Kuwait: Staff Concluding Statement of the 2018 Article IV Mission
IMF News, January 28, 2019
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- Published: January 28, 2019
Recent Macro-Financial Developments
- Higher oil prices in 2017–18 lifted growth and improved fiscal and external balances.
- Hydrocarbon output is estimated to have risen by 1.2 percent in 2018 following a contraction a year earlier.
- Non-oil growth accelerated to 2.5 percent in 2018.
- Current account balance moved into surplus in 2017 (almost 6 percent of GDP) and is estimated at 13.2 percent in 2018.
- Inflation reached a multiyear low of 0.7 percent in 2018.
- FY2017/18 overall fiscal balance improved to an estimated surplus of 8 percent of GDP; expected to reach almost 12 percent of GDP in FY18/19.
- Fiscal financing needs—overall balance excluding investment income and compulsory transfers to the Future Generations Fund (FGF)—remained large at 12.5 percent of GDP in FY2017/18.
- Delays in passage of a new debt law prevented government from issuing debt since October 2017; government drew on General Reserve Fund (GRF) assets, including to pay for maturing debt.
- Private credit grew 3 percent year-on-year in November 2018.
- Central Bank of Kuwait (CBK) kept policy lending rate at 3 percent while raising its repo rate several times.
- Banking sector indicators: capitalization (CAR) of 18 percent; return on assets 1.3 percent in September 2018; NPLs net of specific provisions at 1.4 percent of gross loans.
- Real estate sales rebounded since mid-2018; Kuwaiti stocks outperformed other GCC markets following March 2018 announcement of inclusion in the FTSE Russell Emerging Market Index.
Macro-financial Outlook and Risks
- Baseline oil price assumptions: US$57 per barrel in 2019–20, increasing to US$60 per barrel over the medium term.
- Non-oil growth projected to increase to about 3.5 percent in 2020 as capital project implementation accelerates.
- Oil output expected: 2 percent growth in 2019, 2.5 percent in 2020.
- Inflation expected to rise in 2019–20 to about 2.5 percent.
- Baseline fiscal measures assumed: excises on tobacco and sugary drinks in FY2020/21; VAT in FY2021/22; small increases in fees for government services; stricter enforcement of eligibility rules for transfers.
- Under these measures, underlying fiscal position (non-oil fiscal balance excluding investment income) projected to improve by 13.5 percentage points of non-oil GDP by FY2024/25.
- Overall fiscal balance projected to deteriorate by almost 8.5 percentage points of GDP over the same period (mainly reflecting projected decline in oil revenues in 2019).
- Authorities' principal fiscal measure—overall balance excluding compulsory transfers to the FGF and investment income—will average 13.5 percent of GDP deficit over the medium term.
- Gross financing needs of US$127 billion over the next 6 years.
- Baseline assumes parliament will approve new debt law allowing borrowing to resume in FY2019/20; delay would force sole reliance on the GRF.
- Credit expected to accelerate as growth recovers, capital projects come on stream, supported by ample banking liquidity and easing of lending limits on personal loans.
- Key risks:
- Sustained drop in oil prices (e.g., from heightened trade tensions or weaker global growth) could produce twin deficits, large financing needs, tightening credit, and asset quality deterioration.
- Delays in fiscal and structural reforms could slow growth and increase fiscal deficits, raise funding costs and rollover risks for government and banks.
- Heightened security tensions and adverse geopolitical developments in the region could dampen confidence, investment, and growth.
- If risks materialize, Kuwait could draw on its large financial assets to meet fiscal financing needs while mitigating impacts on financial sector and real economy.
Policy Discussions — A. Bolstering Long-term Fiscal and Macroeconomic Sustainability
- Fiscal adjustment should be primarily expenditure-based, supported by non-oil revenue mobilization.
- Government spending as a share of GDP rose fastest in the GCC during a period of high oil prices and is currently the highest in the region.
- Measures to reduce government spending while cutting inefficiencies:
- (i) closing loopholes in administration of various transfers,
- (ii) improving procurement,
- (iii) limiting grants to priority sectors,
- (iv) rationalizing capital expenditure.
- Increase non-oil revenue:
- Secure parliamentary support for GCC-wide excise taxes on tobacco and sugary drinks and VAT.
- VAT at proposed low 5 percent rate: moderate and temporary adverse impact on growth and inflation; yields stable revenue and helps upgrade tax administration.
- Preparatory work to build administration capacity is encouraged.
- Alternative measures if VAT delayed: (i) repricing government services, (ii) enforcing penalties for not meeting Kuwaitization quotas, (iii) strengthening revenue collection, including for public utilities.
- Intergenerational savings gap: measures under consideration would not close the gap; government’s non-oil balance would fall well short—gap of 13.5 percent of non-oil GDP by 2024.
- Mission proposes a path to close intergenerational savings gap over next decade:
- Most adjustment from spending, which would decline to about 75 percent on non-oil GDP by 2024 (level broadly consistent with 2000-10).
- Curtail public wage bill (currently 18 percent of GDP):
- Centralize compensation policy, harmonize public wage grid, align public sector wages with private sector, foster merit-based compensation.
- Reduce public-private wage premia and limit public employment growth.
- Note: early retirement bill recently approved by parliament could increase relative attractiveness of civil service while imposing budgetary cost.
- Gradually phase out fuel, electricity, and water subsidies and transfers (subsidy bill at 5.3 percent of GDP).
- Raise public awareness of budgetary costs, distortions, and distributional impact.
- Rationalize transfers by consolidating programs, improving targeting, and enforcing eligibility.
- Broaden profit tax coverage to all companies operating in Kuwait and introduce excise on luxury goods; personal income tax on high-income individuals could be an alternative.
- Rebalance spending toward capital with improved implementation and pursue public investment management reforms; undertake a public investment management assessment.
- Strengthen fiscal governance:
- Address shortcomings in public procurement, spending efficiency, and fiscal transparency.
- Welcome anti-corruption strategy and efforts to strengthen Anti-Corruption Agency (ACA).
- Encourage prompt implementation of procurement law (passed in 2016).
- Consider a focused Public Expenditure Review of education and healthcare spending.
- Adopt GFSM2014 methodology and improve timeliness of intra-year budgetary execution data.
- Expand coverage to off-budget entities, debt, and contingent liabilities; increase transparency over management of oil revenues; conduct a Fiscal Transparency Evaluation.
- Strengthen medium-term fiscal framework:
- Reintroduce 3-year expenditure ceilings anchored to long-term fiscal objective (e.g., intergenerational equity).
- Set time-consistent path for intermediary targets such as non-oil primary balance.
- Strengthen top-down budgeting and expenditure control mechanisms.
- Consider fiscal risks from public pensions, state-owned enterprises, and public-private partnerships; develop contingent liabilities framework.
- Debt management and capital market development:
- Approval of new debt law would allow resumption of domestic borrowing and absorption of structural excess liquidity.
- Gradually increase tenor of bonds and issue sovereign Sukuk to widen investor base.
- Establish asset-liability management committee between Ministry of Finance, CBK, Kuwait Investment Authority, and Kuwait Petroleum Corporation.
- Publish regular issuance calendar and move to market-based auctions to allow price discovery.
- Exchange rate policy:
- Peg to an undisclosed basket remains appropriate as effective nominal anchor.
- Staff’s external sector assessment suggests a moderate current account gap, mostly closable by increasing fiscal savings.
- As economy diversifies, benefits of greater exchange rate flexibility may increase.
- Statistics:
- Encourage increased support to the Central Statistical Bureau for capacity building and strengthening data provision arrangements.
Policy Discussions — B. Safeguarding Financial Stability
- CBK prudential regulation and supervision have kept banking sector resilient.
- Banks under Basel III regulations for capital, liquidity, and leverage.
- Transitioned to IFRS9 in January 2019 with little impact due to precautionary loan-loss provisioning.
- FSAP found banks resilient to various stress test scenarios.
- Main banking sector vulnerabilities:
- High concentration of loans to single borrowers and large depositors,
- Common exposures (particularly in real estate),
- Interconnectedness of financial system.
- CBK actions and recommendations:
- Continuous calibration of macroprudential tools to balance stability and credit growth.
- Plans to upgrade stress-testing techniques and early warning indicators.
- Gradual relaxation of interest rate ceilings as banks enhance credit-risk assessment to better price risks and expand lending.
- Supervisory regime enhancements:
- Better integrate on- and off-site supervision, enhance consolidated supervision, and strengthen cross-border supervision.
- Draft amendments to CBK law to establish centralized Shariah Board at CBK to reduce inconsistent Shariah interpretation.
- Strengthen AML/CFT framework, improve coordination between Financial Intelligence Unit (FIU), ACA, and CBK.
- Systemic risk oversight and crisis management:
- Draft law assigning CBK an explicit financial stability mandate and creating Financial Stability Committee to coordinate CBK, Capital Markets Authority, Ministry of Finance, and Ministry of Commerce and Industry.
- Reforms to enhance corrective action framework, establish special resolution regime for banks, mandate bank recovery planning, and reform blanket guarantee of deposits.
- Progress would promote market discipline, allow orderly resolution, and safeguard fiscal resources.
- Liquidity management:
- CBK reviewing forecasting framework to improve accuracy and extend forecast period.
- Information-sharing between CBK and relevant agencies is essential.
- Gradual reduction of ample liquidity needed to incentivize bank balance-sheet management and develop interbank market; reduce reliance on CBK for non-emergency liquidity.
Policy Discussions — C. Boosting Private Sector-led Growth and Economic Diversification
- A vibrant private sector is essential to create jobs for large number of Kuwaiti youth entering labor market.
- Structural reforms should create incentives for entrepreneurship, foster productivity and competitiveness, and encourage private initiative.
- Business environment improvements:
- Streamlined registration and licensing, digitalized administrative procedures, relaxed restrictions on foreign direct investment.
- Further reforms needed: eliminate excessive regulations, ease trading-across-borders costs, enhance market competition, reduce foreign ownership restrictions, improve access to land.
- Privatization and PPPs:
- Legal and institutional frameworks improved, but privatizations and PPPs have yet to gather momentum; several projects in pipeline.
- Authorities should accelerate execution, ensure transparent and competitive implementation, and limit hidden costs and contingent liabilities.
- Education and labor market reforms:
- Comprehensive education reform and enhanced vocational training to produce a better-skilled workforce.
- Revamp public wage subsidies for nationals working in private sector to be time-bound and targeted toward younger Kuwaitis.
- Focus on SMEs:
- Mission welcomes revised definition of SMEs.
- National Fund for SME Development, with recent mandate changes, can provide equity finance, train entrepreneurs, and encourage SME integration into supply chains.
- Growth potential from reforms:
- Rebalancing government spending toward growth-enhancing investment, strengthening governance, and increasing private sector role could raise Kuwait’s non-oil growth potential to 5 percent, from 4 percent currently.
Key Selected Economic Indicators (excerpts)
- Total oil and gas exports (billions of U.S. dollars): 97.6 (2014), 48.5 (2015), 41.5 (2016), 49.6 (2017), 65.7 (2018), 53.4 (2019), 55.8 (2020), 58. 0 (2021), 59.8 (2022), 61.8 (2023), 63.7 (2024).
- Average oil export price (U.S. dollars/barrel): 96.5 (2014), 49.0 (2015), 41.0 (2016), 70.6 (2017), 56.4 (2018), 57.5 (2019), 58.3 (2020), 59.1 (2021), 60.0 (2022), 60.8 (2023).
- Crude oil production (millions of barrels/day): 2.87 (2014), 2.86 (2015), 2.95 (2016), 2.70 (2017), 2.74 (2018), 2.79 (2019), 2.93 (2020), 2.99 (2021), 3.05 (2022), 3.11 (2023).
- Nominal GDP (market prices, in billions of Kuwaiti dinar): 46 (2014), 34 (2015), 33 (2016), 36 (2017), 43 (2018), 40 (2019), 42 (2020), 45 (2021), 47 (2022), 50 (2023), 52 (2024).
- Nominal GDP (market prices, in billions of U.S. dollars): 163 (2014), 115 (2015), 109 (2016), 120 (2017), 141 (2018), 132 (2019), 139 (2020), 147 (2021), 155 (2022), 164 (2023), 173 (2024).
- Real GDP annual changes: 0.5 (2014), 0.6 (2015), 2.9 (2016), -3.5 (2017), 1.7 (2018), 2.5 (2019), 2.7 (2020).
- Real oil GDP annual changes: -2.1 (2014), -1.7 (2015), 3.9 (2016), -7.2 (2017), 1.2 (2018), 2.0 (2019).
- Real non-oil GDP annual changes: 4.9 (2014), 4.2 (2015), 1.4 (2016), 2.1 (2017), 3.0 (2018), 3.5 (2019), 3.4 (2020), 3.2 (2021), 3.7 (2022), 4.0 (2023).
- CPI inflation (average): 3.1 (2014), 1.5 (2015), 0.7 (2016), 4.7 (2017).
- Budgetary operations (percent of GDP) highlights:
- Revenue: 67.4 (2014), 52.3 (2015), 52.8 (2016), 58.9 (2017), 60.4 (2018), 56.8 (2019).
- Oil revenue: 51.9 (2014), 35.4 (2015), 34.5 (2016), 38.0 (2017), 43.2 (2018), 37.9 (2019).
- Non-oil revenue: 15.4 (2014), 16.9 (2015), 18.3 (2016), 20.9 (2017), 17.3 (2018), 18.9 (2019).
- Investment income: 10.6 (2014), 13.3 (2015), 14.6 (2016), 16.4 (2017), 13.0 (2018), 14.3 (2019).
- Expenditures: 48.8 (2014), 52.7 (2015), 50.8 (2016), 48.6 (2017), 52.0 (2018), 52.4 (2019).
- Expense: 43.3 (2014), 45.0 (2015), 44.2 (2016), 42.6 (2017), 40.9 (2018), 43.4 (2019).
- Capital: 5.4 (2014), 7.7 (2015), 8.1 (2016), 8.2 (2017), 7.8 (2018), 8.5 (2019).
- Balance: 18.6 (2014), -0.3 (2015), 11.8 (2016), 5.3 (2017), 4.5 (2018), 3.8 (2019).
- Balance (after transfers to FGF and excl. investment income): 2.3 (2014), -17.5 (2015), -17.9 (2016), -12.6 (2017), -6.0 (2018), -13.7 (2019).
- Non-oil balance excl. investment income (percent of non-oil GDP): -102.5 (2014), -88.3 (2015), -83.8 (2016), -86.4 (2017), -87.4 (2018), -84.8 (2019).
- Excluding oil-related subsidies and benefits (percent of non-oil GDP): -81.2 (2014), -77.5 (2015), -74.8 (2016), -77.3 (2017), -77.1 (2018), -76.3 (2019).
- Total gross debt (calendar year): 10.0 (2014), 20.7 (2015), 14.8 (2016), 18.4 (2017), 21.5 (2018), 26.6 (2019).
- Money and credit:
- Net foreign assets: 3.6 (2014), -3.1 (2015), 5.5 (2016), 7.3 (2017), 5.9 (2018), 6.6 (2019).
- Claims on nongovernment sector: 5.2 (2014), 7.6 (2015), 2.8 (2016), 6.0 (2017), 6.8 (2018), 7.4 (2019).
- Kuwaiti dinar 3-month deposit rate (year average; in percent): 0.8 (2014), 1.1 (2015), 2.4 (2016).
- External sector:
- Exports of goods (billions of U.S. dollars): 104.5 (2014), 54.5 (2015), 46.5 (2016), 55.1 (2017), 71.6 (2018), 59.7 (2019).
- Non-oil exports (annual percent change): 7.0 (2014), 5.6 (2015), 6.3 (2016), 7.1 (2017).
- Current account (billions of U.S. dollars): 54.4 (2014), -5.1 (2015), 6.4 (2016), 9.9 (2017), 10.9 (2018), 10.8 (2019).
- Current account (percent of GDP): 33.4 (2014), -4.6 (2015), 6.9 (2016).
- International reserve assets: 32.3 (2014), 28.3 (2015), 33.0 (2016), 36.5 (2017), 40.3 (2018).
- International reserves in months of next year's imports: 6.5 (2014), 7.2 (2015).
- Memorandum items:
- Exchange rate (U.S. dollar per KD, period average): 3.52 (2014), 3.32 (2015), 3.31 (2016).
- Nominal effective exchange rate (percentage change): 2.6 (2014), 0.2 (2015).
- Real effective exchange rate (percentage change): 0.4 (2014), -0.7 (2015).
IMF staff concluding statement, January 28, 2019.