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### I. Context and recent developments
- Kuwait entered the global financial crisis from a position of strength, with large external buffers from high pre-crisis saving rates and oil revenues.
- Development Plan (DP):
  - Four year DP launched in early 2010 emphasizing health, education, infrastructure, transform Kuwait into a regional trade and financial center, and expand private sector role.
  - Overall cost estimated at $55 billion (about 42 percent of 2010 GDP); expected to be matched by the private sector via public-private participation and joint stock companies.
- Demographics and labor:
  - Kuwaiti nationals: 1.1 million (just over 30 percent of the country’s 3.6 million population); predominantly employed in the public sector.
  - Private sector largely dependent on expatriate labor.
- 2010 economic and financial outcomes:
  - Real GDP growth in 2010 estimated at 3.3 percent (oil growth 3.2 percent; non-oil growth 3.4 percent).
  - Lending growth of 3.3 percent to productive sectors; credit to real estate and financial sectors reduced.
  - FY2010/11 government expenditure (excluding energy-related subsidies and recapitalization of social security) increased by 21½ percent; about half attributable to an Amiri grant that included KD 1,000 (about $3,600) cash transfer to each Kuwaiti citizen (equivalent to almost 3 percent of 2010 GDP) and free essential food items from February 2011 through March 2012.
  - Fiscal surplus about 21 percent of GDP (2010 estimate).
  - External surplus about 28 percent of GDP (2010 estimate).
  - Average food inflation about 8.2 percent in 2010 (9.8 percent at end-April 2011); non-food inflation around 3.6 percent as of April 2011.
- Political and institutional context:
  - Government–parliament tensions; government resigned in late March 2011; subsequent cabinet changes and resignation of Deputy Prime Minister for Economic Affairs in mid-June 2011.
- Financial sector developments:
  - Local banks’ profits increased by 70 percent in 2010; capitalization strengthened.
  - Investment Companies (ICs) continued to post losses on average in 2010 (lower than 2009); of 97 ICs as of May 9, 2011: six completed debt restructuring and three entered restructuring negotiations.
  - Nonfinancial corporates: net profits increased by 170 percent in 2010; real estate sector continued to post losses.
  - KIA established a KD1bn portfolio ($3.6bn or 2 percent of 2011 GDP) for local commercial real estate investment.

### II. Economic outlook and key projections
- Growth and inflation:
  - Real GDP projected to increase by about 5 percent in 2011 (oil GDP about 3¼ percent; non-oil GDP 6 percent, spurred by government spending).
  - Nonoil GDP growth projected to trend slightly downwards in the medium-term following government expenditure growth peaking in 2011–12.
  - Inflation projected to pick up in 2011 to about 6¼ percent, driven by imported inflation.
- Fiscal and external balances (2011 projections):
  - Despite projected growth of 12 percent in FY2011/12 expenditure, fiscal balance expected to improve by almost 5½ percentage points to 26 percent of GDP on account of higher oil revenue.
  - External current account balance projected to increase to 33½ percent of GDP.
- Monetary and credit aggregates:
  - Broad money projected to increase by about 16 percent on account of the Amiri grant.
  - Credit to the private sector projected to rise by over 6 percent due to private sector involvement in DP implementation.
- Fiscal breakeven oil prices:
  - Fiscal breakeven oil price: $51 per barrel.
  - Current account breakeven oil price: $35 per barrel.

### III. Risks to the outlook
- Domestic downside risks:
  - Shortfall in meeting DP spending targets due to red tape, bureaucratic hurdles, and political gridlock could delay projects, discourage private participation, and limit legislative reforms.
  - Further deterioration in ICs or delays in restructuring could raise banking sector provisions and weigh on bank profitability.
- Regional risks:
  - Deterioration in Bahrain and Egypt could cause financial spillovers via losses on Kuwaiti investments in the GCC and MENA region, direct exposure of Kuwaiti banks, and tighter external funding access/costs.
  - Materialization of regional risks likely accompanied by higher oil prices, mitigating impact on Kuwait.
- Global risks:
  - Derailment of global recovery and sustained low oil prices could affect government expenditure prospects.
- Authorities’ view:
  - Authorities closely monitoring regional developments; judged impact on investments and credit portfolios manageable and did not expect significant impact on external funding cost or access.

### IV. Multipliers of government expenditure (staff estimates)
- Real terms impact:
  - Increasing government expenditure by one Kuwaiti Dinar (in real terms) increases real nonoil GDP in the range of 0.9 to 1.3 Kuwaiti Dinars (expenditure multiplier 0.9–1.3).
  - Multiplier of government capital expenditure estimated at almost 2¾.
  - Most impact occurs in the implementation year; capital expenditure may also impact nonoil GDP after one year.
- Factors behind large estimated multipliers:
  - Expenditure largely financed by oil revenues (no tax increase).
  - Highly elastic labor supply due to expatriate labor, alleviating wage pressures.
  - Analysis focused on expenditure types with direct aggregate demand impact; transfers from central government to social security fund excluded.
  - Focus on nonoil sector rather than total GDP.
- Interaction with imports:
  - High correlation between government expenditure and imports appears to operate through higher nonoil GDP activity (government expenditure → nonoil GDP → imports) rather than direct leakage via imports.

### V. Policy discussions and recommendations
- Near-term macroeconomic policy mix:
  - Continued fiscal stimulus expected to support non-oil recovery but should be moderated if overheating emerges, particularly in housing services (rents).
  - Non-oil fiscal deficit (excluding investment income, pension recapitalization, and oil-related subsidies) estimated at over 54½ percent in FY2010/11 and 53 percent in FY2011/12, compared to approximately 49 percent in FY2005/06–FY2007/08; increased by close to 6½ percentage points in FY2010/11 with projected decrease of 1 percentage point in FY2011/12.
  - Staff welcomes macro-fiscal unit at Ministry of Finance and plans to move to performance-based budgeting.
- Monetary policy stance:
  - Expected to remain accommodative reflecting the basket peg and low global interest rates.
  - CBK adjusted policy rates in line with domestic credit conditions and low global interest rates; significant public sector deposits have boosted liquidity.
  - Exchange rate (basket peg with large U.S. dollar weight) could partly offset pass-through of commodity price increases, but flexibility is limited.
- Financial stability and macroprudential policies:
  - Macroprudential policies are essential to dampen credit cycles; fiscal policy should be first line of defense to manage the financial cycle linked to the oil cycle.
  - Reported macroprudential tools: loan-to-deposits ratio, liquidity ratio, higher risk weights for certain portfolios, precautionary provisions, and use of credit growth limits during pre-crisis boom.
  - Authorities monitoring regional impacts on financial sector and ready to respond to potential increases in banking sector provisions related to ICs.
- Medium-to-long-term fiscal reforms:
  - Priorities: revenue diversification, phased reduction of untargeted subsidies with well-targeted safety nets, reallocation toward capital expenditure, consider a fiscal rule (expenditure ceiling with escape clauses), and prioritize VAT implementation given capacity constraints.
  - Staff welcomes planned VAT in 2013 (GCC-wide) and notes government considering comprehensive income tax; staff suggested prioritizing VAT implementation.
  - Authorities’ targets: non-oil revenue to grow to KD 4 billion by end of DP period (FY2013/14) from KD 1.1 billion (6¼ percent of non-oil GDP) in FY2009/10 through fees, customs, and taxation adjustments.
  - No immediate intention to undertake subsidy reform; work underway to improve bill collection and repricing formula for utilities.

### VI. Financial sector: resilience, vulnerabilities, and supervisory reforms
- Banking system strength (2010):
  - Capital adequacy ratio increased to 19 percent in 2010 from 17 percent in 2009.
  - Leverage ratios averaging 13 percent.
  - Credit growth virtually flat in 2010.
  - NPL ratio dropped to 8.9 percent from 11.5 percent in 2009.
  - Sector profits increased by approximately 70 percent in 2010; ROE reached 9.1 percent in 2010.
  - Adequate liquidity owing to stable deposit base, including significant public sector deposits; liquidity ratios on a downward trend.
  - Four banks increased capital in 2010 by a total of KD 466 million ($1.7 billion).
- Investment companies (ICs):
  - Continued losses in 2010 largely from equities and real estate exposure.
  - External financing accounts for approximately 25 percent of ICs’ liabilities as of December 2010.
  - ICs remain highly dependent on foreign financing; restructuring progress limited.
  - Sample stress tests: in severe scenario capital of eight (out of eleven) listed ICs could be wiped out.
- Stress tests:
  - Improved results vs. 2009 due to higher capitalization, liquidity buffers, and precautionary provisions.
  - Under most adverse scenario, no bank loses its entire capital; maximum recapitalization need to restore CAR to 12 percent would not exceed 2 percent of GDP.
  - Single-factor tests highlight vulnerability to real estate and equity exposures.
  - Liquidity stress tests: banks broadly withstand liquidity shock though one bank illiquid under severe scenario.
  - Stress test sample: 11 listed ICs with 29 percent share of total ICs’ assets.
  - Methodology: 2010 FSAP methodology and assumptions used for comparability.
- Regulatory and institutional actions:
  - CBK issued new IC regulations in June 2010 setting prudential limits on liquidity, leverage, and foreign exposure.
  - Capital Market Authority (CMA) issued bylaws and expected to assume supervisory role in September 2011.
  - MoU between CBK and CMA being drafted to delineate supervisory responsibilities over ICs.
  - CBK set up core team to strengthen macroprudential supervision and advanced analytical tools: quarterly off-site surveillance report, stress tests, early warning system (EWS).
- Recommended actions:
  - Finalize MoU between CBK and CMA and remove legal impediments to information sharing (e.g., banking secrecy provisions).
  - Ensure CMA has adequate staffing.
  - Explore an inter-agency financial stability committee for systemic risk monitoring and crisis management.
  - Move expeditiously to establish a special resolution regime (SRR) for financial institutions; consider special courts to adjudicate resolution processes.
  - CBK should monitor ICs’ progress toward 2012 compliance and ensure companies undertake needed restructuring.
  - Continue to ensure banks hold adequate liquid assets.
- AML/CFT:
  - Framework started in 2002 but needs strengthening: criminalization of financing of terrorism, FIU structure and functions, AML/CFT supervisory system.
  - New AML/CFT Law compliant with FATF 40+9 recommendations needs quick adoption.
- Statistics and data:
  - CBK prepares comprehensive monetary and financial statistics and has improved BOP compilation with Fund TA; IIP and external debt data still lag.
  - Long lags in CPI compilation eliminated; national accounts at constant prices delayed (latest data cover 2007).
  - Recommendation: provide financial and institutional support to CSO to improve statistical dissemination.

### VII. Fiscal and external statistics — key numerical highlights (selected series and projections)
- Oil and gas sector (years presented in series):
  - Total oil and gas exports (billions of U.S. dollars): 53.2, 59.1, 82.6, 46.6, 61.7, 85.9, 89.2
  - Average oil export price (U.S. dollars/barrel): 61.2, 70.4, 93.7, 58.2, 76.4, 104.1, 103.1
  - Crude oil production (millions of barrels/day): 2.64, 2.57, 2.68, 2.26, 2.31, 2.41, 2.52
- National accounts and prices (selected series):
  - Nominal GDP (KD billions): 29.5, 32.6, 40.0, 31.5, 38.0, 48.4, 51.4
  - Nominal GDP (U.S. dollars, billions): 101.6, 114.7, 148.8, 109.5, 132.6, 171.9, 182.9
  - Real GDP (annual % change): 5.3, 4.6, 5.0, -5.0, 3.3, 5.0, 5.6
  - Real oil GDP (annual % change): 2.8, -2.6, 3.3, -11.3, 3.2, 3.3, 4.6
  - Real non-oil GDP (annual % change): 8.3, 11.1, 5.6, -1.0, 3.4, 6.0, 6.1
  - CPI inflation (average): 3.1, 5.5, 10.6, 4.0, 4.1, 6.2, 3.5
- Investment and savings (percent of GDP):
  - Investment: 15.9, 20.5, 18.4, 13.9, 14.1, 14.9, 16.9
    - Public investment: 2.8, 3.3, 3.5, 4.6, 4.7, 4.9, 5.6
    - Private investment: 13.1, 16.9, 14.9, 9.3, 9.5, 10.0, 11.3
  - Gross national savings: 60.6, 57.2, 58.9, 37.6, 42.0, 48.4, 49.6
    - Public savings: 60.2, 55.2, 46.4, 47.1, 45.8, 46.2, 47.2
    - Private savings: 4.5, 2.1, 12.5, -10.3, -3.8, 2.1, 2.4
- Budgetary operations (percent of GDP, series):
  - Revenue: 66.6, 67.8, 63.4, 61.5, 59.2, 61.6, 60.6
    - Oil revenue: 48.0, 51.5, 52.1, 50.1, 48.5, 51.6, 50.2
    - Non-oil revenue (of which investment income): 18.6, 16.3, 11.4, 11.5, 10.7, 9.9, 10.4
  - Expenditures: 34.0, 28.1, 47.9, 33.6, 38.4, 35.5, 35.5
    - Expense: 30.0, 23.9, 43.5, 29.2, 33.7, 30.3, 29.8
    - Capital: 4.0, 4.1, 4.3, 4.4, 4.7, 5.2, 5.8
  - Balance: 32.5, 39.7, 15.5, 28.0, 20.7, 26.1, 25.0
  - Non-oil balance (percent of non-oil GDP, alternative measures): excluding investment income: -6.2, -9.4, -8.5, -17.1, -10.0, -14.5, -17.5, ...
- Balance of payments (selected series):
  - Current account (billions of U.S. dollars): 30.1, 45.3, 42.2, 60.2, 25.9, 36.9, 57.6, 59.7
  - Current account (percent of GDP): 37.2, 44.6, 36.8, 40.5, 23.6, 27.8, 33.5, 32.7
  - International reserve assets (billions of U.S. dollars): 8.1, 11.8, 15.9, 16.7, 17.7, 18.7, 23.1, 25.3
    - In months of imports of goods and services: 4.1, 5.3, 5.9, 5.3, 6.8, 6.9, 7.0, 7.1
- Monetary aggregates (end of period, Millions of KD):
  - Broad money: 13,086; 15,921; 18,987; 21,950; 24,896; 25,634; 29,823; 32,861
  - Claims on nongovernment sector: 12,937; 16,148; 21,822; 25,460; 27,019; 27,527; 29,239; 32,217
  - Broad money (annual % change): 12.3, 21.7, 19.3, 15.6, 13.4, 3.0, 16.3, 10.2
- Financial soundness indicators (2006–10, selected):
  - Regulatory capital to risk-weighted assets (percent): 20.2, 19.3, 15.6, 16.7, 18.9
  - Gross non-performing loans to total loans (percent): 4.6, 3.8, 6.8, 11.5, 8.9
  - Specific provisions to gross NPLs (percent): 47.4, 47.2, 29.0, 38.3, 33.9
  - Loans to deposits (percent): 96.1, 103.1, 109.0, 113.0, 116.5
  - Return on Average Equity (ROAE): 20.1, 24.3, 6.5, 6.1, 9.1

### VIII. Fiscal sustainability scenarios (Box 4 highlights)
- Baseline scenario:
  - Non-oil fiscal deficit in equilibrium in FY2011/12 but around 3 percentage points of GDP over its equilibrium by 2016/17.
- Lower population growth scenario:
  - Non-oil fiscal deficit remains below its equilibrium in the medium-term, but margin declines over time.
- Lower oil price scenario (oil prices 20 percent lower than baseline; 2011 average around $85):
  - Non-oil deficit becomes larger than equilibrium by FY2011/12, indicating need for earlier fiscal consolidation even under lower population growth.
- Baseline assumptions enumerated:
  - Long-term real rate of return on assets 4 percent.
  - Inflation 2 percent.
  - Kuwaiti nationals population growth 2 percent.
  - Oil reserves depleted in 72 years.
  - Oil price to reach $98.5 per barrel in 2016 and remain constant in real terms thereafter.
  - Alternative population growth assumes 1.4 percent long-term growth.

### IX. Education, health, and infrastructure (Appendix I)
- Education:
  - Kuwait fares relatively low in education outcomes vis-à-vis international comparisons given its GDP per capita level.
  - Policy focus: emphasize better outcomes and prepare graduates for private sector needs.
- Health:
  - Primary health care relatively good but demand for specialized care outpaced domestic capacity, generating expensive outbound treatment programs.
  - Health infrastructure indicators (e.g., hospital beds per capita) significantly below comparable-income countries.
  - Policy implication: scope to increase domestic provision, requiring capital spending and skilled personnel.
- Infrastructure:
  - Quality of infrastructure (example: quality of electrical supply) relatively poor for current GDP per capita.
  - Additional investment needed to bring electricity and roads up to regional standards and to target bottlenecks that constrain development.

### X. Data, statistics, and Fund relations (Annexes)
- Membership and Fund relations:
  - Joined September 13, 1962; Article VIII on April 5, 1963.
  - Quota: 1,381.10 SDR Million (100.00 percent).
  - Last Article IV consultation completed by Executive Board on July 16, 2010.
- Data adequacy and recommendations (Annex III):
  - Data broadly adequate for surveillance but timeliness and national accounts compilation need improvement.
  - Recommendations include improving timeliness of price indexes and real GDP, better coordination among Ministries of Planning, Oil, and Finance, reclassification of investment companies that accept deposits, classification of two reserve funds’ operations as part of government for GFS, development of WPI into a PPI, and extension of GFS coverage and accrual reporting.
  - Table of Common Indicators shows latest observation dates and reporting frequency for key series (as of 31/05/2011).
- Technical assistance and FSAP:
  - FSAP Update in March 2010; FSSA report discussed by Executive Board with 2010 Article IV staff report.
  - Multiple TA engagements listed across STA, FAD, MFD/LEG and others (dates and topics provided in Annex I).

*Source — IMF staff report (cr11217): "2. Summary of Government Finance, 2005/06–2012/13" and related annexes and appendices as provided in the chapter.*

### 2. Summary of Government Finance, 2005/06–2012/13 .........................................................25

### 2. Summary of Government Finance, 2005/06–2012/13

### I. Context and recent developments
- Kuwait entered the global financial crisis from a position of strength, having accumulated large external buffers from high pre-crisis saving rates and oil revenues.
- The government launched a four year development plan (DP) in early 2010 emphasizing investment in health, education, and infrastructure to transform Kuwait into a regional trade and financial center and expand the private sector’s role.
- Population and labor structure:
  - Kuwaiti nationals: 1.1 million (just over 30 percent of the country’s 3.6 million population) and are predominantly employed in the public sector.
  - Private sector is largely dependent on expatriate labor.
- DP cost and financing:
  - Overall cost of the plan is estimated at $55 billion (about 42 percent of 2010 GDP), expected to be matched by the private sector through public-private participation and the establishment of joint stock companies.
- Real GDP (2010 estimates):
  - Real GDP growth in 2010 is estimated at 3.3 percent, comprising oil growth of 3.2 percent and non-oil growth of 3.4 percent.
- Credit and sectoral lending (2010):
  - Lending growth of 3.3 percent to the productive sectors (industry, services, and trade).
  - Reduction in credit to the real estate and financial sectors.
- Government fiscal actions and transfers:
  - FY2010/11 government expenditure (excluding energy-related subsidies and recapitalization of social security) increased by 21½ percent; about half of this was attributable to an Amiri grant.
  - The Amiri grant included a transfer of KD 1,000 (about $3,600) in cash to each Kuwaiti citizen (equivalent to almost 3 percent of 2010 GDP) and provision of free essential food items from February 2011 through March 2012.
- Fiscal and external balances (2010 estimates):
  - Fiscal surplus about 21 percent of GDP.
  - External surplus about 28 percent of GDP (compared to 28 and 24 percent in 2009, respectively).
- Inflation developments:
  - Average food inflation: about 8.2 percent in 2010 (9.8 percent at end-April 2011), compared to 3.4 percent in 2009.
  - Non-food inflation: around 3.6 percent as of April 2011.
  - Headline inflation increased in 2010, primarily due to higher international food prices; impact on Kuwaiti citizens mitigated by the Amiri grant.
- Political environment:
  - Government–parliament tensions persisted; government resigned in late March 2011 (sixth cabinet resignation in five years), new government formed but disputes continued and led to the resignation of the Deputy Prime Minister for Economic Affairs in mid-June 2011.
- Financial sector:
  - Banks: profits of local banks increased by 70 percent in 2010 and capitalization strengthened further.
  - Investment Companies (ICs): sector continued to post losses on average in 2010 (lower than 2009); debt restructuring of some ICs remains unresolved.
    - As of May 9, 2011: of the 97 investment companies, six companies completed debt restructuring and three entered into restructuring negotiations.
  - Nonfinancial corporates: net profits increased by 170 percent in 2010; real estate sector continued to post losses similar to 2009.
    - Kuwait Investment Authority (KIA) established a KD1bn portfolio ($3.6bn or 2 percent of 2011 GDP) for investment in the local commercial real estate market.

### II. Economic outlook and key projections
- 2011 and medium-term growth:
  - Real GDP is projected to increase by about 5 percent in 2011, reflecting oil GDP increase of about 3¼ percent and non-oil GDP of 6 percent, spurred by government spending.
  - Nonoil GDP growth is projected to trend slightly downwards in the medium-term following a similar pattern of government expenditure growth, which is expected to peak in 2011–12.
- Inflation projection:
  - Inflation is projected to pick up in 2011 to about 6¼ percent, driven by imported inflation.
- Fiscal and external balances (2011 projections):
  - Despite projected growth of 12 percent in FY2011/12 expenditure, the fiscal balance is expected to improve by almost 5½ percentage points to 26 percent of GDP on account of higher oil revenue.
  - External current account balance projected to increase to 33½ percent of GDP.
- Monetary and credit aggregates:
  - Broad money projected to increase by about 16 percent on account of the Amiri grant.
  - Credit to the private sector projected to rise by over 6 percent due to private sector involvement in DP project implementation.
- Fiscal breakeven oil prices:
  - Fiscal breakeven oil price: $51 per barrel.
  - Current account breakeven oil price: $35 per barrel.

### III. Risks to the outlook
- Domestic downside risks:
  - Significant shortfall in meeting DP spending targets due to red tape, bureaucratic hurdles, and political gridlock could delay project implementation, discourage private participation, and limit legislative reforms.
  - Further deterioration in ICs or delays in restructuring could raise banking sector provisions and weigh on banks’ profitability.
- Regional risks:
  - Deterioration in Bahrain and Egypt could cause financial spillovers via:
    - Losses on Kuwaiti investments in the GCC and MENA region, affecting ICs.
    - Direct exposure of Kuwaiti banks to the region.
    - Stricter access to and higher cost of external funding for Kuwaiti entities in the short term.
  - Materialization of regional risks would likely be accompanied by an increase in oil prices, mitigating the impact on Kuwait.
- Global risks:
  - Derailment of global recovery and sustained low oil prices could affect prospects for government expenditure.
- Authorities’ view:
  - Authorities were closely monitoring regional developments; impact on investments and credit portfolios was manageable and they did not expect significant impact on external funding cost or access.

### IV. Box: Multipliers of Government Expenditure
- Staff econometric estimates on DP impact:
  - Increasing government expenditure by one Kuwaiti Dinar (in real terms) produces an increase in (real) nonoil GDP in the range of 0.9 to 1.3 Kuwaiti Dinars (i.e., expenditure multiplier is 0.9–1.3).
  - Multiplier of government capital expenditure estimated at almost 2¾.
  - Most impact of government expenditure occurs in the implementation year; capital expenditure may impact nonoil GDP also after one year.
- Factors explaining relatively large estimated multipliers:
  - Government expenditure largely financed by oil revenues (no accompanying tax increase).
  - Highly elastic labor supply due to dependence on expatriate labor, alleviating wage pressures.
  - Analysis focused on expenditure types expected to have direct impact on aggregate demand (excluded transfers from central government to social security fund).
  - Analysis focused on the nonoil sector rather than total GDP.
- Interaction with imports:
  - High correlation between government expenditure and imports appears to operate through higher nonoil GDP activity (government expenditure → nonoil GDP → imports) rather than direct leakage via imports.

### V. Policy discussions and recommendations
- Near-term macroeconomic policy mix:
  - Continued fiscal stimulus is expected to support non-oil recovery but should be moderated if signs of overheating emerge, particularly in housing services (rents).
  - The non-oil fiscal deficit (excluding investment income, pension recapitalization, and oil-related subsidies) is estimated at over 54½ percent in FY2010/11 and 53 percent in FY2011/12, compared to approximately 49 percent in FY2005/06–FY2007/08; the non-oil fiscal deficit is estimated to have increased by close to 6½ percentage points in FY2010/11 with a projected decrease of 1 percentage point in FY2011/12.
  - Staff notes strong contemporaneous impact of planned capital expenditure on nonoil growth given high fiscal multipliers; capital spending also supports medium- and long-term diversification by addressing infrastructure and strengthening health and education expenditure.
  - Staff welcomes establishment of a macro-fiscal unit at the Ministry of Finance and plans to move to performance-based budgeting.
- Monetary policy stance:
  - Monetary policy expected to remain accommodative reflecting the basket peg and low global interest rates.
  - CBK adjusted policy rates in line with domestic credit conditions and low global interest rates; significant public sector deposits have boosted liquidity.
  - Exchange rate movements (basket peg with large U.S. dollar weight) could partly offset pass-through of commodity price increases, but flexibility is limited.
- Financial stability measures:
  - Authorities monitoring impact of regional developments on financial sector; readiness to respond to potential increases in banking sector provisions related to ICs.

_Italic: Source — IMF staff summary as provided in the chapter "2. Summary of Government Finance, 2005/06–2012/13"._

### 17.      Macroprudential policies are of particular importance in Kuwait. While fiscal

### Macroprudential policies are of particular importance in Kuwait

### Macroprudential policy and exchange rate assessment
- Macroprudential policies are essential to dampen cyclical fluctuations in credit and to maintain financial stability; fiscal policy should be the first line of defense to manage the financial cycle associated with the oil cycle.
- Equilibrium real exchange rate and related assessments:
  - Equilibrium real exchange rate approach: dinar undervalued in the range of 0–10 percent (based on annual and high frequency estimation methods).
  - Macrobalance approach: medium-term current account surplus norm in the range of 32 to 42 percent of GDP, implying either an undervaluation of 4 percent or an overvaluation of 17 percent.
  - External sustainability approach (constant per capita annuity rule): suggests the real exchange rate is overvalued by 12 percent.
  - Range of misalignment across approaches: overvaluation of 17 percent to undervaluation of 10 percent; average across three approaches indicates an overvaluation of just 4½ percent.
  - Staff assessment: on balance, the real exchange rate is broadly in line with fundamentals; subdued domestic inflation and lack of pressure on the currency forward markets support this.
- Authorities’ view:
  - Do not expect inflation to pick up in the near term; excess capacity in real estate and significant leakage of government expenditure through the balance of payments.
  - Consider the basket peg to provide sufficient monetary policy flexibility.
  - Reported macroprudential tools in place: loan-to-deposits ratio, liquidity ratio, higher risk weights for certain portfolios, precautionary provisions, and use of credit growth limits during the pre-crisis boom period.
  - Agreed exchange rate assessments are highly sensitive to assumed future oil price path and parameters.

### Strategy for sustained economic growth (Development Plan—DP)
- DP focus and implementation concerns:
  - Emphasizes investment in health, education, and infrastructure and preparing Kuwaiti nationals for private sector employment.
  - Implementation weaknesses and distortions should be addressed to achieve DP objectives.
- DP implementation requirements:
  - (i) Enhance business environment; develop streamlined procedures and legislative base for efficient and timely project screening and implementation.
  - (ii) Project design that provides appropriate internal rates of return while limiting fiscal risks within a proper framework for public–private risk sharing.
  - (iii) Evaluate project viability and conduct regular reviews of productivity of spending, including qualitative targets on health and education.
  - (iv) Account for absorptive capacity and supply constraints to avoid resurgence of inflation.
  - (v) Avoid buildup of excessive private sector leverage.
  - Pursue initiatives to diversify financing channels, including development of a corporate debt market.
- Labor sector policies and challenges:
  - Private sector largely dependent on expatriate labor.
  - Labor force and employment statistics: annual average growth rate of the Kuwait labor force was 4 percent in 2002–09, with 86 thousand Kuwaitis entering the labor market during the period.
  - Private sector created close to 700 thousand jobs in the past decade; Kuwaitis remain primarily employed in the public sector (83 percent) and constitute less than 10 percent of the private sector labor force.
  - Expatriate employment: 64 percent in private sector, 29 percent as domestic workers; 54 percent of expatriates assessed as having no qualification.
  - Kuwaiti workforce: only 12 percent hold employment in technical or scientific professions.
  - Policy distortions:
    - Generous public sector compensation raises reservation wages and undermines private sector employment objectives.
    - Administrative measures (minimum sectoral quotas for Kuwaiti nationals) are largely ineffective and create distortions.
  - Recommendation: contain growth in the wage bill and adopt consistent labor sector policies to align incentives for Kuwaiti nationals and limit recurring increases in current expenditure.
- Authorities’ response:
  - Broad agreement with staff assessment of DP and challenges; attributed initial delays to legislative readiness and expected implementation performance to improve.
  - Acknowledged need to address wage bill growth but did not expect near-term reforms.
  - Noted law under consideration to allow sukuk issuance by government.

### Medium-term fiscal reform and fiscal sustainability
- Fiscal distortions and pressures:
  - Large subsidies and low contribution of nonoil revenue to the budget likely to be exacerbated as growth picks up.
  - Cost of domestic subsidies—particularly utilities (electricity and water) and fuel—will continue to increase as the economy expands.
  - Subsidies, low taxation, and rapid growth in current expenditure (including public sector wage bill) imply high and inefficient transfers of oil resources to the nonoil economy.
- Fiscal consolidation objective:
  - Required to achieve intergenerational equity in consumption of oil wealth.
  - Staff estimates suggest government’s medium-term non-oil deficit is somewhat above its long-term sustainable value and projected gap widens over time.
  - Current expenditures expanded rapidly in recent years—wages, subsidies, transfers—increasing breakeven prices for fiscal and external balances and raising vulnerability to oil price volatility.
- Box 3: Composition of government expenditure and subsidy reform highlights:
  - Government expenditure in FY2010/11 was about 77 percent of nonoil GDP, 1¼ percentage points below its 25-year average.
  - Oil-related subsidies/benefits estimated at around 17¼ percent of nonoil GDP in FY2010/11—about 11½ percentage points above its 25-year average and almost eight percentage points above the FY1984/85 peak.
  - Oil-related subsidies/benefits comprised one-fifth of government expenditure in FY2010/11.
  - Subsidies largely untargeted; better targeting and reallocation toward capital expenditure could improve efficiency and productivity of government expenditure.
- Box 4: Fiscal sustainability analysis and scenarios:
  - Baseline scenario: non-oil fiscal deficit in equilibrium in FY2011/12 but around 3 percentage points of GDP over its equilibrium by 2016/17.
  - Lower population growth scenario: non-oil fiscal deficit remains below its equilibrium in the medium-term, but margin declines over time.
  - Lower oil price scenario (oil prices 20 percent lower than baseline; 2011 average around $85): non-oil deficit becomes larger than equilibrium by FY2011/12, indicating need for earlier fiscal consolidation even under lower population growth.
  - Assumptions noted in baseline calculation: long-term real rate of return on assets 4 percent, inflation 2 percent, population growth of Kuwaiti nationals 2 percent, oil reserves depleted in 72 years, oil price to reach $98.5 per barrel in 2016 and remain constant in real terms thereafter; alternative population growth assumes 1.4 percent long-term growth.
- Policy options for medium-to-long-term fiscal reforms:
  - Reforms to the tax system:
    - Staff welcomes planned introduction of VAT in 2013 in conjunction with planned GCC-wide VAT implementation.
    - Government considering comprehensive income tax (personal and corporate); staff suggested prioritizing VAT implementation given capacity constraints.
  - Gradual reduction of untargeted subsidies:
    - Phased withdrawal of subsidies should be high priority and complemented by efficient, well-targeted safety nets.
    - Recent census results could form basis for targeting.
  - Fiscal rule for medium-term management:
    - Fiscal rule should yield a relatively high public savings rate to account for revenue volatility and intergenerational equity.
    - Robust fiscal anchor example: expenditure ceiling that saves windfall revenues while allowing wider deficits when oil revenues are below forecast; incorporate explicit “escape clauses” for severe shocks.
- Authorities’ plans and views:
  - Agreed on need to diversify revenue sources and reduce growth in current expenditure.
  - Non-oil revenue target: grow to KD 4 billion by end of DP period (FY2013/14) from KD 1.1 billion (6¼ percent of non-oil GDP) in FY2009/10 through adjustments to fees, customs, and taxation.
  - VAT preparations well underway to be implemented jointly with GCC countries, but growing uncertainty on implementation date.
  - Comprehensive income tax scheduled by end-FY2013/14.
  - No immediate intention to undertake subsidy reform; work underway to improve bill collection and repricing formula for utilities.
  - Planned move to performance-based budgeting in eight years.
  - Authorities acknowledged downside risks to targets, largely due to potential legislative delays.

### Financial sector monitoring and regulation
- Macroprudential emphasis:
  - Macroprudential policies considered particularly important for Kuwait to manage financial cycle linked to oil cycle and to preserve financial stability.
  - Existing macroprudential instruments cited by authorities: loan-to-deposits ratio, liquidity ratio, higher risk weights for certain portfolios, precautionary provisions, and use of credit growth limits in earlier boom.
- Banking sector portfolio snapshot (2010):
  - Allocation of banks' credit portfolio: Total Personal Facilities 34% (33% in 2009), Real Estate 26% (26%), NBFIs 11% (12%), Construction 7% (7%), Trade 15% (15%), Other 7% (7%)*.
  - Source: Central Bank of Kuwait. (*2009 weights shown in parentheses.)

*Source: IMF staff report (cr11217).*

### 26.      The banking system is now in a stronger position to finance the DP. Private sector

### 26. The banking system is now in a stronger position to finance the DP. Private sector

### Banking system: recent performance and key indicators
- Capital adequacy ratio increased to 19 percent in 2010 from 17 percent in 2009.
- Leverage ratios averaging 13 percent.
- Credit growth was virtually flat in 2010.
- NPL ratio dropped to 8.9 percent from 11.5 percent in 2009.
- Sector profits increased significantly in 2010 (by approximately 70 percent).
- Return on equity (ROE) reached 9.1 percent in 2010.
- Liquidity appears adequate owing to a stable deposit base, including significant public sector deposits, although liquidity ratios have been on a downward trend in recent years and the CBK should continue to monitor it.
- Note on recapitalization: In 2010, four banks increased their capital by a total of KD 466 million ($1.7 billion).

### Investment companies (ICs): vulnerabilities and exposures
- Several ICs continued posting significant losses in 2010, originating mostly from investment in equities and real estate.
- External financing accounts for approximately 25 percent of ICs’ liabilities as of December 2010.
- Despite deleveraging after Lehman’s collapse, ICs remain highly dependent on foreign financing.
- Sector setbacks in debt restructuring; potential for further balance sheet and liquidity pressures if regional real estate and equity prices remain depressed and external financing tightens.
- Constraints on consolidation: prevalence of family business groups; absence of an efficient and speedy resolution framework; lack of financial expertise in the court system.

### Stress test results and implications
- Stress tests show improved results compared to 2009 owing to higher capitalization and liquidity buffers and large precautionary provisions.
- Under the most adverse scenario (significant drop in oil and asset prices and protracted low growth over a year), no bank loses its entire capital.
- Maximum recapitalization need under the adverse scenario to restore the CAR to the statutory 12 percent requirement would not exceed 2 percent of GDP.
- Single-factor stress tests highlight vulnerability to real estate and equity market exposures, but recapitalization needs under severe scenarios appear manageable.
- Liquidity stress tests indicate banks can broadly withstand a liquidity shock, although one bank becomes illiquid under the severe scenario.
- ICs in the stress test sample show limited capacity to withstand shocks: under the severe scenario the capital of eight (out of eleven) ICs could be wiped out due to insufficient capital buffers and exposure to risky assets.
- Stress test sample note: The sample included 11 listed ICs with a 29 percent share of total ICs’ assets.
- Methodology note: The 2010 FSAP methodology and assumptions were used in the stress test updates for comparability purposes.

### Regulatory, supervisory, and institutional developments
- New ICs regulations issued by the CBK in June 2010 set prudential limits on liquidity, leverage, and foreign exposure.
- The Capital Market Authority (CMA) has issued its full set of bylaws and is expected to assume its supervisory role in September 2011.
- A MoU between the CBK and CMA is being drafted to delineate supervisory responsibilities over ICs and specify coordination.
- CBK has set up a core team to strengthen macroprudential supervision and has made progress on analytical tools: quarterly off-site surveillance report, stress tests, and an early warning system (EWS).
- Major improvements in banking sector data collection and analysis and migration into a risk-based supervisory system.
- Recommendations and outstanding actions:
  - Finalize the MoU between the CBK and CMA to close gaps and limit overlap.
  - Remove legal impediments to sharing information between the two authorities (e.g., banking secrecy provisions).
  - Ensure the CMA has adequate staffing, both quantitatively and qualitatively.
  - Explore establishment of an inter-agency financial stability committee for systemic risk monitoring and crisis management.
  - CBK should continue to monitor progress toward the 2012 deadline for compliance with quantitative regulations for ICs and ensure companies undertake needed restructuring.
  - Move expeditiously to establish a special resolution regime (SRR) for financial institutions; consider special courts to adjudicate the process in case of challenges.
  - Authorities should continue to ensure that banks hold adequate liquid assets to cushion against stressful events.

### AML/CFT and supervisory framework
- Kuwait’s AML/CFT framework started in 2002 but needs further strengthening:
  - Criminalization of the financing of terrorism.
  - Structure and functions of the Financial Intelligence Unit.
  - AML/CFT supervisory system.
- Authorities should draw upon the recommendations of the assessment report adopted in June 2011.
- A new AML/CFT Law, compliant with the Financial Action Task Force 40+9 recommendations, will need to be quickly adopted.

### Statistics and data improvements
- CBK prepares and publishes comprehensive and timely monetary and financial statistics and has made progress in BOP data compilation, coverage, and periodicity with Fund TA, although IIP and external debt data are still provided with some lag.
- Long lags in CPI data compilation have been eliminated following organizational changes at the Central Statistical Office (CSO).
- Preparation of national accounts at constant prices continues to be delayed; latest data cover 2007.
- Recommendation: Authorities are encouraged to provide necessary financial and institutional support to the CSO to improve quality and frequency of statistical dissemination.

### Staff appraisal: macro outlook, risks, and policy priorities
- 2010 outcomes:
  - Real GDP growth estimated at 3.3 percent in 2010.
  - Government expenditure increased in FY2010/11 by 21½ percent—excluding energy-related subsidies and recapitalization of social security.
  - Inflation inched up, primarily due to higher international food prices.
- Near-term outlook:
  - Real GDP is projected to increase by about 5 percent in 2011.
  - Inflation is projected to pick up, driven by imported inflation.
  - Fiscal and external balances expected to improve on account of higher oil revenue.
- Downside risks:
  - Domestic risk: significant shortfall in meeting the spending targets of the DP due to red tape and political gridlock delaying project implementation and private sector participation.
  - Regional political and economic deterioration (particularly in Bahrain and Egypt) posing financial spillover risks to Kuwait.
  - A derailed global recovery leading to sustained decline in oil prices and affecting government expenditure prospects.
- Policy guidance:
  - Near-term macro policy mix judged adequate; fiscal expansion should be moderated if signs of overheating emerge.
  - Monetary policy constrained by exchange rate regime; macroprudential policies should primarily maintain financial stability if demand pressures reemerge.
  - DP implementation should: enhance the business environment and legislation; ensure project viability and productivity of spending; consider absorptive capacity and supply constraints to avoid renewed inflation; avoid buildup of excessive private sector leverage.
  - Pursue development of a corporate debt market and contain growth in the public sector wage bill.
  - Medium-to-long-term fiscal reforms recommended to reduce distortions and ensure intergenerational equity: tax and subsidy reforms; better targeting of subsidies/benefits; reallocation toward capital expenditure; consider a fiscal rule for medium-term fiscal management.
- Financial sector conclusion:
  - Banks’ financial positions improved markedly in 2010, but many ICs remain precarious.
  - Banks are adequately provisioned against loans to ICs and can withstand additional deterioration, though profitability would be affected.
  - CBK should monitor ICs’ progress toward 2012 compliance and facilitate restructuring and exits via SRR and possibly special courts.

*Source: IMF staff report excerpt (sections 26–42).*

### 43.      It is recommended that the next Article IV Consultation take place on a

### _cr11217 - 43.      It is recommended that the next Article IV Consultation take place on a

### Oil and gas sector
- Total oil and gas exports (in billions of U.S. dollars): 53.2, 59.1, 82.6, 46.6, 61.7, 85.9, 89.2
- Average oil export price (in U.S. dollars/barrel): 61.2, 70.4, 93.7, 58.2, 76.4, 104.1, 103.1
- Crude oil production (in millions of barrels/day): 2.64, 2.57, 2.68, 2.26, 2.31, 2.41, 2.52

### National accounts and prices
- Nominal GDP (market prices, in billions of Kuwaiti dinar): 29.5, 32.6, 40.0, 31.5, 38.0, 48.4, 51.4
- Nominal GDP (market prices, in billions of U.S. dollars): 101.6, 114.7, 148.8, 109.5, 132.6, 171.9, 182.9
- Real GDP (at factor cost, annual percentage change): 5.3, 4.6, 5.0, -5.0, 3.3, 5.0, 5.6
- Real oil GDP (annual percentage change): 2.8, -2.6, 3.3, -11.3, 3.2, 3.3, 4.6
- Real non-oil GDP (annual percentage change): 8.3, 11.1, 5.6, -1.0, 3.4, 6.0, 6.1
- CPI inflation (average): 3.1, 5.5, 10.6, 4.0, 4.1, 6.2, 3.5
- Unemployment rate (Kuwaiti nationals): 4.0, 6.1, 4.9, 3.6, 2.9, ... (data truncated)

### Investment and savings
- Investment (percent of GDP): 15.9, 20.5, 18.4, 13.9, 14.1, 14.9, 16.9
  - Public investment (percent of GDP): 2.8, 3.3, 3.5, 4.6, 4.7, 4.9, 5.6
  - Private investment (percent of GDP): 13.1, 16.9, 14.9, 9.3, 9.5, 10.0, 11.3
- Gross national savings (percent of GDP): 60.6, 57.2, 58.9, 37.6, 42.0, 48.4, 49.6
  - Public savings (percent of GDP): 60.2, 55.2, 46.4, 47.1, 45.8, 46.2, 47.2
  - Private savings (percent of GDP): 4.5, 2.1, 12.5, -10.3, -3.8, 2.1, 2.4
- Savings/investment balance (percent of GDP): 44.6, 36.8, 40.5, 23.6, 27.8, 33.5, 32.7

### Budgetary operations (percent of GDP and KD billions as presented)
- Revenue (percent of GDP): 66.6, 67.8, 63.4, 61.5, 59.2, 61.6, 60.6
  - Oil revenue (percent of GDP): 48.0, 51.5, 52.1, 50.1, 48.5, 51.6, 50.2
  - Non-oil revenue (percent of GDP, of which investment income): 18.6, 16.3, 11.4, 11.5, 10.7, 9.9, 10.4
- Expenditures (percent of GDP): 34.0, 28.1, 47.9, 33.6, 38.4, 35.5, 35.5
  - Expense (percent of GDP): 30.0, 23.9, 43.5, 29.2, 33.7, 30.3, 29.8
  - Capital (percent of GDP): 4.0, 4.1, 4.3, 4.4, 4.7, 5.2, 5.8
- Balance (percent of GDP): 32.5, 39.7, 15.5, 28.0, 20.7, 26.1, 25.0
- Domestic financing (percent of GDP): -2.8, -3.1, -4.5, -1.7, 1.9, -1.9, -0.6
- External financing (percent of GDP): -29.8, -36.6, -11.0, -26.3, -22.7, -24.1, -24.5
- Non-oil balance (percent of non-oil GDP): -58.8, -58.2, -73.0, -59.7, -72.1, -73.0, -70.7

### Government finance (Budget tables highlights)
- Revenue (KD billions, select years): 18.9, 20.1, 23.3, 24.0, 20.4, 24.0, 13.1, 30.2, 31.5
- Oil and gas revenue (KD billions, select years): 13.0, 14.5, 17.7, 19.7, 16.6, 19.7, 12.3, 25.4, 26.1
- Investment income and transfer of profits of public entities (KD billions, select years): 5.4, 4.7, 4.5, 3.2, 2.7, 3.2, 0.0, 3.7, 4.2
- Total expenditure (KD billions, select years): 6.8, 10.3, 9.7, 18.1, 11.1, 15.6, 18.3, 17.4, 18.5
- Net lending / borrowing [=A-B] (KD billions, select years): 12.1, 9.8, 13.7, 5.9, 9.3, 8.4, -5.2, 12.8, 13.0
- Non-oil balance (percent of GDP, alternative measures):
  - excluding investment income: -6.2, -9.4, -8.5, -17.1, -10.0, -14.5, -17.5, -16.3, -17.2
  - excluding recapitalization of pension: -6.2, -7.4, -8.5, -11.4, -10.0, -13.4, -16.4, -15.2, -16.2
  - excluding oil-related subsidies and benefits: -5.4, -6.3, -7.1, -8.6, -8.1, -10.1, -11.1, -12.1

### Balance of payments (2005–12, selected)
- Current account (billions of U.S. dollars): 30.1, 45.3, 42.2, 60.2, 25.9, 36.9, 57.6, 59.7
- Current account (percent of GDP): 37.2, 44.6, 36.8, 40.5, 23.6, 27.8, 33.5, 32.7
- Goods (trade balance, billions): 30.2, 40.2, 43.4, 64.0, 34.4, 47.9, 69.4, 71.0
- Exports (billions): 45.3, 56.6, 62.6, 87.0, 51.7, 67.0, 92.5, 96.0
  - Oil exports (billions): 42.4, 53.2, 59.1, 82.6, 46.6, 61.7, 85.9, 89.2
  - Non-oil exports including re-exports (billions): 2.9, 3.3, 3.5, 4.4, 5.1, 5.3, 6.6, 6.8
- Imports (billions): -15.1, -16.2, -19.1, -22.9, -17.3, -19.1, -23.1, -25.0
- Investment income (net, billions): 7.2, 11.0, 12.4, 10.7, 7.0, 7.9, 9.2, 11.3
- Current transfers (billions): -3.4, -3.7, -10.5, -10.7, -13.0, -13.0, -13.8, -14.9
- Capital and financial account (billions): -32.1, -48.8, -33.4, -49.6, -25.3, -32.6, -53.3, -57.5
- Overall balance (billions): 0.7, 3.6, 3.3, 0.7, 1.7, 1.0, 4.4, 2.2
- International reserve assets (billions of U.S. dollars): 8.1, 11.8, 15.9, 16.7, 17.7, 18.7, 23.1, 25.3
  - In months of imports of goods and services: 4.1, 5.3, 5.9, 5.3, 6.8, 6.9, 7.0, 7.1

### Monetary survey and financial aggregates
- Broad money (Millions of KD, end of period): 13,086; 15,921; 18,987; 21,950; 24,896; 25,634; 29,823; 32,861
- Money (Millions of KD, end of period): 3,727; 3,550; 4,147; 4,370; 4,714; 5,625; 6,325; 6,969
- Quasi money (Millions of KD, end of period): 9,359; 12,370; 14,841; 17,580; 20,182; 20,009; 23,499; 25,892
- Claims on nongovernment sector (Millions of KD, end of period): 12,937; 16,148; 21,822; 25,460; 27,019; 27,527; 29,239; 32,217
- Foreign assets (net, Millions of KD, end of period): 3,904; 5,545; 5,718; 7,610; 9,441; 9,464; 11,535; 12,981
- Broad money (annual percentage change): 12.3, 21.7, 19.3, 15.6, 13.4, 3.0, 16.3, 10.2

### Illustrative Macroeconomic Baseline Scenario (selected projections, 2005–16)
- Nominal GDP (KD billions, selected): 23.6 (2005), 29.5 (2006), 32.6 (2007), 40.0 (2008), 31.5 (2009), 38.0 (2010), 48.4 (2011), 51.4 (2012)
- Nominal GDP growth (percent): 34.7, 24.9, 10.6, 22.7, -21.2, 20.6, 27.3, 6.4
- Real GDP (percent): 10.4, 5.3, 4.6, 5.0, -5.0, 3.3, 5.0, 5.6
- Kuwait crude export price (U.S. dollars per barrel): 50.6, 61.2, 70.4, 93.7, 58.2, 76.4, 104.1, 103.1
- Crude oil output (millions of barrels per day): 2.57, 2.64, 2.57, 2.68, 2.26, 2.31, 2.41, 2.52
- Consumer price index (annual): 4.1, 3.1, 5.5, 10.6, 4.0, 4.1, 6.2, 3.5
- Fiscal balance (percent of GDP): 48.5, 32.5, 39.7, 15.5, 28.0, 20.7, 26.1, 25.0
- Fiscal balance after transfer to FGF and excl. transfer to pension (percent of GDP): 21.6, 18.4, 21.2, 16.4, 14.5, 10.4, 15.4, 13.9
- Non-oil balance/non-oil GDP excluding recapitalization of pension (percent): -57.6, -58.8, -58.2, -73.0, -59.7, -72.1, -73.0, -70.7
- Current account (percent of GDP): 37.2, 44.6, 36.8, 40.5, 23.6, 27.8, 33.5, 32.7
- Investment income (net, percent of GDP): 8.9, 10.8, 10.8, 7.2, 6.4, 5.9, 5.4, 6.2
- Saving rates (percent of GDP): Savings 56.8, 64.7, 57.2, 58.9, 36.8, 42.0, 48.4, 49.6

### Financial soundness indicators of the banking sector (2006–10, selected)
- Regulatory capital to risk-weighted assets (percent): 20.2 (2006), 19.3 (2007), 15.6 (2008), 16.7 (2009), 18.9 (2010)
- Regulatory Tier I capital to risk-weighted assets (percent): 17.7, 17.2, 14.3, 14.9, 17.3
- Capital to assets (percent): 12.6, 12.3, 10.9, 11.4, 12.6
- Gross non-performing loans to total loans (percent): 4.6, 3.8, 6.8, 11.5, 8.9
- NPLs net of specific provisions to total loans net of specific provisions (percent): 2.5, 2.1, 4.9, 7.4, 6.1
- Specific provisions to gross NPLs (percent): 47.4, 47.2, 29.0, 38.3, 33.9
- Loans to deposits (percent): 96.1, 103.1, 109.0, 113.0, 116.5
- FX-loans to total loans (percent): 19.7, 23.3, 24.9, 25.8, 25.5
- FX-deposits to total deposits (percent): 28.8, 34.9, 35.1, 32.7, 30.7
- Return on Average Assets (ROAA): 2.7, 3.3, 0.8, 0.7, 1.2
- Return on Average Equity (ROAE): 20.1, 24.3, 6.5, 6.1, 9.1

*Sources: Data provided by the authorities; Central Bank of Kuwait; Ministry of Finance; Kuwait Investment Authority; Fund staff estimates and projections; and IMF World Economic Outlook. Canonical source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11217.pdf*

### APPENDIX I. EDUCATION, HEALTH, AND INFRASTRUCTURE IN KUWAIT

### APPENDIX I. EDUCATION, HEALTH, AND INFRASTRUCTURE IN KUWAIT

### Education: outcomes, challenges, and reform priorities
- Kuwait fares relatively low in education outcomes vis-à-vis international comparisons given its GDP per capita level.
- The long-term growth potential of the economy is linked to the effectiveness of the education sector; education is also important to reduce inequality.
- A World Bank study ("The Road Not Traveled: Education Reform in the Middle East and North Africa, World Bank, 2008") concluded that once basic education needs are met, effective participation in secondary and tertiary education required a complex mix of factors—not just higher spending.
- Policy focus recommended:
  - Emphasize achieving better outcomes rather than only increasing spending.
  - Prepare graduates to meet the needs of the private sector.

### Health: capacity gaps and domestic provision
- Primary health care system is relatively good but demand for specialized care has outpaced domestic capacity, generating an expensive program to send citizens abroad for healthcare services.
- Health care infrastructure indicators (e.g., hospital beds per capita) are significantly below countries with comparable income levels.
- The share of health spending in GDP is low.
- Policy implications:
  - Significant scope exists to increase domestic provision of healthcare services.
  - This will require capital spending and adequate resources to hire well-trained service providers.

### Infrastructure: quality shortfalls and investment priorities
- At its current GDP per capita level, the quality of infrastructure in Kuwait is relatively poor (example indicator: quality of electrical supply).
- Additional investment is needed to bring electricity and roads up to regional standards.
- Investment should target bottlenecks that constrain economic development and help ease capacity constraints.

### Illustrative indicators and international comparisons (as presented)
- Sources cited for indicators: Global Competitiveness Report 2008-09 (World Economic Forum); World Development Indicators; International Association for the Evaluation of Educational Achievement (IEA).
- Trends and relationships shown in figures include:
  - Trends in International Mathematics and Science Study (2007) - Math Results.
  - Relationship Between Health Expenditure per capita and GDP per capita (log), 2007.
  - Relationship Between Infant Mortality (per 1,000 live births) and GDP per capita, 2008.
  - Quality of roads and quality of electrical supply (7 = highest) by GDP per capita.
  - Relationship Between Public Expenditure on Education and GDP per capita (log), 2008 (or latest).

*Source: _cr11217 - APPENDIX I. EDUCATION, HEALTH, AND INFRASTRUCTURE IN KUWAIT*

### ANNEX I. KUWAIT—FUND RELATIONS

### ANNEX 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: 1,201.08 SDR Million (73.93 percent)
- Reserve position in Fund: 360.06 SDR Million (26.07 percent)

### III. SDR Department
- Net cumulative allocation: 1,315.57 SDR Million (100.00 percent)
- Holdings: 1,444.23 SDR Million (109.78 percent)

### IV. Outstanding Purchases and Loans
- None

### V. Financial Arrangements
- None

### VI. Lending to the Fund and Grants
- SDR million 11.8 (New Arrangements to Borrow)
- Kuwait contributions 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

### VII. Exchange Rate Arrangement
- Since May 2007, the Kuwaiti dinar has been pegged to an undisclosed currency basket, reverting to the exchange system before January 2003.
- Between January 1, 2003 and May 2007, the Kuwaiti dinar was 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.
- Kuwait has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system free of restrictions on payments and transfers for current international transactions, other than those notified to the Fund pursuant to Decision 144-(52/51).
- 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
- The last Article IV consultation was completed by the Executive Board on July 16, 2010.
- The staff report is available at: http://www.imf.org/external/pubs/cat/longres.aspx?sk=24092.0

### IX. FSAP Participation
- An FSAP Update was conducted in March 2010; it included an updated assessment of a selected number of Basel Core Principles.
- An FSSA report was discussed by the Executive Board along with the staff report for the 2010 Article IV consultation and is available at: http://www.imf.org/external/pubs/cat/longres.aspx?sk=24096.0

### 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
- STA: External Sector Statistics — February 2009
- STA: External Sector Statistics — December 2009

### XI. Resident Representative
- None

### XII. Quota and Governance Actions
- 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.

*Source: ANNEX I. KUWAIT—FUND RELATIONS (As of May 31, 2011).*

### ANNEX III. KUWAIT—STATISTICAL ISSUES

### ANNEX III. KUWAIT—STATISTICAL ISSUES

### I. Assessment of Data Adequacy for Surveillance — General
- Data provision has some shortcomings, but is broadly adequate for surveillance.
- Scope for improved compilation of the national accounts and balance of payments statistics through better coordination among statistical agencies.
- Timeliness, particularly for the national accounts, is an area of concern.

### I. Assessment of Data Adequacy for Surveillance — National Accounts and Production
- Recent improvements:
  - Change of the base year for the constant price data to 2000.
  - Estimates of value added for subsidized goods and services of the public utilities sector now use input costs (previously used the household expenditure survey).
- Continued progress needs:
  - Improved estimation of value added for the oil sector.
  - Dedication of adequate resources and improved coordination between the Ministries of Planning, Oil, and Finance.
- Technical assistance:
  - The IMF’s statistics department (STA) has provided TA to the Ministry of Planning to improve national accounts and price data.
- Suggested publication improvements:
  - It would be useful if the Central Bank of Kuwait (CBK) would publish oil sector information in the Quarterly Statistical Bulletin: output, refining, domestic consumption, export price for crude and refined products, and the domestic price of petroleum products. (These data are available from the Ministry of Oil.)
- Timeliness issue:
  - Recent delays in the production of price indexes have caused long delays in the production of real GDP data.

### I. Assessment of Data Adequacy for Surveillance — Price Statistics
- CPI:
  - CPI weights are based on the 1999–2000 household expenditure survey and were introduced into the index for a reference year of 2002.
  - An improved monthly CPI based on a revised basket has been published in monthly CPI bulletins with about a one-month lag.
- Wholesale/producer prices:
  - The wholesale price index (WPI) needs to be developed into a producer price index (PPI) consistent with the national accounts and including all domestically produced goods, ex-factory, for the export and the domestic market.

### I. Assessment of Data Adequacy for Surveillance — Government Finance Statistics
- Annual GFS data are reported for publication in the Government Finance Statistics Yearbook (GFSY).
- Major omissions/not reported:
  - Major components of extrabudgetary revenues (investment income and transfers of profits of public institutions).
  - Extrabudgetary expenditures (interest on foreign debt and treasury paper).
  - Financing operations conducted by two reserve funds.
- Note: Data on investment income, and on interest on foreign debt and treasury paper, are usually provided to Article IV consultation missions.
- Presentation and classification:
  - Lack of a suitable classification of data on the execution of the budget remains a constraint on monitoring fiscal developments during the year.
  - Authorities’ presentation is not yet fully compliant with the GFSM 2001 guidance, but progress is being made: creating a new chart of accounts and moving reporting to an accrual basis.
- Coverage gaps and recommendations:
  - Data on the operations of the Public Institute for Social Security are not made available.
  - Sharing of information between various government agencies could be improved.
  - STA has indicated operations of the two reserve funds should be classified as part of government, as they perform activities for public policy purposes (management of debt and assets, and financing of the budget).
  - Additional extension of coverage recommended: report GFS in the form of the Statement of Sources and Uses of Cash for the consolidated central government.
  - Authorities briefed on IMF “Code of Good Practices on Fiscal Transparency” and encouraged to adopt recommended practices.

### I. Assessment of Data Adequacy for Surveillance — Monetary and Financial Statistics
- CBK reporting:
  - The CBK reports monetary data to STA on a regular and timely basis based on the Standardized Report Forms (SRFs).
- Sector classification issue:
  - CBK needs to distinguish investment companies that accept deposits from those that do not.
  - Investment companies that accept deposits should be classified as part of the depository corporations sector.
  - In current SRFs, all investment companies (including those that accept deposits) are classified as other financial corporations.
  - The amount of deposits accepted by investment companies is considered as not significant.

### I. Assessment of Data Adequacy for Surveillance — Balance of Payments Statistics
- Compilation and dissemination:
  - The CBK compiles and disseminates detailed annual data in accordance with BPM5 methodology, while trade data estimates are disseminated monthly.
- Coverage limitations and improvements:
  - Data on capital flows of the nonfinancial private sector are limited.
  - To improve coverage for inward FDI, the CBK is making efforts to obtain more data by surveying direct investment enterprises.
  - The Central Statistical Office (CSO), working with the CBK, plans to implement the IMF’s Coordinated Direct Investment Survey in 2010–11.
  - Enhancements made in estimation of travel services and communication services, but further improvements needed for several service items and private transfers.
- International Investment Position (IIP) and portfolio data:
  - 2007: dissemination of IIP data for 2001 onwards in STA publications was a major step forward.
  - IIP data made available to staff are incomplete: they exclude external assets held by the general government due to domestic legal constraints on dissemination (loans granted by the Kuwaiti Fund for Arab Economic Development and general government trade credits are included).
  - CBK participates in the Coordinated Portfolio Investment Survey (CPIS) with data reported for 2003 onwards. These data cover the financial sector acting as end-investors or intermediaries and do not include holdings of foreign securities held by government agencies, which comprise the bulk of Kuwait’s cross-border holdings.
- Technical assistance and remaining gaps:
  - 2009: STA provided TA on improving external accounts data.
  - CBK has made progress: substantial revisions to report forms, separate reporting of financial transactions in the BOP and other changes in volume in the IIP, and progress in estimation of remittances data.
  - Major delays and data gaps remain:
    - Major government entities do not report quarterly data to the CBK in time to compile timely quarterly statistics.
    - Trade data are compiled by the CSO annually and provided to the CBK with a time lag of well over one year.
    - The response rate for the private nonfinancial sector is low.

### II. Data Standards and Quality
- GDDS participation:
  - Kuwait is one of the first GDDS participants.
  - Most metadata, except real sector and socio-demographic metadata, have not been updated since October 2002.
- Public dissemination by agencies:
  - CBK webpage provides: money and banking statistics; balance of payments statistics; trade balance statistics; exchange rate; GDP by sector and expenditure at current and constant prices; public finance statistics; CPI and WPI; and security market indicators.
  - Ministry of Planning webpage (CSO) publishes national accounts, prices, and related statistics.
  - Ministry of Finance webpage includes detailed data for actual and estimated budget operations.
  - Kuwait Stock Exchange webpage provides stock market indices, volume and value of securities traded, privatization schedules and related information.
- Data ROSC:
  - No data ROSC is available.

### Table of Common Indicators Required for Surveillance — Selected metadata (as of 31/05/2011)
- Exchange rates
  - Date of latest observation: 30/05/2011
  - Date received: 31/05/2011
  - Frequency of Data/Reporting/Publication: D / D / D
- International reserve assets and reserve liabilities of the monetary authorities
  - Date of latest observation: 30/04/2011
  - Date received: 27/05/2011
  - Frequency: M / M / M
- Reserve/base money; Broad money; Central bank balance sheet; Consolidated balance sheet of the banking system; Interest rates
  - Date of latest observation: 30/04/2011
  - Date received: 27/05/2011
  - Frequency: M / M / M
- Consumer price index
  - Date of latest observation: 30/04/2011
  - Date received: 27/05/2011
  - Frequency of Data: M; Frequency of Publication: Q
- Revenue, expenditure, balance and composition of financing—general government
  - Date of latest observation: 31/12/2010
  - Date received: 25/04/2011
  - Frequency: Q / Q / Q
  - Memo: Not published on Fund standards
- Stocks of central government and central government-guaranteed debt
  - Date of latest observation: 31/03/2011
  - Date received: 25/04/2011
  - Frequency: M / M / M
- External current account balance; Exports and imports of goods and services
  - Date of latest observation: 31/12/2010
  - Date received: 25/04/2011
  - Frequency: A / A / A
- GDP/GNP
  - Date of latest observation: 31/12/2009
  - Date received: 15/09/2010
  - Frequency: A / A / A
- Gross external debt; International investment position
  - Date of latest observation: 31/12/2009
  - Date received: 25/04/2011 (gross external debt); 15/09/2010 (IIP)
  - Frequency: A / A / A

### Key findings and policy-relevant recommendations (statistical focus)
- Improve timeliness and regularity:
  - Prioritize timely production of price indexes to avoid delays in real GDP compilation.
  - Ensure major government entities report quarterly data to CBK on schedule.
- Enhance inter-agency coordination:
  - Strengthen coordination among the Ministries of Planning, Oil, and Finance, CBK, and CSO for national accounts, oil sector data, and external accounts.
  - Improve sharing of information between government agencies (including on Public Institute for Social Security).
- Improve sector and instrument classification:
  - Reclassify investment companies that accept deposits into the depository corporations sector.
  - Classify operations of the two reserve funds as part of government for GFS purposes.
- Extend coverage and methodological alignment:
  - Develop WPI into a PPI aligned with national accounts.
  - Implement the IMF Coordinated Direct Investment Survey (planned for 2010–11) to improve FDI statistics.
  - Consider reporting GFS as a Statement of Sources and Uses of Cash for the consolidated central government.
- Adopt international best practices:
  - Continue progress toward GFSM 2001 compliance and accrual reporting.
  - Update GDDS metadata (most have not been updated since October 2002).

*Source: ANNEX III. KUWAIT—STATISTICAL ISSUES (As of May 31, 2011).*

### 1.      On behalf of the Kuwaiti authorities, I would like to thank staff for the constructive

### _cr11217 - 1.      On behalf of the Kuwaiti authorities, I would like to thank staff for the constructive

### Recent developments
- After contracting by 5 percent in 2009, economic activity recovered to about 3 percent in 2010, underpinned by a supportive fiscal stance and reflecting a rebound in both the oil and non-oil sectors.
- Headline inflation increased on account of higher international food prices; non-food prices remained subdued.
- The fiscal surplus is estimated at 21 percent of GDP in 2010, notwithstanding an increase in government expenditure by 21½ percent of GDP.
- Financial soundness indicators point to a considerable improvement in banking system strength and resilience.
  - Capital adequacy ratio remained significantly above the minimum required by the Central Bank of Kuwait (CBK).
  - Bank profitability increased and non-performing loans dropped due to write-offs of fully provisioned loans.
  - Credit to residents recorded modest growth in 2010, as a result of stricter regulations following the financial crisis and the cautious lending policies adopted since last year.

### An ambitious development plan
- In February 2010, Kuwait’s parliament approved a US$ 108 billion development plan extending over 4 years.
- The plan is the first of six successive plans aimed at rendering Kuwait a regional financial and trade hub by 2035.
- Objectives and composition:
  - Promote diversification away from the oil sector and pave the way for greater private sector participation in economic activity.
  - Half of the investments envisaged in the plan will come from the private sector.
  - Three quarters of investments will benefit the non-oil sector.
  - Envisages the enactment or revision of laws intended to enhance the role of the private sector.

### Economic outlook and risks
- Growth momentum is likely to be sustained in 2011 and beyond, on account of the newly approved development plan.
- Risks and implementation concerns:
  - There may be concerns regarding the government’s capacity to execute the development plan in a timely manner.
  - Restoration of confidence in the prospects of the economy is likely to have a positive impact on the non-oil sector.
  - The increase in oil prices in 2011 will provide an added incentive for the government to move ahead with large projects and expedite project execution.
- Price pressures are expected to pick up in 2011, mainly reflecting an increase in international food prices.

### Towards sustainable economic growth
- Kuwait’s economy and public finances remain very reliant on the oil sector, which accounts for more than 90 percent of budget revenues and exports.
- The development plan aims to build a more diverse and dynamic economy by providing incentives for the private sector to assume a leading role.
- Reducing government reliance for employment:
  - The plan will also reduce pressures on the government to continue providing job opportunities for Kuwaiti nationals.
- Business environment and human capital:
  - The business environment will largely benefit from investments identified in the development plan, including upgrades to roads, airports, and hospitals.
  - The plan calls for sizable investments in education to prepare Kuwaiti nationals for employment in the private sector.
- Implementation note:
  - The development plan took off slowly in its first year due to delays in introducing the needed legislative base intended to improve efficiency, governance, and competitiveness.

### Fiscal policy reforms
- High oil prices enable Kuwait to sustain continued spending over the medium term while still achieving a significant surplus.
- Staff’s analysis points to a high government expenditure multiplier; the authorities agree with this finding.
- Authorities concur on the importance of better targeting spending, particularly subsidies.
  - Ongoing work to improve collection and propose a new pricing mechanism for public utilities.
- A significant portion of government spending is directed towards the recapitalization of the social security fund.
- Revenue-side reforms:
  - Authorities will introduce tax reforms in the medium term to enhance non-oil revenue.
  - They intend to introduce a VAT as well as an income tax.
  - Progress has been achieved in establishing a macro-fiscal unit at the Ministry of Finance.

### Monetary policy and financial sector issues
- Monetary policy stance:
  - Monetary policy has been accommodative since the onset of the global financial crisis.
  - Below potential growth in the non-oil GDP, import-driven inflationary pressures, and low global interest rates justify an accommodative stance.
  - The CBK remains vigilant to developments of liquidity in the banking system and stands ready to tighten its monetary stance when market conditions signal overheating.
- Exchange rate and policy tools:
  - The pegged exchange rate regime continues to serve the Kuwaiti economy well.
  - Although the U.S. dollar plays a dominant role in the basket, the exchange rate regime gives the CBK a degree of flexibility in relation to the U.S. economy.
  - The CBK has policy instruments such as loan-to-deposit ratio and credit growth limits to resort to if needed.
- Banking sector resilience and regulations:
  - The banking system remains well supervised and highly capitalized.
  - Banks’ profitability is expected to rise with healthy growth and financing opportunities created by the development plan.
  - Stress tests carried out by CBK and by staff indicate a strong resiliency of banks to severe shocks.
  - Adequate provisioning against loans to investment companies (IC) will mitigate the impact of IC risks on banks’ profitability.
  - The CBK issued new regulations in June 2010 imposing prudential limits on IC liquidity, leverage, and foreign exposure.
  - IC must meet the quantitative regulations of the CBK by 2012 to ensure proper restructuring; the CBK continues to monitor progress.

### Other issues
- Kuwait is committed to continue its support to developing countries, especially through the HIPC Initiative.
- Kuwait pledged to support the Managing Natural Resources Wealth topical fund and the Tax Policy and Administration topical fund.

*Source: _cr11217 - 1.      On behalf of the Kuwaiti authorities, I would like to thank staff for the constructive*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11217.pdf_