IMF Concludes 2021 Article IV Consultation with Kuwait

WASHINGTON, DC – March 14, 2022: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kuwait.[1]

The authorities responded swiftly and decisively to the COVID-19 crisis with social distancing restrictions and fiscal, monetary and financial policy support measures. In 2021, a high rate of vaccination was achieved. An economic recovery is underway, supported by higher oil prices and relaxation of mobility restrictions. Non-oil GDP growth is estimated at 3.4 percent in 2021 and is projected to rise slightly to 3.5 percent in 2022, as domestic activity gradually recovers along with the global environment. Oil production is projected to rebound as OPEC+ quotas are relaxed. Overall, GDP is projected to grow around 2.7 percent over the medium term. Inflation is estimated at 3.4 percent in 2021 given increases in food prices and costs of travel-related services and is projected to rise to 4.4 percent in 2022, reflecting the impact of the global supply chain disruptions before declining to 2.4 percent over the medium term.

The fiscal deficit increased to an estimated 16.6 percent of GDP in FY 2020/21. In addition to fiscal stimulus in the wake of the COVID-19 crisis, the wider deficit reflects a 13.9 percent of GDP decline in oil revenues and a slump in economic activity. In the absence of a public debt law to permit borrowing, or legal authority to draw from the Future Generations Fund (FGF), financing was based on drawdown of the liquid assets of the much smaller General Reserve Fund (GRF). In FY 2021/22, the headline fiscal balance is expected to improve to a surplus of 3.7 percent of GDP, boosted by the rebound in oil revenues, together with spending cuts announced in August 2021 and significantly higher nominal GDP reflecting the impact of higher oil prices on the GDP deflator. Supported by higher oil exports, the 2021 current account surplus is projected to increase to 16.1 percent of GDP.

Kuwait’s financial sector has weathered the crisis well. Banks are well-capitalized and highly liquid. As of 2021Q3, bank capital adequacy ratio stood at 18.6 percent, well above the required minimum level. Nonperforming loans net of specific provisions remain low, while loan-loss provisioning is high.

Substantial uncertainties surround the outlook, with the balance of risks tilted to the downside. The rapid spread of the new Omicron variant points to renewed global challenges in controlling the pandemic. Delays in fiscal and structural reforms could amplify the risk of procyclical fiscal policies, undermine investor confidence, hinder the progress toward more economic diversification and higher competitiveness, and foster social pressures. Volatility in oil prices would have a significant impact on the outlook and macroeconomic balances. Upside risks to the outlook would come from a stronger rebound in global activity than anticipated, which could also boost oil revenues. A resolution to political gridlock and strong fiscal consolidation could considerably improve investor sentiment.

Executive Board Assessment:

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for their swift and decisive policy actions and strong vaccination efforts, that helped alleviate the economic and social impacts of the pandemic and laid groundwork for a gradual recovery. Notwithstanding higher oil prices, which are expected to boost fiscal revenues and growth, risks to the outlook remain elevated. Directors emphasized that going forward the authorities will need to focus their efforts on challenges related to heavy reliance on the oil sector and fiscal sustainability.

Directors called for comprehensive fiscal consolidation to reinforce fiscal sustainability and support intergenerational equity. They encouraged the authorities to consider introducing a VAT and excises duties, expanding corporate tax to domestic firms, and implementing a property tax to boost revenues. On the spending side, curtailing the wage bill and consolidating subsidies and social benefits will be of the essence. Directors stressed the importance of passing the new public debt law and establishing a robust medium-term fiscal framework with a clear fiscal anchor to limit procyclicality of policies, enhance fiscal credibility, reduce fiscal risks, and improve the capacity to manage adverse shocks. Strengthening fiscal governance and transparency would significantly improve public financial management.

Directors agreed that the pegged exchange rate regime remains an effective anchor for the economy. They welcomed the banking system’s sound position and commended the Central Bank of Kuwait for prudent regulation and supervision. Given the uncertainties to the outlook, they encouraged continued forward-looking assessment of bank asset quality and accompanying measures to support strong capital and liquidity buffers to safeguard the resilience of the financial system. Directors emphasized that relaxing interest ceilings on commercial loans and enhancing the credit information infrastructure would help improve access to finance, including for SMEs. They encouraged further efforts to strengthen the AML/CFT framework.

Directors emphasized that a comprehensive set of well-sequenced structural reforms, including to the social safety net, labor market, regulatory framework, and business environment, are needed to diversify away from hydrocarbon and promote private sector-led growth. Addressing climate challenges, including through supporting green infrastructure while strengthening energy efficiency standards, would further support these efforts. Forceful implementation of the anti-corruption strategy and action plan will be critical to strengthen governance and improve the business environment.

It is expected that the next Article IV consultation with Kuwait will be held on the standard 12-month cycle.


[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.

Table 1. Kuwait: Selected Economic Indicators, 2016-27

Prel.

Est.

Projections

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

Oil and gas sector

Total oil and gas exports (billions of U.S. dollars)

41.5

49.6

65.3

58.7

35.8

59.1

78.9

74.6

71.4

70.5

71.5

71.9

Average crude oil export price (U.S. dollars/barrel)

39.5

51.6

68.7

64.0

41.5

69.1

82.4

75.3

70.9

68.1

66.3

65.5

Crude oil production (millions of barrels/day)

2.95

2.70

2.74

2.68

2.44

2.43

2.72

2.77

2.83

2.88

2.94

3.00

(Annual percentage change, unless otherwise indicated)

National accounts and prices

Nominal GDP (market prices, in billions of Kuwaiti dinar)

33

37

42

41

32

41

49

49

49

50

51

53

Nominal GDP (market prices, in billions of U.S. dollars)

109

121

138

136

106

135

163

161

161

164

169

174

Real GDP 1

2.9

-4.7

2.4

-0.6

-8.9

1.3

8.2

2.6

2.6

2.6

2.6

2.7

Real oil GDP (including refineries)

3.9

-9.0

2.1

-0.1

-9.8

-0.3

12.0

2.0

2.0

2.0

2.0

2.0

Real nonoil GDP 1

1.4

1.7

2.9

-1.1

-7.5

3.4

3.5

3.5

3.5

3.5

3.5

3.5

CPI inflation (average)

3.5

1.5

0.6

1.1

2.1

3.4

4.4

2.3

2.3

2.4

2.4

2.4

CPI inflation (eop)

2.6

1.1

0.4

1.2

3.0

4.1

3.0

2.8

2.4

2.4

2.4

2.4

(Percent of GDP at market prices)

Budgetary operations 2

Revenue

53.6

53.3

61.7

55.9

44.9

53.8

56.9

55.1

53.7

52.5

50.4

48.6

Oil

34.4

38.0

44.3

39.3

25.4

36.0

40.0

37.8

36.0

34.7

32.6

30.9

Nonoil, of which:

19.2

15.3

17.4

16.7

19.5

17.8

16.8

17.3

17.7

17.8

17.8

17.7

Investment income

15.5

11.0

12.3

11.9

14.5

13.6

12.6

12.9

13.2

13.3

13.2

13.2

Expenditures 3

52.2

51.0

53.2

55.1

61.5

50.1

44.5

46.6

48.1

48.7

49.3

49.8

Expense

45.6

44.4

46.9

49.3

56.5

44.6

38.7

40.5

41.8

42.5

43.1

43.5

Capital

6.5

6.6

6.3

5.9

5.0

5.5

5.9

6.1

6.2

6.3

6.3

6.2

Balance

1.5

2.3

8.5

0.8

-16.6

3.7

12.3

8.5

5.6

3.8

1.1

-1.2

Balance (after transfer to FGF and excl. investment income)

-17.9

-12.9

-8.8

-15.5

-31.1

-9.9

-0.3

-4.4

-7.6

-9.5

-12.2

-14.4

Domestic financing (net)

6.5

1.8

-2.8

-4.4

-1.8

3.4

-0.3

1.5

1.8

2.6

3.7

3.4

External borrowing and drawdown on GRF (net)

11.4

11.1

11.5

19.9

32.9

6.6

0.6

2.9

5.8

6.9

8.5

11.0

Nonoil balance excl. investment income (percent of non-oil GDP) 4

-83.6

-86.6

-95.5

-94.2

-98.7

-95.3

-90.1

-88.9

-87.5

-86.0

-85.2

-84.5

Excluding oil-related subsidies and benefits (percent of non-oil GDP)

-74.6

-77.6

-85.6

-86.8

-90.4

-85.1

-81.1

-80.7

-80.0

-78.9

-78.3

-77.8

Total gross debt (calendar year) 5

10.0

20.5

15.1

11.6

11.7

8.8

13.2

13.6

17.9

25.0

33.7

42.2

Estimated KIA assets

476.6

460.4

405.3

431.0

597.6

544.8

472.1

497.4

517.7

530.0

534.4

535.7

Net government financial assets

466.6

439.9

390.2

419.4

585.9

535.9

458.9

483.8

499.8

505.0

500.7

493.5

(Percent change; unless otherwise indicated)

Money and credit

Net foreign assets 6

8.7

-3.1

10.0

6.2

8.7

-13.7

7.6

2.9

3.0

3.0

2.0

0.5

Claims on nongovernment sector

2.5

2.8

3.9

4.4

3.6

6.2

6.8

5.7

5.8

5.9

5.5

5.5

Kuwaiti dinar 3-month deposit rate (year average; in percent)

1.1

1.5

2.3

2.8

1.4

1.1

Stock market unweighted index (annual percent change)

-0.2

12.8

11.8

23.7

-11.7

27.0

(Billions of U.S. dollars, unless otherwise indicated)

External sector

Exports of goods

46.5

55.2

72.1

64.7

40.1

64.5

85.4

81.5

78.7

78.2

79.6

80.6

Of which: nonoil exports

5.0

5.6

6.8

6.0

4.3

5.4

6.5

6.8

7.2

7.7

8.1

8.6

Annual percentage change

-15.7

11.7

19.9

-11.9

-28.0

25.9

19.5

6.0

6.0

6.0

6.0

6.0

Imports of goods

-27.0

-29.5

-31.1

-29.4

-24.6

-30.1

-33.4

-35.5

-37.4

-39.4

-41.3

-43.4

Terms of Trade (ratio, annual percent change)

-12.5

27.1

17.0

3.8

-19.2

51.3

11.4

-8.3

-6.4

-4.0

-2.5

-2.6

Current account

-5.1

9.6

19.9

17.1

3.4

21.8

37.3

31.5

26.9

24.8

24.8

24.9

Percent of GDP

-4.6

8.0

14.4

12.5

3.2

16.1

22.9

19.6

16.7

15.1

14.7

14.3

International reserve assets 7

31.2

33.6

37.2

39.9

48.3

45.1

50.5

54.0

57.9

61.8

65.2

67.8

In months of next year’s imports of goods and services

6.6

6.4

8.0

11.5

11.3

9.0

9.6

9.9

10.1

10.4

10.5

10.5

Memorandum items:

Exchange rate (U.S. dollar per KD, period average)

3.31

3.30

3.31

3.29

3.27

3.29

Nominal effective exchange rate (Percentage change)

1.8

0.4

0.2

2.6

-0.3

-0.5

Real effective exchange rate (Percentage change)

3.2

0.5

-1.9

1.7

0.1

-0.1

Sources: Data provided by the authorities; and IMF staff estimates and projections.

1Calculated at market prices.

2Based on fiscal year cycle, which starts on April 1 and ends on March 31.

3Starting FY2016/17, there has been a reclassification of expenditure items.

4Excludes pension fund recapitalization.

5 Excludes debt of Kuwait’s SWF related to asset management operations.

6Excludes SDR holdings and IMF reserve position.

7 Does not include external assets held by KIA.

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