Kuwait: Staff Concluding Statement of the 2023 Article IV Mission
IMF News, June 5, 2023
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- Published: June 5, 2023
Recent Developments, Outlook, and Risks
- Growth and inflation
- Growth is estimated to have surged to 8.2 percent in 2022, up from 1.3 percent in 2021, primarily driven by high oil production and prices.
- Non-oil growth is estimated to have risen to 4.0 percent in 2022, up from 3.4 percent in 2021.
- Annual headline CPI inflation peaked at 4.7 percent in April 2022 and reached 3.7 percent in April 2023.
- Fiscal and external balances; reserves
- The overall fiscal surplus is estimated by Fund staff to have surged to 22.5 percent of GDP in 2022, up from 6.4 percent of GDP in 2021.
- The current account surplus is estimated to have risen to 33.0 percent of GDP in 2022, up from 26.6 percent of GDP in 2021.
- Official reserve assets increased to US$48.2 billion (10.3 months of prospective imports) at end-2022.
- The external position in 2022 is assessed as weaker than the level implied by fundamentals and desirable policies, largely due to insufficient public saving of the oil revenue windfall.
- Financial stability and banking sector
- Banks remain well capitalized and liquid, comfortably exceeding prudential regulatory requirements; non-performing loans remain low.
- The Central Bank of Kuwait (CBK) tightened policy by a total of 250 basis points since the global monetary policy tightening cycle began.
- Impact of global banking sector turbulence on Kuwait’s banks has been limited.
- Political developments
- Government resigned on January 23.
- Crown Prince reappointed the Prime Minister on March 5 and tasked him to form a new Cabinet.
- New Cabinet formed on April 9.
- Amir dissolved Parliament and called for a general election on May 1.
- A general election will be held on June 6.
- 2023 outlook and risks
- Real GDP growth is projected to fall to 0.1 percent in 2023 due to agreed OPEC+ oil production cuts and slower external demand growth.
- Non-oil growth is projected to remain robust at 3.8 percent in 2023.
- Overall fiscal and current account surpluses will fall in 2023, reflecting fiscal expansion and lower oil revenues.
- Elevated risks: volatility in oil prices and production; deeper global growth slowdown from further monetary tightening or banking sector stress; domestic risks from delays in fiscal and structural reforms.
- Upside scenario: resolution of political gridlock could accelerate reforms, boost investor confidence, and stimulate private investment.
Fiscal Policy — Supporting the Recovery and Reinforcing Sustainability
- Short-term stance and forecast
- The draft FY2023/24 Budget envisages a large fiscal expansion concentrated in higher current spending on the public sector wage bill, as well as subsidies and social benefits.
- Non-oil output gap is estimated at -1.7 percent in 2023.
- The overall fiscal surplus is projected by Fund staff to drop to 6.9 percent of GDP in 2023, and to fall steadily thereafter into deficit over the medium term.
- Consolidation needs and recommended measures
- Substantial fiscal consolidation based on both expenditure and non-oil revenue measures is needed.
- Expenditure measures: rationalize the public sector wage bill; gradually phase out large energy subsidies while replacing them with targeted income support to vulnerable households.
- Revenue measures: introduce a 5 percent value-added tax; levy excises on tobacco and sugary drinks as agreed with other GCC countries in 2015-16; expand the 15 percent corporate income tax to cover domestic firms to conform with the OECD-led global minimum corporate tax agreement for multinationals.
- Allocate part of fiscal savings towards investments in transport and renewable energy infrastructure; frontload infrastructure investment in the event of a substantial fall in non-oil growth.
- Medium-term fiscal framework and governance
- Develop a robust medium-term fiscal framework underpinned by a medium-term macroeconomic framework to strengthen fiscal analysis, forecasting, and evaluation of reform options.
- Adopt a fiscal rule based on the non-oil structural primary balance to provide discipline and achieve countercyclical stabilization and intergenerational equity objectives.
- Strengthen sovereign asset and liability management framework to identify and manage risks to the consolidated public sector balance sheet.
- Reinstate monthly fiscal reporting and expand coverage to SOEs to enhance fiscal transparency and governance.
- Public Debt Law
- Expeditiously pass the new Public Debt Law to permit borrowing and facilitate orderly fiscal financing through sovereign bond issuance while supporting development of the domestic bond market.
- The new law should ideally not impose restrictions on sovereign bond maturities or have a predetermined expiration date.
- Financing note
- In the absence of borrowing authority or legal access to the Future Generations Fund, fiscal financing has relied on the much smaller General Reserve Fund.
Monetary and Financial Sector Policies — Safeguarding Financial Stability
- Exchange rate and monetary policy
- The exchange rate peg to an undisclosed basket of currencies remains an appropriate nominal anchor.
- The peg has delivered low and stable inflation and provides the CBK with some monetary policy autonomy.
- Maintaining central bank independence is critical; fiscal consolidation and structural reforms are desirable to strengthen the external position and support the peg.
- Prudential supervision and emerging risks
- Prudent regulation and supervision by the CBK have helped maintain a resilient banking system.
- Internationally active banks in Kuwait could face higher interbank dollar funding costs in the event of global systemic financial instability, constraining credit supply.
- The domestic credit cycle is maturing as interest rates rise; the CBK should closely monitor banks’ dollar funding liquidity and credit quality.
- Now that pandemic-related financial regulatory support measures have been unwound, the CBK could consider activating the countercyclical capital buffer.
- Financial sector reforms and instruments
- CBK plans to regularly review the adequacy of its financial regulatory perimeter and macroprudential policy toolkit and to continue regular stress testing of the banking system.
- Replace the existing blanket guarantee on bank deposits with a limited deposit insurance framework to address moral hazard.
- Phase out the interest rate cap on commercial loans to support efficient risk pricing and credit supply to SMEs.
Structural Reforms — Strengthening Non-Oil Growth and Employment
- Labor market and employment
- Over the next five years, roughly 100,000 young Kuwaitis will join the labor force, as implied by demographics.
- Given fiscal consolidation needs and global decarbonization trends, most labor force entrants should join the non-oil private sector.
- Implement labor market reforms to incentivize nationals to seek private sector employment: gradually align compensation and working conditions across public and private sectors; harmonize labor market policies for nationals versus expatriates; enhance job search assistance and training programs.
- Progress noted: encouraging female labor force participation by improving the working environment for women; digitalizing public services.
- Business environment and investment
- Reforms to strengthen competition and promote investment, including relaxing foreign ownership restrictions on firms, are needed.
- Enhance public land allocation for commercial development with longer lease terms.
- Climate change mitigation and adaptation
- 2019-30 National Adaptation Plan addresses extreme heat impacts on health and productivity; the plan needs translation into investment projects and implementation following parliamentary approval.
- Kuwait committed under the Paris Agreement to cut greenhouse gas emissions by 7.4 percent relative to business-as-usual by 2035.
- Kuwait plans to reach net zero greenhouse gas emissions in the oil sector by 2050, and economy-wide by 2060.
- To achieve emissions targets, finish developing the mitigation plan, including phasing out fossil fuel subsidies while replacing them with targeted income support to vulnerable households and promoting investment in renewables-based electricity generation infrastructure.
- Governance and anti-corruption
- Implement remaining elements of the 2019-24 Integrity and Anti-Corruption Strategy, including enhancing compliance with the asset declaration system and strengthening integrity and efficiency of public procurement.
- Continue strengthening the AML/CFT framework in line with FATF recommendations, including beneficial ownership elements.
IMF staff concluding statement, June 5, 2023.