IMF says Kuwait’s economic outlook remains favourable

The IMF’s annual article IV consultation agreed that Kuwait’s economic outlook remained favourable and forecast that non-oil sector growth will quicken in 2015, a statement released by the fund on 9 November says.

The report on the consultation forecast that Kuwait’s GDP would grow in 2015, but this projection was based on the assumption Kuwait’s average oil export price would be $101.4 a barrel in 2015. This compares with spot prices in mid-December of $65 a barrel.

The article IV report said non-oil growth will be 3.5 per cent. This was driven by higher domestic consumption and a pick-up in government capital spending and private investment.

“Flat oil production would keep the overall real GDP growth positive at 1.3 per cent,” the report said. “The average inflation rate is forecast to remain at about 3 per cent. The current account and fiscal surpluses are expected to remain high.”

The report says Kuwait’s banks are amply capitalised and liquid with stable profits. Banks have a combined capital adequacy ratio of 18.3 per cent, falling gross non-performing loans (NPLs) of 3.5 per cent and a growing provisioning ratio of 139 per cent.

“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 report said.

The report said non-oil GDP growth is expected to pick up to 4–5 per cent in the medium term, supported by government investment in infrastructure and the oil sector, and by consumption.

“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 programme,” the report said. “It is vital for the government and the parliament to agree on an agenda to place the public investment programme on track, and continue with economic reforms to achieve this growth.”

The report said Kuwait’s fiscal position is 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,” the report said.“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 report said 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, the report said.

“Higher capital spending should be accompanied by improved efficiency of public investment, and integrated with the budget formulation process,” the report said. “(T)he 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.”

The report called for the Central Bank of Kuwait to be given a formal mandate for ensuring financial stability. “Enhanced coordination across regulators would further contribute to financial stability,” the report said.

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 investment companies, engender consolidation, and ensure implementation of the corporate governance code by June 2016, the report said.

Other recommendations included:

  • 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
  • private sector competition, implementing labour market reforms, and limiting government employment could help realign incentives for firms and national workers to promote entrepreneurship and pursue private sector jobs.
  • 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.
  • Further developing domestic financial markets including domestic debt markets would provide alternatives to funding large infrastructure investment projects. Expediting the legal framework for the issuance of sukuk would help deepen this market.
Kuwait: Selected Economic Indicators, 2007–15
2007 2008 2009 2010 2011 2012 2013 2014 2015
Oil and gas sector
Total oil and gas exports (billions of U.S. dollars) 59.1 82.6 48.9 61.8 96.7 113 109 106 103
Average oil export price (U.S. dollars/barrel) 68.4 92.2 61.5 77.7 103 107 106 105 101
Crude oil production (millions of barrels/day) 2.57 2.68 2.26 2.31 2.66 2.98 2.93 2.93 2.94
National accounts and prices
Nominal GDP (market prices, in billions of Kuwaiti dinar) 32.6 39.6 30.5 33.1 42.5 48.7 49.9 50.7 51.1
Nominal GDP (market prices, in billions of U.S. dollars) 115 147 106 115 154 174 176 180 181
 % change
Real GDP (at factor cost) 6 2.5 -7.1 -2.4 10.2 8.3 -0.2 1.3 1.7
Real oil GDP -4.7 6.5 -13 0.5 14.6 12.2 -1.8 0 0.3
Real non-oil GDP 14 0 -3.2 -4.1 3.6 1.9 2.8 3.5 4
CPI inflation (average) 5.5 6.3 4.6 4.5 4.9 3.2 2.7 3 3.5
Unemployment rate (Kuwaiti nationals) 6.1 4.9 3.6 2.9 3.4
Sovereign rating (S&P) AA- AA- AA- AA- AA AA AA

Source: IMF