Mission Concluding Statement 

Washington, DC:

Developments, the Outlook and Risks

1. Kuwait has started the transition from an oil dependent welfare state towards a dynamic and diversified economy. Since May 2024, reform momentum has been building, starting with enactment of the Financing and Liquidity Law.
2. The economy is recovering, while inflation continues to moderate. An incipient recovery is underway, with real GDP expanding by 1.7 percent (y-o-y) in 2025Q2, driven by robust non-oil growth of 3.1 percent (y-o-y). So far this year, headline CPI inflation has continued to moderate, reaching 2.4 percent (y-o-y) in August.
3. The current account remained in surplus and external buffers strong in 2024. The current account surplus declined to 29.1 percent of GDP in 2024, due to lower oil exports. However, higher non-oil exports and investment income helped cushion the impact. Official reserve assets stood at 8.3 months of projected imports at end-2024. The external position was substantially weaker than the level implied by medium-term fundamentals and desirable policies in 2025, reflecting an excessive reliance on oil exports and inadequate public saving of oil revenue. External buffers are ample.
4. The fiscal balance improved despite lower oil revenue. The fiscal deficit of the budgetary central government narrowed to 2.2 percent of GDP in FY2024/25. This reflected rationalization of the public sector wage bill from retirements, moderation of energy subsidies alongside international fuel prices, and mobilization of non-oil revenue by raising government service fees. At the general government level, the fiscal surplus widened to 27.7 percent of GDP in FY2024/25, also reflecting higher estimated SWF investment income. The government resumed sovereign debt issuance after an almost decade long hiatus, issuing 4.6 percent of GDP in domestic bonds and 7.1 percent of GDP in external bonds as of end-October.
5. Financial stability has been maintained, supported by prudent financial regulation. Banks have maintained strong capital and liquidity buffers to satisfy the prudent regulatory requirements set by the Central Bank of Kuwait (CBK). Growth in credit to the non-financial private sector has been picking up, supporting non-oil growth. Nonperforming loans remain low and well provisioned for.
6. Under the baseline assuming current policies, the economy is projected to recover in 2025, then to expand further in 2026 and over the medium term:

• Real GDP will expand by 2.6 percent in 2025 and 3.8 percent in 2026, driven by the unwinding of OPEC+ production cuts and robust non-oil growth, then will stabilize just above 2.0 percent over the medium term.
• Non-oil GDP will expand by 2.7 percent in 2025 and 3.0 percent in 2026 on the back of a surge in investment, then will grow at its potential rate of 2.7 percent over the medium term.
• Headline CPI inflation will moderate to 2.3 percent in 2025 and 2.1 percent in 2026, then will stabilize just below 2.0 percent over the medium term.
• The current account surplus will moderate to 22.9 percent of GDP in 2025 and 19.1 percent of GDP in 2026, primarily reflecting lower oil exports, then will gradually decline over the medium term.
• The fiscal deficit of the budgetary central government will increase to 8.7 percent of GDP (4.2 billion KD) in FY2025/26 and 9.4 percent of GDP (4.6 billion KD) in FY2026/27, given higher spending and lower oil revenue, then will widen to 11.5 percent of GDP (7.0 billion KD) by FY2031/32.
• Financing the fiscal deficit of the budgetary central government from FY2025/26 to FY2031/32 will require 39.1 billion KD in net financing.

7. The risks around these baseline economic projections are broadly balanced. The economy is highly exposed to a variety of global risks through its oil dependence, in particular to commodity price volatility, a global growth slowdown or acceleration, and shifts in global financial conditions. The materialization of these risks would be transmitted to Kuwait mainly via their impacts on oil prices and OPEC+ production. The main domestic risk is changes in the speed of structural reforms and associated infrastructure project implementation to diversify the economy.

Economic Reforms—Transitioning to a Dynamic and Diversified Economy

8. The authorities aspire to diversify the economy under their Vision 2035. To sustainably boost non-oil growth, a comprehensive package of fiscal and structural reforms is needed. Fiscal reforms should reinforce long-term fiscal sustainability while incentivizing Kuwaitis to pursue jobs in the private sector. In parallel, structural reforms should unify the labor market and improve the business environment.

Fiscal Policy—Reinforcing Long-Term Fiscal Sustainability

9. Relative to the baseline, further fiscal consolidation is needed to reinforce intergenerational equity. Given proven hydrocarbon reserves, Kuwait would need to undertake about 10 percent of GDP in fiscal consolidation over the next decade to equitably distribute oil wealth across current and future generations, accounting for population growth.
10. Tax and expenditure policy reforms are needed to support the transition to a dynamic and diversified economy:

• Fiscal consolidation should be implemented at a pace of about 1 percent of GDP per year—without which the fiscal deficit would deteriorate by about 0.5 percent of GDP per year—with manageable impacts on growth and inflation.
• The hydrocarbon share of government revenue remains the highest in the GCC. To mobilize non-oil revenue, the 15 percent CIT should be extended to all domestic companies, while the GCC-wide excise tax and 5 percent VAT should be introduced.
• Compensation of government employees is by far the highest in the GCC. A performance-based public sector wage setting mechanism should be introduced to gradually reduce the large premium over the private sector, and a hiring cap instituted to steadily lower the public sector employment share. Allowances should be streamlined or integrated into base salaries.
• Energy subsidies are among the highest in the GCC. They should be phased out by gradually raising retail electricity, water and fuel prices towards their GCC-average levels while providing targeted transfers to vulnerable groups via the existing social assistance system. Electricity generation and distribution efficiency should also be enhanced to reduce costs.
• The level of infrastructure remains the lowest in the GCC. Public investment should be further scaled up by around 2.5 percent of GDP over the medium term, which together with structural reforms would mitigate the contractionary impact of fiscal consolidation on the economy.

11. Gradual fiscal consolidation should be supported by comprehensive PFM reforms to strengthen the conduct of fiscal policy. A priority is to develop a medium-term fiscal framework, including a fiscal rules framework with a ceiling on public debt and a target for the non-oil fiscal balance. In addition, the coverage of the fiscal accounts statistics should be expanded to the general government level. Moreover, public investment management assessments should be undertaken periodically to ensure best practice in infrastructure governance and track contingent liabilities. Furthermore, the government should publish a medium-term debt management strategy including a bond issuance calendar. Finally, the government should develop a sovereign asset-liability management framework to balance intergenerational fiscal policy tradeoffs while managing risks to the public sector balance sheet.

Monetary and Financial Sector Policies—Maintaining Macrofinancial Stability

12. The exchange rate peg remains an appropriate nominal anchor for monetary policy. It has helped support macroeconomic and financial stability for many years, including relatively low and stable inflation. Sustaining this successful monetary policy track record requires preserving the independence of the CBK. Fiscal consolidation to reinforce intergenerational equity, together with structural reforms to enhance competitiveness, would help strengthen the external position and support the peg.
13. The stance of monetary policy remains appropriate. Since September 2024, the CBK has cut its policy rate by 75 basis points. The policy rate remains above neutral, and is in line with achieving inflation control and non-oil output stabilization objectives. Under the baseline, monetary normalization should continue as inflation further moderates and the non-oil output gap closes.
14. Systemic risk remains contained and prudently managed. Under the CBK’s latest stress tests, the capitalization and liquidity of the banking system generally exceeded Basel III minimum requirements, while individual bank shortcomings were limited. With the credit cycle near its midpoint, the CBK could consider reclassifying part of its country-specific capital buffer as a positive neutral countercyclical capital buffer. The forthcoming Real Estate Financing Law will permit banks to offer mortgage loans for the first time, in which context the CBK should continue its practice of regularly reviewing the adequacy of its financial regulatory perimeter and extensive macroprudential policy toolkit. Finally, the CBK should continue its risk-based supervisory approach to assessing banks and effectively addressing any vulnerabilities.
15. Financial regulatory reforms are warranted to enhance financial intermediation efficiency. The unlimited guarantee on bank deposits should be replaced with a limited deposit insurance framework to address moral hazard. Furthermore, the CBK is in the process of adopting the Basel III endgame requirements to constrain capital risk-weights. Finally, bank lending rate caps should be phased out to support the efficient pricing of default risk while expanding access to credit to riskier borrowers.

Structural Reforms—Boosting Non-Oil Growth

16. A structural reform package should be implemented to unify the labor market and improve the business environment. The state owns most productive assets, employs nearly all Kuwaitis, and leads all megaprojects. The priorities include reducing the public sector wage premium, scaling up the supply of housing, and deepening the financial markets.
17. Labor market reforms are needed to tackle duality, boost productivity, and incentivize private sector-led growth. The labor market remains highly segmented, with Kuwaitis overwhelmingly preferring public sector jobs for their attractive compensation and working conditions, while expatriates fill the vast majority of private sector jobs. Incentivizing Kuwaitis to pursue jobs in the private sector requires better aligning compensation and working conditions in the public sector. Moving towards a performance-based compensation system in the public sector and expanding vocational training programs would help support this.
18. Housing supply is being scaled up to satisfy strong demand. To address the excess demand for housing, the government has announced several large-scale PPP projects to build some 185,000 homes and associated infrastructure. Sustainably satisfying the demand for housing will require reducing implicit subsidies. Full foreign ownership of land is now permitted, but public land sales for commercial development should be scaled up.
19. The recent enactment of the Financing and Liquidity Law is promoting financial deepening. While the banking sector and equity market are well developed, the new law provides an opportunity to deepen the domestic bond market and develop a market-based benchmark yield curve. The CBK is in the process of developing an auction-based primary market open to a broader range of investors to support price discovery and fiscal savings.
20. Progress is being made to strengthen AML/CFT effectiveness. The authorities are working to address the deficiencies identified by the 2024 FATF Mutual Evaluation Report.
21. Statistical capacity has weakened further from a low base, hampering IMF surveillance. Major gaps persist in the national accounts, prices, government finance and external sector statistics. Priority should be given to boosting the funding of the Central Statistical Bureau (CSB) to enable it to resume its annual establishment survey, which has been suspended since 2020. Expenditure-side GDP statistics remain unavailable for 2024, while the publication of CPI statistics was temporarily paused. In addition, the fiscal accounts statistics exclude government investment income and SOE profit transfers, while the IIP statistics exclude government foreign assets. These major gaps in the coverage of the fiscal accounts and external sector statistics should also be filled, especially now that the government has resumed issuing debt.

The mission thanks the authorities for their warm hospitality and constructive engagement.