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Kuwait: Staff Concluding Statement of the 2021 Article IV Mission
October 20, 2021
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Wafa Amr
Phone: +1 202 623-7100Email: MEDIA@IMF.org
October 20, 2021
PRESS OFFICER: Wafa Amr
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Washington, DC: Sustained political gridlock has hobbled reforms and increased macroeconomic vulnerabilities, but a new high-level effort offers hope for resolving the impasse. The authorities have responded swiftly and decisively to address the COVID-19 pandemic and its fallout, paving the way for economic recovery. In the near term, supporting the recovery and mitigating the impact of the pandemic remains a priority. Over the medium term, strong fiscal consolidation is needed to reinforce sustainability. Comprehensive structural reforms, including to social benefits, the labor market, land allocation, and the business environment are needed to promote strong job-rich private sector growth, and alleviate fiscal strains. With large financial assets and a sound banking sector, Kuwait can enter the reforms from a position of strength.
The IMF mission welcomes the candid discussions with the authorities and expresses its gratitude for their continued cooperation.
Recent Developments, Outlook, and Risks
1. Sustained political gridlock has impeded progress in addressing fiscal risks and implementing growth enhancing structural reforms. Several important reform bills, including a new debt law needed to ensure orderly financing of fiscal operations, await parliamentary approval with no clear timeline for approval. However, efforts led by the Amir are underway to resolve the political impasse between government and parliament ahead of the next parliamentary session starting October 26, which could pave the way for accelerating the reform momentum. Moreover, the government has been actively preparing a comprehensive reform plan—the Program of Action for the Sixteenth Legislative Term (2021/2022 – 2024/2025)—which aims to address the structural imbalances in the economy and public finance and promote sustainable and inclusive growth.
2. The authorities responded swiftly and decisively to the COVID-19 crisis. Stringent containment measures and health support to combat the COVID-19 crisis have limited the cases and fatalities despite waves of infections. Fiscal, monetary, and financial support measures introduced by the government and the Central Bank of Kuwait (CBK) eased the burden on households, firms, and the financial sector, limiting the damage from the pandemic. Thanks to the authorities’ strong vaccination efforts, about 80 percent of the target population had been at least partially vaccinated and over 70 percent fully vaccinated as of mid-September 2021, and the pace of infection has slowed significantly, allowing for a pickup in economic activity.
3. The economy is expected to gradually recover from the pandemic. Besides the direct impact of COVID-19 on economic activity, sharp declines in oil prices and cuts to oil production under the OPEC+ agreement weighed on the oil sector. Real GDP is estimated to have contracted 8.9 percent in 2020, with non-oil growth at -7.5 percent and oil growth at -9.8 percent. Non-oil GDP growth of 3.0 percent is projected for 2021, as economic activity gradually recovers and the global environment improves, rising to about 3.5 percent over the medium term. Oil production is projected to rebound as OPEC+ quotas are relaxed. Overall, GDP is projected to grow around 2.7 percent over the medium term. Inflation is expected to average 3.2 percent in 2021 given increases in food prices and costs of travel-related services and stay at about 3 percent over the medium term.
4. A sharp improvement in the fiscal balance is expected for FY 2021/22 given the rebound in oil prices, but thereafter the fiscal position would deteriorate in the absence of consolidation. The fiscal balance (including investment income) sharply deteriorated in FY 2020/21 to a deficit of 15.4 percent of GDP, reflecting lower oil revenue, fiscal support measures to ease the effects of the pandemic, and a slump in economic activity. In FY 2021/22 the fiscal balance is projected to improve to a surplus of 2.0 percent of GDP owing to a rebound in hydrocarbon revenue, significantly higher nominal GDP that reduces the expenditure to GDP ratio, spending cuts, and the withdrawal of some COVID-19 related fiscal measures. However, in subsequent years continued expenditure pressures and declining oil prices would result in a widening deficit and significant decline in government net assets over the medium term absent strong consolidation efforts. Fiscal deterioration would also cause the current account surplus to weaken significantly over the medium term.
5. Kuwait’s financial sector has weathered the crisis well, benefiting from the central bank’s prudent regulation and close supervision, and the strong buffers before entering the crisis. The CBK policy support measures helped support credit growth of 3.6 percent (y/y) by end 2020. Banks are well-capitalized and highly liquid. As of 2021Q1, the Net Stable Funding Ratio and Liquidity Coverage Ratio stood at 110% and 174.5%, respectively. Bank capital adequacy ratio stood at 18.7 percent, well above the required minimum level. Nonperforming loans (NPLs) net of specific provisions stood at 1.7 percent, and total provisions to gross NPL was high, at 195 percent.
6. Substantial uncertainties surround the outlook, with the balance of risks tilted to the downside. A prolonged pandemic could weigh on the nascent economic recovery. Delays in fiscal and structural reforms could amplify the risk of procyclical fiscal policies, undermine investor confidence, and hinder the progress toward more economic diversification and higher competitiveness. Volatility in oil prices would have a significant impact on the outlook and macroeconomic balances. Upside risks to the outlook would come a stronger rebound in global activity than anticipated, which could also boost oil revenues. A resolution to political gridlock and strong fiscal consolidation could considerably improve investor sentiment.
Near-Term Policies: Supporting Economic Recovery
7. Economic scarring from the pandemic appears modest so far, though this could change if the pandemic is prolonged. The oil sector has been resilient, and information available suggests that the policy support measures have contained bankruptcies in hard-hid sectors. Exit of expatriates also appears reversible as Covid-19 containment measures are relaxed. With the recovery gradually strengthening, the fiscal, monetary, and financial sector support measures are being phased out at a measured pace. Given the uncertainties of the pandemic, closely monitoring the health and economic situation while planning for coordinated withdrawal of the remaining support measures would help ensure a smooth return to normalcy. Additional supportive measures can be deployed if the situation warrants but these should increasingly target those hard-hit but viable sectors and the most vulnerable, and should be temporary to avoid permanently increasing the fiscal deficit.
8. Planned near-term fiscal adjustments should be implemented with careful consideration to safeguarding the nascent recovery. The Council of Ministers recently announced plans to cut spending by 10 percent relative to the FY 2021/22 budget targets by 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 overall 10 percent target for the full year. Careful consideration is therefore needed to ensure that the measures are implemented in a manner and at a pace that safeguards the recovery.
9. Passing the public debt law is essential for the issuance of government debt and to support orderly fiscal operations. The draft debt law currently before parliament envisages a debt ceiling of 60 percent of GDP which allows for room for additional borrowing as the size of the economy expands and appears appropriate. More generally, the debt law should provide sufficient flexibility for adequate debt management and avoid legislating restrictions such as on debt maturities, sizes or use of financing, which are best managed at the operational level. Absent the passage of the debt law and with no legal provision to tap the much larger Future Generations Fund (FGF), fiscal financing has relied primarily on drawing down GRF liquid assets. Early resolution of the political gridlock in parliament is needed to pass the debt law in a timely fashion.
10. The mission welcomes the continued focus of monetary and financial policy responses on supporting the economy while containing risks to financial stability. Banks remain well-capitalized and liquid despite a slight increase in non-performing loans ratio and a decline in profitability. The first 6-month loan moratorium to corporates and households, financed by banks, expired in October 2020 without significant impact on asset quality. In April 2021, a 6-month loan moratorium for Kuwaiti retail clients, financed by the government, was announced, and will expire in October. The impact is expected to be minimal as most beneficiaries are public employees who have been receiving their salaries normally throughout the pandemic. Nonetheless, a prolonged pandemic could further intensify vulnerabilities in the corporate sector. The Central Bank of Kuwait continues to monitor credit risk closely and have a forward-looking assessment of banks’ asset quality and ensure adequate capital buffers to withstand credit risks if they materialize.
Fiscal Policy: Reinforcing Fiscal Sustainability
11. To restore fiscal sustainability and rebuild buffers, an ambitious, credible, and growth-friendly fiscal consolidation plan should be deployed over the medium term. A potential adjustment path that would close the intergenerational savings’ gap and reduce financing needs requires both revenue and spending reforms. In line with the government program, revenue measures could include the introduction of a 5 percent VAT, excises on tobacco, expanding corporate tax to cover domestic corporates, and implementing a property tax. On the spending side, phasing out subsidies while targeting support to the most vulnerable and reforming public wages will be critical.
12. A robust medium-term fiscal framework, with a clear fiscal anchor, is needed to support fiscal consolidation. As fiscal reforms will likely take several years to implement, a medium-term fiscal framework is needed to support sound policymaking and rigorous evaluation of reform options. Moreover, given the sensitivity of the headline fiscal balance to oil prices, a target for the non-oil structural primary balance—which would be robust to oil price and cyclical volatility—could be an appropriate fiscal anchor to support consolidation. Operationalizing such a framework would require rejuvenating the staffing, resources, technical capacity, and high-level support of the Macro-Fiscal Unit in the Ministry of Finance. The IMF stands ready to provide technical assistance (TA) in this area.
13. Enhancing public financial management and fiscal governance would improve accountability and effectiveness of policy and strengthen consolidation efforts.
· More disclosures in quarterly fiscal reports and on the balance sheet of KIA, are needed to improve fiscal transparency. Lack of accurate information about sovereign assets notably contributed to raising concerns about fiscal financing risks. Greater transparency would also help facilitate public consensus about reforms, strengthening prospects for implementation.
· Public procurement should also be strengthened to enhance fiscal spending efficiency and mitigate perceptions of corruption.
· A sovereign asset and liability management framework should be developed to strengthen management of assets and liabilities in a consolidated manner, by helping to detect sovereign risk exposures early and to design appropriate mitigation measures.
· Timely and high-quality macroeconomic data, including inflation and national accounts, are critical inputs to analyzing economic conditions and steering economic policies. Thus, the staffing, resources, and mandate of the Central Statistics Bureau should be strengthened. Notably, collection of inflation data has ceased since April 2021; Q1 2021 GDP data are not yet published; there are long lags in the publication of annual GDP by expenditure; and GDP by income has reportedly been discontinued. The IMF stands ready to provide TA in this area.
Strengthening Non-Oil Growth and Employment
14. Reforms are urgently needed to promote non-oil growth. Given Kuwait’s demographics, over 100 thousand young persons will enter the labor force over the medium term and taking account of retirements about 64,000 new jobs would need to be created. With fiscal strains limiting public employment, growth of the non-oil economy would need to double to offer sufficient private sector opportunities to job seekers. Social benefit reforms, augmented by harmonizing labor market policies across all sectors in line with market conditions, would be needed to support competitiveness, attract private investment, and reduce pressure on public sector employment. Also, expatriate labor mobility could be enhanced to attract higher skilled labor and increase productivity. The government’s program of action for the Sixteenth Legislative Term has laid out an ambitious structural and fiscal reform agenda. Going forward, concrete and well-sequenced reform measures and steadfast implementation, accompanied by public broad consultation, are of the essence.
15. There is scope to improve the quality of education and expand vocational training. Kuwait made big strides in raising educational attainment in past decades, but there is scope to improve efficiency of public spending on education and enhance quality and relevance. While Kuwait’s public spending on education is, on average, similar to the level in advanced economies, the outcomes, proxied by TIMSS scores, are lower than averages in advanced economies.
16. Measures to improve the business environment would add to the positive feedbacks from labor market and social benefit reforms.
· The enactment of the new Bankruptcy Law in 2020 strengthens the bankruptcy procedures for corporates, including by emphasizing early restructuring of indebtedness for distressed companies. It would facilitate resources reallocation by allowing nonviable firms to exit more efficiently.
· The mission welcomes the recent establishment of the Disciplinary Board under the Competition Protection Agency and emphasizes that building a strong track record in handling business complaints regarding fair competition and enhancing public awareness would be instrumental in ensuring a level playing field for businesses.
· Recent improvements to the doing business environment, notably in streamlining procedures and promoting the use of electronic platforms, are welcome and should be continued.
· To address the critical issue of land shortage for development, a road map for land reform, including introducing market-based and transparent mechanisms for land allocation and providing public information on land allocation, would be needed.
· Further business incubation support could be considered to help startup companies and foster innovation by providing services such as training on business management and marketing.
· A more developed local debt markets would help diversify corporates’ funding sources and support non-oil private sector development more broadly.
17. Vigorously addressing corruption and improving government efficiency would be critical in sustaining public support for reforms. Addressing corruption would require not only tackling corruption cases in a transparent, timely manner, but also establishing and implementing a strong anti-corruption framework. The authorities’ 2019-24 Integrity and Anti-Corruption Strategy aims to address different forms of corruption by enhancing the rule of law, strengthening institutional transparency and accountability, and improving the role of the private sector and civil society. As part of the country’s efforts to implement the strategy, an executive regulation on access to information under Law No.12 was issued in January 2021, which is key to enhancing transparency and reducing opportunities for corruption. Forceful implementation of this strategy will not only fight corruption directly and improve government efficiency, but also contribute to improving the overall business climate.
18. Climate change calls for persistent adaptation and mitigation efforts. The government expressed its commitment to harmonize economic growth with a low-carbon and climate-resilient development in the National Adaption Plan 2019-30. To reduce electricity related emissions, the authorities have shifted most power generation plants from the use of oil to natural gas. Accelerating fossil fuel subsidy reforms would help reduce carbon emissions. Supporting green infrastructure and strengthening energy efficiency standards would also help address climate change and has the potential to attract private investors and contribute to growth and economic diversification.
Monetary and Financial Policies: Safeguarding Financial Stability
19. The current exchange rate peg to an undisclosed basket of currencies remains an appropriate policy anchor, delivering low and stable inflation while providing significant monetary policy autonomy. While a more flexible exchange rate could potentially support the development of the non-oil tradable sectors over time, a move away from the peg would have limited benefits for competitiveness in the near term and remove an effective nominal anchor. External adjustment would be facilitated by fiscal consolidation and structural reforms. In the meantime, reforms continue to further improve the conduct of monetary policy and deepen monetary and capital markets. In this regard, the recent establishment of the Monetary Stability Committee by the central bank is a welcome step.
20. The skillful supervision and regulation by the CBK have helped keep the banking sector resilient. The CBK strengthened its stress testing techniques recently by supplementing the existing bottom-up approach with a top-down exercise and calibrated three severe stress testing scenarios which showed Kuwait banking system remains resilient under challenging adverse shocks. The CBK established a centralized Shariah Board in late 2020, which is a welcome and important step in ensuring consistent interpretation of Shariah law in Islamic banks at the national level.
21. The central bank continues to strengthen macroprudential tools, regulatory framework, and financial safety nets. The macroprudential and regulatory toolkits appear adequate. Regular reviews of the regulatory perimeter and macroprudential tools would ensure these policy tools continue to balance financial stability and recovery. Finalizing the Counter Cyclical Buffer and Domestic Systemically Important Banks frameworks would further strengthen oversight and management of systemic risks. The mission welcomes the establishment of the Financial Stability Committee by the central bank which aims to improve supervision efficiency and guide macroprudential policy decisions. A draft bank resolution law has been submitted to the government for review, while work is ongoing on the legal framework to introduce a deposit insurance scheme. The preparation for the AML/CFT mutual evaluation in 2022 is progressing as planned. The mission also welcomes ongoing efforts to promote financing for green projects and Fintech for greater financial inclusion while containing risks.
