IMF Executive Board Concludes 2023 Article IV Consultation with Kuwait
August 23, 2023
WASHINGTON, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kuwait [1] and considered and endorsed the Staff Appraisal on a lapse-of-time basis without a meeting.
Benefiting from high oil prices, Kuwait’s economic recovery continues, and inflation is contained. Non-oil GDP growth rose to an estimated 3.4 percent in 2021, benefiting from a recovery in domestic and external demand, and strengthened further to 4.0 percent in 2022. This, together with a pickup in oil production, resulted in a rebound in overall real GDP growth to 8.2 percent in 2022. While oil GDP growth is expected to decline in 2023 due to oil production cuts, non-oil GDP growth would stay robust, driven by domestic demand, and is foreseen to remain steady over the medium term. After peaking at 4.7 percent y-o-y in April 2022, headline inflation has receded to 3.7 percent in May 2023. Subsidies on basic food items such as rice and sugar, and caps on domestic gasoline prices, helped contain inflation, as did tighter monetary policy. Core inflation (excluding food and transport items) has also been trending down since 2022Q2.
The fiscal and external balances have strengthened, and external buffers are increasing. The overall fiscal balance turned into a surplus of 6.5 percent of GDP in FY2021/22, while the non-oil balance (less investment income) improved by about 9 percentage points of non-oil GDP to -90.1 percent, and fiscal financing needs fell substantially. The fiscal surplus is estimated to have improved to 23.4 percent of GDP in FY2022/23, benefiting mainly from high oil revenues, but also from expenditure restraint which helped increase the non-oil balance by about 2 percentage points of non-oil GDP to about -88.3 percent. Helped by higher oil revenue, the current account surplus is estimated to have reached 33.8 percent of GDP in 2022 and is projected to remain high in 2023. Official reserve assets stood at US$48.2 billion as of end-2022 (10.4 months of prospective imports, 106.5 percent of the IMF Assessing Reserve Adequacy metric).
Financial soundness indicators and the authorities’ stress tests suggest the banking system is stable and resilient to severe shocks. Banks are well-capitalized and highly liquid. Non-performing loans remain sufficiently provisioned. Profitability is also recovering.
The risks surrounding the baseline macroeconomic outlook are elevated and are tilted to the downside. Volatility in oil prices and production—arising from global factors—poses two-sided risks to growth and inflation, as well as to the fiscal and current account balances. A deeper global growth slowdown, possibly caused by further monetary policy tightening or banking sector stress in major advanced economies, would adversely impact Kuwait’s economy. Deepening geo-economic fragmentation would reduce potential growth, while structurally worsening the fiscal and current account balances. As for domestic risks, delays in needed fiscal and structural reforms could amplify the risk of procyclical fiscal policy and undermine investor confidence. Such delays would also hinder progress towards diversifying the economy, making it more vulnerable to climate transition risks. On the upside, a resolution to the political gridlock could accelerate needed fiscal and structural reforms, boosting investor confidence, and stimulating private investment.
Executive Board Assessment[2]
The economic recovery continues but risks to the outlook remain substantial. Non-oil growth remains robust in 2023, with declining headline inflation and a large current account surplus. Nonetheless, elevated risks surround the baseline economic outlook, especially those associated with volatility in oil prices and production arising from global factors. Given Kuwait’s large fiscal and external buffers, it can undertake needed reforms from a position of strength. However, political gridlock between the government and Parliament could continue to delay reforms. Resolving the impasse is critical to accelerate reform momentum, and to thereby boost growth and diversify the economy.
Comprehensive and growth-friendly fiscal consolidation is needed to reinforce fiscal sustainability and support intergenerational equity. The fiscal expansion envisaged in the draft FY 2023/24 budget is appropriate given the negative non-oil output gap. Starting next fiscal year, fiscal consolidation should aim to increase non-oil revenue and tackle current spending rigidities while increasing capital outlays to raise potential growth. Revenue measures could include introducing the GCC-wide excises and VAT, as well as expanding corporate income taxation to cover domestic firms. Expenditure measures should focus on curtailing the wage bill and gradually phasing out energy subsidies while improving targeted income support.
A robust medium-term fiscal framework with a clear fiscal anchor would support consolidation. Given the sensitivity of the headline fiscal balance to oil prices, a target for the non-oil structural primary balance could serve as an appropriate fiscal anchor. Conducting fiscal policy under a robust
framework could help resist spending pressures when oil prices rise, preventing pro-cyclical spending and ensuring durable adjustment gains.
Strengthening fiscal governance and transparency would boost accountability and policy credibility. Reforms should aim to enhance fiscal data coverage and reporting, strengthen corporate governance, and enhance public procurement. They should also reinvigorate the integrated asset-liability management framework, to assess the costs and benefits of investment and borrowing decisions, as well as broader macro-financial implications, in a holistic manner.
The fixed exchange rate regime—based on the peg to an undisclosed basket of currencies—remains an appropriate framework for monetary policy. This framework provides the CBK with some monetary policy autonomy and has enabled it to deliver low and stable inflation for many years. Fiscal consolidation to support intergenerational equity and structural reforms to diversify the economy should be pursued to strengthen the external position (which is weaker than the level implied by fundamentals and desirable policies) and support the peg.
The banking system is stable and systemic risk is contained, supported by a strong prudential framework that should continue to be enhanced. To proactively manage emerging financial stability risks arising from global monetary policy tightening, the CBK should continue to closely monitor banks’ dollar funding liquidity and credit quality. Now that all pandemic-related financial regulatory support measures have been unwound, the CBK should consider adjusting the composition of capital requirements to make macroprudential policy more countercyclical. The interest rate ceiling on commercial loans should be phased out to support efficient risk pricing and credit supply to SMEs, while the existing blanket guarantee on bank deposits should be replaced with a limited deposit insurance framework to address moral hazard.
A structural reform package is needed to boost labor productivity and non-oil private sector-led growth. Strong non-oil private sector-led growth is needed to absorb new labor market entrants. This requires a comprehensive set of reforms that tackle deep-rooted structural challenges. To incentivize Kuwaitis to seek careers in the private sector, labor market reforms to promote a market-aligned wage structure are needed. In particular, compensation and working conditions should be gradually aligned across the public and private sectors, while labor market policies should be steadily harmonized between nationals and expatriates. Social safety net reforms should proceed in parallel to ensure adequate social protection for nationals during the transition period. In the meantime, it is critically important to press ahead with reform measures that strengthen governance and the business environment to enhance competition and promote investment, including relaxing foreign ownership restrictions on firms and improving public land allocation for commercial development with longer lease terms. Investing in human capital would also promote long-term productivity growth.
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Kuwait: Selected Economic Indicators, 2019–28
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[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
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