Press Release No. 14/557

Press Release: IMF Executive Board Concludes 2014 Article IV Consultation with Kuwait

December 9, 2014

On December 5, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Kuwait and considered and endorsed the staff appraisal without a meeting.²

Economic activity picked up in 2014. Non-oil growth is projected at 3.5 percent driven by a combination of continued increase in domestic consumption and some pick-up in government capital spending and private investment. Flat oil production would keep the overall real GDP growth positive at 1.3 percent. The average inflation rate is forecast to remain at about 3 percent. The current account and fiscal surpluses are expected to remain high.

Banks are amply capitalized and liquid with stable profits. Banks have a combined capital adequacy ratio of 18.3 percent, falling gross non-performing loans (NPLs) of 3.5 percent (driven by a combination of lower NPLs in real estate and equity, a pick-up in loan growth and continued write-offs of loans), and a growing provisioning ratio (general plus specific provisions) of 139 percent. Risks to the financial system from investment companies are contained, although a few companies continue to make losses and deleverage and restructure their balance sheets and operations.

The medium-term economic outlook is favorable. Non-oil GDP growth is expected to pick up to 4.0–5.0 percent in the medium term, supported by government investment in infrastructure and the oil sector, and by consumption. The fiscal and current account surpluses are projected to be significantly lower in the baseline scenario. The main downside risk to the outlook arises from a sustained decrease in oil prices as well as slow implementation of the Development Plan (public investment program).

Executive Board Assessment

In concluding the 2014 Article IV Consultation with Kuwait, Executive Directors endorsed staff’s appraisal, as follows:

The economic outlook for Kuwait remains favorable. Non-oil GDP growth in Kuwait is expected to further accelerate to 4.0 percent in 2015, and is projected to increase to 4.5–5.0 percent in the medium term in the baseline scenario. It is vital for the government and the parliament to agree on an agenda to place the public investment program on track, and continue with economic reforms to achieve this growth.

The fiscal position is currently strong but restraint in current spending is needed to preserve buffers and increase saving for future generations. A medium-term fiscal strategy is required to drive reforms, the elements of which would include containing current expenditure growth, particularly subsidies and wages, prioritizing capital expenditure, and increasing non-oil revenue. Subsidy reform needs to be supported by an effective communication strategy raising awareness about the cost of subsidies and the benefits of reform, and accompanied by targeted mitigating measures, especially to protect the vulnerable segment of the population. The proposed wage reform would be more effective if it operates within overall expenditure limits, aligns incentives for reducing the wage gap between public and private sector jobs and contains public employment.

Prioritizing capital expenditure towards social and physical infrastructure projects would help strengthen growth. Higher capital spending should be accompanied by improved efficiency of public investment, and integrated with the budget formulation process. Drawing lessons from experience with the current Development Plan (2010–14), which fell short of targets, the new plan (2015–19) should set realistic targets that are consistent with the overall economic objectives and increase safeguards to ensure better implementation. A cost-benefit analysis of mega projects is warranted.

A key challenge will be to strengthen the fiscal policy framework to support fiscal reforms. Medium-term fiscal framework would support implementation of the desirable fiscal measures. Strengthening the macro-fiscal unit would facilitate preparation of macroeconomic forecasts and improve revenue and expenditure projections. Other elements would include combining the medium-term frameworks with the annual budget process, while preparing for an adoption of fiscal rules. The implementation of a public investment management system would help increase the efficiency of public investment.

While the current regulatory framework has effectively contained financial risks, enhancing the macroprudential policy framework would further strengthen systemic stability. Effective and prudent regulation by the central bank has ensured high capitalization and provisioning and maintained banking system stability. Developing a formal macroprudential framework that gives the CBK a formal mandate for ensuring financial stability and enhanced coordination across regulators would further contribute to financial stability. The macroprudential policy framework should consider further strengthening the central bank’s early warning system for identifying and monitoring systemic risks, with macro stress testing being an integral part of systemic surveillance, and the use of macroprudential policies in a countercyclical manner.

The systemic risk from investment companies (ICs) is contained, but strengthened oversight and governance, and some consolidation is required to prevent potential financial stability risks. The completion of the new draft of corporate bankruptcy law, with support from an effective oversight and communication campaign by the Capital Markets Authority, could help expedite the restructuring of some loss-making ICs, engender consolidation, and ensure implementation of the corporate governance code by June 2016.

Economic diversification into areas with potential for national employment should constitute a key policy priority. Improving the business environment, infusing stronger governance in public administration, and providing a greater role for small and medium-sized enterprises, are needed to take this agenda forward. In addition a number of policy measures such as strengthening private sector competition, implementing labor market reforms, and limiting government employment could help realign incentives for firms and national workers to promote entrepreneurship and pursue private sector jobs. For instance, a review of competition policy law and its implementation and of policies related to procurement procedures and barriers to entry of new firms could help increase competition. Diversification could benefit from integrating the private sector through backward and forward linkages in upstream and downstream input industries.

Further developing domestic financial markets will help the diversification process and reduce concentration risks. Developing domestic debt markets would bring important benefits, such as providing alternatives to funding large infrastructure investment projects. Expediting the legal framework for the issuance of sukuk would help deepen this market.

Considerable progress has been made in improving the quality and availability of key economic data. Staff encourages the authorities to further their efforts in improving all areas of economic data, particularly in the areas of government finance, national accounts and real estate market statistics, including through cooperation with GCCStat.

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.