Kuwait: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, October 20, 2021
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- Published: October 20, 2021
Recent developments, outlook, and risks
- Sustained political gridlock has impeded fiscal risk management and structural reforms; several important reform bills, including a new debt law, await parliamentary approval. Efforts led by the Amir aim to resolve the impasse ahead of the parliamentary session starting October 26.
- Government preparing the Program of Action for the Sixteenth Legislative Term (2021/2022 – 2024/2025) to address structural imbalances and promote sustainable and inclusive growth.
- Authorities’ COVID-19 response:
- About 80 percent of the target population had been at least partially vaccinated and over 70 percent fully vaccinated as of mid-September 2021.
- Stringent containment measures and fiscal, monetary, and financial support measures limited cases, fatalities, and economic damage.
- Economic performance and projections:
- Real GDP is estimated to have contracted 8.9 percent in 2020.
- Non-oil growth in 2020: -7.5 percent; oil growth in 2020: -9.8 percent.
- Non-oil GDP growth projected for 2021: 3.0 percent; projected over the medium term: about 3.5 percent.
- Overall GDP projected to grow around 2.7 percent over the medium term.
- Inflation expected to average 3.2 percent in 2021 and stay at about 3 percent over the medium term.
- Oil production projected to rebound as OPEC+ quotas are relaxed.
- Fiscal outlook:
- Fiscal balance (including investment income) deteriorated to a deficit of 15.4 percent of GDP in FY 2020/21.
- FY 2021/22 fiscal balance projected to improve to a surplus of 2.0 percent of GDP.
- Without consolidation, expenditure pressures and declining oil prices would widen deficits and reduce government net assets over the medium term; current account surplus would weaken significantly.
- Financial sector resilience and indicators:
- Credit growth supported to 3.6 percent (y/y) by end 2020.
- As of 2021Q1: Net Stable Funding Ratio = 110%; Liquidity Coverage Ratio = 174.5%.
- Bank capital adequacy ratio = 18.7 percent.
- Nonperforming loans (NPLs) net of specific provisions = 1.7 percent.
- Total provisions to gross NPL = 195 percent.
- Risks:
- Downside: prolonged pandemic, delays in fiscal and structural reforms, oil price volatility, political gridlock.
- Upside: stronger global rebound, higher oil revenues, resolution of political gridlock, strong fiscal consolidation.
Near-term policies: supporting economic recovery
- Economic scarring appears modest so far but could worsen if the pandemic is prolonged; policy support measures are being phased out at a measured pace.
- Recommendations for near-term support:
- Monitor health and economic situation closely and plan coordinated withdrawal of remaining support measures.
- If additional support is needed, increasingly target hard-hit but viable sectors and the most vulnerable; support should be temporary to avoid permanently increasing the fiscal deficit.
- Fiscal adjustment considerations:
- Council of Ministers announced plans to cut spending by 10 percent relative to the FY 2021/22 budget targets through measures including reducing phantom employees in private sector, reducing wage subsidies in the private sector, curtailing non-essential spending including travel expenses, optimizing capital expenditures, and reducing government procurement spending by reviewing big-ticket contracts.
- With only the latter half of the fiscal year remaining, much larger cuts would be needed in the coming months to achieve the full-year 10 percent target; careful implementation is necessary to safeguard the recovery.
- Debt law:
- Passing the public debt law is essential for issuance of government debt and orderly fiscal operations.
- Draft debt law envisages a debt ceiling of 60 percent of GDP.
- Debt law should avoid legislating operational restrictions (e.g., on maturities, sizes, or use of financing).
- Absent passage, fiscal financing has relied primarily on drawing down GRF liquid assets; early resolution of political gridlock is needed.
Fiscal policy: reinforcing fiscal sustainability
- Medium-term consolidation needed: deploy an ambitious, credible, and growth-friendly fiscal consolidation plan to restore sustainability and rebuild buffers.
- Recommended revenue measures (as aligned with government program):
- Introduction of a 5 percent VAT.
- Excises on tobacco.
- Expanding corporate tax to cover domestic corporates.
- Implementing a property tax.
- Recommended spending measures:
- Phasing out subsidies while targeting support to the most vulnerable.
- Reforming public wages.
- Medium-term fiscal framework:
- Establish a robust medium-term fiscal framework with a clear fiscal anchor.
- Consider a target for the non-oil structural primary balance to be robust to oil price and cyclical volatility.
- Rejuvenate staffing, resources, technical capacity, and high-level support of the Macro-Fiscal Unit in the Ministry of Finance; IMF stands ready to provide technical assistance (TA).
- Public financial management and governance enhancements:
- More disclosures in quarterly fiscal reports and on the balance sheet of KIA to improve fiscal transparency.
- Strengthen public procurement to enhance spending efficiency and mitigate perceptions of corruption.
- Develop a sovereign asset and liability management framework to consolidate and detect sovereign risk exposures early.
- Strengthen staffing, resources, and mandate of the Central Statistics Bureau; noted data issues include cessation of inflation data collection since April 2021, Q1 2021 GDP data not yet published, long lags in publication of annual GDP by expenditure, and reported discontinuation of GDP by income; IMF stands ready to provide TA.
Strengthening non-oil growth and employment
- Labor market and demographic challenge:
- Over 100 thousand young persons will enter the labor force over the medium term; accounting for retirements, about 64,000 new jobs would need to be created.
- With fiscal constraints limiting public employment, non-oil growth would need to double to create sufficient private sector opportunities.
- Structural reforms needed:
- Social benefit reforms and harmonizing labor market policies across sectors to support competitiveness and private investment.
- Enhance expatriate labor mobility to attract higher skilled labor and increase productivity.
- Concrete, well-sequenced reform measures with public consultation are essential.
- Education and training:
- Scope to improve quality of education and expand vocational training.
- Kuwait’s public spending on education is similar to advanced economies, but TIMSS scores are lower than advanced-economy averages.
- Business environment and private sector development:
- Enactment of the new Bankruptcy Law in 2020 strengthens corporate bankruptcy procedures and early restructuring.
- Establishment of the Disciplinary Board under the Competition Protection Agency welcomed; building a track record and public awareness is important.
- Continue improvements in streamlining procedures and promoting electronic platforms.
- Road map for land reform needed: introduce market-based, transparent mechanisms for land allocation and provide public information on land allocation.
- Consider further business incubation support (training on business management and marketing).
- Develop local debt markets to diversify corporate funding sources.
- Governance and anti-corruption:
- Vigorously address corruption and improve government efficiency to sustain public support for reforms.
- Authorities’ 2019-24 Integrity and Anti-Corruption Strategy and the January 2021 executive regulation on access to information under Law No.12 are key steps; forceful implementation is needed.
Climate change and energy
- Government committed to harmonize growth with low-carbon and climate-resilient development in the National Adaption Plan 2019-30.
- To reduce electricity-related emissions, most power generation plants have shifted from oil to natural gas.
- Policy measures to consider:
- Accelerate fossil fuel subsidy reforms to reduce carbon emissions.
- Support green infrastructure and strengthen energy efficiency standards to attract private investors and support diversification.
Monetary and financial policies: safeguarding financial stability
- Exchange rate and monetary policy:
- Current exchange rate peg to an undisclosed basket of currencies remains an appropriate policy anchor, delivering low and stable inflation while providing monetary policy autonomy.
- A more flexible exchange rate could potentially support non-oil tradables over time, but near-term benefits are limited and would remove an effective nominal anchor; external adjustment should be facilitated by fiscal consolidation and structural reforms.
- Recent establishment of the Monetary Stability Committee by the central bank is welcomed.
- Banking sector supervision and resilience:
- CBK strengthened stress testing by adding a top-down exercise and calibrated three severe stress testing scenarios showing the banking system remains resilient.
- Centralized Shariah Board established in late 2020 to ensure consistent interpretation of Shariah law in Islamic banks.
- Macroprudential framework and financial safety nets:
- Macroprudential and regulatory toolkits appear adequate; regular reviews recommended.
- Finalizing the Counter Cyclical Buffer and Domestic Systemically Important Banks frameworks would strengthen oversight.
- Establishment of the Financial Stability Committee by the central bank welcomed.
- A draft bank resolution law submitted to government; work ongoing on legal framework for a deposit insurance scheme.
- Preparation for the AML/CFT mutual evaluation in 2022 is progressing as planned.
- Ongoing efforts to promote financing for green projects and Fintech for greater financial inclusion are welcomed while containing risks.
IMF Communications Department — Mission Concluding Statement, October 20, 2021