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Kuwait Outlook ‘broadly positive’: IMF

Middle East : 18 June 2012

Source: The Saudi Gazette

The Executive Board of the International Monetary Fund (IMF) which recently concluded the Article IV consultation with Kuwait, painted a “broadly positive” outlook for the country this year.

The board said the country’s economic recovery is expected to strengthen, led by high government expenditure – particularly wages and capital expenditure. High fiscal and external surpluses are expected to persist. Inflation is projected to moderate slightly due to a decline in global food inflation. Low implementation rates of the capital budget and legislative bottlenecks could, however, dampen the recovery.

Near term economic policies should continue to remain supportive. While the supportive fiscal stance is appropriate and has been called for in recent years in view of still-moderate economic growth and low inflationary pressure, the recurrent nature of expenditure growth increases the rigidity of the budget and complicates short-term fiscal management. Inflation is projected to remain low, but inflation risk is on the upside and the authorities should be ready with a strategy for fiscal adjustment if inflationary pressures build up. This strategy should safeguard the capital budget as much as possible. The real exchange rate is broadly in line with fundamentals.

Kuwait has significant fiscal space but the country is now at a crossroads as regards conserving wealth for its future generations. Kuwait’s non-oil primary deficit is above the estimated baseline benchmarks that take into account intergenerational equity in the distribution of oil wealth. Furthermore, rising public sector wage and pension costs and rapid population growth are expected to exert pressures on public finances in the medium term. If Kuwait is to preserve wealth equally for its future generations, fiscal consolidation will be needed in the medium term.Overall, the IMF board said there is a need to improve the productivity and welfare impact of government spending. Reallocating government expenditure toward capital expenditure would enhance non-oil GDP growth and improve the long-term outcomes of the fiscal accounts, while improving the productivity of government expenditure and contributing to the diversification objectives of the DP. “In this connection, the authorities are encouraged to improve the government’s capacity to implement the capital budget, contain the growth of the public sector wage bill, avoid a further buildup of the pension system’s unfunded liabilities, and avoid new measures that would further increase current expenditures.” The introduction of a VAT would be a step forward, the IMF board said. The adoption of a medium-term budget framework and a well-designed fiscal rule could improve fiscal management. Finally, the phased retargeting of fuel-related subsidies to the most vulnerable segments of the population should be part of a medium- to long-term fiscal reform program.Legislative and other reforms are needed to improve Kuwait’s business environment and employment opportunities for Kuwaitis. Specific attention should be given to upgrading the education system to make it attuned to the needs of the business sector. Corporate governance should be enhanced by strengthening institutions’ board member composition and member roles, and enforcing the appropriate implementation of auditing and reporting standards.

On the legislative side, the authorities should proceed with modernizing legislation to enhance the business environment, taking into account best international practices to avoid the pitfalls of recent legislative experience. Finally, the authorities are encouraged to undertake a comprehensive review of business procedures and requirements with the view to streamlining them.

The authorities are encouraged to continue to be vigilant toward existing and emerging financial sector risks. To this end, they should maintain their strategy of building precautionary provisions and retained profits by banks, continue to enhance ICs supervision, and develop the needed tools for ICs resolution. Furthermore, in developing a new and improved national legislative base, the authorities should continue to take into account the specific nature of the central bank’s operations and the need to strengthen and preserve its operational independence.

There has been significant progress in improving Kuwait’s statistical system, but further improvements are needed. In this regard, the authorities are encouraged to provide the needed resources to the Central Statistical Bureau.

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