IMF Executive Board Concludes 2011 Article IV Consultation with Kuwait

Public Information Notice (PIN) No. 11/93
July 19, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 15, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kuwait.1

Background

The 2011 consultation discussions were held against the backdrop of the second year of implementation of Kuwait’s Development Plan, recovery in non-oil economic activity, tension between government and parliament, regional unrest, and higher global oil prices.

Real Gross Domestic Product (GDP) growth in 2010 is estimated at 3.3 percent, comprising oil growth of 3.2 percent and non-oil growth of 3.4 percent. Activity has been driven mostly by an expansionary fiscal stance. Government Expenditure in Fiscal Year (FY)2010/11—excluding energy-related subsidies and recapitalization of social security—is estimated to have increased by 21½ percent. Half of this growth was attributed to the recent Amiri grant, which included a cash transfer of about $3,600 to each Kuwaiti citizen (equivalent to almost 3 percent of 2010 GDP) and free essential food items from February 2011 through March 2012. The increase in bank lending to the private sector was small, with higher lending of 3.3 percent to the productive sectors (industry, services, and trade) partially offset by a reduction in credit to the real estate and financial sectors.

Headline inflation increased in 2010, primarily due to higher international food prices. Average food inflation reached about 8.2 percent in 2010 (and 9.8 percent at end-April 2011), compared to 3.4 percent in 2009, but its impact on Kuwaiti citizens has been mitigated by the Amiri grant. Non-food inflation remains subdued at around 3.6 percent as of April 2011, reflecting moderate increases in rents. Similar to other countries in the region, the regional unrest has weighed down on stock market prices, which declined by over 8 percent in 2011 through May 25. At the same time, Kuwait has increased its oil production to assist in the effort to stabilize the global oil market.

Banks’ profitability and capitalization have improved but the Investment Companies (ICs) sector continued to post losses. Profits of local banks increased by 70 percent in 2010 and the sector’s capital adequacy ratio increased to 19 percent in 2010 from 17 percent in 2009. ICs continued to struggle and posted losses on average in 2010—although at a lower level than average losses in 2009—and the debt restructuring of some ICs remains unresolved. The performance of the nonfinancial corporate sector has improved in 2010, notwithstanding the continued drag by the real estate sector.

Executive Board Assessment

Executive Directors noted that Kuwait’s economy has recovered from the impact of the global financial crisis on the back of a strong fiscal stimulus and an ambitious development plan. The outlook is however subject to external and internal risks and policy will need to be implemented flexibly in the period ahead. To secure sustainable broad-based growth and address the challenges ahead, Directors also stressed the need for further fiscal, financial, and institutional reforms.

Directors endorsed the currently accommodative mix of macroeconomic policies, but recommended that support be withdrawn if signs of overheating emerge. They agreed that the basket peg regime remains broadly appropriate and took note of the staff’s assessment that the exchange rate is broadly in line with medium-term fundamentals.

Directors considered that the authorities’ 2010–14 Development Plan rightly targets much needed investment, including in human capital, with a view to better preparing Kuwaiti nationals for private sector employment. They underscored the importance of implementing this plan carefully, with special regard to project viability, the business environment, and absorptive capacity, while avoiding the buildup of vulnerabilities in private sector’s balance sheets.

More broadly, Directors emphasized the importance of further reforms to improve the fiscal framework, reduce distortions, and ensure intergenerational equity in the sharing of oil wealth. Priority should be given to tax reforms, including the introduction of a value-added tax and a comprehensive income tax system, better targeted subsidies and social benefits, and a reallocation of public expenditure toward investment. A fiscal rule could also strengthen fiscal management.

Directors recognized important advances in financial sector stability. They welcomed improvements in banks profits and balance sheets and progress in implementing the recommendations of the 2010 Financial Sector Assessment Program. Directors cautioned, however, that many investment companies remained in fragile financial positions and urged the authorities to monitor their situation closely. In this regard, developing of a special resolution regime for financial institutions would facilitate efficient restructuring and exits. The effectiveness of financial oversight would also be boosted by further empowering the newly established Capital Market Authority and the adoption of a new AML/CFT law.

Directors welcomed improvements in Kuwait’s statistical system but considered that more work is needed. They encouraged the authorities to provide additional support to the Central Statistical Office and give priority to the compilation of timely national accounts.


Kuwait: Selected Economic Indicators, 2006–12
(Quota: SDR 1,381.1 million) (Population: 3.58 million; Dec. 2010)
(Per capita GDP: $37,039; 2010 estimate)
Main exports: oil and gas
 
            Prel. Proj.
  2006 2007   2008 2009 2010 2011 2012
 
Oil and gas sector                
Total oil and gas exports (in billions of U.S. dollars) 53.2 59.1   82.6 46.6 61.7 85.9 89.2

Average oil export price (in U.S. dollars/barrel)

61.2 70.4   93.7 58.2 76.4 104.1 103.1

Crude oil production (in millions of barrels/day)

2.64 2.57   2.68 2.26 2.31 2.41 2.52
  (Annual percentage change, unless otherwise indicated)

National accounts and prices

               

Nominal GDP (market prices, in billions of Kuwaiti dinar)

29.5 32.6   40.0 31.5 38.0 48.4 51.4

Nominal GDP (market prices, in billions of U.S. dollars)

101.6 114.7   148.8 109.5 132.6 171.9 182.9

Real GDP (at factor cost)

5.3 4.6   5.0 -5.0 3.3 5.0 5.6

  Real oil GDP

2.8 -2.6   3.3 -11.3 3.2 3.3 4.6

  Real non-oil GDP

8.3 11.1   5.6 -1.0 3.4 6.0 6.1

CPI inflation (average)

3.1 5.5   10.6 4.0 4.1 6.2 3.5

Unemployment rate (Kuwaiti nationals)

4.0 6.1   4.9 3.6 2.9 ... ...
  (Percent of GDP at market prices)

Investment and savings

               

Investment

15.9 20.5   18.4 13.9 14.1 14.9 16.9

  Public

2.8 3.3   3.5 4.6 4.7 4.9 5.6

  Private 1

13.1 16.9   14.9 9.3 9.5 10.0 11.3

Gross national savings

60.6 57.2   58.9 37.6 42.0 48.4 49.6

  Public

60.2 55.2   46.4 47.1 45.8 46.2 47.2

  Private 1

4.5 2.1   12.5 -10.3 -3.8 2.1 2.4

Savings/investment balance

44.6 36.8   40.5 23.6 27.8 33.5 32.7
  (Percent of GDP at market prices)

Budgetary operations 2

               

Revenue

66.6 67.8   63.4 61.5 59.2 61.6 60.6

  Oil

48.0 51.5   52.1 50.1 48.5 51.6 50.2

  Non-oil, of which:

18.6 16.3   11.4 11.5 10.7 9.9 10.4

    Investment income

15.7 13.0   8.5 8.1 7.9 7.5 8.0

Expenditures

34.0 28.1   47.9 33.6 38.4 35.5 35.5

  Expense 3

30.0 23.9   43.5 29.2 33.7 30.3 29.8

  Capital

4.0 4.1   4.3 4.4 4.7 5.2 5.8

Balance

32.5 39.7   15.5 28.0 20.7 26.1 25.0

Non-oil balance (percent of non-oil GDP) 4

-58.8 -58.2   -73.0 -59.7 -72.1 -73.0 -70.7

Total gross debt (calendar year-end) 5

8.3 6.7   5.6 7.0 5.7 4.5 4.2
  (Changes in percent of beginning broad money stock)

Money and credit

               

Net foreign assets 6

12.5 1.1   10.0 8.3 0.1 8.1 4.8

Claims on nongovernment sector

24.5 35.6   19.2 7.1 2.0 6.7 10.0

Broad money

21.7 19.3   15.6 13.4 3.0 16.3 10.2

Kuwaiti dinar 3-month deposit rate (year average; in percent)

5.0 5.2   3.3 1.4 0.8 ... ...

Stock market unweighted index (annual percent change)

-12.0 24.7   -38.0 -10.0 -0.7 ...  
  (Billions of U.S. dollars, unless otherwise indicated)

External sector

               

Exports of goods

56.5 62.6   87.0 51.7 67.0 92.5 96.0

  Of which: non-oil exports

3.3 3.5   4.4 5.1 5.3 6.6 6.8

  Annual percentage change

14.6 6.4   25.1 16.0 4.4 25.2 2.4

Imports of goods

-16.2 -19.1   -22.9 -17.3 -19.1 -23.1 -25.0

  Annual percentage change

7.9 17.7   20.0 -24.7 10.3 21.0 8.4

Current account

45.3 42.2   60.2 25.9 36.9 57.6 59.7

  Percent of GDP

44.6 36.8   40.5 23.6 27.8 33.5 32.7

External debt including private sector

30.8 57.5   60.6 57.5 ... ... ...

International reserve assets

11.8 15.9   16.7 17.7 18.7 23.1 25.3

  In months of imports of goods and services

5.3 5.9   5.3 6.8 6.9 7.0 7.1

Memorandum items:

               

Exchange rate (U.S. dollar per KD, period average)

3.45 3.52   3.72 3.48 3.49 ...  

Sovereign rating (S&P)

A+ AA-   AA- AA- AA- ...  
 

Sources: Data provided by the authorities; and IMF staff estimates and projections.

1 Also includes government entities.

2 Kuwaiti fiscal year ending March 31, e.g. 2007 refers to fiscal year 2007/08.

3 In 2006/07 KD 2 billion was transferred to partly cover the actuarial deficit of the Public Pension Fund.

In 2008/09, KD 5.5 were transferred. KD 1.1 billions are budgeted for each year from 2010/11 to 2014/15.

4 Excludes investment income and pension recapitalization, and after transfers for FGF.

5 Excludes debt of Kuwait's SWF related to asset management operations.
6 Excludes SDRs and IMF reserve position.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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