Public Information Notice No. 98/4

Press Information Notice: IMF Concludes Article IV Consultation with Kuwait

February 3, 1998

The IMF Executive Board on October 15, 1997 concluded the 1997 Article IV consultation¹ with Kuwait.

Background

Following the successful completion of reconstruction and the restoration of oil output in the years immediately following the 1990-91 regional crisis, the focus of Kuwait's economic policies has been on eliminating financial imbalances, addressing the difficulties in the financial system, and creating the appropriate environment for private sector growth. Significant progress has been made toward these goals. The fiscal deficit was reduced substantially to 4 percent of GDP in 1995/96, from 10 percent the previous year and 18 percent in 1993/94. In 1995, for the first time since the Gulf war, the balance of payments recorded an overall surplus equivalent to 15 percent of GDP. Progress was also made in resolving the difficult bank debt problem through the implementation of the Debt Collection Program (DCP).

Economic and financial conditions continued to improve sharply in 1996 reflecting higher international oil prices, and the pursuit of appropriate financial policies. While crude oil output remained practically unchanged from the 1995 level, in line with Kuwait's OPEC quota, export prices rose from an average of US$15.57 per barrel to US$18.34. Activity in the non-oil sectors is estimated to have risen by some 2 percent in real terms, with growth mainly driven by construction in the petrochemical sector and sustained activity in the financial and other services. Thus, while total real GDP rose by 0.9 percent, real income--adjusted for the terms of trade effects--increased by about 12 percent. Inflation remained low, at about 2 percent.

The fiscal position is estimated to have improved markedly, registering a surplus of 9 percent of GDP in 1996/97, enabling the authorities to return to their policy of building assets for future generations. The balance of payments also benefited from higher oil export prices, which generated an increase in export receipts of 17 percent. Imports grew by about 7 percent and the net service deficit declined because of higher investment income, leading to a rise in the external current account surplus to the equivalent of 23 percent of GDP, from 17 percent in 1995. In 1996, Kuwait repaid the last installment of the 1992 syndicated loan of US$5.5 billion and the overall balance of payments was also in surplus (US$2.6 billion), strengthened by increases in exports and private capital inflows.

The domestic debt problem--which developed as a result of collapses of the informal stock exchange in 1982 and from the loss of assets following the Gulf war--continued to be addressed appropriately, and bank supervision and prudential regulations were enhanced. The improved confidence was buoyed by the continued successful divestiture of government shares in commercial enterprises.

Preliminary estimates for 1997 point to a slightly less favorable financial performance than in 1996 as a result of adverse terms of trade developments. Crude oil output is expected to remain unchanged, but export prices are projected to decline by some US$1 per barrel, thus resulting in an estimated fall in nominal oil GDP of about 5 percent. However, owing to increased refining capacity and petrochemical production, together with higher capital expenditure under the 1997/98 budget, total real GDP could grow by about 1 percent. The fiscal position, including investment income, is likely to remain in surplus, taking into account current oil price projections. Similarly, the external current account is projected to record a surplus of about 25 percent of GDP and the overall balance will also be in surplus.

Executive Board Assessment

Executive Directors commended the authorities for the significant progress achieved in 1996 in eliminating fiscal imbalances, enhancing bank supervision, making progress toward resolving the difficult debt problem, and moving forward with the divestiture program. Reflecting that progress, and aided by higher oil export prices, confidence had improved, economic activity had picked up, inflation had remained low, and the stock of foreign assets had risen.

Directors noted that those favorable developments offered a sound basis for an ambitious medium-term program of structural reforms aimed at diversifying the economic base, strengthening the role of the private sector in economic activity, and providing employment opportunities for the growing number of Kuwaitis entering the labor force.
Directors observed that commendable progress had been made in the sale of government shares in commercial enterprises, and they urged the authorities to proceed with the next phase of privatization, involving the transfer to the private sector of public utilities and services. Prompt approval of the legislation currently before the National Assembly--the Five-Year Plan and the Privatization Bill--would be important to lay the foundation for the privatization program, as well as other key elements of the medium-term structural reform agenda. Directors also emphasized the importance of permitting greater private sector participation, local and foreign, in all sectors of the economy. Directors stressed the need to pursue labor market reform, in particular to preserve labor market flexibility. Directors generally cautioned against the setting of quantitative requirements governing employment of Kuwaiti nationals in the private sector. Instead, they thought that the emphasis should be placed on education and training, removing disincentives for Kuwaitis to seek employment in the private sector, and fostering the development of the private sector.

Directors noted that, notwithstanding the relatively favorable fiscal prospects over the medium term, the structure of the budget would need to be strengthened by raising the share of non-oil revenues, in order to minimize the volatility of revenues, and by rationalizing spending consistent with the need to transfer responsibilities from the public to the private sector and to enhance resource allocation. Revenue-raising measures could include a restructuring of company taxes, the introduction of a consumption tax, and increases in fees and charges on public sector services. Expenditure measures should aim at reducing subsidies and transfers and at containing the growth of wages and salaries through an overhaul of the salary and benefit structure. Directors welcomed the authorities' intention to pursue continued expenditure restraint, but disappointment was expressed that the additional revenue measures proposed in the 1997/98 budget had not been adopted by the National Assembly, given the contribution of such measures to improving the structure of the budget.

Directors noted that the steps taken to enhance bank supervision, together with the successful implementation of the Debt Collection Program (DCP), had strengthened the soundness of the financial system and reduced moral hazard risks. They stressed, in particular, the need for continued vigilance in enforcing repayments under the DCP. Directors encouraged the authorities to continue to rely on indirect instruments of monetary management, and they welcomed the consideration being given to the possible elimination of the interest rate ceiling.

Directors commended the authorities for pursuing an open exchange and trade system and prudent fiscal and monetary policies in support of the pegged exchange rate arrangement, which had served the economy well.

Directors commended Kuwait for its very generous foreign economic assistance program.

Directors encouraged the authorities to continue in their efforts to make further substantial progress to improve statistics, particularly data on national accounts and prices, and public finances.