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Kuwait 2023 Article IV Consultation Summary

Core Content

The International Monetary Fund (IMF) concluded the 2023 Article IV consultation with Kuwait, highlighting the country's ongoing economic recovery and improved fiscal and external balances. The consultation took place from May 16 to 30, 2023, with the staff report finalized on July 20, 2023. The Executive Board endorsed the Staff Appraisal without a formal meeting, emphasizing the need for continued reforms and policy adjustments.

Main Economic Developments

• Economic Recovery:

  • Non-oil GDP growth rose to 3.4% in 2021 and 4.0% in 2022, driven by domestic and external demand recovery.
  • Overall real GDP growth rebounded to 8.2% in 2022, supported by a pickup in oil production.
  • In 2023, non-oil GDP growth is expected to remain robust, while oil GDP growth may decline due to production cuts.

• Inflation:

  • Headline inflation peaked at 4.7% in April 2022 but has since receded to 3.7% in May 2023.
  • Core inflation (excluding food and transport) has been trending down since 2022Q2, reaching 3.0% in May 2023.
  • Subsidies on basic food items and price caps on gasoline, along with tighter monetary policy, helped contain inflation.

• Fiscal Position:

  • The overall fiscal balance turned into a surplus of 6.5% of GDP in FY2021/22.
  • It improved further to 23.4% of GDP in FY2022/23, mainly due to high oil revenues and expenditure restraint.
  • The non-oil fiscal balance improved by about 2 percentage points of non-oil GDP to -88.3% in FY2022/23.

• External Sector:

  • The current account surplus reached 33.8% of GDP in 2022.
  • Official reserve assets stood at US$48.2 billion as of end-2022, equivalent to 10.4 months of prospective imports.
  • The external position is weaker than the level implied by fundamentals and desirable policies, partly due to inadequate public saving of oil revenue windfalls.

Key Risks and Challenges

• Global Risks:

  • Volatility in oil prices and production poses two-sided risks to growth, inflation, and fiscal and current account balances.
  • A deeper global growth slowdown, due to monetary tightening or banking sector stress in advanced economies, could adversely impact Kuwait's economy.

• Domestic Risks:

  • Delays in fiscal and structural reforms could lead to procyclical fiscal policy and undermine investor confidence.
  • Political gridlock between the government and Parliament continues to hinder reform efforts.
  • The need to diversify the economy and address climate transition risks remains urgent.

Policy Recommendations

A. Fiscal Policy

• Fiscal Consolidation:

  • A growth-friendly fiscal consolidation is necessary to reinforce fiscal sustainability.
  • Revenue measures should include introducing GCC-wide excises and VAT, as well as expanding corporate income taxation.
  • Expenditure measures should focus on curbing the wage bill and gradually phasing out energy subsidies.
  • A clear fiscal anchor, such as a target for the non-oil structural primary balance, is recommended to support medium-term fiscal stability.

• Legal Framework:

  • Passage of the Public Debt Law is critical for orderly fiscal financing and the development of the local debt market.
  • Strengthening fiscal governance and transparency is essential to improve accountability and credibility.

B. Monetary and Financial Policies

• Monetary Policy:
  • The fixed exchange rate regime, based on a peg to an undisclosed basket of currencies, remains appropriate.
  • The Central Bank of Kuwait (CBK) should continue to monitor dollar funding liquidity and credit quality.
  • Adjusting the composition of capital requirements could 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.
  • A limited deposit insurance framework should replace the existing blanket guarantee to address moral hazard.

C. Structural Reforms

• Labor Market Reforms:

  • Reforms are needed to promote a market-aligned wage structure and improve labor market flexibility.
  • Compensation and working conditions should be gradually aligned between the public and private sectors.
  • Labor policies should be harmonized for nationals and expatriates.

• Business Environment:

  • Reforms to strengthen governance and the business environment are necessary to enhance competition and attract investment.
  • Relaxing foreign ownership restrictions and improving public land allocation for commercial development with longer lease terms are recommended.

• Social Safety Nets:

  • Social safety net reforms should proceed in parallel with economic restructuring to ensure adequate support for nationals.

• Anti-Corruption:

  • Continued implementation of the anti-corruption strategy is vital to build market confidence and support other reforms.

Key Statistics (Selected Economic Indicators, 2019–2028)

Conclusion

The IMF Executive Board concluded that while Kuwait's economic recovery continues and its fiscal and external balances have strengthened, the risks to the macroeconomic outlook are elevated and tilted to the downside. The country is in a strong position to undertake necessary reforms, but political gridlock and delays in implementing structural changes remain significant challenges. The IMF emphasized the importance of a robust fiscal framework, improved financial stability measures, and comprehensive structural reforms to enhance non-oil private sector-led growth and support long-term economic sustainability.