On November 25, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kuwait.¹

High oil prices and increased production have enabled the government to continue to record high fiscal and external surpluses and build strong buffers. Overall real non-oil gross domestic product (GDP) growth is projected to increase modestly to 3 percent in 2013, driven by an increase in domestic consumption and pick-up in public investment. A slight reduction in oil production would bring down total real GDP growth below 1 percent. The overall average consumer price inflation (CPI) is projected at 3 percent in 2013. The fiscal and external surpluses are projected at 27 percent of GDP and 39 percent of GDP, respectively, in 2013, reflecting high oil prices. Monetary policy has remained accommodative and bank credit growth has picked up.

Bank profitability has remained stable and soundness indicators appear strong. Banks had an average capital adequacy ratio of 18.3 percent (Tier 1 capital of 16.6 percent) at end-June 2013. Gross nonperforming loans declined to 4.6 percent at end-June 2013 from 5.2 percent at end-2012. Banks had a provisioning ratio of 107 percent at end-June 2013. Some investment companies continued to record losses in 2012, though of a lower order compared to 2008; a few of these are still deleveraging and restructuring their balance sheets.

The economic outlook is expected to improve further in 2014 and over the medium term. In 2014, non-oil growth is expected to increase to 4.4 percent supported by public capital spending, driving average inflation to 3.5 percent. A constant level of oil production would keep total real GDP growth below 3 percent. Fiscal and current account surpluses are expected to remain large in 2014. Over the medium term, non-oil growth is projected to accelerate to about 5 percent as large infrastructure investments are expected to support the growth momentum. A moderate increase in oil production is expected to further support overall growth. Inflation is projected to increase slightly as growth picks up. The fiscal and current account surpluses are projected to taper if spending continues on the current growth trajectory. The main downside risk to the outlook is a sustained fall in oil prices.

Executive Board Assessment²

Executive Directors welcomed Kuwait’s recent economic performance. High oil prices and increased production have enabled the build-up of large fiscal and external buffers, and the non-oil sector is continuing its recovery. Nevertheless, the outlook is subject to risks from global and regional developments, and the economy remains highly oil-dependent. Directors therefore encouraged the authorities to make further efforts to promote economic diversification, particularly in areas with potential for greater national employment.

Directors noted that while the fiscal position is strong, a sustained period of low oil prices could deplete fiscal surpluses. To contain risks, free up resources for increased capital spending, and to save for future generations, Directors agreed that it will be important to restrain current expenditure growth, including the public sector wage bill and generalized subsidies, and to enhance non-oil revenues. They considered that strong fiscal frameworks will be needed to guide public spending in the medium term. In this context, strengthening the macro-fiscal unit would support the development of a medium-term budget framework and greater efficiency of public spending.

Directors agreed that the current accommodative monetary stance remains appropriate and the exchange rate peg to a basket has provided a strong and credible monetary anchor. They noted that the banking system is well regulated and resilient to shocks, and welcomed continued steps to strengthen financial regulation and supervision. Continuous refining of the macroprudential toolkit and greater central bank autonomy would enable the authorities to better deal with systemic risk. Directors cautioned that the recent large consumer debt relief program could give rise to moral hazard. Noting the continued weak balance sheets of some investment companies, they called for the completion of the restructuring process and a review of the sector.

Directors welcomed the recent passage of important legislation that will enhance the investment climate and forge partnerships with the private sector, and encouraged further steps in this direction. To foster Kuwaiti employment in the private sector, Directors underscored the need to contain public sector wage and employment growth, enhance educational quality, further promote female labor force participation, and create an enabling environment for small and medium enterprises. Well-functioning local debt markets could help the diversification process. Directors also encouraged continued efforts to improve effectiveness in public administration, and the establishment of an independent Financial Intelligence Unit.