
    - Capital adequacy ratio (CAR) (in percent): 16.0; 13.9; 11.5; 8.8; 5.9
    - NPLs to total loans (in percent): 3.1; 5.9; 8.6; 11.4; 14.2
    - Recapitalization needs (in million U.S. dollars) 1/: 0.0; 0.0; 443.2; 2,617.8; 4,792.5
    - Recapitalization needs (in percent of 2009 GDP): 0.0; 0.0; 0.4; 2.6; 4.8
  - Interpretation:
    - Scenarios with 5 to 10 percent default/loss rates: banking system would remain adequately capitalized although some banks become undercapitalized.
    - Scenarios with 15–20 percent default/loss rates: the system becomes undercapitalized.
    - Recapitalizing the banking system to a 12 percent CAR under the 20 percent scenario would require the injection of at least $5 billion, equivalent to 5 percent of GDP.
- Banks' relatively high risky assets (2008 exposures; shares of total assets/capital/total loans, in percent):
  - Lending to construction: 4.3; 38.4; 7.2
  - Lending to real estate: 14.5; 130.2; 24.4
  - Lending for purchase of securities: 6.8; 63.1; 11.8
  - Lending to investment companies: 7.0; 64.7; 12.1
  - Other local investments 1/: 4.5; 40.9; ...
  - Foreign investments 1/: 5.0; 45.5; ...
  - Total exposure: 42.0; 382.8; 141.8
- Note: Recapitalization needs figure is a lower bound given banks differ in CAR.

### Principles guiding the financial stability strategy
- Strategy should not delay or prevent necessary consolidation and restructuring.
- Favor upfront recognition of losses (as in the recent bank recapitalization).
- Recapitalization should, to the extent possible, rely on participation of existing shareholders or new private investors.
- Measures to address stress should be relatively simple to reduce monitoring costs, enhance transparency, and speed implementation.
- An effective communication and coordination plan detailing actions and communication at each stage by all necessary parties is key to success.

### Regulatory oversight and stress-testing plans
- Authorities plan to tighten regulatory oversight, especially of ICs.
- Emphasis on conducting comprehensive stress tests for the financial system, including ICs, to assess impacts of pronounced declines in real estate prices and further stock market losses.
- CBK appointed international experts to address difficulties in assessing some ICs’ foreign assets.
- Authorities requested an FSAP update in late 2009.

### Macroeconomic policy mix and fiscal considerations
- 2009/10 budget status:
  - Capital expenditures will be maintained but current expenditures could be cut.
  - Previously-planned transfer of KD 5.5 billion to the pension fund will be postponed.
  - Non-oil deficit as a share of non-oil GDP is estimated to fall by 3 percentage points to 58 percent in 2009/10.
- Fiscal stimulus discussion:
  - Mission urged complementing financial stability package with fiscal stimulus to increase demand, shore up investor confidence, and help stabilize asset markets.
  - Authorities argued fiscal prudence warranted due to sharp decline in revenues and oil price uncertainty; noted significant leakages through remittances and imports and capacity constraints limiting capital spending.
- If oil prices remain low for a prolonged period, possible adjustment measures to preserve sustainability and intergenerational equity:
  - Reducing subsidies for fuel, electricity, and water (noted fiscal cost: 9.5 percent of GDP and 25 percent of total government expenditures).
  - Reforming the pension system by restructuring contribution and benefit rules.
  - Linking public sector salaries and benefits to performance.
  - Stepping up efforts to introduce the VAT in coordination with other GCC countries.
- Recommendation: formulate fiscal policy within a medium-term framework; IMF technical assistance mission provided detailed recommendations.

### Monetary policy and exchange rate
- Monetary stance:
  - Recent easing of the monetary stance and supportive measures (liquidity injection, relaxation of loan-to-deposit ratio) appropriate to support macroeconomic and financial stability.
  - Interest and credit channels likely to remain impaired until global market confidence returns; real interest rates should return to positive territory given expected decline in inflation.
- Exchange rate regime:
  - Move to a basket peg in May 2007 (peg to a basket of currencies with undisclosed weights) enhanced flexibility in fine tuning interest rates and managing inflation.
  - Authorities consider current level of the KD consistent with domestic and external stability.
- CGER-type analysis (Box 3) findings:
  - ERER approach suggests KD moved from undervaluation in 2007 to a small overvaluation (6 percent) by end-2008; KD depreciation in early 2009 should help close this gap.
  - Macro Balance (MB) approach indicates current account surplus slightly below its “norm” but gap expected to close by 2013 with KD slightly undervalued by 2013.
  - External Sustainability (ES) approach suggests projected current account surplus is too low relative to the norm derived from the annuity financing a constant per capita non-oil CA deficit.
- Projected Current Account and Norms (in percent of GDP) — figures preserved:
  - 2008: Estimated/Projected CA 44.7; MB norm 45.4; ES norm 51.1
  - 2013: Estimated/Projected CA 38.8; MB norm 34.6; ES norm 53.0
- CGER assumptions for ES calculations include: reserves of 102 billion barrels; a 64 percent recovery rate; production peaking at 2.9 mbd in 2030 then declining by 2 percent per annum; beyond 2013 oil prices and GDP deflator increasing by 3.5 percent a year, real GDP by 2.8 percent, population by 2 percent; a nominal discount rate and rate of return on assets of 6.5 percent; initial financial wealth of $0.3 trillion.

### Oil sector prospects
- Authorities reaffirmed decline in oil prices would not affect upstream and downstream investment plans.
- Production capacity targets:
  - Current level 2.7 mbpd
  - Plan to increase to 3.0 mbpd in 2010
  - Plan to increase to 3.2 mbpd in 2013–14
- Gas production and project stages:
  - First stage completed; currently producing 150 million cubic feet (mcf).
  - Second stage (2011–12) would boost production to 400 mcf.
  - Third stage (2015–16) would increase production to 1.0 billion cubic feet.
- Investment plan:
  - Distribution of the $84 Billion Investment Plan in the Oil and Gas Sector: Upstream 46%; Other downstream 32%; New Refinery 18%; Petrochemicals 1%; Transportation and other 3%.
  - Authorities expect the $84 billion cost to decline given market developments.
  - Projects will not involve international oil companies (IOCs); projects would be self-financed though borrowing may be needed if oil prices decline or remain low for a prolonged period.
  - Lack of political consensus has hindered IOC involvement despite potential technology and recovery benefits.

### Structural reforms, AML/CFT, and data issues
- Structural reform progress is slow; except for the capital market law, little progress on companies, competition, public-private partnership, and privatization laws.
- Corporate tax change: marginal corporate tax rate on foreign companies reduced from 55 percent to 15 percent in 2008; implementing regulations information lacking.
- AML/CFT law revision: draft currently with the Ministry of Finance to make it compatible with international standards.
- Data weaknesses:
  - CPI, national accounts, and especially trade data are released with considerable lags; more progress needed to address these weaknesses.

*Source: IMF staff report excerpt (_cr09152 - 10.      The authorities have taken several measures to preserve financial stability.).*

### 26.      Kuwait’s economy performed strongly in 2008 but important challenges lie

### _cr09152 - 26.      Kuwait’s economy performed strongly in 2008 but important challenges lie

### Overview
- Kuwait’s economy performed strongly in 2008 but important challenges lie ahead.
- The key short-term challenge is preserving financial stability and cushioning the impact of the global slowdown.
- Maintaining strong non-oil growth over the medium term will require public spending focused primarily on expanding the economy’s productive capacity, as well as implementation of structural reforms that promote private investment.

### Financial sector soundness and stability measures
- Policies to safeguard the soundness of the financial sector should not prevent the necessary consolidation and restructuring of the sector.
- The government’s financial stability package should:
  - favor upfront recognition of losses,
  - avoid rewarding excessive risk taking, and
  - minimize fiscal cost.
- Staff encourages the authorities to conduct comprehensive stress tests for the overall financial system to assess the impact of a further decline in asset prices and a prolonged period of low growth to help determine how and whether the government should intervene.
- Given the lack of political consensus and low investor confidence, an effective communication strategy would be key to success.

### Investment companies (IC) sector oversight and reforms
- The central bank should strengthen oversight of risk management practices and encourage restructuring of the IC sector.
- Required measures include:
  - ensuring the existence of adequate policies and procedures for identifying, monitoring and controlling risks,
  - adopting tighter conditions for granting IC licenses,
  - introducing a minimum set of fit and proper criteria for the appointment of IC managers and board members, and
  - enhancing disclosure.
- If enforced strictly, these measures would encourage consolidation in the sector, lead to fewer and well-managed institutions, and provide a quality hurdle to entry.
- Staff welcomes the authorities’ interest in undertaking an FSAP update.

### Fiscal policy, stimulus, and public investment
- In light of the expected economic slowdown, staff urges the authorities to complement the financial stability package with a well-designed fiscal stimulus package.
- Rationale and roles of fiscal stimulus:
  - Mitigate the negative feedback loop between weakening balance sheets of financial institutions and lower economic activity.
  - Support economic activity through the standard multiplier channel and by shoring up investor confidence.
- Kuwait’s fiscal cushion should allow it to maintain a healthy level of quality capital spending over the next few years without jeopardizing medium-term fiscal sustainability.
- Strengthening capital spending capacity is key.

### Fiscal reform priorities
- The recent decline in oil prices highlights the importance of fiscal reforms aimed at reducing dependence on oil revenue and rationalizing fiscal spending. These include:
  - reducing large subsidies and transfers,
  - reforming the pension system to ensure its long-term viability,
  - linking public sector salaries and benefits to merit, and
  - introducing the VAT in coordination with other GCC countries.

### Hydrocarbon sector investment
- Staff encourages the authorities to continue implementing their investment program in the hydrocarbon sector to enhance economic prospects and support oil market stability.
- Participation of IOCs would bring the necessary know-how for the efficient development of the sector.

### Exchange rate and GCC Monetary Union
- The KD is broadly aligned with its fundamentals.
- The current exchange rate regime remains appropriate in the run up to the GCC monetary union.
- Staff welcomes the signing of the treaty to establish the GCC Monetary Union and the adoption of the charter for the Monetary Council.
- Meeting the remaining key prerequisites by the stated deadline of 2010—including developing a monetary and exchange rate policy framework and building the GCC-wide data requirements—remains a challenge.

### Structural reforms to support private-sector investment
- The authorities should expedite structural reforms vital to private-sector investment, including key laws regulating private sector activity.
- Other important measures include:
  - streamlining business registration and other administrative barriers to investment, and
  - enhancing access to land for private businesses and individuals.

### Macroeconomic statistics and institutions
- A sustained effort to address weaknesses in macroeconomic statistics is needed.
- Staff encourages the authorities to conduct a comprehensive review of the role and resources of the General Statistical Office.

### External assistance and aid
- Kuwait’s generous external assistance program is commendable.
- The size of Kuwait’s foreign aid program is estimated to have averaged about 2 percent of GDP over the past 20 years.
- Staff encourages Kuwait to continue providing debt relief to all eligible-HIPC countries.

*Source: _cr09152 - 26.      Kuwait’s economy performed strongly in 2008 but important challenges lie*

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

### _cr09152 - 37.      It is recommended that the next Article IV consultation take place on the standard

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

### Oil and gas sector (key figures, 2004–09)
- Total oil and gas exports (in billions of U.S. dollars): 27.8, 44.1, 55.7, 60.1, 84.1, 35.2
- Average oil export price (in U.S. dollars/barrel): 34.1, 49.1, 60.2, 67.8, 92.4, 40.0
- Crude oil production (in millions of barrels/day): 2.29, 2.57, 2.64, 2.58, 2.68, 2.56

### National accounts and prices (key figures, 2004–09)
- Nominal GDP (market prices, in billions of Kuwaiti dinar): 17.5, 23.6, 29.5, 31.8, 42.5, 28.1
- Nominal GDP (market prices, in billions of U.S. dollars): 59.4, 80.8, 101.6, 111.8, 158.1, 99.2
- Real GDP (at factor cost): 10.2, 10.7, 5.2, 2.5, 6.4, -1.2
- Real oil GDP: 8.1, 11.4, 2.9, -2.3, 4.2, -4.5
- Real non-oil GDP: 12.1, 10.6, 8.3, 7.8, 7.3, 1.0
- CPI inflation (average): 1.3, 4.1, 3.1, 5.5, 10.5, 6.0
- Unemployment rate (Kuwaiti nationals): 3.9, 3.8, 4.0, .........

### Investment and savings (key figures, 2004–09)
- Investment: 18.2, 16.4, 16.2, 19.4, 17.6, 14.7
  - Public: 3.7, 3.0, 2.8, 3.4, 3.1, 5.2
  - Private 1/: 14.5, 13.5, 13.4, 15.8, 14.5, 9.5
- Gross national savings: 48.7, 58.9, 66.1, 64.2, 62.2, 33.9
  - Public: 36.2, 56.2, 60.8, 57.0, 46.3, 39.6
  - Private 1/: 12.5, 2.7, 5.3, 7.1, 15.9, -5.7
- Savings/investment balance: 30.6, 42.5, 49.8, 44.7, 44.7, 19.2

### Budgetary operations and fiscal indicators (2004–09)
- Revenue: 53.8, 75.6, 67.0, 67.8, 65.5, 48.1
  - Oil: 42.9, 51.7, 48.3, 51.5, 52.4, 36.8
  - Non-oil, of which: 10.9, 23.9, 18.7, 16.3, 13.1, 11.4
    - Investment income: 7.5, 2.1, 4.7, 5.8, 13.0, 7.1
- Expenditures and net lending: 32.8, 27.2, 34.2, 27.9, 39.7, 39.2
  - Current 3/: 28.6, 23.6, 30.1, 23.8, 35.7, 33.3
  - Capital: 4.2, 3.6, 4.1, 4.1, 4.0, 5.8
- Balance: 21.0, 48.5, 32.8, 39.9, 25.8, 9.0
- Domestic financing: -5.7, -1.2, -2.8, -3.1, -4.4, -0.8
- External financing: -15.4, -47.3, -30.1, -36.8, -21.4, -8.2
- Non-oil balance (in percent of non-oil GDP) 4/: -60.3, -57.0, -58.9, -58.9, -61.0, -58.1
- Total gross debt (calendar year-end): 17.3, 11.8, 8.3, 6.9, 5.3, 8.0

### Money and credit (selected, 2004–09)
- Net foreign assets 5/: 10.3, 3.2, 12.5, 1.1, 10.0, 1.2
- Net domestic assets: 1.8, 9.1, 9.1, 18.2, 5.6, 7.2
- Claims on government (net): -10.4, -2.6, -6.4, -6.8, -9.0, -1.1
- Claims on nongovernment sector: 14.5, 17.6, 24.5, 35.6, 19.2, 6.4
- Broad money: 12.1, 12.3, 21.7, 19.3, 15.6, 8.4
- Kuwaiti dinar 3-month deposit rate (year average; in percent): 1.6, 2.9, 5.0, 5.2, 3.3, 1.6
- Stock market unweighted index (annual percent change) 6/: 33.8, 78.6, -12.0, 23.6, -37.5, -11

### External sector (selected, 2004–09)
- Exports of goods: 30.1, 47.0, 58.9, 63.7, 88.2, 40.0
  - Of which: non-oil exports: 2.3, 2.9, 3.3, 3.6, 4.1, 4.7
  - Annual percentage change (exports): 4.6, 23.0, 14.5, 10.3, 13.0, 16.0
- Imports of goods (annual percent change): -11.7, -14.2, -15.4, -18.5, -21.2, -19.7
  - Annual percentage change (imports): 18.1, 22.1, 2.8, 3.8, 20.0, -7.1
- Current account: 18.2, 34.3, 50.6, 50.0, 70.6, 19.0
  - In percent of GDP: 30.6, 42.5, 49.8, 44.7, 44.7, 19.2
- External debt including private sector: 12.1, 16.5, 26.4, 26.3, 26.7, ...
- International reserve assets: 7.3, 8.1, 11.8, 15.9, 17.8, 16.9
  - In months of imports of goods and services: 4.6, 4.3, 5.5, 5.7, 6.0, 6.0
- Exchange rate (U.S. dollar per KD, period average): 3.39, 3.42, 3.45, 3.52, 3.72, ...

### Table 1 memorandum and notes (selected)
- Sovereign rating (S&P): A+, A+, A+, A, AA-, A, ...
- Sources: Data provided by the authorities; and Fund staff estimates and projections.
- Notes include: 1/ Also includes government entities. 2/ Kuwaiti fiscal year ending March 31. 3/ In 2006/07 KD 2 billion was transferred to partly cover the actuarial deficit of the Public Pension Fund. In 2008/09 , KD 5.5 billions are budgeted. 4/ Excluding investment income and pension recapitalization. 5/ Excludes SDRs and IMF reserve position. 6/ Change in the KSE as of February 5, 2009 for 2009.

### Table 2. Summary of Government Finance (2004/05–2009/10; selected)
- Total revenue (in billions KD): 10.2, 19.0, 20.1, 8.3, 23.3, 12.5, 25.5, 14.0
- Oil and gas (in billions KD): 8.2, 13.0, 14.5, 7.5, 17.7, 11.7, 20.4, 10.7
- Investment income and transfer of profits of public entities 2/: 1.4, 5.4, 4.7, 0.0, 4.5, 0.0, 3.9, 2.1
- Total expenditure (in billions KD): 6.2, 6.8, 10.3, 11.1, 9.6, 18.7, 15.4, 11.4
  - Current: 5.4, 5.9, 9.0, 8.5, 8.2, 16.7, 13.9, 9.7
  - Capital: 0.8, 0.9, 1.2, 2.6, 1.4, 2.1, 1.5, 1.7
- Overall balance (excluding KIA income): 3.0, 9.5, 4.9, 11.3, 7.9, 1.5
- Overall balance (including KIA income): 4.0, 12.2, 19.9, -2.8, 13.7, -6.3, 10.0, 2.6
- Overall balance exc. oil rev.: -4.2, -0.8, -4.6, -10.2, -4.0, -17.9, -10.4, -8.1
- Financing: -4.0, -12.1, -9.9, 2.8, -13.7, 6.3, -10.0, -2.6
- Revenue (percent of GDP): 53.8, 75.6, 67.0, 24.2, 67.8, 32.0, 65.5, 48.1
- Expenditure (percent of GDP): 32.8, 27.2, 34.2, 32.2, 27.9, 48.2, 39.7, 39.2
- Overall balance/GDP: 21.0, 48.5, 32.8, -8.0, 39.9, -16.1, 25.8, 9.0
- Memorandum: Average oil export price (in U.S. dollar/barrel) series: 37.8, 51.8, 62.1, 36.0, 73.9, 50.0, 79.3, 41.9
- Sources: Ministry of Finance; Central Bank of Kuwait; and Fund staff estimates and projections.
- Notes include coverage and special items: e.g., KD 5.5 billion is budgeted for social security recapitalization; FY conventions; and transfers to citizens in 2006/07.

### Table 3. Summary Balance of Payments (2004–13; selected projections)
- Current account (in billions): 18.2, 34.3, 50.6, 50.0, 70.6, 19.0, 33.4, 46.2, 52.1, 56.6 (2004–13 sequence)
- Goods (trade balance): 18.4, 32.7, 43.5, 45.2, 67.1, 20.3, 26.0, 30.2, 32.2, 33.4
- Exports: 30.1, 47.0, 58.9, 63.7, 88.2, 40.0, 47.7, 54.2, 58.6, 62.6
  - Oil exports: 27.8, 44.1, 55.7, 60.1, 84.1, 35.2, 42.6, 48.6, 52.6, 56.1
  - Non-oil exports including re-exports 1/: 2.3, 2.9, 3.3, 3.6, 4.1, 4.7, 5.2, 5.6, 6.0, 6.5
  - Re-exports series: 0.5, 0.6, 0.5, 0.5, 0.6, 0.7, 0.8, 0.8, 0.9, 1.0
- Imports: -11.7, -14.2, -15.4, -18.5, -21.2, -19.7, -21.7, -24.0, -26.4, -29.2
- Investment income (net): 6.1, 8.9, 13.2, 12.9, 12.9, 6.3, 15.5, 24.8, 29.4, 33.4
  - Receipts: 6.6, 9.4, 14.7, 15.7, 14.2, 6.9, 16.7, 27.0, 31.7, 35.6
  - General government receipts 2/: 5.2, 6.5, 9.4, 8.5, 7.9, 3.9, 9.3, 15.0, 17.6, 19.9
  - Other sectors receipts 3/: 1.4, 2.9, 5.3, 7.1, 6.3, 3.1, 7.4, 12.0, 14.0, 15.8
- Current transfers: -2.6, -3.4, -3.6, -5.1, -6.0, -5.6, -6.0, -6.5, -7.1, -7.7
- Capital and financial account (net): -16.4, -30.1, -50.4, -42.8, -68.6, -19.9, -31.9, -44.6, -50.3, -54.6
  - Capital account 4/: 0.4, 0.8, 0.9, 1.6, 1.7, 1.7, 1.7, 1.8, 1.8, 1.9
  - Financial account: -16.8, -30.9, -51.3, -44.4, -70.3, -21.6, -33.6, -46.3, -52.1, -56.5
    - Direct investment: -2.5, -4.9, -8.1, -13.6, -8.6, -2.2, -3.9, -5.3, -6.0, -6.5
      - Abroad: -2.5, -5.1, -8.2, -13.7, -8.7, -2.3, -4.0, -5.5, -6.2, -6.7
      - In Kuwait: 0.0, 0.3, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1
    - Portfolio investment: -13.9, -10.5, -29.1, -40.0, -55.8, -12.5, -21.8, -31.9, -35.6, -37.9
    - Other investment (net): -0.4, -15.4, -14.1, 9.2, -6.0, -6.9, -7.9, -9.1, -10.5, -12.1
- Net errors and omissions 5/: -1.1, -3.4, 3.5, -3.1, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0
- Overall balance: 0.7, 0.8, 3.7, 4.0, 2.0, -0.9, 1.5, 1.7, 1.8, 2.0
- Memorandum: Current account/GDP (in percent): 30.6, 42.5, 49.8, 44.7, 44.7, 19.2, 29.9, 37.1, 38.6, 38.8
- WEO oil price (dollars per barrel) series: 37.8, 53.4, 64.3, 71.0, 97.0, 44.0, 52.0, 57.5, 61.5, 64.0
- International reserve assets (in millions of U.S. dollars): 7.3, 8.1, 11.8, 15.9, 17.8, 16.9, 18.5, 20.2, 22.0, 23.9
- In months of imports: 4.6, 4.3, 5.5, 5.7, 6.0, 6.0, 6.0, 6.0, 6.0, 6.0
- Sources: Central Bank of Kuwait; and Fund staff estimates.
- Notes: 1/ Also includes unrecorded oil exports. 2/ KIA, KPC, Kuwait Fund for Arab Economic Development, Public Institute for Social Security, Kuwait Airways Corporation, and Bank of Savings and Credit. 3/ CBK, local banks, investment companies, exchange companies, insurance companies, and the nonfinancial private sector. 4/ Includes UN war compensation. 5/ Includes other unclassified private sector flows. 6/ Includes SDRs and IMF reserve position.

### Table 4. Monetary Survey (end of period, 2004–09; selected)
- Foreign assets (net, in millions of KD): 3,535; 3,904; 5,545; 5,718; 7,610; 7,876
  - Central bank: 2,165; 2,370; 3,416; 4,327; 4,510; 4,263
  - Local banks: 1,370; 1,534; 2,129; 1,392; 3,100; 3,613
- Domestic assets (net, in millions of KD): 8,120; 9,182; 10,375; 13,269; 14,341; 15,927
- Claims on nongovernment sector (in millions of KD): 10,886; 12,937; 16,148; 21,822; 25,460; 26,875
  - Credit facilities: 9,867; 11,827; 14,934; 20,139; 23,660; 24,851
- Broad money (in millions of KD): 11,655; 13,086; 15,921; 18,987; 21,950; 23,804
  - Money: 3,174; 3,727; 3,550; 4,147; 4,370; 4,739
  - Quasi money: 8,481; 9,359; 12,370; 14,841; 17,580; 19,064
  - Of which: Foreign currency deposits: 1,169; 1,548; 2,245; 1,710; 1,899; 2,060
- Annual percentage change (selected): Foreign assets (net): 43.5, 10.4, 42.0, 3.1, 3.1, 3.5; Domestic assets (net): 2.3, 13.1, 13.0, 27.9, 8.1, 11.1; Broad money: 12.1, 12.3, 21.7, 19.3, 15.6, 8.4
- Memorandum: Private credit/non-oil GDP: 115.0, 114.8, 121.3, 144.7, 140.7, 142.4
- Sources: Central Bank of Kuwait; and Fund staff estimates.
- Notes: 1/ Excludes SDRs and IMF reserve position. 2/ Excludes deposits with financial institutions which are marginal.

### Table 5. Illustrative Macroeconomic Baseline Scenario, 2005–13 (selected projections)
- Nominal GDP (KD billions): 23.6, 29.5, 31.8, 42.5, 28.1, 31.7, 35.3, 38.3, 41.3, 44.6 (2005–14 sequence)
- Real GDP: 10.7, 5.2, 2.5, 6.4, -1.2, 2.3, 4.4, 4.8, 4.8, 4.8
- Real oil GDP: 11.4, 2.9, -2.3, 4.2, -4.5, 0.9, 1.9, 2.1, 2.1, 1.9
- Real non-oil GDP: 10.6, 8.3, 7.8, 7.3, 1.0, 3.0, 5.5, 6.0, 6.0, 6.0
- Kuwait crude export price (U.S. dollars per barrel): 49.1, 60.2, 67.8, 92.4, 40.0, 47.9, 53.7, 56.9, 57.5, 60.0
- Crude oil output (millions of barrels per day): 2.57, 2.64, 2.58, 2.68, 2.56, 2.58, 2.63, 2.69, 2.75, 2.81
- CPI: 4.1, 3.1, 5.5, 10.5, 6.0, 4.8, 4.4, 3.4, 3.4, 3.4
- Public finance (percent of GDP, selected): Revenue series: 75.6, 67.0, 67.8, 65.5, 48.1, 55.1, 59.7, 59.9, 58.8, 57.3; Expenditure series: 27.2, 34.2, 27.9, 39.7, 39.2, 37.8, 36.9, 36.5, 36.2, 32.5
- Fiscal balance (deficit -): 48.5, 32.8, 39.9, 25.8, 9.0, 17.3, 22.8, 23.4, 22.6, 24.8
- Non-oil primary deficit/Non-oil GDP (in percent): -57.0, -58.9, -58.9, -61.0, -58.1, -58.7, -58.4, -57.6, -56.8, -50.2
- Memorandum: Public sector external assets, billions of U.S. dollars: 200.1, 245.5, 307.4, 349.7, 388.9, 427.5, 477.8, 535.0, 596.5, 596.5
- Sources: Kuwait authorities; IMF World Economic Outlook; and Fund staff estimates and projections.
- Notes: 1/ Fiscal year ending March 31. 2/ Includes profits of public enterprises. 3/ In 2006/07 KD 2 billion was transferred to partly cover the actuarial deficit of the social security fund. In 2008/09 KD 5.4 billions are budgeted. 4/ Non-oil primary deficit definition. 5/ Staff estimates and projections, based mainly on balance of payment flow data and assuming return on foreign assets close to the LIBOR.

### Table 6. Financial Soundness Indicators (2004–08; selected)
- Regulatory capital to risk-weighted assets: 17.3, 21.3, 21.8, 18.5, 16.0
- Nonperforming loans net of provisions to capital: 5.9, ..., 15.2, 12.6, 15.2
- Nonperforming loans to gross loans: 5.3, 5.0, 3.9, 3.2, 3.2, 3.1
- Return on assets: 2.5, 3.0, 3.2, 3.4, 3.2
- Return on equity: 20.9, 22.9, 27.1, 28.1, 27.8
- Liquid assets to total assets: 13.2, 11.1, 8.1, 7.0, 7.7
- Net open position in foreign exchange to capital and reserves: 8.7, 7.4, 1.4, 1.1, 0.4
- Encouraged set examples:
  - Capital to assets: 12.1, 12.7, 11.7, 12.0, 11.6
  - Average lending rate 1/: 5.6, 7.5, 8.8, 8.3, 6.4
  - Average deposits rate 1/: 2.7, 3.5, 5.5, 5.3, 4.2
  - Loan provisions to nonperforming loans: 82.5, 107.2, 95.8, 92.0, 84.7
  - Ratio of banks' lending to banks' capital — total (stock market plus real estate): 127.1, 135.3, 154.3, 164.1, 185.8
- Investment companies' capital and reserves to total assets: 30.3, 36.2, 35.4, 34.8, 36.0
- Source: Central Bank of Kuwait.
- Note: 1/ For local banks. 2/ Includes lending for stock purchases. 3/ Includes only credit to developers (excludes credit to home buyers). 4/ Excluding Islamic institutions.

### Table 7. Vulnerability Indicators (2004–08; selected)
- REER (CPI based, period average): -5.1, 2.0, 0.9, 0.4, 7.2
- External debt including private sector (in billions of U.S. dollars): 12.1, 16.5, 26.4, 26.3, 26.7
- Short-term debt (original maturity; in billions of U.S. dollars): 25.9, 8.0, 12.8, 12.7, 12.9
- Medium- and long-term debt (in billions of U.S. dollars) 3/: 6.3, 8.5, 13.6, 13.6, 13.8
- External debt/GDP: 20.4, 20.4, 26.0, 23.5, 16.9
- External debt/total exports of goods and services: 35.8, 31.9, 39.5, 35.9, 26.9
- Short-term debt/total exports of goods and services: 17.4, 15.5, 19.1, 17.4, 13.0
- External debt service/total exports of goods and services: 3.7, 1.7, 2.3, ......
- General government domestic debt/GDP 5/: 17.3, 11.8, 8.3, 6.9, 5.3
- Interest payments/total revenue: 0.8, 0.5, 0.5, 0.4, 0.3
- Distribution of public domestic debt by holders: Local commercial banks: 90.7, 88.4, 89.0, 87.7, 88.1; Other: 9.3, 11.6, 11.0, 12.3, 11.9
- Oil revenue/total revenue: 79.2, 70.1, 71.2, 75.1, 79.0
- CBK net foreign assets (in billions of U.S. dollars): 7.3, 8.1, 11.8, 15.8, 16.8
- CBK gross foreign assets (in billions of U.S. dollars) 6/: 7.5, 8.5, 12.3, 16.4, 16.7
- In months of imports of goods and services: 4.6, 4.5, 5.7, 6.3, 5.7
- Relative to short-term external debt: 126.9, 106.2, 96.0, 128.6, 129.4
- Relative to M0: 279.3, 268.1, 294.6, 243.1, 278.8
- Oil exports/total exports: 92.3, 93.9, 94.4, 94.3, 95.4
- Sources: Central Bank of Kuwait; and Fund staff estimates.
- Notes: 1/ Percentage changes in period's average. 2/ Short-term data from BIS-IMF-OECD-World Bank database. 3/ Medium- and long-term debt estimated as residual. 4/ Includes private sector's debt. 5/ Treasury bills and bonds, and debt purchase bonds. 6/ Excludes SDRs and IMF reserve position.

### Informational Annex header
- INTERNATIONAL MONETARY FUND
- KUWAIT
- 2009 Article IV Consultation
- Informational Annex
- Prepared by the Middle East and Central Asia Department
- March 25, 2009

*Sources: Data provided by the authorities; Central Bank of Kuwait; Ministry of Finance; Kuwait Investment Authority; Kuwait Petroleum Corporation; Kuwait Fund for Arab Economic Development; Public Institute for Social Security; Kuwait Airways Corporation; Bank of Savings and Credit; IMF World Economic Outlook; and Fund staff estimates and projections.*

### APPENDIX I: KUWAIT—FUND RELATIONS

### APPENDIX I: KUWAIT—FUND RELATIONS

### I. Membership
- Status: Joined September 13, 1962
- Article VIII on April 5, 1963

### II. General Resources Account
- Quota: 1,381.10 SDR Million (100.00 percent)
- Fund holdings of currency: 1,207.35 SDR Million (87.42 percent)
- Reserve position in Fund: 173.77 SDR Million (12.58 percent)

### III. SDR Department
- Net cumulative allocation: 26.74 SDR Million (100.00 percent)
- Holdings: 152.67 SDR Million; 570.85 SDR Million

### IV. Outstanding Purchases and Loans
- None

### V. Financial Arrangements
- None

### VI. Lending to the Fund and Grants
- Contribution to the PRGF-HIPC Trust:
  - Interest-free deposit of SDR 4.2 million with a maturity at end-2018
  - Grant contribution of SDR 0.1 million to the PRGF-HIPC Trust

### VII. Exchange Rate Arrangement
- Since May 2007, the Kuwaiti dinar has been pegged to an undisclosed currency basket
- Reverted to the exchange system before January 2003
- Between January 1, 2003 and May 2007, pegged to the U.S. dollar with a margin of 3.5 percent on either side around the parity exchange rate of 299.63 fils/U.S. dollar
- On April 2, 2002 Kuwait notified the Fund, under Decision 144-(52/51), of exchange restrictions introduced to implement UN Security Council resolutions 1373 (2001), 1333 (2000) and 1267 (1999)

### VIII. Article IV Consultations
- Last Article IV consultation completed by the Executive Board on April 18, 2008
- The authorities decided to publish the report

### IX. FSAP Participation
- FSAP exercise conducted in September 2003 to assess three international standards and codes (banking, securities, and AML/CFT)
- FSSA report discussed by the Executive Board along with the staff report for the 2003 Article IV consultation and issued in May 2004, Country Report No. 04/151

### X. Technical Assistance
- 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
- FAD: Macro Fiscal Unit — February 2009

### XI. Resident Representative
- None

### XII. Quotas and Articles
- Kuwait has consented to the quota increase under the Eleventh General Review of Quotas
- Kuwait has accepted the Fourth Amendment of the Articles of Agreement

*APPENDIX I: KUWAIT—FUND RELATIONS (As of February 28, 2009)*

### 2.      An Amiri decree was issued on March 26, 2009 approving the Financial Stability

### _cr09152 - 2.      An Amiri decree was issued on March 26, 2009 approving the Financial Stability

### Financial Stability Law: main measures
- Addressing possible bank undercapitalization through a combination of capital injections and government guarantees.
- Providing support to liquidity-constrained investment companies that are financially solvent and with a viable business model through several measures, including guaranteeing 50 percent of new loans to these companies.
- Support to both banks and investment companies would be subject to some conditionality, including the authorities’ right to merge institutions.
- Encouraging lending through government guarantees for 50 percent of new loans from local banks to economic productive sectors (maximum KD 4 billions in two years).
  - The new guaranteed loans cannot be used for speculative investments in equity and real estate markets or for repayment of existing loans.
- Providing a legal framework for resolution of insolvent financial institutions.

### 2009/10 Budget (Amiri decree March 29, 2009)
- Budget is broadly in line with information provided to the mission by the authorities.
- Current expenditures allocations would remain broadly unchanged relative to staff report projections.
  - Increases in salaries, transport and equipment would be offset by lower allocations for goods and services.
- Allocation for construction and maintenance (capital budget) would decline by 24 percent, owing in part to a reduction in purchases of land.
  - With an under-execution of the capital budget of at least 25 percent in recent years, the reduction in the budgetary allocation is unlikely to lead to a significant decline in actual capital spending.
- Main spending cutback: cancellation of a one-off payment of KD 5.5 billion (about 13 percent of 2008 GDP) to the pension fund.

### Background and near-term outlook (context from Article IV consultation)
- Kuwait’s economy performed strongly in 2008 but showed signs of weakness in the second half of the year.
- Real GDP:
  - Estimated to have picked up to 6.4 percent in 2008, up from 2.5 percent in 2007.
  - Projected to contract by 1.2 percent in 2009 due to lower oil production and a decline in non-oil growth.
- Inflation:
  - Peaked at 11.6 percent (year-on-year) in August 2008; projected to moderate to 6 percent in 2009.
- External and fiscal positions in 2008:
  - Current account recorded a surplus of 45 percent of GDP.
  - Budget surplus for 2008/09 estimated at 26 percent of GDP, notwithstanding a large transfer to recapitalize the pension fund (10.5 percent of GDP).
- Financial sector strains:
  - KD interbank rate spiked in October 2008; authorities intervened with large liquidity injections.
  - Kuwait Stock Exchange (KSE) index fell by 50 percent since the deepening of the global crisis after the fall of Lehman Brothers.
  - In October 2008, the third largest bank lost $1.4 billion, mostly on derivative transactions; authorities guaranteed customer deposits and implemented a recapitalization plan.
  - In December 2008, the largest investment company defaulted on most of its $3 billion debt obligations and has been negotiating a debt restructuring.
- Key risks:
  - Rapid deterioration in the balance sheet of financial institutions.
  - Prolonged global recession maintaining oil prices below $50.

### Executive Board assessment: policy guidance and priorities
- Commended Kuwaiti authorities’ prudent macroeconomic policies and proactive measures safeguarding financial stability (liquidity injections, financial stability law).
- Financial sector recommendations:
  - Encourage consolidation and restructuring of financial institutions.
  - Ensure upfront recognition of losses and participation of private investors in recapitalizations.
  - Strengthen oversight of risk management practices to identify, monitor, and control systemic risk.
  - Restructure the investment companies sector.
  - Undertake a Financial Sector Assessment Program update.
  - Speed up reform of money laundering and terrorism financing legislation to conform to international standards.
- Fiscal policy and medium-term reform:
  - Commended commitment to fiscal prudence and medium-term fiscal sustainability.
  - A number of Directors encouraged a fiscal stimulus to complement the financial stability package, citing Kuwait’s strong fiscal position; others noted concerns about absorptive capacity, uncertain future oil prices, and stimulus leakages through remittances and imports.
  - Need for medium-term fiscal reform to reduce dependence on oil revenue and rationalize fiscal spending.
  - Encouraged accelerated introduction of a value added tax in coordination with other Gulf Cooperation Council (GCC) countries.
  - Support for maintaining capital spending while containing current spending, including curbing large subsidies and transfers, reforming the pension system, and moving to merit-based public sector salaries and benefits.
- Structural reforms to boost private investment:
  - Enactment of key laws: capital markets, companies, competition, public-private partnership, and privatization laws.
  - Streamline business registration and administrative barriers.
  - Enhance access to land by private businesses and individuals.
- Exchange rate and monetary policy:
  - Pegged exchange rate regime remains appropriate in the run up to the GCC monetary union.
  - Recent move to a basket peg may have helped contain inflation; Kuwaiti dinar broadly in line with fundamentals.
  - Directors supported recent easing of monetary policy given weakening inflationary pressures.
- Data and statistical improvements:
  - Welcomed authority’s intention to improve economic statistics.
  - Encouraged program toward subscription to Special Data Dissemination Standard and a comprehensive review of the role and resources of the General Statistical Office.
- External assistance:
  - Commended authorities’ substantial development foreign assistance and support for the Heavily Indebted Poor Countries (HIPC) Initiative; urged continuation of debt relief to all eligible-HIPC countries.

### Selected economic indicators and key statistics (2004–09; as presented)
- Oil and gas sector:
  - Total oil and gas exports (in billions of U.S. dollars): 27.8, 44.1, 55.7, 60.1, 84.1, 35.2 (2004–2009)
  - Average oil export price (in U.S. dollars/barrel): 34.1, 49.1, 60.2, 67.8, 92.4, 40.0 (2004–2009)
  - Crude oil production (in millions of barrels/day): 2.29, 2.57, 2.64, 2.58, 2.68, 2.56 (2004–2009)
- National accounts and prices:
  - Nominal GDP (market prices, in billions of Kuwaiti dinar): 17.5, 23.6, 29.5, 31.8, 42.5, 28.1 (2004–2009)
  - Nominal GDP (market prices, in billions of U.S. dollars): 59.4, 80.8, 101.6, 111.8, 158.1, 99.2 (2004–2009)
  - Real GDP (at factor cost): 10.2, 10.7, 5.2, 2.5, 6.4, -1.2 (2004–2009)
  - Real oil GDP: 8.1, 11.4, 2.9, -2.3, 4.2, -4.5 (2004–2009)
  - Real non-oil GDP: 12.1, 10.6, 8.3, 7.8, 7.3, 1.0 (2004–2009)
  - CPI inflation (average): 1.3, 4.1, 3.1, 5.5, 10.5, 6.0 (2004–2009)
- Investment and savings (in percent of GDP):
  - Investment: 18.2, 16.4, 16.2, 19.4, 17.6, 14.7 (2004–2009)
  - Public investment: 3.7, 3.0, 2.8, 3.4, 3.1, 5.2 (2004–2009)
  - Private investment 1/: 14.5, 13.5, 13.4, 15.8, 14.5, 9.5 (2004–2009)
  - Gross national savings: 48.7, 58.9, 66.1, 64.2, 62.2, 33.9 (2004–2009)
  - Public savings: 36.2, 56.2, 60.8, 57.0, 46.3, 39.6 (2004–2009)
  - Private savings 1/: 12.5, 2.7, 5.3, 7.1, 15.9, -5.7 (2004–2009)
- Budgetary operations (in percent of GDP):
  - Revenue: 53.8, 75.6, 67.0, 67.8, 65.5, 48.1 (2004–2009)
  - Oil revenue: 42.9, 51.7, 48.3, 51.5, 52.4, 36.8 (2004–2009)
  - Investment income: 7.5, 21.4, 15.8, 13.0, 10.0, 7.1 (2004–2009)
  - Expenditures and net lending: 32.8, 27.2, 34.2, 27.9, 39.7, 39.2 (2004–2009)
  - Current expenditures 3/: 28.6, 23.6, 30.1, 23.8, 35.7, 33.3 (2004–2009)
  - Capital expenditures: 4.2, 3.6, 4.1, 4.1, 4.0, 5.8 (2004–2009)
  - Balance: 21.0, 48.5, 32.8, 39.9, 25.8, 9.0 (2004–2009)
- Money and credit (changes in percent of beginning broad money stock):
  - Net foreign assets 5/: 10.3, 3.2, 12.5, 1.1, 10.0, 1.2 (2004–2009)
  - Net domestic assets: 1.8, 9.1, 9.1, 18.2, 5.6, 7.2 (2004–2009)
  - Claims on nongovernment sector: 14.5, 17.6, 24.5, 35.6, 19.2, 6.4 (2004–2009)
  - Broad money: 12.1, 12.3, 21.7, 19.3, 15.6, 8.4 (2004–2009)
  - Kuwaiti dinar 3-month deposit rate (year average; in percent): 1.6, 2.9, 5.0, 5.2, 3.3, 1.6 (2004–2009)
- External sector (in billions of U.S. dollars unless otherwise indicated):
  - Exports of goods: 30.1, 47.0, 58.9, 63.7, 88.2, 40.0 (2004–2009)
  - Imports of goods: -11.7, -14.2, -15.4, -18.5, -21.2, -19.7 (2004–2009)
  - Current account: 18.2, 34.3, 50.6, 50.0, 70.6, 19.0 (2004–2009)
  - In percent of GDP: 30.6, 42.5, 49.8, 44.7, 44.7, 19.2 (2004–2009)
  - International reserve assets: 7.3, 8.1, 11.8, 15.9, 17.8, 16.9 (2004–2009)
  - Reserves in months of imports of goods and services: 4.6, 4.3, 5.5, 5.7, 6.0, 6.0 (2004–2009)
- Memorandum items:
  - Exchange rate (U.S. dollar per KD, period average): 3.39, 3.42, 3.45, 3.52, 3.72, ...
  - Stock market unweighted index (annual percent change) 6/: 33.8, 78.6, -12.0, 23.6, -37.5, -11 (2004–2009)

*Source: IMF staff report and Public Information Notice (PIN) No. 09/56 — IMF Executive Board Concludes 2009 Article IV Consultation with Kuwait.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09152.pdf_