IMF Executive Board Concludes 2020 Article IV Consultation with Kuwait

IMF News, March 30, 2020

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Bibliographic details

• Published: March 30, 2020

Overview

• Press Release No. 20/117, March 30, 2020.
• Staff report prepared for Executive Board consideration on March 24; reflects discussions with Kuwaiti authorities in January 2020 and information available as of March 2. Supplementary Information based on information available as of March 12.
• Report prepared before COVID-19 became a global pandemic and therefore does not reflect the implications of those developments; outbreak amplified uncertainty and downside risks around the outlook.

Recent economic developments

• Real GDP growth:
  • Real GDP growth slowed to estimated 0.7 percent in 2019 from 1.2 percent in 2018.
  • Nonoil growth estimated to have strengthened to 3 percent in 2019.
  • Oil output contracted by 1 percent in 2019, broadly in line with the OPEC+ agreement.
• Inflation and credit:
  • Inflation rebounded to 1.1 percent in 2019 as food and transport prices recovered.
  • Credit growth accelerated to 4.4 percent in 2019, spurred by relaxation of macroprudential ceilings on personal loans and supportive monetary conditions.

Fiscal position and public finances

• Fiscal balances and financing:
  • Fiscal and current account surpluses narrowed in 2019 due to lower oil prices and output.
  • Underlying fiscal stance loosened in FY2018/19; nonoil balance excluding investment income in percent of nonoil GDP deteriorated as government spending continued to rise.
  • Fiscal financing needs—the overall balance after compulsory transfers to the Future Generations Fund (FGF) and excluding investment income—remained large at 7.7 percent of GDP.
  • Lacking borrowing authorization since October 2017, the government continued drawing solely on General Reserve Fund (GRF) assets; total and liquid GRF balances fell to 56 and 24 percent of GDP by June 2019.
  • Combined FGF and GRF assets continued to grow as the FGF generated strong returns and received mandatory transfers from the government.
• Fiscal projections and indicators (selected from table):
  • Revenue (percent of GDP): 59.3 in 2019; projected 55.5 in 2020, 52.6 in 2021, 50.6 in 2022, 49.?
  • Oil revenue (percent of GDP): 39.8 in 2019; projected 36.7 in 2020, 35.5 in 2021, 34.6 in 2022, 33.9 in 2023, 33.3 in 2024, 32.8 in 2025.
  • Investment income (percent of GDP): 14.2 in 2019; projected 13.1 in 2020, 13.2 in 2021, 12.8 in 2022, 12.4 in 2023.
  • Expenditures (percent of GDP): 56.9 in 2019; projected 57.1 in 2020, 57.0 in 2021, 56.8 in 2022, 56.9 in 2019 listed earlier.
  • Balance (percent of GDP): -2.6 in 2019; projected -3.7 in 2020, -4.4 in 2021, -5.2 in 2022, -5.6 in 2023.
  • Balance after transfer to FGF and excl. investment income (percent of GDP): -13.9 in 2019; projected -18.3 in 2020, -19.8 in 2021, -20.9 in 2022, -21.4 in 2023, -21.8 in 2024, -21.9 in 2025.
  • Nonoil balance excl. investment income (percent of nonoil GDP): -88.4 in 2019; projected -86.7 in 2020, -85.4 in 2021, -84.5 in 2022, -83.4 in 2023, -82.3 in 2024, -81.1 in 2025.
  • Total gross debt (calendar year): 41.6 in 2019; projected 55.1 in 2020, 65.2 in 2021, 74.4 in 2022.

(Note: table contains many additional year-by-year figures for oil exports, oil prices, crude oil production, nominal GDP in KWD and USD, external assets, KIA assets, net government financial assets, and other items.)

Financial sector and markets

• Banking system:
  • Systemwide capital adequacy ratio reached 17.6 percent in September 2019.
  • Banks have plentiful short-term liquidity.
  • Nonperforming loans net of specific provisions remain low; loan-loss provisioning is high.
  • Net interest income declined due to a narrowing spread between bank lending rates and cost of funds.
• Markets:
  • Real estate market has stabilized.
  • Equity markets outperformed in 2019, in part thanks to inclusion in emerging market indices.

Executive Board assessment and recommended policy actions

• Main judgment:
  • The challenge to reduce dependence on oil and boost savings has become more urgent.
  • Kuwait has large financial buffers and low debt, but the window of opportunity to tackle challenges from a position of strength is narrowing.
• Risks if no course correction:
  • At current policies, the overall fiscal balance would turn into a growing deficit, which, after mandatory savings in the FGF, would give rise to large financing needs over the medium term.
  • Borrowing should be viewed as temporary; while slowing depletion of liquid assets it would lead to rapid debt buildup.
• Fiscal policy recommendations:
  • Pursue ambitious, growth-friendly, and socially equitable fiscal adjustment.
  • Cut current expenditure by tackling spending rigidities and boost nonoil revenue to create space for growth-enhancing investment.
  • Reform the large public wage bill.
  • Phase out generalized subsidies and transfers in favor of targeted compensation schemes.
  • Initiate broad consultations, engage parliament, and continue technical work on GCC-wide excises and VAT.
  • Consider taxes on corporate income, luxury items, and personal income of the wealthy for a more socially-balanced adjustment mix.
  • Embed fiscal measures in a comprehensive reform package that promotes private sector growth, strengthens governance and accountability, and improves public services to build support for reforms.
• Fiscal framework and governance:
  • Introduce a rules-based fiscal framework to manage oil revenues and anchor fiscal policy on intergenerational equity.
  • Include a well-calibrated operational rule reconciling long-term savings and near-term stabilization.
  • Enshrine fiscal rule in a sound institutional framework; until in place, maintain current arrangement with respect to the FGF.
  • Implement fiscal governance reforms to enhance transparency, modernize public procurement, and boost spending efficiency.
• Monetary and exchange rate policy:
  • Exchange rate peg remains appropriate and has provided an effective nominal anchor.
  • Proposed fiscal adjustment would close the current account gap over the medium term; arrangement should be periodically reviewed as the economy diversifies.
• Financial sector reforms:
  • Enhance corrective action framework and establish a special resolution regime for banks; unwind blanket deposit guarantee to reduce moral hazard.
  • Continue CBK efforts to recalibrate macroprudential tools.
  • Gradually relax interest rate ceiling on commercial loans to expand lending to new market segments, including SMEs.
  • Allow greater market role in allocation and pricing of liquidity to promote interbank market development.
• Structural reforms for private sector development:
  • Reduce economic footprint of the state, promote market competition, and improve business environment.
  • Revamp insolvency framework, reduce excessive regulations, and ease trading across borders.
  • Align public sector wages with private sector to incentivize private sector employment, accompanied by improvements in education and training programs to nurture entrepreneurship and equip graduates with in-demand skills.

Selected key statistics (from the report and table)

• Nonoil growth: 3 percent (2019 estimate).
• Overall GDP growth: 0.7 percent (2019 estimate).
• Oil output change: -1 percent (2019).
• Inflation (average): 1.1 percent (2019).
• Credit growth: 4.4 percent (2019).
• Fiscal financing needs (overall balance after compulsory transfers to FGF and excluding investment income): 7.7 percent of GDP.
• GRF total and liquid balances: 56 and 24 percent of GDP by June 2019.
• Systemwide capital adequacy ratio: 17.6 percent (September 2019).
• Total gross debt (calendar year): 41.6 (2019); projected 55.1 (2020), 65.2 (2021), 74.4 (2022).
• Nominal GDP (market prices, in billions of U.S. dollars): 137 (2019); projected 135 (2020), 140 (2021), 146 (2022), 152 (2023), 159 (2024), 168 (2025).
• Total oil and gas exports (billions of U.S. dollars): 58.2 (2019); projected 52.9 (2020), 52.8 (2021), 53.4 (2022), 54.6 (2023), 56.0 (2024), 57.5 (2025).
• Average crude oil export price (U.S. dollars/barrel): 61.8 (2019); projected 55.9 (2020), 54.2 (2021), 54.3 (2022), 54.7 (2023), 55.2 (2024).

Source: Press Release No. 20/117 — IMF Executive Board Concludes 2020 Article IV Consultation with Kuwait (March 30, 2020).

References

• https://www.imf.org/-/media/images/imf/bios/imfboard.jpg
• The Executive Board
• PRESS CENTER
• http://www.IMF.org/external/np/sec/misc/qualifiers.htm
• https://www.imf.org/en/home