## 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

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### 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).*

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_Source: https://www.imf.org/en/news/articles/2020/03/27/pr20117-kuwait-imf-executive-board-concludes-2020-article-iv-consultation_