## Public Information Notice: IMF Executive Board Concludes 2008 Article IV Consultation with Kuwait

_IMF News, June 12, 2008_

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## Bibliographic details
- Published: June 12, 2008

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### Background and recent macroeconomic developments
- Macroeconomic performance in 2007 described as "strong" with prudent macroeconomic management supporting high growth, especially in the non-oil economy.
- Large increase in oil revenue generated substantial fiscal and external current account surpluses, enabling buildup of foreign assets.
- Structural reforms continued to promote a dynamic private sector and enhance incentives for bringing in foreign know-how.
- Inflation:
  - "Gradually picking up," reaching "7.3 percent year-on-year in October 2007," driven by domestic demand pressures (especially rents) and higher import prices (mostly food).
- Output and sectoral performance:
  - Real GDP growth in 2007 is estimated at "4.6 percent."
  - Oil production declined by "2.6 percent in 2007," in line with OPEC decisions.
  - Non-oil activity—particularly financial, transportation, and communication services—grew by "almost 9 percent per annum," benefiting from surge in investment and expansionary macroeconomic policies.
- Fiscal position:
  - Fiscal surplus estimated to have increased to "40 percent of GDP in FY2007/08 (ended March 31)."
  - Projected to narrow in FY2008/09 due to a large transfer to the Kuwait Public Institution for Social Security (KPISS) and large increases in public wages, transfers and subsidies, and capital expenditure.
- Exchange rate and monetary conditions:
  - Kuwait abandoned the peg to the U.S. dollar in May 2007 and pegged the Kuwaiti dinar (KD) to an undisclosed basket of currencies.
  - REER of the Kuwaiti dinar appreciated by "about 2 percent in 2007," largely due to a "6 percent appreciation against the U.S. dollar" and relatively higher inflation.
  - Broad money and credit to the private sector expanded rapidly in 2007.
  - Central Bank measures: tightened loan-to-deposit ceiling, drove KIBOR below LIBOR.
- Financial markets:
  - Kuwait stock exchange (KSE) corrected "12 percent" in 2006, recovered with KSE index gaining "25 percent" in 2007, and fell again in early 2008 as global turbulences intensified.
  - Banking system described as sound; available financial soundness indicators through September 2007 point to strong capitalization, asset quality, and profitability.
- Structural reforms and institutional measures:
  - Profit tax on foreign investors reduced from "55 percent to 15 percent"; capital gains from stock investment exempted from tax.
  - Sale of State Properties Law approved to provide state land to investors and legal basis for PPP projects.
  - Parliament authorized privatization of Kuwait Airways; licenses granted to three private airlines and four new private universities; privatized a number of gas stations.
  - Budget preparation consolidated in the ministry of finance, including wage bill and capital budget.

### Executive Board assessment — key findings and recommendations
- Commendations and priorities:
  - Directors commended prudent macroeconomic policies and structural reform efforts contributing to strong growth, especially in labor-intensive non-oil sector.
  - Agreed that dealing with inflation pressures will be a priority for the near term.
  - Vigorous implementation of government reform plans should support favorable medium-term growth prospects for oil and non-oil sectors.
- Oil policy and capacity:
  - Directors commended Kuwait's intention to play a constructive role in the global oil market and welcomed plans to increase oil production and refinery capacity.
- Fiscal policy guidance:
  - Kuwait's strong fiscal position enhances resilience to shocks.
  - Fiscal policies should balance moderating demand pressures, addressing domestic supply bottlenecks, and building financial assets for future generations to reduce dependence on volatile oil revenue.
  - Recommendations:
    - Contain wage bill and subsidies through merit-based wage increases and better-targeted social spending.
    - Build on improvements in budget planning and execution by adopting a medium-term budget preparation framework.
    - Welcome plans to close the actuarial deficit of the Pension Fund.
- Sovereign wealth fund and transparency:
  - Directors welcomed the stabilizing role of the Kuwait Investment Authority (KIA) domestically and in global markets.
  - Some Directors saw scope for greater transparency regarding the KIA's financial position.
  - Encouraged participation in initiative to formulate best practices for sovereign wealth funds; some Directors shared authorities' reservations about participating in such initiatives.
- Exchange rate regime and monetary union:
  - Most Directors agreed the pegged exchange rate regime remains appropriate; move to a basket peg may have helped contain imported inflation.
  - Peg limits active use of interest rate policy; some Directors suggested reviewing the nature of the exchange rate arrangement.
  - To counter rising domestic inflationary pressures, supply response in nontradables—particularly housing and land—needs enhancement while maintaining fiscal prudence.
  - Containing domestic credit growth through continued supervisory vigilance recommended.
  - Directors noted Kuwait's commitment to GCC monetary union; implementation by 2010 will require speeding up institutional framework building and removing remaining obstacles to labor and capital flow among GCC countries.
  - Several Directors looked forward to forthcoming staff paper on exchange rate arrangement options under the planned monetary union.
- Financial sector supervision and regulation:
  - Noted sound position of banking sector; cautioned that rapid growth of financial investment companies calls for continued vigilance.
  - Encouraged completion of outstanding FSAP recommendations, including:
    - Establishing a unified and independent capital market regulatory authority applying best international practices.
    - Continuing and broadening regular stress testing of the overall financial sector.
- Structural reforms and private sector development:
  - Further structural reforms critical to sustain medium-term growth.
  - Recommendations:
    - Focus public expenditure on infrastructure and education rather than subsidies and transfers to develop human capital and create private sector employment for Kuwaiti nationals.
    - Establish a strong capital market regulator and enact legal reforms to encourage competition and facilitate doing business.
- Data and international assistance:
  - Directors welcomed authorities' intention to improve economic statistics and encouraged adopting a program aimed at subscribing to the Fund's Special Data Dissemination Standard (SDDS).
  - Commended Kuwait for substantial development assistance and support for the Highly Indebted Poor Countries (HIPC) Initiative; encouraged extending HIPC debt relief to claims held by the Kuwait Investment Authority.

### Kuwait: Selected Economic Indicators, 2003-08 (highlights)
- Production and prices (Percent change)
  - Real GDP: 2003: "17.2", 2004: "10.6", 2005: "11.5", 2006: "6.4", 2007: "4.6", 2008 (Proj.): "6.0"
  - Real oil GDP: 2003: "19.8", 2004: "8.1", 2005: "11.4", 2006: "2.9", 2007: "-2.3", 2008 (Proj.): "1.3"
  - Real non-oil GDP: 2003: "13.9", 2004: "12.9", 2005: "12.0", 2006: "9.4", 2007: "9.2", 2008 (Proj.): "8.6"
  - Consumer Price Index (annual average): 2003: "1.0", 2004: "4.1", 2005: "3.1", 2006: "5.0", 2007: "6.5"
- Government finances (In percent of GDP; fiscal year ending March 31)
  - Total Revenue: 2003: "52.9", 2004: "55.7", 2005: "64.5", 2006: "64.0", 2007: "72.6", 2008 (Est./Proj.): "70.3"
  - Oil and gas revenue: 2003: "40.8", 2004: "42.9", 2005: "52.1", 2006: "49.5", 2007: "56.6", 2008: "58.0"
  - Investment income: 2003: "7.7", 2004: "9.3", 2005: "9.8", 2006: "13.6", 2007: "10.2"
  - Total Expenditure: 2003: "36.2", 2004: "32.8", 2005: "27.4", 2006: "35.0", 2007: "32.2", 2008: "45.8"
  - Current Expenditure: 2003: "31.7", 2004: "28.6", 2005: "23.8", 2006: "30.9", 2007: "24.7", 2008: "37.8"
  - Capital Expenditure: 2003: "4.5", 2004: "4.2", 2005: "3.6", 2006: "7.4", 2007: "7.9"
  - Overall fiscal balance: 2003: "16.7", 2004: "22.9", 2005: "37.1", 2006: "29.0", 2007: "40.5", 2008: "24.5"
- Money and credit
  - Broad money: 2003: "7.8", 2004: "12.1", 2005: "12.3", 2006: "21.7", 2007: "19.3", 2008: "14.3"
  - Interest Rate (Three-month Kuwaiti dinar deposit rate, period average): 2003: "1.5", 2004: "1.6", 2005: "5.2", 2006: "..."
  - Claims on nongovernment sector: 2003: "21.4", 2004: "16.1", 2005: "18.8", 2006: "24.8", 2007: "35.1", 2008: "18.6"
- External sector (In billions of U.S. dollars unless otherwise indicated)
  - Exports, of which: 2003: "21.8", 2004: "30.1", 2005: "47.0", 2006: "58.6", 2007: "62.8", 2008: "84.7"
  - Crude oil and refined products: 2003: "19.6", 2004: "27.8", 2005: "44.1", 2006: "59.7", 2007: "81.4"
  - Imports: 2003: "-9.9", 2004: "-11.7", 2005: "-14.2", 2006: "-14.3", 2007: "-16.7", 2008: "-19.9"
  - Current account balance (deficit = -): 2003: "18.2", 2004: "34.3", 2005: "51.1", 2006: "52.7", 2007: "65.6"
  - Current account in percent of GDP: 2003: "19.7", 2004: "30.6", 2005: "42.5", 2006: "51.7", 2007: "47.4", 2008: "45.2"
  - International reserve assets (in months of imports of goods and services): 2003: "7.6", 2004: "8.3", 2005: "9.0", 2006: "12.6", 2007: "15.5"
  - Months of imports of goods and services: 2003: "5.5", 2004: "4.7", 2005: "6.1", 2006: "5.7", 2007: (not explicitly listed)
  - Real effective exchange rate (percent change): 2003: "-7.2", 2004: "-5.1", 2005: "2.1", 2006: "0.8", 2007: "1.9"

*Public Information Notice (PIN) No. 08/67; June 12, 2008. Executive Board discussion concluded April 18, 2008.*

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