The latest IMF country report for Kuwait reports that the sustained decline in oil prices led to a deterioration in fiscal reserves. The balance declined from a surplus of over 2.4 per cent of GDP in 2014 to a deficit of about 18 per cent of GDP (about KD 6 billion) in 2015 leading to a need for financing for the first time since 1998.
The report states, “Despite efforts to contain government spending, the fiscal and external accounts have deteriorated markedly and budget financing needs have emerged. The authorities’ principal measure of the fiscal balance—which excludes mandatory transfers to the Future Generations Fund (FGF) and investment income and better reflects the government’s gross financing challenge—has swung into a large deficit (17.5 per cent of GDP in 2016/17). Even when including investment income and before transfers to the FGF, fiscal surpluses have vanished.”
To finance the deficit Kuwait has drawn on the General Reserves Fund (GRF), and to a lesser extent domestic bond issues. With oil prices projected to remain low, the fiscal balance is projected to remain in deficit, and financing needs will remain large in the coming years according to the report.
However the IMF adds that Kuwait is well positioned to mitigate the impact of lower oil prices on the economy. Nonoil growth is expected to regain momentum to about four per cent over the medium term supported by a continued improvement in project implementation under the five-year Development Plan. But low oil prices call for steadfast implementation of reforms with the IMF expressing support for the government’s six-pillar strategy focused on reforming public finances and promoting a greater role for the private sector in generating growth and jobs for nationals.
Furthermore, the recent gasoline and utility price reforms, and measures to facilitate business licencing will help ease the fiscal position.
Economic activity in the nonoil sector has continued to expand, albeit at a slower pace, reflecting the impact of lower oil prices. Nonhydrocarbon growth slowed from five per cent to an estimated 3.5 per cent in 2015, as higher uncertainty weighed on consumption. Inflation, which has been hovering at around 3 per cent, is set for an uptick to about 3.5 this year, reflecting the recent gasoline price increases.
Meanwhile, the financial sector has remained sound and credit conditions favourable. As of June 2016, banks featured high capitalisation (capital adequacy ratio of 17.9 per cent), robust profitability (return on assets of 1 per cent), low nonperforming loans (ratio of 2.4 per cent), and high loan-loss provisioning (206 per cent coverage). Bank liquidity has been comfortable. Credit to the private sector has been increasing at a solid pace, driven mainly by instalment loans.
The IMF recommends that steps can be taken to further strengthen financial sector resilience. A formal framework for operationalizing macro-prudential measures, reforms to facilitate debt recovery, developing a liquidity forecasting framework, and strengthening the crisis management framework, including by introducing a special resolution regime for banks and a deposit insurance mechanism, would help further enhance financial sector resilience and ensure orderly resolution of banks in the event of stress.
“In light of the potential risks from a sustained further decline in oil prices and given the financial sector risks inherent to a largely undiversified economy, the CBK initiatives to enhance financial sector surveillance are welcome,” states the report.
The IMF praised the peg to an undisclosed basket of currencies saying it is appropriate and can be further underpinned by fiscal adjustment. The peg has provided an effective nominal anchor. A moderate current account gap can be largely closed by increasing fiscal savings as recommended over the medium term.
The IMF makes some recommendations for the labour market, stating, “Labour market reforms and efforts to promote the role of the private sector are important to foster diversification and boost job creation for nationals. Better aligning labour market incentives is necessary to encourage nationals to take on private sector jobs and private firms to create opportunities for them. Greater use of privatisation and partnerships with the private sector will help boost productivity, private sector investment and job creation for nationals. Relying on stronger legal and institutional frameworks that foster competition and reduce hidden costs and contingent liabilities for the government is important for the success of this strategy. This should be combined with further steps to improve the business environment, including reforms to facilitate access to land and finance, reduce the burden of administrative procedures and excessive regulations, foster competition, and facilitate SMEs’ access to finance.”
