IMF Executive Board Concludes 2020 Article IV Consultation with Kuwait

March 30, 2020

This Staff Report was prepared by a staff team of the IMF for the Executive Board’s consideration on March 24. The staff report reflects discussions with the Kuwaiti authorities in January 2020 and is based on the information available as of March 2. It focuses on Kuwait’s near and medium-term challenges and policy priorities and was prepared before COVID-19 became a global pandemic and resulted in unprecedented strains in global trade, commodity and financial markets. It, therefore, does not reflect the implications of these developments and related policy priorities. The Supplementary Information is based on the information available as of March 12. The outbreak has greatly amplified uncertainty and downside risks around the outlook. Staff is closely monitoring the situation and will continue to work on assessing its impact and the related policy response in Kuwait and globally.

WASHINGTON, DC – the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation ^[1] with Kuwait and considered and supported the staff appraisal without a meeting. ^[2]

Nonoil growth strengthened to estimated 3 percent in 2019, propelled by government and consumer spending. With oil output contracting by 1 percent, broadly in line with the OPEC+ agreement, overall growth slowed to estimated 0.7 percent in 2019 from 1.2 percent in 2018. Fiscal and current account surpluses narrowed on account of lower oil prices and output. Inflation rebounded to 1.1 percent 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.

The underlying fiscal stance loosened in FY2018/19. The 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 had to continue drawing solely on General Reserve Fund (GRF) assets for financing, which brought its total and liquid balances down to 56 and 24 percent of GDP by June 2019. Combined FGF and GRF assets continued to grow however, as the FGF generated strong returns and received mandatory transfers from the government.

The banking system remains sound. The systemwide capital adequacy ratio reached 17.6 percent in September 2019, and banks have plentiful short-term liquidity. Nonperforming loans net of specific provisions remain low, while loan-loss provisioning is high. Net interest income declined due to a narrowing spread between bank lending rates and cost of funds.

The real estate market has stabilized, and equity markets outperformed in 2019, in part thanks to the inclusion in emerging market indices.

Executive Board Assessment ^[3]

The challenge to reduce dependence on oil and boost savings has become more urgent. The subdued forecast for oil revenues is weighing on near-term growth and fiscal and external balances. This has heightened the need for reforms to create a vibrant private sector and ensure adequate savings of the exhaustible oil wealth for future generations. Kuwait has large financial buffers and low debt, but the window of opportunity to tackle its challenges from the position of strength is narrowing.

Without a course correction, fiscal and financing challenges will intensify. The recent runup in hard-to-reverse spending weakened the underlying fiscal position. 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 a temporary solution—while slowing the depletion of liquid financial assets, it would lead to a rapid debt buildup.

Kuwait needs ambitious, growth-friendly, and socially equitable fiscal adjustment. Staff’s proposed adjustment would cut current expenditure, by tackling spending rigidities, boost nonoil revenue, and create space for growth-enhancing investment. The large public wage bill should be reformed, and generalized subsidies and transfers phased out in favor of targeted compensation schemes. As for revenue, the government should initiate broad consultations, redouble efforts to engage parliament, and continue the technical work on the GCC-wide excises and VAT. Taxes on corporate income, luxury items, and personal income of the wealthy could be also considered for a more socially-balanced adjustment mix. Embedding fiscal measures in a comprehensive reform package that promotes private sector growth, strengthens governance and accountability, and improves public services would help build broad support for reforms.

A rules-based fiscal framework would improve management of oil revenues. A rules-based framework would help anchor fiscal policy on a long-term objective of intergenerational equity. It should include a well-calibrated operational rule that helps reconcile long-term savings and near-term economic stabilization objectives. Such a rule would help establish policy predictability, prevent procyclicality, and ensure durable gains from adjustment. To be effective, a fiscal rule would need to be enshrined in a sound institutional framework. Until a properly calibrated fiscal rule is in place, the current arrangement with respect to the FGF should be maintained.

Fiscal governance reforms should be an integral part of the overall fiscal strategy. Reforms should aim to enhance fiscal transparency, modernize public procurement, and boost spending efficiency. These steps would reduce vulnerabilities to corruption and strengthen support for fiscal adjustment.

The exchange rate regime remains appropriate. The peg has provided an effective nominal anchor. The proposed fiscal adjustment would close the current account gap over the medium term. As the economy becomes diversified, the arrangement should be periodically reviewed to ensure that it continues to serve Kuwait well.

Financial sector reforms should focus on bolstering resilience and deepening inclusion. To reduce moral hazard, the authorities should enhance the corrective action framework, establish a special resolution regime for banks, and unwind the blanket deposit guarantee. CBK’s continued efforts to recalibrate macroprudential tools to balance stability and growth considerations are welcome. Gradually relaxing the interest rate ceiling on commercial loans would expand lending to new market segments, including SMEs. Market forces should be allowed to play a greater role in the allocation and pricing of liquidity to promote interbank market development.

Sustaining reforms to foster private sector-led and diversified growth will be critical. With limited scope for public employment going forward, a vibrant private sector must emerge to absorb the large number of Kuwaitis entering the labor market in coming years. Enabling the private sector to thrive requires reducing the economic footprint of the state, promoting market competition, and improving the business environment. To that end, further efforts are needed to revamp insolvency framework, reduce excessive regulations, and ease trading across borders. To incentivize Kuwaitis to seek private sector opportunities, public sector wages should be aligned with those in the private sector, accompanied with improvements in education and training programs to nurture entrepreneurship and equip graduates with skills for in-demand jobs.

Kuwait: Selected Economic Indicators, 2014–25
						Est.	Projections
	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023	2024	2025
Oil and gas sector
Total oil and gas exports (billions of U.S. dollars)	97.6	48.5	41.5	49.6	65.4	58.2	52.9	52.8	53.4	54.6	56.0	57.5
Average crude oil export price (U.S. dollars/barrel)	95.2	47.8	39.5	51.6	68.8	61.8	55.9	54.6	54.2	54.3	54.7	55.2
Crude oil production (millions of barrels/day)	2.87	2.86	2.95	2.70	2.74	2.70	2.70	2.76	2.81	2.87	2.93	2.99
(Annual percentage change, unless otherwise indicated)
National accounts and prices
Nominal GDP (market prices, in billions of Kuwaiti dinar)	46	34	33	37	42	41	41	42	44	46	48	51
Nominal GDP (market prices, in billions of U.S. dollars)	163	115	109	121	141	137	135	140	146	152	159	168
Real GDP ¹	0.5	0.6	2.9	-4.7	1.2	0.7	1.5	2.7	2.7	2.7	2.7	2.7
Real oil GDP (including refineries)	-2.1	-1.7	3.9	-9.0	0.2	-1.0	0.3	2.0	2.0	2.0	2.0	2.0
Real nonoil GDP ¹	4.9	4.2	1.4	1.8	2.7	3.0	3.0	3.5	3.5	3.5	3.5	3.5
CPI inflation (average)	3.1	3.7	3.5	1.5	0.6	1.1	1.8	2.5	2.5	2.5	2.5	2.5
CPI inflation (eop)	3.0	3.0	2.6	1.1	0.4	1.5	2.2	2.5	2.5	2.5	2.5	2.5
Unemployment rate (Kuwaiti nationals)	5.0	4.7	3.3	3.3	...	...	...	...	...	...	...	...
	(Percent of GDP at market prices)
Budgetary operations ²
Revenue	67.4	52.3	52.7	58.3	60.9	59.3	55.5	54.2	53.4	52.6	51.6	50.6
Oil	51.9	35.4	34.4	37.8	43.7	39.8	36.7	35.5	34.6	33.9	33.3	32.8
Nonoil, of which:	15.4	16.9	18.2	20.5	17.2	19.5	18.7	18.8	18.8	18.7	18.3	17.9
Investment income	10.6	13.3	14.6	16.2	12.2	14.2	13.3	13.1	13.2	13.1	12.8	12.4
Expenditures ³	48.8	52.7	52.2	50.7	51.6	54.5	56.3	56.9	57.1	57.0	56.8	56.3
Expense	43.3	45.0	45.6	44.2	45.4	47.8	49.3	49.7	50.0	49.9	49.8	49.4
Capital	5.4	7.7	6.5	6.6	6.2	6.7	7.0	7.2	7.1	7.1	7.0	6.8
Balance	18.6	-0.3	0.5	7.5	9.3	4.7	-0.8	-2.6	-3.7	-4.4	-5.2	-5.6
Balance (after transfer to FGF and excl. investment income)	2.3	-17.5	-17.9	-12.9	-7.7	-13.9	-18.3	-19.8	-20.9	-21.4	-21.8	-21.9
Domestic financing (net)	-0.7	-1.2	6.5	1.8	-2.7	-3.4	4.0	4.4	4.2	5.2	5.0	4.0
External financing (net)	-1.6	18.8	11.4	11.0	10.5	17.3	14.3	15.5	16.7	16.3	16.8	17.9
Nonoil balance excl. investment income (percent of nonoil GDP) ⁴	-102.5	-88.3	-83.5	-85.5	-90.2	-88.4	-86.7	-85.4	-84.5	-83.4	-82.3	-81.1
Excluding oil-related subsidies and benefits (percent of nonoil GDP)	-81.2	-77.5	-74.5	-76.6	-81.6	-80.8	-79.8	-78.8	-78.1	-77.1	-76.2	-75.0
Total gross debt (calendar year) ⁵	3.4	4.7	10.0	20.5	14.8	11.6	15.5	30.4	41.6	55.1	65.2	74.4
Estimated KIA assets	345.6	456.3	476.6	460.4	398.2	407.9	426.8	421.7	415.2	405.0	393.6	380.7
Net government financial assets	342.1	451.7	466.6	439.9	383.3	396.2	411.3	391.4	373.7	349.8	328.3	306.3
	(Percent change; unless otherwise indicated)
Money and credit
Net foreign assets ⁶	3.7	-2.1	8.7	-3.1	10.0	6.2	0.2	0.5	0.8	1.1	0.7	0.3
Claims on nongovernment sector	5.2	7.9	2.5	2.8	3.9	4.4	5.4	6.4	6.4	6.4	6.4	6.3
Kuwaiti dinar 3-month deposit rate (year average; in percent)	0.8	0.8	1.1	1.5	2.3	2.8	...	...	...	...	...	...
Stock market unweighted index (annual percent change)	-3.8	-16.5	-0.2	12.8	11.8	23.2	...	...	...	...	...	...
	(Billions of U.S. dollars, unless otherwise indicated)
External sector
Exports of goods	104.5	54.5	46.5	55.2	72.3	64.6	59.0	59.2	60.2	61.7	63.6	65.6
Of which: nonoil exports	7.0	6.0	5.0	5.6	6.9	6.3	6.1	6.4	6.7	7.2	7.6	8.1
Annual percentage change	-2.8	-14.1	-15.7	11.7	22.3	-8.1	-3.8	5.0	5.5	6.3	6.3	6.5
Imports of goods	-27.0	-26.5	-27.0	-29.5	-31.3	-32.0	-33.1	-34.2	-35.6	-37.1	-38.8	-40.1
Terms of Trade (ratio, annual percent change)	-12.2	-42.5	-12.5	27.1	19.9	-11.1	-7.1	-1.0	0.3	-0.1	0.1	0.7
Current account	54.4	4.0	-5.1	9.6	20.4	12.1	4.2	3.0	2.3	2.0	1.5	1.4
Percent of GDP	33.4	3.5	-4.6	8.0	14.5	8.8	3.1	2.1	1.6	1.3	0.9	0.9
International reserve assets ⁷	32.3	28.3	31.2	33.6	37.2	39.6	40.8	42.2	43.8	45.6	47.2	48.7
In months of next year's imports of goods and services	7.4	6.5	6.6	6.4	6.8	7.0	7.0	7.0	7.0	7.0	7.0	7.0
Memorandum items:
Exchange rate (U.S. dollar per KD, period average)	3.52	3.32	3.31	3.29	3.29	3.29	...	...	...	...	...	...
Nominal effective exchange rate (Percentage change)	1.1	1.5	1.8	0.4	0.2	2.6	...	...	...	...	...	...
Real effective exchange rate (Percentage change)	1.5	2.9	3.2	0.5	-1.9	1.4	...	...	...	...	...	...
Sources: Data provided by the authorities; and IMF staff estimates and projections.
¹ Calculated at market prices.
² Based on fiscal year cycle, which starts on April 1 and ends on March 31.
³ Starting FY2016/17, there has been a reclassification of expenditure items.
⁴ Excludes pension fund recapitalization.
⁵ Excludes debt of Kuwait's SWF related to asset management operations.
⁶ Excludes SDR holdings and IMF reserve position.
⁷ Does not include external assets held by KIA.

[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.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

[3] 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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