{
  "title": "Kuwait: Staff Concluding Statement of the 2023 Article IV Mission",
  "publication": "IMF News, June 5, 2023",
  "sourceUrl": "https://www.imf.org/en/news/articles/2023/06/05/mcs060523-kuwait-staff-concluding-statement-2023-article-iv-mission",
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  "summary": "Benefiting from high oil production and prices, Kuwait’s economic recovery continues. Inflation has been contained, while the fiscal and external balances have strengthened, and financial stability has been maintained.",
  "publishDate": "2023-06-05",
  "sections": [
    {
      "heading": "Recent Developments, Outlook, and Risks",
      "content": "- Growth and inflation\n  - 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.\n  - Non-oil growth is estimated to have risen to 4.0 percent in 2022, up from 3.4 percent in 2021.\n  - Annual headline CPI inflation peaked at 4.7 percent in April 2022 and reached 3.7 percent in April 2023.\n- Fiscal and external balances; reserves\n  - 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.\n  - 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.\n  - Official reserve assets increased to US$48.2 billion (10.3 months of prospective imports) at end-2022.\n  - 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.\n- Financial stability and banking sector\n  - Banks remain well capitalized and liquid, comfortably exceeding prudential regulatory requirements; non-performing loans remain low.\n  - The Central Bank of Kuwait (CBK) tightened policy by a total of 250 basis points since the global monetary policy tightening cycle began.\n  - Impact of global banking sector turbulence on Kuwait’s banks has been limited.\n- Political developments\n  - Government resigned on January 23.\n  - Crown Prince reappointed the Prime Minister on March 5 and tasked him to form a new Cabinet.\n  - New Cabinet formed on April 9.\n  - Amir dissolved Parliament and called for a general election on May 1.\n  - A general election will be held on June 6.\n- 2023 outlook and risks\n  - 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.\n  - Non-oil growth is projected to remain robust at 3.8 percent in 2023.\n  - Overall fiscal and current account surpluses will fall in 2023, reflecting fiscal expansion and lower oil revenues.\n  - 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.\n  - Upside scenario: resolution of political gridlock could accelerate reforms, boost investor confidence, and stimulate private investment."
    },
    {
      "heading": "Fiscal Policy — Supporting the Recovery and Reinforcing Sustainability",
      "content": "- Short-term stance and forecast\n  - 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.\n  - Non-oil output gap is estimated at -1.7 percent in 2023.\n  - 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.\n- Consolidation needs and recommended measures\n  - Substantial fiscal consolidation based on both expenditure and non-oil revenue measures is needed.\n  - Expenditure measures: rationalize the public sector wage bill; gradually phase out large energy subsidies while replacing them with targeted income support to vulnerable households.\n  - 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.\n  - 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.\n- Medium-term fiscal framework and governance\n  - Develop a robust medium-term fiscal framework underpinned by a medium-term macroeconomic framework to strengthen fiscal analysis, forecasting, and evaluation of reform options.\n  - Adopt a fiscal rule based on the non-oil structural primary balance to provide discipline and achieve countercyclical stabilization and intergenerational equity objectives.\n  - Strengthen sovereign asset and liability management framework to identify and manage risks to the consolidated public sector balance sheet.\n  - Reinstate monthly fiscal reporting and expand coverage to SOEs to enhance fiscal transparency and governance.\n- Public Debt Law\n  - 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.\n  - The new law should ideally not impose restrictions on sovereign bond maturities or have a predetermined expiration date.\n- Financing note\n  - 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."
    },
    {
      "heading": "Monetary and Financial Sector Policies — Safeguarding Financial Stability",
      "content": "- Exchange rate and monetary policy\n  - The exchange rate peg to an undisclosed basket of currencies remains an appropriate nominal anchor.\n  - The peg has delivered low and stable inflation and provides the CBK with some monetary policy autonomy.\n  - Maintaining central bank independence is critical; fiscal consolidation and structural reforms are desirable to strengthen the external position and support the peg.\n- Prudential supervision and emerging risks\n  - Prudent regulation and supervision by the CBK have helped maintain a resilient banking system.\n  - Internationally active banks in Kuwait could face higher interbank dollar funding costs in the event of global systemic financial instability, constraining credit supply.\n  - The domestic credit cycle is maturing as interest rates rise; the CBK should closely monitor banks’ dollar funding liquidity and credit quality.\n  - Now that pandemic-related financial regulatory support measures have been unwound, the CBK could consider activating the countercyclical capital buffer.\n- Financial sector reforms and instruments\n  - 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.\n  - Replace the existing blanket guarantee on bank deposits with a limited deposit insurance framework to address moral hazard.\n  - Phase out the interest rate cap on commercial loans to support efficient risk pricing and credit supply to SMEs."
    },
    {
      "heading": "Structural Reforms — Strengthening Non-Oil Growth and Employment",
      "content": "- Labor market and employment\n  - Over the next five years, roughly 100,000 young Kuwaitis will join the labor force, as implied by demographics.\n  - Given fiscal consolidation needs and global decarbonization trends, most labor force entrants should join the non-oil private sector.\n  - 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.\n  - Progress noted: encouraging female labor force participation by improving the working environment for women; digitalizing public services.\n- Business environment and investment\n  - Reforms to strengthen competition and promote investment, including relaxing foreign ownership restrictions on firms, are needed.\n  - Enhance public land allocation for commercial development with longer lease terms.\n- Climate change mitigation and adaptation\n  - 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.\n  - Kuwait committed under the Paris Agreement to cut greenhouse gas emissions by 7.4 percent relative to business-as-usual by 2035.\n  - Kuwait plans to reach net zero greenhouse gas emissions in the oil sector by 2050, and economy-wide by 2060.\n  - 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.\n- Governance and anti-corruption\n  - 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.\n  - Continue strengthening the AML/CFT framework in line with FATF recommendations, including beneficial ownership elements.\n\nIMF staff concluding statement, June 5, 2023.\n\n---\n\n\n References\n\n- Kuwait and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2023/06/05/mcs060523-kuwait-staff-concluding-statement-2023-article-iv-mission"
    }
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    "Published: June 5, 2023",
    "Growth and inflation",
    "Fiscal and external balances; reserves",
    "Financial stability and banking sector",
    "Political developments",
    "2023 outlook and risks",
    "Short-term stance and forecast",
    "Consolidation needs and recommended measures",
    "Medium-term fiscal framework and governance",
    "Public Debt Law",
    "Financing note",
    "Exchange rate and monetary policy",
    "Prudential supervision and emerging risks",
    "Financial sector reforms and instruments",
    "Labor market and employment",
    "Business environment and investment",
    "Climate change mitigation and adaptation",
    "Governance and anti-corruption",
    "[Kuwait and the IMF](http://www.imf.org/external/country/KWT/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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