Business
THE Executive Board of the International Monetary Fund, IMF, concluded the Article IV consultation with Kuwait.
The economy remains in recession due to OPEC+ production cuts, but a recovery has begun in the non-oil sector, and inflation is moderating. Real GDP contracted by 3.6 percent in 2023, led by a 4.3 percent contraction of the oil sector given an OPEC+ production cut, and reinforced by a 1.0 percent contraction of the non-oil sector primarily reflecting lower manufacturing activity.
More recently, real GDP contracted by 1.5 percent (y-o-y) in 2024Q2, driven by a further 6.8 percent contraction of the oil sector that was partially offset by a 4.2 percent rebound of the non-oil sector. Headline CPI inflation declined to 3.6 percent in 2023, reflecting lower core and food inflation. More recently, headline CPI inflation moderated further to 2.6 percent (y-o-y) in September 2024.
Lower oil prices and production have weakened the external and fiscal balances, while financial stability has been maintained. The external position remains strong, with the current account surplus moderating to 31.4 percent of GDP in 2023, and official reserve assets amounting to US$47.6 billion at end-2023, equivalent to 9.2 months of projected imports.
The fiscal balance of the budgetary central government has weakened, swinging to a deficit of 3.1 percent of GDP in FY2023/24. Nonetheless, the fiscal balance of the general government—including estimated SWF investment income and SOE profit transfers—was 26.1 percent of GDP in FY2023/24. Credit growth slowed in 2023 given higher interest rates, but banks maintained strong capital and liquidity buffers, while NPLs remained low and well provisioned for.
The economy is projected to remain in recession under the baseline in 2024, then to recover over the medium term. Real GDP will contract by a further 2.8 percent in 2024 due to additional OPEC+ production cuts, then will expand by 2.6 percent in 2025 as the cuts get unwound. The incipient recovery of the non-oil sector will continue in 2024 alongside a pickup in real credit growth, with non-oil GDP expanding by 2.0 percent despite fiscal consolidation.
Headline CPI inflation will continue to moderate to 3.0 percent in 2024 as excess demand pressure dissipates and imported food prices fall. The current account surplus will moderate further to 27.2 percent of GDP in 2024 as lower oil prices and production reduce the trade surplus. The fiscal deficit of the budgetary central government will increase to 6.6 percent of GDP in FY2024/25 as lower oil revenue more than offsets expenditure rationalization.
The risks around these baseline economic projections are skewed to the downside. The economy is highly exposed to a variety of global risks through its oil dependence, in particular to commodity price volatility, a global growth slowdown or acceleration, and the intensification of regional conflicts. Domestic risks are primarily associated with the implementation of fiscal and structural reforms, which could get further delayed or accelerated. These reforms are needed to diversify the economy away from oil, which would enhance its resilience and promote private investment.
Executive Board Assessment
Executive Directors agreed with the thrust of the staff appraisal. While noting the ongoing recession, Directors welcomed the emergence of recovery in the non-oil sector, moderating inflation, and the significant financial buffers, which provide a cushion against adverse shocks. They highlighted, however, that risks to the outlook are skewed to the downside and that the heavy reliance on oil underscores the need for sustained diversification efforts. Directors welcomed the authorities’ focus on a transition to a more dynamic and diversified economy and emphasized the importance of a comprehensive and well-sequenced package of fiscal and structural reforms.
Directors underscored the need for fiscal consolidation over the medium-term to enhance fiscal sustainability and reinforce intergenerational equity. They called for a balanced approach underpinned by current expenditure rationalization and non-oil revenue mobilization, while increasing infrastructure investment. Directors highlighted the need to extend the CIT to all large domestic companies and adopt the GCC-wide VAT and excise taxes. They stressed the importance of containing the wage bill and phasing out energy and water subsidies, while protecting vulnerable groups. Directors encouraged the implementation of a Medium-Term Fiscal Framework to strengthen budget planning and execution and efforts to expeditiously enact the Financing and Liquidity Law to facilitate orderly fiscal financing.
Directors agreed that the exchange rate peg remains an effective nominal anchor for the economy. Noting that the restrictive monetary policy stance remains appropriate, Directors recommended further strengthening monetary transmission by deepening the interbank and domestic sovereign debt markets.
Directors welcomed that the financial sector remains stable and systemic risks have been prudently managed. They recommended replacing the unlimited guarantee on bank deposits with a limited deposit insurance framework to mitigate moral hazard. Phasing out bank lending rate caps could help to support efficient risk pricing.
Directors underscored the importance of comprehensive, well-sequenced reforms to enhance competitiveness and diversify the economy. Priorities include improving the business environment, enhancing transparency, and further opening the economy. Directors concurred that gradual labor market reforms would incentivize private sector-led growth. Measures to improve the AML/CFT framework identified by the 2024 FATF Mutual Evaluation are crucial for strengthening governance. Directors underscored the need for further progress on climate change adaptation and mitigation. They stressed the importance of addressing shortcomings in data provision, supported by Fund capacity development.
It is expected that the next Article IV consultation with Kuwait will be held on the standard 12-month cycle.
| Table 1. Kuwait: Selected Economic Indicators, 2022-2026 | ||||||
| Projections | ||||||
| 2022 | 2023 | 2024 | 2025 | 2026 | ||
| Output and prices | (Percent change) | |||||
| Real GDP | 5.9 | -3.6 | -2.8 | 2.6 | 2.2 | |
| Oil 1/ | 12.1 | -4.3 | -6.9 | 3.0 | 2.0 | |
| Non-oil 1/ | -0.3 | -1.0 | 2.0 | 2.1 | 2.3 | |
| CPI inflation (average) | 4.0 | 3.6 | 3.0 | 2.4 | 2.2 | |
| Core 2/ | 3.3 | 3.1 | 2.5 | 2.2 | 2.0 | |
| External sector | (Percent of GDP, unless noted otherwise) | |||||
| Current account balance | 34.3 | 31.4 | 27.2 | 22.5 | 19.8 | |
| Official reserve assets (months of imports) | 9.1 | 9.2 | 9.3 | 9.4 | 9.5 | |
| Gross external debt | 35.0 | 39.4 | 39.5 | 41.7 | 42.3 | |
| Government finance 3/ | (Percent of GDP) | |||||
| Revenue 4/ | 69.8 | 78.6 | 75.4 | 74.0 | 73.2 | |
| Oil | 65.5 | 73.7 | 70.2 | 68.5 | 67.3 | |
| Other 4/ | 4.3 | 4.9 | 5.2 | 5.5 | 5.9 | |
| Expenditure | 39.4 | 48.7 | 50.7 | 50.2 | 49.7 | |
| Net lending (+) / borrowing (-) 4/ | 30.4 | 29.9 | 24.7 | 23.8 | 23.4 | |
| Budgetary central government | 7.2 | 0.9 | -5.8 | -7.9 | -8.8 | |
| Gross government debt 5/ | 2.9 | 3.2 | 7.3 | 12.9 | 16.3 | |
| Money and credit | (Percent change) | |||||
| Credit to nonfinancial private sector | 8.6 | 1.8 | 3.9 | 4.7 | 5.1 | |
| Broad money: M2 | 6.5 | 1.0 | 2.7 | 4.6 | 5.1 | |
| Memorandum items | ||||||
| Nominal GDP (US$ billions) | 184.0 | 163.7 | 159.1 | 158.6 | 162.2 | |
| Population (millions) | 4.8 | 4.9 | 5.0 | 5.1 | 5.2 | |
| GDP per capita (US$) | 38,380 | 33,321 | 31,753 | 31,029 | 31,104 | |
| Sources: Kuwaiti authorities; IMF staff estimates. | ||||||
| 1/ Factor cost basis. | ||||||
| 2/ Excludes food and non-alcoholic beverages. | ||||||
| 3/ Calendar year basis. | ||||||
| 4/ Includes estimated KIA investment income and GRF profit transfers from the KPC and CBK. | ||||||
| 5/ Assumes resumption of government debt issuance from FY2024/25. | ||||||
[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] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.
A.I
Dec. 10, 2024
Tags: IMF International Monetary Fund OPEC+
