## 1. Kuwait–Diversification Efforts Have to Start Now (_cr14333)

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### Context and reform agenda
- Economic activity picked up, supported by high oil prices and production, but challenges remain.
- Non-oil sector growth driven mainly by consumption growth reflecting increase in public wages and subsidies.
- Execution of the government’s Five Year Development Plan (DP) (2010–14) has been below target; public investment has stalled and remains lower than in other emerging market economies.
- Authorities preparing new Development Plan (2015–19) focused on economic reform and implementation of long-stalled strategic mega projects.
- Government measures broadly in line with staff advice:
  - Cabinet eliminated diesel subsidies, reduced allowances for Kuwaitis travelling abroad for medical aid, and passed a law to cap end-of-service compensation.
  - Departmental group in the Ministry of Finance studying rationalization of kerosene and electricity subsidies.
  - Public finance management reform initiated with World Bank assistance and an ambitious implementation timetable.
  - Parliament passed laws on anti-corruption, promoting foreign investment, public-private partnerships, and privatization.
  - Central Bank of Kuwait (CBK) proactively maintaining banking system stability.
- Diversification priorities and needed structural reforms:
  - Improve business environment, governance, and institutional and policy-making frameworks.
  - Enhance worker skills and encourage entrepreneurship via SME development.
  - Review competition policy law, government procurement procedures, barriers to entry; foster forward/backward linkages with state-owned enterprises.
  - Contain growth in public sector wages and jobs to strengthen incentives for employment of nationals in the private non-oil sector.
- External role and external flows:
  - Outward remittances about $15 billion in 2013.
  - Kuwait Investment Authority estimated at $550 billion at end-2013.

### Recent economic developments (selected figures)
- Non-oil growth and GDP:
  - Non-oil growth projected to increase to 3.5 percent in 2014 from an estimated 2.8 percent in 2013.
  - Flat oil production in 2014 would keep overall real GDP growth positive at 1.3 percent.
- Inflation and external balances:
  - Average inflation forecast to remain at about 3 percent in 2014.
  - Current account surplus expected to remain high at about 38 percent of GDP in 2014.
- Fiscal developments:
  - Fiscal surplus of 26 percent of GDP projected in 2014, down from about 35 percent in 2013.
  - Wages and salaries constitute 50 percent of total expenditure in the FY 2014/15 budget.
  - Total spending projected to rise by 25 percent in the budget (current expenditures up 22 percent; capital expenditures up 45 percent).
- Monetary and financial conditions:
  - CBK benchmark discount rate unchanged since October 2012 at 2 percent.
  - Weighted-average deposit and lending rates at end-June 2014: 1.49 percent and 4.35 percent (from 1.60 percent and 4.86 percent at end-October 2012).
  - Total deposits increased by 6.5 percent y-o-y in June 2014.
  - Bank credit to private sector grew y-o-y by 7 percent in June 2014; bank lending to non-bank financial institutions contracted to 5 percent of banks’ total credit portfolio in June 2014 (compared to 6.3 percent a year ago and 12.7 percent in mid-2008).

### Outlook and risks
- Baseline projections:
  - Non-oil GDP growth expected to accelerate to 4.0 percent in 2015 and to 4.5–5.0 percent in the medium term.
  - Inflation projected to increase to 3.5 percent in 2015.
  - Current account and fiscal surpluses projected to remain high but on a declining trajectory amid rising government spending and a gradual decline in projected oil prices.
- Oil price shock risks:
  - Breakeven oil price estimated at $75 in 2014/15 (excluding investment income); production level assumed at 2.925 million barrels a day in 2014.
  - Staff analysis: a $20 decline in oil prices relative to the baseline would result in bringing the fiscal position (excluding investment income) to a sizable deficit in the medium term.
  - Recommendation: continue near-term capital spending plans but undertake further consolidation in the medium term to preserve buffers and saving for future generations.
- Political and implementation risks:
  - Underexecution of DP projects led staff to lower non-oil growth projections compared to last year; further shortfalls would lower non-oil growth below forecasts.
  - Continued parliamentary pressure to increase subsidies and wages could strain fiscal consolidation.

### Risk Assessment Matrix (selected entries)
- Sustained decline in energy prices (Medium likelihood; High expected impact)
  - Impact: Fiscal and external revenues would fall; private sector confidence likely to decline.
  - Recommended response:
    - Contain current expenditures and continue to increase buffers while oil prices are high.
    - Develop a medium-term fiscal policy framework (medium-term macroeconomic framework and medium-term expenditure framework).
    - Undertake substantial economic reforms to support diversification and reduce oil dependence.
- Slow implementation of the Development Plan (DP) (Medium likelihood; Medium expected impact)
  - Impact: Lower non-oil growth; cost overruns; lower public investment efficiency.
  - Recommended response:
    - Resolve political gridlock; integrate DP into a medium-term fiscal framework; monitor implementation of capital expenditure; improve public investment efficiency and strengthen anti-corruption efforts.
- Abrupt change in global financial market volatility (High likelihood; Medium expected impact)
  - Impact: Funding, market and credit risks for investment companies (ICs) and banks; tightening of domestic lending; pressure from real estate exposure.
  - Recommended response:
    - Monitor health of ICs and complete restructuring of loss-making ICs; establish a macroprudential framework and coordinating mechanism.

---

### Monetary Policy, External Anchor, and Fiscal Strategy

### Monetary policy and credit conditions
- The accommodative monetary policy stance remains conducive to credit growth.
- Monetary instruments focus on absorption of surplus liquidity through conventional and Islamic instruments.
- Monetary policy in coming years expected to tighten under the basket peg.
- Macroprudential policy tools available and currently on a neutral setting.

### External sector and exchange rate anchor
- Peg to a basket provides a credible monetary anchor; staff view peg as appropriate.
- Real exchange rate broadly in line with fundamentals; external sustainability approach gives inconclusive results.
- Central bank reserves stable in range of about 6.5–8 months of imports.
- Real effective exchange rate has been stable.

### Fiscal stance, public spending, and sustainability
- Overall fiscal stance is expansionary until FY 2015/16; some consolidation envisaged thereafter.
- Draft new Development Plan (2015–19) envisages annual average public investment of KD 6.3 billion ($22 billion) in water, power, transportation and oil sectors.
- Staff calculations show non-oil primary deficit projected to exceed long-term sustainable level indicated by intergenerational equity considerations by about 5 percent of GDP by 2019 (12 percent of GDP if oil prices are 20 percent lower).
- Options to reduce the non-oil fiscal deficit:
  - Gradual phasing-out of subsidies (9 percent of GDP) with social safety net and mitigating measures; avoid increasing inflationary pressures.
  - Curtail increase in government jobs and keep growth in compensation constant in real terms: saving of 0.8 percent of GDP in 2015 and an average of about 1.5 percent of GDP per year in the medium term.
  - Review transfers, goods and services spending, and other current expenditures (about 15 percent of GDP); pension reform cited as potential candidate.
  - Tax measures: subject Kuwaiti companies to corporate tax and lower rate to 10 percent from 15 percent, abolish National Labor Support Tax and the tax for the Kuwait Foundation for the Advancement of Sciences, make Zakat creditable against corporate tax — potential to increase revenues by 1.8 percent of GDP.
  - Implementation of VAT could yield an additional 2.3 percent of non-oil GDP. Combined revenue potential of these taxes is 2.9 percent of GDP.
  - Revising fees for public services as additional non-oil revenue source.

### Subsidies, tariffs, and wage reforms (selected measures)
- Cabinet increased diesel and kerosene prices from 55 fils per liter to 170 fils per liter (potential saving of 0.5 percent of GDP).
- Proposal for electricity tariff structure based on a sliding scale of usage would generate revenues of about 1 percent of GDP each year and a reduction in usage by 20 percent.
- Key elements for subsidy reform: comprehensive reform plan with impact assessment, phased price increases, communication strategy, targeted mitigating measures.
- Public sector wage reform under consideration: revamp payroll system; link performance management with promotions; standardize salaries; move to salary indexation with periodic rebasing. Staff suggested Ministry of Finance be given powers to set wage bill ceilings or overall expenditure limits.

---

### Financial Sector Vulnerabilities, Macroprudential Policy, and Bank Soundness

### Banking sector health and resilience (end-June 2014 and related)
- Combined capital adequacy ratio of banks: 18.3 percent.
- Gross non-performing loans (NPLs): 3.5 percent.
- Provisioning ratio (general plus specific provisions) at end-June 2014: 139 percent.
- Liquid assets at end-June 2014: 30 percent of total assets.
- Islamic banking sector market share: 23 percent of banking system assets at end-2005 to 39 percent by end-June 2014.
- CBK introduced Basel III capital regulations for conventional and Islamic banks; framework for domestic systemically important banks and regulations on leverage ratio introduced. Regulations on short-term liquidity in advanced stages.

### Macroprudential concerns and recommendations
- Main vulnerabilities: credit concentration to corporate sector and real estate; sectoral exposures to real estate, equity, and household lending.
- Existing tools: concentration limits for corporate exposures; ceilings on equity investments; debt-to-income limits; loan-to-value ratio for residential real estate for investment purposes (introduced November 2013).
- Staff recommended:
  - Strengthen macroprudential arrangements through a formal mandate.
  - Further strengthen Early Warning System (EWS); expand indicators for corporate and real estate sectors; make macro stress testing integral to systemic surveillance.
  - Enhance macroprudential toolkit; provide CBK with enhanced powers.
  - Structural measures: develop domestic interbank money and debt markets; modernize insolvency regimes; strengthen crisis management and resolution systems.

### Investment companies (ICs), shadow banking, and CMA actions
- ICs large exposures to global and regional financial and real estate markets; dependent on foreign financing; some ICs loss-making and under protracted restructuring.
- Staff recommended monitoring health of ICs and completing restructuring of loss-making ICs.
- Shadow banking measures vary between 2 percent of GDP (activity-based) and 60 percent of GDP (institution-based) depending on definition; institution-based measure substantially influenced by ICs regulated by CMA.
- CMA strengthening: onsite/offsite supervision, minimum capital requirements, regulations on liquidity and leverage under review; corporate governance code implementation deadline extended to June 2016.
- Recommendation: expand data coverage for Other Financial Corporations, enhance data sharing among regulators, and strengthen monitoring of shadow banking institutions.

### Banking sector indicators (selected time-series from tables)
- Regulatory capital to risk-weighted assets series: 20.2, 19.3, 15.6, 16.7, 18.9, 18.5, 18.0, 18.9, 18.3.
- Gross non-performing loans to total loans series: 4.6, 3.8, 6.8, 11.5, 8.9, 7.3, 5.2, 3.6, 3.5.
- Profitability measures: ROAA series: 2.7, 3.3, 0.8, 0.7, 1.2, 1.1, 1.2, 1.0, 1.0; ROAE series: 20.1, 24.3, 6.5, 6.1, 9.1, 8.1, 9.0, 7.4, 8.0.
- Monetary aggregates (Broad money, Millions of KD): 18,987; 21,950; 24,896; 25,179; 27,747; 29,669; 32,558; 33,974; 36,463.

### Financial stability policy priorities
- Formalize macroprudential policy framework and grant CBK a formal mandate for financial stability.
- Monitor and complete restructuring of loss-making ICs; strengthen CMA oversight and corporate governance for ICs.
- Develop domestic debt markets and expedite legal framework for sukuk issuance.
- Enhance coordination among CBK, CMA, MOF, and KIA for crisis management.

---

### Fiscal Framework, DSA Highlights, and Baseline Projections (Appendix I & projections)

### Public sector debt sustainability analysis (baseline highlights, percent of GDP unless noted)
- Nominal gross public debt series: 10.0 (2012), 3.6 (2013), 3.2 (2014), 3.3 (2015), 3.3 (2016), 3.2 (2017), 3.1 (2018), 3.0 (2019), 2.8 (projection series).
- Public gross financing needs series: -28.2 (2012), -35.3 (2013), -34.6 (2014), -28.4 (2015), -26.6 (2016), -26.0 (2017), -25.6 (2018), -23.8 (2019), -21.3 (projection series).
- Real GDP growth (percent): 6.1 (2012), 8.3 (2013), -0.2 (2014), 1.3 (2015), 1.7 (2016), 1.8 (2017), 3.1 (2018), 3.3 (2019), 3.3 (projection series).
- Inflation (GDP deflator, percent): 9.8 (2012), 5.8 (2013), 2.5 (2014), 0.4 (2015), -0.9 (2016), 0.2 (2017), 0.6 (2018), 1.1 (2019), 1.4 (projection series).
- Effective interest rate (percent): 3.4 (2012), 2.3 (2013), 2.2 (2014), 2.6 (2015), 3.4 (2016), 4.5 (2017), 5.8 (2018), 6.3 (2019), 6.5 (projection series).
- Primary (noninterest) revenue and grants series: 65.2 (2012), 73.5 (2013), 72.4 (2014), 72.1 (2015), 71.6 (2016), 72.1 (2017), 72.8 (2018), 71.9 (2019), 70.6 (projection series).
- Primary (noninterest) expenditure series: 36.2 (2012), 37.9 (2013), 37.5 (2014), 43.4 (2015), 44.7 (2016), 45.7 (2017), 46.8 (2018), 47.7 (2019), 48.6 (projection series).

### Baseline macro projections (selected series from Table 5)
- Nominal GDP (KD billions): 32.6, 39.6, 30.5, 33.1, 42.5, 48.7, 49.9, 50.7, 51.1, 52.1, 54.1, 56.5, 59.2 (projection series as listed).
- Real GDP series: 6.0, 2.5, -7.1, -2.4, 10.2, 8.3, -0.2, 1.3, 1.7, 1.8, 3.1, 3.3, 3.3.
- Kuwait crude export price (U.S. dollars per barrel) series: 68.4, 92.2, 61.5, 77.7, 103.3, 107.1, 105.5, 104.7, 101.4, 99.5, 97.6, 96.4, 95.5.
- Fiscal balance (deficit -) as percent of GDP series: 39.0, 16.5, 28.9, 23.8, 37.2, 34.5, 34.8, 26.3, 27.1, 26.2, 25.7, 23.5, 21.5.
- Current account (percent of GDP) series: 36.8, 40.9, 26.7, 31.8, 42.7, 45.2, 39.6, 37.7, 35.5, 34.5, 33.8, 31.2, 28.6.

### External assessment (Appendix II summary)
- Staff view: peg to a basket appropriate; REER broadly in line with estimated long-run equilibrium with mid-2014 slight overvaluation of about 6 percent by some estimates.
- Macroeconomic balance (specification IV) medium-term current account norm ≈ 35 percent of GDP; comparable to projected surplus of 29 percent of GDP in 2019.
- External sustainability approach gives wide range of norms (≈ 14 percent to 49 percent of GDP); results inconclusive.
- Central bank reserves: stable in range of about 6.5–8 months of imports over past few years.
- International investment position decreased to about 51 percent of GDP in 2012.

---

### Implementation Status of FSAP 2010 (Annex II — selected entries)

### Completed actions (selected)
- MOU signed with CMA clarifying regulatory and supervisory responsibilities (recommendation 1) — Status: Completed.
- Extend viability assessment to all systemically important ICs — Status: Completed.
- Integration of ICAAP in on-site manual and pilot on-site ICAAP examination — Status: Completed.
- Staffing enhancements for banking supervision department — Status: Completed.
- Establish Financial Stability Office (FSU) and publish Financial Stability Report 2013 — Status: Completed.
- Strengthen corporate governance "fit and proper" tests for bank boards — Status: Completed.
- Migration from compliance-based to risk-based supervision — Status: Completed.
- Widen collateral acceptance for ELA operations — Status: Completed.

### In progress / partially implemented / not implemented (selected)
- Periodic stress tests of real estate and other sectoral credit risk concentrations — Financial Stability Office performs regular stress tests; Supervision Sector reviews ICAAPs.
- Directive on conflict of interest and limits for related-party credit — Status: Partially Completed; corporate governance principles revised June 2013; implementation of limits pending.
- Quantitative and qualitative regulation for ICs and licensing regime — Status: In progress; Stage One (evaluation/classification) prepared.
- Deposit insurance funding and coverage — Status: Not implemented.
- MOU on financial crisis management among CBK, MOF, CMA, and KIA — Status: In progress; MOU prepared and CBK work team formed.
- Special resolution regime / insolvency reform — Status: In progress; World Bank assigned to revamp insolvency and creditor/debtor laws; draft law under discussion.
- Corporate governance guidelines for ICs — Implementation postponed until June 2016.

---

*Source: IMF staff report excerpts and appendices from _cr14333.*

### 1. Kuwait–Diversification Efforts Have to Start Now ______________________________________________ 17

### 1. Kuwait–Diversification Efforts Have to Start Now

### Context
- Economic activity picked up, supported by high oil prices and production, but challenges remain.
- Non-oil sector growth driven mainly by consumption growth, reflecting an increase in public wages and subsidies.
- Execution of the government’s Five Year Development Plan (DP) (2010–14) has been below target and public investment has stalled; public investment remains lower than in other emerging market economies.
- Frequent changes in governments since 2006 partly delayed implementation of mega projects.
- Spending rigidities and increased reliance on oil revenues have highlighted fiscal risks.
- Authorities are preparing a new Development Plan (2015–19) focused on economic reform and implementation of long-stalled strategic mega projects.
- Government measures broadly in line with staff advice:
  - Cabinet decided to eliminate diesel subsidies, reduced allowances for Kuwaitis travelling abroad for medical aid, and passed a law to cap end-of-service compensation.
  - A departmental group in the Ministry of Finance is studying rationalization of kerosene and electricity subsidies.
  - Public finance management reform initiated with World Bank assistance and an ambitious implementation timetable.
  - Parliament passed laws on anti-corruption, promoting foreign investment, public-private partnerships, and privatization.
  - Central Bank of Kuwait (CBK) is proactively maintaining banking system stability.
- Diversification is a policy priority; transition to a private-sector-driven, export-oriented model requires:
  - Structural reforms to improve the business environment, governance, and institutional and policy-making frameworks.
  - Enhancing worker skills and encouraging entrepreneurship via SME development.
  - Changing firm incentives toward the tradable sector by reviewing competition policy law, government procurement procedures, barriers to entry, and fostering forward/backward linkages with state-owned enterprises.
  - Strengthening incentives for employment of nationals in the private non-oil sector by containing growth in public sector wages and jobs.
- Kuwait’s external role:
  - Important role in maintaining global oil market stability and embarking on investment program to increase crude capacity.
  - Outward remittances about $15 billion in 2013.
  - Provided financial and humanitarian assistance to Arab countries in transition and to Africa.

### Recent Economic Developments
- Non-oil growth projections and drivers:
  - Non-oil growth projected to increase to 3.5 percent in 2014 from an estimated 2.8 percent in 2013, driven by continued domestic consumption increase and some pickup in government capital spending and private investment.
  - Flat oil production in 2014 would keep overall real GDP growth positive at 1.3 percent.
  - Average inflation forecast to remain at about 3 percent in 2014.
  - Current account surplus expected to remain high at about 38 percent of GDP in 2014.
- Fiscal developments:
  - Fiscal surplus of 26 percent of GDP projected in 2014, down from about 35 percent in 2013, supported by high oil prices but with increases in salaries and subsidies.
  - Wages and salaries constitute 50 percent of total expenditure in the FY 2014/15 budget.
  - Total spending projected to rise by 25 percent in the budget, reflecting increased current (22 percent) and capital expenditures (45 percent).
- Monetary and financial conditions:
  - CBK benchmark discount rate unchanged since October 2012 at 2 percent.
  - Weighted-average deposit and lending rates fell to 1.49 percent and 4.35 percent, respectively, at end-June 2014 (from 1.60 percent and 4.86 percent, respectively at end-October 2012).
  - Total deposits increased by 6.5 percent y-o-y in June 2014; excess liquidity—bank reserves at the central bank—rising.
  - Bank credit to private sector grew y-o-y by 7 percent in June 2014, driven mainly by personal loans.
  - Bank lending to non-bank financial institutions contracted to 5 percent of banks’ total credit portfolio in June 2014 (compared to 6.3 percent a year ago and the pre-crisis boom of 12.7 percent in mid-2008).

### Outlook and Risks
- Baseline projections:
  - Non-oil GDP growth expected to accelerate to 4.0 percent in 2015, projected to further increase gradually to 4.5–5.0 percent in the medium term on strength of public spending in infrastructure and the oil sector, private investment, and consumption.
  - Inflation projected to increase to 3.5 percent in 2015.
  - Moderate increase in oil production expected to further support overall growth.
  - External current account and fiscal surpluses projected to remain high over the medium term but on a declining trajectory amid rising government spending and a gradual decline in projected oil prices.
- Political and implementation risks:
  - Authorities acknowledge need for enduring political agreement on reform agenda to implement the DP and improve investment climate.
  - Relationship between government and parliament has improved; current parliament’s legislation passing exceeds any previous parliament’s performance over a full term.
  - Government moving forward with major projects in oil sector (refineries and clean fuel), roads, port, and airport.
  - Continued pressure from parliament to increase subsidies and wages and other benefits to Kuwaitis.
  - Staff lowered non-oil growth projections compared to last year due mainly to underexecution of DP projects; further shortfalls would lower non-oil growth below forecasts.
- Oil price shock risks:
  - Sustained decline in oil prices is a major downside risk.
  - Given recent trends in current spending and projected decline in oil prices in the baseline, government expenditure would exceed revenues, excluding investment income, by 2020, although overall fiscal position will remain in surplus.
  - Breakeven oil price estimated at $75 in 2014/15 (excluding investment income); production level assumed at 2.925 million barrels a day in 2014.
  - Staff analysis: a $20 decline in oil prices relative to the baseline would result in bringing the fiscal position (excluding investment income) to a sizable deficit in the medium term.
  - Large fiscal buffers could smooth public spending in the medium term but at cost of lower savings for future generations; adverse effects on long-term fiscal sustainability.
  - Recommendation: continue near-term capital spending plans but undertake further consolidation in the medium term, which would lead to slower growth.
  - Authorities recognize importance of using period of high surpluses to save more by containing current spending growth and increasing non-oil revenues.
- Oil sector expansion and global shale risk:
  - Authorities embarked on program to increase crude oil production capacity from 3 mbd to 4 mbd by 2020; expanding refineries and petrochemical complex capacity.
  - Staff noted potential risks from global shale oil developments.
  - Authorities did not anticipate near-term reduction in market share due to shale because of supply outages in Iraq, Libya and Nigeria.
  - In medium- to long-term authorities cited environmental concerns, crude quality, uncertainty on US policy to permit crude shale oil exports, high depletion rate of shale, cost differentials, and improved global demand outlook as factors that could constrain shale supplies and create space for Kuwait to increase market share.

### Financial Sector Vulnerabilities and Policy Responses
- Banking sector resilience and exposures:
  - Banks fund assets mainly from domestic deposits.
  - Direct exposures to cyclical real estate sector and equity (24 percent of total assets) and collaterals expose banks to downturns in real estate and equity prices.
  - Feedback effects among banks, nonbank financial institutions, real estate, and stock market could exacerbate impact.
  - High capitalization and provisioning provide substantial loss absorption capacity; CBK and credit rating agencies’ stress tests validated resilience (CBK stress tests show lowest after-shock capital adequacy ratio of an individual bank was 11 percent).
- Investment companies (ICs) vulnerabilities:
  - ICs have large exposures to global and regional financial and real estate markets and remain dependent on foreign financing.
  - Abrupt global market volatility could increase market and funding risks for ICs, forcing deleveraging of proprietary positions and adversely affecting fiduciary assets.
- Policy and macroprudential measures:
  - CBK proactively monitors and mitigates concentration and other risks through macroprudential tools, including limits on loan-to-value ratios, and mandating less well capitalized banks to raise capital.
  - Recommended: monitor health of ICs and complete restructuring of loss-making ICs.
  - Recommended: establish a macroprudential framework and a coordinating mechanism to assess incipient systemic risks and adjust macroprudential policies as needed to limit risks to the financial system.

### Risk Assessment Matrix (selected entries)
- Sustained decline in energy prices (medium likelihood; High expected impact)
  - Impact: Fiscal and external revenues would fall; private sector confidence likely to decline.
  - Recommended response:
    - Contain current expenditures and continue to increase buffers while oil prices are high.
    - Develop a medium-term fiscal policy framework underpinned by a medium-term macroeconomic framework and a medium-term expenditure framework.
    - Undertake substantial economic reforms to support diversification and reduce oil dependence.
- Slow implementation of the Development Plan (DP) (Medium likelihood; Medium expected impact)
  - Impact: Protracted political uncertainty could affect business confidence and investment climate, lower non-oil growth; delays and bureaucratic hurdles could cause cost overruns and lower public investment efficiency.
  - Recommended response:
    - Resolve political gridlock.
    - Integrate DP into a medium-term fiscal framework to ensure continued implementation.
    - Monitor implementation of capital expenditure.
    - Improve efficiency of public investment and strengthen anti-corruption efforts.
- Abrupt change in global financial market volatility (High likelihood; Medium expected impact)
  - Impact: Funding, market and credit risks for ICs and banks; tightening of domestic lending to riskier borrowers; pressure from high real estate exposure.
  - Recommended response:
    - Monitor health of ICs and complete restructuring of loss-making ICs.
    - Establish a macroprudential framework and coordinating mechanism to assess incipient systemic risks and adjust policies as needed.
- Protracted period of slower growth in advanced and emerging economies (Likelihood/impact analogous to oil price decline)
  - Impact: Could lead to decline in oil demand and prices; economy remains highly dependent on oil for fiscal and external revenues and government spending.
  - Recommended response: Same as for sustained decline in energy prices.

### Main Policy Discussion Points
- Restrain current spending growth.
- Develop medium-term macroeconomic and fiscal frameworks.
- Sustain long-term growth through diversification.
- Maintain financial stability.

*Source: IMF staff report excerpt, "1. Kuwait–Diversification Efforts Have to Start Now."*

### 13.      The accommodative monetary policy stance remains conducive to credit growth. Bank

### _cr14333 - 13.      The accommodative monetary policy stance remains conducive to credit growth. Bank

### Monetary policy and credit conditions
- The accommodative monetary policy stance remains conducive to credit growth.  
- Bank credit continues to grow, supported by deposit growth.  
- The central bank is ensuring that current liquidity conditions are supportive of credit demand.  
- Monetary operations continue to focus primarily on absorption of surplus liquidity through conventional and Islamic instruments.  
- With low inflation and gradually increasing non-oil growth, the policy mix is growth-supportive and remains appropriate.  
- Monetary policy in coming years is expected to tighten under the basket peg.  
- Macroprudential policy tools are available to the central bank to mitigate potential financial stability risks, and they are currently on a neutral setting.

### External sector and exchange rate anchor
- The peg to a basket provides a credible monetary anchor.  
- Staff share the authorities’ view that the peg to the basket is appropriate given the current structure of the Kuwaiti economy.  
- Estimates from the macrobalance and equilibrium real exchange rate assessment methodologies show that the real exchange rate is broadly in line with fundamentals, while estimates from the external sustainability approach give inconclusive results (Appendix II).  
- On balance, staff believe there is no compelling evidence that the exchange rate is misaligned.  
- Central bank reserves have remained stable in the range of about 6.5–8 months of imports over the past few years.  
- The sovereign wealth fund (Kuwait Investment Authority) has an estimated $550 billion at end-2013.  
- The availability of cheap migrant labor keeps labor costs down and inflation moderate.  
- The real effective exchange rate has been stable.

### Fiscal stance, public spending, and sustainability
- The overall fiscal stance is expansionary until FY 2015/16 as some expenditures (e.g. foreign aid and subsidies) were shifted from the last year to the current year.  
- Some consolidation is envisaged thereafter, and this is appropriate in the context of fiscal sustainability.  
- Staff’s model-based analysis suggests that the government has the space to undertake more capital spending, while underlining the need to contain current spending growth (Selected Issues Paper I).  
- The draft new Development Plan (DP) (2015–19) envisages an annual average public investment of KD 6.3 billion ($22 billion) in water, power, transportation and oil sectors.  
- Staff’s calculations show that the non-oil primary deficit is projected to exceed the long-term sustainable level indicated by intergenerational equity considerations by about 5 percent of GDP by 2019 (12 percent of GDP if oil prices are 20 percent lower).  
- The need for medium-term fiscal restraint would be larger and more urgent in a scenario of lower oil prices.

### Options to reduce the non-oil fiscal deficit (staff and authorities)
- Gradual phasing-out of subsidies (9 percent of GDP), with a social safety net and mitigating measures (e.g. cash transfers) and a well-designed communication strategy; implementation should avoid increasing inflationary pressures.  
- Curtailing the increase in government jobs and keeping the growth in compensation constant in real terms: saving of 0.8 percent of GDP in 2015 and an average of about 1.5 percent of GDP per year in the medium term.  
- Review of various transfers to enterprises and households, goods and services spending, and other current expenditures (about 15 percent of GDP) to rationalize spending; pension reform cited as a potential candidate.  
- Tax measures: subjecting Kuwaiti companies to corporate tax and lowering the rate to 10 percent from 15 percent, abolishing the National Labor Support Tax and the tax for the Kuwait Foundation for the Advancement of Sciences, and making Zakat creditable against the corporate tax — potential to increase revenues by 1.8 percent of GDP. Implementation of the value added tax (VAT) could yield an additional 2.3 percent of non-oil GDP. Combined revenue-increasing potential of these taxes is 2.9 percent of GDP. Revising fees for public services would be an additional source of non-oil revenues.

### Ongoing and proposed reforms: subsidies, tariffs, and wages
- The cabinet has decided to increase diesel and kerosene prices from 55 fils per liter to 170 fils per liter (with potential saving of 0.5 percent of GDP).  
- Some allowances for Kuwaitis travelling for healthcare abroad have been rationalized.  
- Government is in advanced stages of sending a proposal to the cabinet for reducing subsidies for electricity. Government’s proposal on a tariff structure for electricity based on a sliding scale of usage would generate revenues of about 1 percent of GDP each year and a reduction in usage by 20 percent.  
- Staff suggested policies to eliminate the gap between the reference price (domestic production cost with some remuneration for capital in the sector) and current tariffs over the medium term.  
- For subsidy reform to gain public support, key elements include: (i) comprehensive reform plan with impact assessment studies, (ii) appropriate phasing of price increases, (iii) far-reaching communication strategy, and (iv) targeted mitigating measures to protect vulnerable populations. The government is actively engaged on these fronts.  
- Government is considering public sector wage reform with objectives to revamp payroll system, link performance management with promotions, standardize salaries across public sector jobs, and move to a system of salary indexation with periodic rebasing. Staff suggested design changes to prevent arbitrary increases during rebasing and to address employment growth containment. Staff suggested the Ministry of Finance be given powers to set wage bill ceilings or overall expenditure limits as part of the medium-term fiscal framework. Staff emphasized reducing the wage gap between public and private sector jobs and restraining the increase in public sector employment; introducing skills testing for new and existing staff; reviewing wage subsidies to retain their temporary intent.

### Public investment, efficiency, and diversification strategy
- Consensus on prioritizing capital expenditure towards social and physical infrastructure projects, accompanied by measures to improve efficiency, to support growth.  
- Higher capital spending should be accompanied by improved efficiency of public investment, consistent with diversification goals, and integrated with the budget formulation process.  
- Kuwait compares better than oil exporters in the MENA region in public investment management, but falls behind when compared to other emerging market economies.  
- Near-term actions to improve efficiency include: modernizing the procurement system, increasing transparency and oversight of public investment projects, preparing an infrastructure needs assessment, effectively implementing the anti-corruption framework, and assessing the state of the public investment management system.  
- Medium-term reforms should revamp the public investment management framework by developing the medium-term expenditure framework, improving appraisal of investment projects, and introducing systematic ex-post evaluation of projects (Selected Issues Paper II).  
- The government recognizes the need to establish a fiscal policy framework to lessen fiscal policy uncertainty: develop a medium-term macroeconomic framework, a medium-term fiscal framework (MTFF), and a medium-term expenditure framework. These elements will support public finance management reform.

### Diversification, labor market, and private sector development
- Main challenge: strengthen growth potential through infrastructure investment, improving business environment and product markets, and labor market reforms.  
- The new five-year Development Plan (DP, 2015–19) is intended to set realistic targets and improve execution; staff emphasized the importance of monitoring and ensuring implementation to sustain investment and support non-oil growth.  
- Diversification priorities include improving education quality and skill development, reducing distortions that lead to reliance on foreign labor to increase private sector employment opportunities for nationals, and reforms that encourage tradable goods and services production.  
- Developing SMEs with support from the KD 2 billion National Fund for SME Development is important for job creation for nationals, economic diversification, promoting non-oil exports, and sustainable growth (Selected Issues Paper III).  
- As Kuwait advances diversification, banks need to reorient strategies toward a more diversified asset portfolio and improve credit risk assessment. Sectoral concentrations exist, particularly in real estate, for both conventional and Islamic banks. Greater focus on risk management of the growing Islamic banks’ segment is important due to risk-sharing business models.  
- Developing domestic debt markets would raise funding for large infrastructure programs. Expediting the legal framework for issuance of sukuk would help deepen this market; the Capital Markets Authority (CMA) is currently reviewing the draft law for sukuk issuance.

*Source: IMF staff report excerpt.*

### 26.      Banks are amply capitalized and liquid with stable profits, reflecting prudent

### _cr14333 - 26.      Banks are amply capitalized and liquid with stable profits, reflecting prudent

### Banking sector health and resilience
- Combined capital adequacy ratio of banks: 18.3 percent.
- Gross non-performing loans (NPLs): 3.5 percent (driven by lower NPLs in real estate and equity, a pick-up in loan growth, and continued write-offs).
- Provisioning ratio (general plus specific provisions) at end-June 2014: 139 percent.
- Liquid assets at end-June 2014: 30 percent of total assets.
- Islamic banking sector market share increase: from 23 percent of banking system assets at end-2005 to 39 percent by end-June 2014.
- CBK actions and expectations:
  - Introduced Basel III capital regulations for conventional and Islamic banks, including a framework for domestic systemically important banks and regulations on leverage ratio.
  - Regulations on short-term liquidity are in advanced stages of preparation.
  - The CBK does not envisage problems with banks complying with upcoming liquidity and leverage ratios.

### Macroprudential policy and concentration risks
- Main sources of vulnerability to the banking system:
  - Credit concentration to the corporate sector and real estate.
  - Sectoral exposures: real estate, equity, and household lending.
- Existing regulatory tools:
  - Concentration limits for corporate exposures.
  - Ceilings on equity investments.
  - Debt-to-income limits for household lending.
  - Loan-to-value ratio for residential real estate for investment purposes of individuals (introduced November 2013).
- Recent developments and monitoring:
  - Increasing activity observed in investment properties and commercial real estate segments; CBK is closely watching and ready to use macroprudential tools.
- Recommended enhancements (staff view):
  - Strengthen macroprudential arrangements through a formal mandate.
  - Further strengthen the Early Warning System (EWS), expand early warning indicators for the corporate and real estate sectors, and make macro stress testing integral to systemic surveillance.
  - Enhance the macroprudential toolkit.
  - Implement structural measures: develop domestic interbank money and debt markets, modernize insolvency regimes and judiciary support, and strengthen crisis management and resolution systems.
  - Provide CBK with enhanced powers for macroprudential policy (Selected Issues Paper VI).

### Investment companies (ICs) and systemic considerations
- Nature and risks:
  - ICs are mainly investment vehicles and do not perform a major role in credit intermediation.
  - Sector-wide profitability, but some ICs continue to make losses and some are under protracted restructuring.
  - Vulnerable to swings in real estate and financial markets.
- Regulatory and legal actions:
  - Strengthening of regulatory oversight by the Capital Markets Authority (CMA) is needed to engender consolidation given interconnectedness to the financial system.
  - Completion of the new draft corporate bankruptcy law could help expedite restructuring of loss-making ICs.
  - Implementation of the corporate governance code would help strengthen the sector; CMA plans a communication campaign to ensure adoption by the extended deadline of June 2016.
  - CMA conducts onsite and offsite supervision, imposes minimum capital requirements, and has regulations on liquidity and leverage under constant review; CMA is reviewing by-laws and working toward harmonizing listing and disclosure requirements for funds.

### Shadow banking
- Measurement variability and data limitations:
  - Staff assessment shows measures of shadow banking for Kuwait vary between 2 percent of GDP (activity-based) and 60 percent of GDP (institution-based) depending on the definition used.
  - Institution-based measure is substantially influenced by ICs, which are regulated by the CMA.
- Policy priorities:
  - Strengthen monitoring of shadow banking institutions and activities, with emphasis on those posing systemic risks.
  - Expand data coverage for Other Financial Corporations operating in Kuwait and enhance data sharing among regulators.
  - Develop a formal macroprudential policy framework to enable early, reliable, and comprehensive identification, assessment and containment of systemic risks.

### Regulatory coordination, AML/CFT, and supervisory strengthening
- Regulatory coordination and surveillance:
  - Continued coordination between regulatory and supervisory bodies and enhanced surveillance tools will facilitate effective monitoring and management of systemic risks.
- AML/CFT progress:
  - Fund technical assistance supported development and adoption of an AML/CFT law and regulations in line with international standards.
  - Established a high level AML/CFT National Strategic Committee and set up the Financial Intelligence Unit (FIU) under the oversight of the Minister of Finance; FIU recently became operational.
  - Established comprehensive mechanisms to freeze terrorist assets.
  - Going forward: continue improving AML/CFT effectiveness and strengthen the role of the FIU.

### Staff appraisal: outlook, fiscal strategy, and policy recommendations
- Growth projections:
  - Non-oil GDP growth expected to accelerate to 4.0 percent in 2015.
  - Projected to increase to 4.5–5.0 percent in the medium term in the baseline scenario.
- Fiscal strategy and public investment:
  - Fiscal position is currently strong, but restraint in current spending is needed to preserve buffers and increase saving for future generations.
  - A medium-term fiscal strategy is required; elements should include containing current expenditure growth (particularly subsidies and wages), prioritizing capital expenditure, and increasing non-oil revenue.
  - Subsidy reform should be supported by an effective communication strategy and accompanied by targeted mitigating measures to protect vulnerable population segments.
  - Proposed wage reform should operate within overall expenditure limits, align incentives to reduce the public–private wage gap, and contain public employment.
  - Prioritize capital expenditure toward social and physical infrastructure, improve public investment efficiency, integrate capital spending with budget formulation, set realistic targets for the new plan (2015–19), and conduct cost-benefit analysis of mega projects.
- Fiscal framework and institutions:
  - Strengthen the macro-fiscal unit to improve macroeconomic forecasts and revenue/expenditure projections.
  - Combine medium-term frameworks with the annual budget process and prepare for adoption of fiscal rules.
  - Implement a public investment management system to increase efficiency.
- Financial stability and market development:
  - While current regulation has contained financial risks, formalizing the macroprudential policy framework and giving CBK a formal mandate for financial stability would strengthen systemic resilience.
  - Further develop domestic financial markets (including domestic debt markets and expediting legal framework for issuance of sukuk) to support diversification and reduce concentration risks.
- Structural reforms for diversification and employment:
  - Prioritize economic diversification into areas with potential for national employment.
  - Improve the business environment, strengthen governance in public administration, and increase the role of small and medium-sized enterprises.
  - Policy measures: strengthen private sector competition, implement labor market reforms, limit government employment, review competition policy law and procurement procedures, and reduce barriers to entry for new firms.
- Data and statistics:
  - Encourage continued improvement in economic data quality and availability, particularly government finance, national accounts, and real estate market statistics, including cooperation with GCCStat.

*Source: IMF staff report (sections 26–41) as provided in the supplied content.*

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

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

### Macroeconomic developments
- Key assessment: "Non-oil growth picks up as spending increases, inflation is stable, and current account and fiscal surpluses are large."
- Notable time-series descriptors from figures:
  - "Real GDP Growth, 2007–14 (Contribution; in percent)" (figure context).
  - Headline and core inflation series shown as "Headline and Core Inflation, 2007–14 (Y-o-y percent change)."

### Fiscal developments
- Summary assessment: "Despite an increase in current spending, fiscal surpluses are high due to high oil prices."
- Selected fiscal aggregates (from Table 1 and Table 2):
  - "Revenue67.165.164.669.075.373.371.971.971.5" (percent of GDP series, 2007–2015).
  - "Expenditures28.148.535.745.338.238.837.245.644.4" (percent of GDP series, 2007–2015).
  - "Balance39.016.528.923.837.234.534.826.327.1" (percent of GDP series, 2007–2015).
  - From Table 2 (billions of Kuwaiti Dinars): "Revenue (includes grants) (A)23.124.320.124.533.235.936.036.5" and "Total expenditure (B=C+D)9.718.111.116.016.819.018.623.2".
  - Non-oil balance indicators: "Non-oil balance -4.3-13.5-7.6-11.5-12.2-13.1-11.9-15.6" (billions of KD) and "Non-oil balance -12.6-36.3-24.4-32.5-27.7-26.7-23.7-30.8" (percent of GDP).

### Monetary and financial conditions
- Assessment: "Deposits, liquidity, and bank credit are growing as interest rates are stable."
- Key monetary aggregates (Table 4, end of period, Millions of KD):
  - "Broad money18,98721,95024,89625,17927,74729,66932,55833,97436,463".
  - "Money4,1474,3704,7145,1526,3667,6548,6779,0149,674".
  - "Quasi money14,84117,58020,18220,02721,38122,01523,88224,96026,789".
- Selected banking soundness indicators (Table 6):
  - "Regulatory capital to risk-weighted assets 20.219.315.616.718.918.518.018.918.3".
  - "Gross non-performing loans to total loans 4.63.86.811.58.97.35.23.63.5".
  - Profitability measures: "Return on Average Assets (ROAA) 2.73.30.80.71.21.11.21.01.0" and "Return on Average Equity (ROAE) 20.124.36.56.19.18.19.07.48.0".

### External sector and reserves
- Characterization: large current account surpluses and substantial international reserves.
- Selected balance of payments figures (Table 3):
  - "Current account42.260.228.336.765.878.769.667.764.3".
  - Trade and oil export series: "Exports62.687.054.467.1102.9119.7115.7113.4110.5" and "Oil exports59.182.648.961.896.7112.9108.5106.0102.7".
  - International reserve assets (billions of U.S. dollars): "International reserve assets 16.717.220.421.426.029.032.238.540.6" and "In months of imports of goods and services6.25.47.67.27.57.78.29.19.0".

### Social, education, and labor-market observations
- Headline: "Kuwaitis are employed mostly in high-earning public-sector jobs while education is lagging behind."
- Indicators and context (figure captions and data series):
  - "Education Expenditure, 2010 (Percent of GDP)" shows Kuwait relative to peers.
  - "Length and Quality of Education, 2013 (Years of schooling and performance in math and science)" with TIMSS math scores and years of schooling plotted.
  - Public-sector wage distribution: "Public Sector Employees by Wage Group, 2013 (Thousands)" (nationals vs. non-nationals).

### Institutions, governance, and competitiveness
- Assessment: "Improvements in regulations, business climate, and infrastructure are needed."
- Indicators presented:
  - Economic freedom, ease of doing business rankings, Global Competitiveness Index positions, and governance indicators (Voice & Accountability; Political Stability; Government Effectiveness; Regulatory Quality; Rule of Law; Control of Corruption) for Kuwait and comparators.

### Investment companies and market risks
- Observation: "Investment companies are deleveraging, but market risks remain."
- Selected series (assets and liabilities, KD billions):
  - "Assets (KD billions) — Total of Conventional and Islamic 2001200220032004200520062007200820092010201120122013Jun-14" (series displayed in figure).
  - "Foreign Liabilities (through June 2014) (KD billions)" and "Foreign Assets (through June 2014) (KD billions)" shown in time series.

### Baseline projections and scenario indicators
- Illustrative macroeconomic baseline (Table 5 projections, selected series):
  - Nominal GDP (KD billions): "32.639.630.533.142.548.749.950.751.152.154.156.559.2".
  - Real GDP: "6.02.5-7.1-2.410.28.3-0.21.31.71.83.13.33.3".
  - Kuwait crude export price (U.S. dollars per barrel): "68.492.261.577.7103.3107.1105.5104.7101.499.597.696.495.5".
  - Fiscal balance (deficit -) as percent of GDP: "39.016.528.923.837.234.534.826.327.126.225.723.521.5".
  - Current account (percent of GDP): "36.840.926.731.842.745.239.637.735.534.533.831.228.6".

### Policy implications and recommendations (drawn from assessments)
- Maintain regular Article IV surveillance: "It is recommended that the next Article IV consultation take place on the standard 12-month cycle."
- Fiscal policy: continue to manage large oil-revenue-driven surpluses while addressing non-oil fiscal balances and long-term sustainability (non-oil balance indicators highlight pronounced deficits).
- Financial stability: monitor banking sector indicators—NPLs, capital adequacy, and liquidity—despite generally sound metrics; watch investment companies' deleveraging and market risks.
- Structural reforms: prioritize improvements in education outcomes, regulatory quality, business climate, and infrastructure to support non-oil growth and private sector employment.

*Source: Kuwait — IMF staff report excerpts, figures, tables, and projections as provided in the supplied content.*

### Appendix I. Public Sector Debt Sustainability Analysis

### Appendix I. Public Sector Debt Sustainability Analysis

### Baseline DSA — Key fiscal and debt indicators (in percent of GDP unless otherwise indicated)
- Nominal gross public debt: 10.0 (2012), 3.6 (2013), 3.2 (2014), 3.3 (2015), 3.3 (2016), 3.2 (2017), 3.1 (2018), 3.0 (2019), 2.8 (projection series)
- Public gross financing needs: -28.2 (2012), -35.3 (2013), -34.6 (2014), -28.4 (2015), -26.6 (2016), -26.0 (2017), -25.6 (2018), -23.8 (2019), -21.3 (projection series)
- Real GDP growth (in percent): 6.1 (2012), 8.3 (2013), -0.2 (2014), 1.3 (2015), 1.7 (2016), 1.8 (2017), 3.1 (2018), 3.3 (2019), 3.3 (projection series)
- Inflation (GDP deflator, in percent): 9.8 (2012), 5.8 (2013), 2.5 (2014), 0.4 (2015), -0.9 (2016), 0.2 (2017), 0.6 (2018), 1.1 (2019), 1.4 (projection series)
- Nominal GDP growth (in percent): 16.8 (2012), 14.6 (2013), 2.3 (2014), 1.7 (2015), 0.8 (2016), 2.0 (2017), 3.7 (2018), 4.5 (2019), 4.8 (projection series)
- Effective interest rate (in percent): 3.4 (2012), 2.3 (2013), 2.2 (2014), 2.6 (2015), 3.4 (2016), 4.5 (2017), 5.8 (2018), 6.3 (2019), 6.5 (projection series)

### Contribution to changes in public debt (selected items)
- Change in gross public sector debt (yearly): -2.8 (2012), -1.0 (2013), -0.4 (2014), 0.1 (2015), 0.0 (2016), -0.1 (2017), -0.1 (2018), -0.1 (2019), cumulative -0.3
- Identified debt-creating flows (yearly): -2.1 (2012), -0.6 (2013), -0.1 (2014), -0.1 (2015), 0.0 (2016), 0.0 (2017), -0.1 (2018), -0.1 (2019), cumulative -0.4
- Primary deficit: -29.1 (2012), -35.6 (2013), -34.9 (2014), -28.7 (2015), -26.9 (2016), -26.4 (2017), -25.9 (2018), -24.2 (2019), cumulative -154.0
- Primary (noninterest) revenue and grants: 65.2 (2012), 73.5 (2013), 72.4 (2014), 72.1 (2015), 71.6 (2016), 72.1 (2017), 72.8 (2018), 71.9 (2019), 70.6 (projection series), cumulative 431.0
- Primary (noninterest) expenditure: 36.2 (2012), 37.9 (2013), 37.5 (2014), 43.4 (2015), 44.7 (2016), 45.7 (2017), 46.8 (2018), 47.7 (2019), 48.6 (projection series), cumulative 277.0

### Automatic debt dynamics (derived contributions)
- Automatic debt dynamics (total): -1.8 (2012), -0.5 (2013), 0.0 (2014), 0.0 (2015), 0.1 (2016), 0.1 (2017), 0.1 (2018), 0.1 (2019), cumulative 0.4
- Interest rate/growth differential: -1.8 (2012), -0.5 (2013), 0.0 (2014), 0.0 (2015), 0.1 (2016), 0.1 (2017), 0.1 (2018), 0.1 (2019), cumulative 0.4
  - Of which: real interest rate: -0.8 (2012), -0.2 (2013), 0.0 (2014), 0.1 (2015), 0.1 (2016), 0.1 (2017), 0.2 (2018), 0.1 (2019), cumulative 0.8
  - Of which: real GDP growth: -1.0 (2012), -0.3 (2013), 0.0 (2014), 0.0 (2015), -0.1 (2016), -0.1 (2017), -0.1 (2018), -0.1 (2019), cumulative -0.4
- Exchange rate depreciation contribution: 0.0 (all years)

### Other identified debt-creating flows and asset changes
- Other identified debt-creating flows (yearly): 28.7 (2012), 35.5 (2013), 34.9 (2014), 28.6 (2015), 26.8 (2016), 26.2 (2017), 25.8 (2018), 24.0 (2019), 21.9 (projection series), cumulative 153.2
- Privatization (negative): 0.0 (all years)
- Contingent liabilities: 0.0 (all years)
- Asset accumulation: 28.7 (2012), 35.5 (2013), 34.9 (2014), 28.6 (2015), 26.8 (2016), 26.2 (2017), 25.8 (2018), 24.0 (2019), 21.9 (projection series), cumulative 153.2
- Residual, including asset changes: -0.7 (2012), -0.5 (2013), -0.4 (2014), 0.2 (2015), 0.0 (2016), 0.0 (2017), 0.0 (2018), 0.0 (2019), cumulative 0.1

### Market indicators and ratings (as reported)
- Sovereign spreads: EMBIG (bp): na; 5Y CDS (bp): na
- Ratings — Moody's: Aa2 (Foreign, Local); S&Ps: AAAA (Foreign, Local); Fitch: AAAA (Foreign, Local)
- Effective interest rate definition: interest payments divided by debt stock (excluding guarantees) at the end of previous year

### Notes on methodology and assumptions
- Public sector is defined as general government.
- Automatic debt dynamics formula: [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).
- Real interest rate contribution derived as r - π(1+g); real growth contribution as -g; exchange rate contribution as ae(1+r).
- Residual includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.
- Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

### Composition of public debt and public gross financing needs (charts summarized)
- Gross nominal public debt (in percent of GDP) trajectory shown for 2012–2019 with projections indicating low single-digit levels.
- Public gross financing needs (in percent of GDP) projected declining from the high negative values in 2012–2014 toward smaller negative values by 2019.
- Debt composition by maturity: medium and long-term versus short-term shown historically and in projection.
- Debt composition by currency: local currency-denominated versus foreign currency-denominated shown historically and in projection.

### Alternative scenarios and underlying assumptions (selected)
- Baseline scenario assumptions (2014–2019):
  - Real GDP growth: 1.3, 1.7, 1.8, 3.1, 3.3, 3.3 (2014–2019)
  - Inflation (GDP deflator): 0.4, -0.9, 0.2, 0.6, 1.1, 1.4 (2014–2019)
  - Primary Balance: 28.7, 26.9, 26.4, 25.9, 24.2, 22.0 (2014–2019)
  - Effective interest rate: 2.6, 3.4, 4.5, 5.8, 6.3, 6.5 (2014–2019)
- Historical scenario assumptions (2014–2019):
  - Real GDP growth: 1.3, 4.6, 4.6, 4.6, 4.6, 4.6 (2014–2019)
  - Inflation (GDP deflator): 0.4, -0.9, 0.2, 0.6, 1.1, 1.4 (2014–2019)
  - Primary Balance: 28.7, 31.4, 31.4, 31.4, 31.4, 31.4 (2014–2019)
  - Effective interest rate: 2.6, 3.4, 4.6, 6.1, 6.8, 7.3 (2014–2019)
- Constant Primary Balance Scenario:
  - Primary Balance: 28.7 (constant 2014–2019)
  - Other macro variables as in baseline

---

### Appendix II excerpt — External sector assessment (summary)
- Staff view: peg to the basket is appropriate given the structure of the Kuwaiti economy; overall assessment points to external stability.
- Equilibrium real effective exchange rate (EREER):
  - REER broadly in line with estimated long-run equilibrium.
  - Mid-2014: real exchange rate slightly above estimated equilibrium (overvaluation of about 6 percent), but close to equilibrium using vector-error correction model estimates.
- Macroeconomic balance (MB) approach:
  - Medium-term current account norm (specification IV) ≈ 35 percent of GDP; comparable to projected surplus of 29 percent of GDP in 2019.
  - Other specifications: 30–32 percent, and one at 20 percent.
  - MB estimate (specification IV) shows slight overvaluation; taken with other estimates suggests no large misalignment.
- External sustainability approach:
  - Wide range of current account benchmarks: ≈ 14 percent of GDP and 49 percent of GDP, implying both overvaluation and undervaluation; inconclusive.
  - Benchmark based on real per capita annuity implies overvaluation ≈ 31 percent.
  - Benchmark based on real annuity implies undervaluation ≈ 23 percent.
- External indicators reinforcing stability:
  - Central bank reserves: stable in range of about 6.5–8 months of imports over past few years.
  - International investment position: decreased to about 51 percent of GDP in 2012 (below 2005–11 average ≈ 70 percent).
  - Sovereign wealth fund (Kuwait Investment Authority): estimated $550 billion at end-2013.
  - Labor market: availability of cheap migrant labor keeps labor costs down and inflation moderate.

### Kuwait: External sustainability current account norms vs. projections (chart summary)
- Projected current account compared with current account norms based on annuity constants in real per capita terms and in real terms for 2012–2019 (percent of GDP series shown in source).

### Annex I — Status of staff recommendations from 2013 Article IV Consultation (selected recommendations and status updates)
- Containing fiscal spending, in particular public wage bill, and reallocating spending toward capital:
  - Public wage bill increased in 2013, but a public wage reform is under study. Capital spending almost flat in 2013/14 from previous year; 2014/15 budget envisaged a large increase.
- Revisiting energy subsidies:
  - Government eliminated diesel subsidies (about 0.5 percent of GDP) and is studying proposals for kerosene and electricity subsidy reforms.
- Building institutional capacity to improve tax system and introduce VAT and strengthen budget framework:
  - Modernization of the tax administration system continues per Fund and World Bank TA. The macro-fiscal unit is operational with Fund resident advisor support. A working group set up on medium-term fiscal and expenditure frameworks.
- Establish a more formal macroprudential framework and coordinating mechanism to assess incipient risks:
  - Financial sector regulators meet periodically to exchange information. CBK and other agencies are working on establishing a crisis management framework.
- Expanding and refining macroprudential toolkit:
  - CBK introduced a value-to-loan ratio for residential housing used for investment purposes. A Fund TA has been initiated to help strengthen the macroprudential policy framework.
- Enhancing ICs’ resolution, developing needed tools, and coordinating between CBK and CMA on ICs’ supervision:
  - Restructuring of some ICs is protracted. Coordination exists between CBK and CMA, but no formal committee.
- Improving governance and auditing/reporting standards for investment companies:
  - Implementation of new corporate governance guidelines for ICs postponed until June 2016.
- Improving a liquidity management framework and developing debt markets:
  - A draft law on sukuk is being reviewed by the CMA.
- Developing the non-oil tradable sector and supporting employment of nationals in the private sector:
  - By-laws for the National Fund for SMEs Development and on the new Direct Investment Promotion Law are being finalized. The offset clause suspended to encourage foreign investment. The quota system for Kuwaitis in the private sector updated.
- Modernizing restructuring resolution:
  - Bankruptcy law still under preparation.
- Improving AML/CFT framework:
  - The Financial Intelligence Unit was set up.

*Source: IMF staff (Appendix I. Public Sector Debt Sustainability Analysis, Kuwait: Public Sector Debt Sustainability Analysis (DSA)–Baseline Scenario; Appendix II and Annex I excerpts).*

### Annex II. Status of Implementation of FSAP 2010

### Annex II. Status of Implementation of FSAP 2010

### Implementation summary
- The annex lists 14 numbered recommendations from FSAP 2010 with their Status and Update as provided by authorities.

### Completed recommendations (with updates)
- 1 Clarify regulatory and supervisory responsibilities for financial institutions between the CBK, CMA and MOCI and initiate coordination for transition process to new oversight architecture.
  - Status: Completed
  - Update: A Memorandum of Understanding (MOU) was signed with CMA. Amendments to be made to the MOU in respect of the joint issues between Ministry of Commerce and Industry and CBK, are under consideration.
- 3 Extend viability assessment to all systemically important ICs.
  - Status: Completed
  - Update: The CMA conducts onsite and offsite supervision and is preparing risk assessments of ICs.
- 4 Complete integration of ICAAP in an on-site manual and start on-site examination on ICAAP in one bank as a pilot project.
  - Status: Completed
  - Update: The On-site Supervision Department prepared a manual for the work procedures to include the ICAAP. A professional team was formed to undertake an inspection program with the specific purpose to focus on the local banks for examining the ICAAP.
- 5 Finalized qualitative and quantitative staffing enhancement program for the banking supervision department.
  - Status: Completed
  - Update: The qualitative and quantitative capabilities of all staff working in the supervision department shall be developed on regular basis.
- 6 Enhance framework for macroprudential surveillance by establishing the FSU and initiate integrated supervision of systematically important sectors.
  - Status: Completed
  - Update: Financial Stability Office was established and supervision has been integrated. The first Financial Stability Report was published in 2013.
- 7 Strengthen corporate governance rules by applying “fit and proper” test on board and management of new conventional banks.
  - Status: Completed
  - Update: Article (68) of Law NO. (32) of 1968 refers to the conditions to be met by a person who becomes a board member of a bank or executive authority, in addition to the resolution passed by the CBK Board of directors in this respect.
- 9 Continue the migration process from compliance-based supervision to risk-based supervision.
  - Status: Completed
  - Update: Risk-based supervision system has been implemented in the supervision sector, where, on-site inspections, in accordance with this method, have started. The study of banks' data, using the Off-site Surveillance System (OSS), has started as well.
- 13 Consider widening collateral acceptance for ELA operations.
  - Status: Completed
  - Update: Collateral acceptance was widened for Emergency Lending Assistance operations for banks, under the CBK Board Resolution No. (91/377/2011) in its session held on 18/12/2011. The list of guarantees, issued under CBK Board Resolution dated 17/02/1979, was annulled.

### In progress / Partially completed / Not implemented (with updates)
- 2 Perform periodic stress tests of real estate and other major sectoral credit risk concentrations and review existing assessment of the way banks consider these risk concentrations in their Internal Capital Adequacy Assessment Process (ICAAP).
  - Status: (no explicit status label in table)
  - Update: The Financial Stability Office performs regular stress tests on all Kuwaiti banks. The Supervision Sector reviews and suggests revisions for stress tests and ICAAPs prepared by banks.
- 8 Issue directive on conflict of interest requiring board members and senior management and staff to abstain from participating in decisions on credit granting in their favor and reduce the individual and aggregate limit for credit to related parties.
  - Status: Partially Completed
  - Update: CBK in June 2013 issued the revised principles of Corporate Governance. The implementation of individual and aggregate limits is yet to take place since the authorities find it unsuitable in the current situation.
- 10 Introduce quantitative and qualitative regulation to better monitor ICs' financial soundness and improve corporate governance. Develop new licensing regime for ICs.
  - Status: In progress
  - Update: A comprehensive study was prepared about the evaluation and classification of ICs according to the level of risk on the basis of six qualitative factors (Stage One). Since ICs are no longer subject to the supervision of CBK, the application of (Stage Two); preparing corporate governance instructions, will be limited to finance companies.
- 11 Establish funding and operational arrangements for deposit insurance and cap coverage.
  - Status: Not implemented
  - Update: This recommendation has not been implemented because it is not suitable for the present circumstances and will be considered at a future date.
- 12 Establish an MOU on financial crisis management between key agencies such as the CBK, MOF, CMA, and KIA.
  - Status: In progress
  - Update: A Memorandum of Understanding (MOU) for financial crisis management was prepared by CBK with all related authorities (MOF, CMA, and KIA) and a work team from CBK was formed that includes the Financial Stability Office, Supervision Department, Research Department, Foreign Operations Department and the Legal Office.
- 14 Establish a special resolution regime that sets out a set of distinct bankruptcy.
  - Status: In progress
  - Update: Ministry of Commerce and Industry (MOCI) assigned the World Bank to revamp the insolvency and creditor/debtor laws in Kuwait. The draft law is being discussed with relevant stakeholders.

*Annex II. Status of Implementation of FSAP 2010 (from _cr14333 - Annex II. Status of Implementation of FSAP 2010)*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14333.pdf_