Kuwait: Staff Concluding Statement of the 2016 Article IV Mission
IMF News, November 15, 2016
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- Published: November 15, 2016
Mission summary and key findings
- Kuwait’s fiscal and external accounts have been adversely affected by the lower oil prices, and financing needs have emerged.
- Resilient nonoil activity and strong oversight by the Central Bank of Kuwait have kept the financial sector sound.
- The government has a comprehensive six-pillar reform plan aiming to promote fiscal consolidation and boost private sector growth, diversification, and job creation for nationals.
- Policymakers have initiated important fiscal reforms; sustained efforts should focus on:
- further rationalizing energy subsidies;
- containing the wage bill;
- increasing nonoil revenue;
- creating space for higher growth-enhancing capital outlays;
- better aligning labor market incentives and promoting higher productivity through privatization and private-sector partnerships;
- improving the business climate to encourage diversification and private sector development.
I. Recent Macro-Financial Developments
- Real activity
- Nonhydrocarbon growth slowed from 5 percent to an estimated 3½ percent in 2015.
- Overall growth is on track to reach about 3½ in 2016, with oil production recovering after three consecutive years of decline.
- Inflation has been hovering at around 3 percent and is set for an uptick to about 3½ this year, reflecting recent gasoline price increases.
- Financial sector soundness (as of June 2016)
- capital adequacy ratio of 17.9 percent;
- return on assets of 1 percent;
- nonperforming loans ratio of 2.4 percent;
- loan-loss provisioning coverage of 206 percent.
- Credit to the private sector increasing at about 6¾ percent year-over-year in September 2016, driven mainly by installment loans.
- Banks’ exposure to Investment Companies reduced to 3 percent on average.
- Real estate sector showing slowdown in volume and value of sales; nonfinancial corporate earnings deteriorating; stock prices declined broadly since mid-2014 and remained volatile.
- Fiscal and external accounts
- Government fiscal balance—excluding investment income and after mandatory transfers to the Future Generations Fund (FGF)—in a deficit of over 17 percent of GDP in 2015/16.
- External current account surplus reached 5¼ percent of GDP in 2015 and set to fall to 4½ percent in 2016.
- Financing developments
- Deficit financed mainly through drawdown of General Reserve Fund (GRF) assets.
- Domestic bond issuance contributed to net financing of about KD 1.4 billion year to date—over half the targeted amount for 2016/17.
- Government announced intention to tap international capital markets to raise up to KD 2.9 billion.
II. Macro‑financial Outlook and Risks
- Growth and inflation projections
- Real nonoil GDP growth to about 3½ percent in 2017 and 4 percent thereafter (medium term).
- Hydrocarbon output set to increase by 2 percent annually.
- Overall real GDP growth about 3 percent over the medium term.
- Inflation expected to temporarily increase to 4½ percent in 2017 before easing gradually.
- Higher hydrocarbon exports will lift the current account surplus above 10 percent of GDP by 2021.
- Fiscal projections and financing needs
- Baseline assumes oil prices will gradually recover to some $60 by 2021.
- Under the baseline, government fiscal balance after transfers to the FGF projected to decline from about 17½ percent of GDP this year to some 13 percent of GDP over the medium term.
- Cumulative gross financing needs would amount to about KD 35 billion over the next 6 years.
- These needs assumed to be covered by continued drawdown of GRF assets, measured domestic bond issuance, and some external borrowing.
- Financial stability outlook
- Growth-enhancing capital expenditures support bank profitability and internal capital generation.
- Downside risks to asset quality exist, but loss absorption buffers are high.
- Robust credit growth, with significant contribution from installment loans secured by salary assignments, mitigating concerns of financial risk buildup.
- Key risks
- Main risk: sustained further drop in oil prices causing larger deficits and financing needs.
- Potential decline in investors’ appetite for GCC bonds could force tradeoff between issuing domestic debt (risking crowding out) and depleting buffers.
- Other risks: reform setbacks, slow Development Plan implementation, heightened security risks, more volatile global financial conditions.
- Mission and authorities’ stress tests indicate resilience to severe solvency and liquidity shocks, but protracted lower oil prices could increase liquidity and credit risks, exacerbate stock market volatility, and negatively affect real estate prices.
III. Policy Discussion
A. Anchoring macroeconomic stability
- Need for a gradual but sustained fiscal effort to reduce vulnerabilities and bring government savings closer to intergenerational equity.
- Nonoil balance projected to diverge from intergenerational equity levels by some 20 percent of nonoil GDP by 2021.
- Large fiscal buffers and low debt allow a gradual consolidation supporting growth and financial stability.
- Recommended adjustment path (ten-year horizon)
- Reduce government deficit (after transfer to the FGF) from a projected 17½ percent of GDP in 2015/16 to about 7 percent by 2021 and broadly eliminate the deficit by 2025.
- Achieve through combination of expenditure and revenue reforms in the government’s six-pillar reform plan.
- Revenue measures supported
- Introduce a value-added tax (VAT) at a rate of 5 percent and raise excise tax on tobacco and sugary drinks; could generate additional revenue in the order of 1¾ percent of GDP.
- Business profit tax reform at a rate of 10 percent could raise an additional 1½ percent of GDP in revenue by 2020.
- Step up tax administration reforms to implement VAT early and adjust prices of government services gradually.
- Subsidy reform
- Energy subsidies estimated at about 6 percent of GDP in 2015/16.
- Encourage further rationalization of energy subsidies with gradual implementation and targeted mitigation to vulnerable households; emphasize energy efficiency.
- Recommend a communication strategy highlighting budgetary costs, distortions, distributional impact, and compensatory measures.
- Wage bill and public employment
- Support for authorities’ wage reform to simplify and harmonize wage structure and centralize wage policy decisions.
- Ensure overall wage bill does not rise further; offset initial costs by savings in allowances and bonuses.
- Provide flexibility in setting wage increases to control future wage growth, reduce wage gap with private sector, reduce nationals’ reservation wages, and facilitate diversification and private-sector employment for nationals.
- Encourage limiting employment growth while promoting private sector job creation for nationals and early communication to reset expectations.
- Current spending and public investment
- Contain transfers to enterprises and households and goods and services to create space for higher capital outlays.
- Improve public investment management, strengthen project appraisal and prioritization, and emphasize projects that encourage diversification and employment for nationals.
- Systematic ex-post evaluation and effective anti-corruption implementation important.
- Fiscal framework and debt management
- Move from annual incremental budgets to medium-term budgets starting in FY2017/18 and introduce three-year expenditure ceilings.
- Develop a comprehensive medium-term framework guided by a long-term fiscal objective and an intermediary target (a nonoil fiscal balance objective recommended).
- Strengthen top-down budgeting, reduce fragmentation of the investment budget, improve expenditure control, reporting, and accountability.
- Borrowing and investment decisions should follow asset-liability management strategy assessing costs/benefits, macro-financial impacts, and role of liquid buffers; coordination with CBK important.
- Balanced approach: domestic and external borrowing from diversified investors and drawdowns in GRF assets.
- Strengthen institutional and legal frameworks: high-level debt committee, new debt management unit (DMU), medium-term debt strategy, address legal hurdles to issuance (including Sukuk), maintain a debt ceiling, improve disclosure and fiscal accounts, promote deep and liquid government debt market via regular auctions and transparent communication.
- Exchange rate
- Mission considers the peg to an undisclosed basket appropriate as it has provided an effective nominal anchor.
- Modest depreciation against the dollar since mid-2014 (7 percent) noted; staff’s external sector assessment suggests a moderate current account gap largely closable by increasing fiscal savings.
- Over the longer term, benefits of greater exchange rate flexibility may increase as economy diversifies.
B. Safeguarding financial stability
- CBK actions and prudential framework
- Banks under Basel III regulations for capital, liquidity, and leverage.
- Macro-prudential measures enforced to prevent excessive household debt buildup and limit banks’ exposure to real estate and equities.
- New corporate governance framework introduced.
- Ongoing initiatives: strengthen stress testing techniques, develop early warning indicators, monitor deposit trends, and identify pressures in corporate and household balance sheets.
- Further recommended steps
- Establish a formal framework to operationalize macro-prudential measures to balance preempting risk buildup and avoiding liquidity shocks and pro-cyclicality.
- Continue reforms to strengthen insolvency regime and judicial reforms (commercial courts, expedite enforcement).
- Develop liquidity forecasting framework to anticipate system-wide pressures.
- Sustain efforts to streamline noncore bank activities where corporate structures are complex to facilitate risk identification and supervision.
- Crisis management and resolution
- No special resolution regime for banks yet; a blanket guarantee covers all banking system deposits.
- Consider frameworks enabling least-cost and effective resolution; formalize arrangements between key regulatory institutions to improve crisis preparedness.
- Mission welcomes advanced IMF technical cooperation arrangements in these areas.
C. Private sector‑led growth and economic diversification
- Labor market and job creation
- Address labor market inefficiencies and improve incentives for nationals to take private sector jobs; manage expectations on limited future public sector jobs.
- Sustain wage and benefit streamlining to make private sector more attractive; foster education to reduce skill mismatches.
- Privatization and PPPs
- Government’s six-pillar reform plan focuses on privatization and PPPs to enhance private sector role and upgrade infrastructure.
- Several Build-Operate-Transfer projects in pipeline; recommend clear timetables, strengthen underlying assets, and promote transparency to reduce hidden costs and contingent liabilities.
- Business environment and SMEs
- Recent initiatives: Kuwait Business Center one-stop window to streamline registration and licensing; steps toward digitalizing administrative procedures; SME-focused initiative planned.
- Sustain reforms to facilitate access to land and finance, reduce administrative burdens and excessive regulations, and foster competition.
- Improve functioning of the National Fund for SMEs development to free up resources.
- Consider reviewing hurdles to SMEs’ access to finance, including potential impact of the cap on lending rate spreads.
Key statistics (selected from "Kuwait; Selected Economic Indicators, 2013–21")
- Total oil and gas exports (billions of U.S. dollars): 108.6 (2013), 97.6 (2014), 48.8 (2015), 45.0 (2016), 54.0 (2017), 57.8 (2018), 60.4 (2019), 63.7 (2020), 66.5 (2021).
- Average oil export price (U.S. dollars/barrel): 105.4 (2013), 98.0 (2014), 51.9 (2015), 44.0 (2016), 54.4 (2017), 55.9 (2018), 59.3 (2019).
- Crude oil production (millions of barrels/day): 2.93 (2013), 2.87 (2014), 2.86 (2015), 2.97 (2016), 3.03 (2017), 3.09 (2018), 3.15 (2019), 3.22 (2020), 3.28 (2021).
- Nominal GDP (market prices, in billions of Kuwaiti dinar): 49.4 (2013), 46.3 (2014), 34.3 (2015), 33.8 (2016), 38.2 (2017), 41.1 (2018), 43.9 (2019), 47.1 (2020), 50.4 (2021).
- Nominal GDP (market prices, in billions of U.S. dollars): 174.2 (2013), 162.7 (2014), 114.1 (2015), 111.3 (2016), 125.8 (2017), 135.3 (2018), 144.6 (2019), 155.2 (2020), 166.0 (2021).
- Real oil GDP (annual percentage change): -1.8 (2013), -2.1 (2014), -0.3 (2015), 3.9 (2016), 2.0 (2017).
- Real non-oil GDP (annual percentage change): 4.0 (2013), 5.0 (2014), 3.5 (2015), 3.2 (2016).
- CPI inflation (average): 2.7 (2013), 3.4 (2014), 4.5 (2015).
- Balance (after transfer to FGF and excl. inv. income) (percent of GDP): 20.0 (2013), 2.4 (2014), -17.5 (2015), -17.3 (2016), -12.6 (2017), -11.7 (2018), -12.0 (2019), -12.1 (2020), -12.8 (2021).
- Non-oil balance (percent of non-oil GDP): -91.2 (2013), -102.8 (2014), -88.3 (2015), -85.7 (2016), -84.3 (2017), -82.0 (2018), -80.4 (2019), -78.8 (2020), -77.2 (2021).
- Energy subsidy estimate: about 6 percent of GDP in 2015/16.
- Total gross debt (calendar year-end) (percent): 3.1 (2013), 12.0 (2014), 18.2 (2015), 23.0 (2016), 26.3 (2017), 29.1 (2018), 31.8 (2019).
- Credit to the private sector (percent change): claims on nongovernment sector 7.2 (2013), 7.1 (2014), 8.0 (2015), 8.5 (2016), 8.7 (2017).
- Stock market unweighted index (annual percent change): 27.2 (2013), -13.4 (2014), -14.1 (2015), -6.1 (2016).
- Current account (billions of U.S. dollars): 69.5 (2013), 6.0 (2014), 11.7 (2015), 13.2 (2016), 14.1 (2017), 16.0 (2018), 17.0 (2019).
- International reserve assets (billions of U.S. dollars): 32.2 (2013), 32.3 (2014), 28.3 (2015), 31.5 (2016), 34.9 (2017), 38.9 (2018), 40.8 (2019).
- Exchange rate (U.S. dollar per KD, period average): 3.53 (2013), 3.52 (2014), 3.32 (2015), 3.31 (2016).
- Sovereign rating (S&P): AA.
IMF Staff Concluding Statement of the 2016 Article IV Mission for Kuwait (November 15, 2016).