Kuwait could Adjust Fiscal Status to Face Oil Prices Decline

The State of Kuwait could adjust its fiscal status in response to the recent decline in oil prices and revenues through applying a sizable investment spending policy, the International Monetary Fund (IMF) said.

"The decline in oil prices has adversely affected Kuwait's fiscal and current account balances and slowed growth in 2014-15," IMF stated in a press release via its website on the sidelines of the 2015 conclusion of Article IV consultations with Kuwait.

"Real non-oil GDP growth is projected to slow in 2015 and 2016, and pick up to four percent in the medium term, supported by government investment in infrastructure and private investment. Average inflation is projected to increase to 3.4 percent in 2015 and will remain broadly stable at that level over the medium term, given limited global inflation," it said.

The fiscal and external positions are projected to deteriorate further in 2015 and 2016, and improve somewhat over the medium term as oil prices and production recover partially.

The IMF also indicated that the oil price decline has increased the urgency of diversifying the economy and creating high productivity jobs is a priority to reduce Kuwait's dual dependency on oil revenue and expatriate workers.

"The government is focusing on reforms to contain current expenditure, prioritize capital expenditure and pursue with policies aimed towards increasing the role of private sector investment and job creation for nationals," it said.

IMF executive directors noted that Kuwait's large fiscal and external buffers have cushioned the macroeconomic impact of the fall in oil prices and will facilitate adjustment in the period ahead.

They encouraged the Kuwaiti authorities to take advantage of the available policy space to pursue gradual, sustained reforms to safeguard fiscal sustainability, promote export diversification, and boost private sector participation in the economy.

IMF directors also underscored the need for fiscal consolidation through higher non-oil revenue mobilization, expenditure restraint, and further subsidy and public sector wage reforms.

They also supported the authorities' plans to introduce a value-added tax and a business profits tax, and recommended combining domestic and external financing sources to maintain capital spending and preserve the social safety net.

IMF executives agreed that the pegged exchange rate regime has served Kuwait well and delivered monetary stability, encouraging the Central Bank of Kuwait to remain vigilant and develop its macro-prudential policy framework to further strengthen financial sector stability.

The IMF stressed the importance of further promoting private employment for Kuwaiti nationals in order to reduce demands on the budget and transform the country's development model, recommending deeper labor market reforms as well as additional efforts to modernize education and training.

IMF directors also encouraged the authorities in Kuwait to implement further reforms to diversify the economy by improving the business environment, stepping up privatization, and strengthening governance.

Meanwhile, they welcomed Kuwait's progress in upgrading its regime against money laundering and the financing of terrorism. They also commended efforts to improve the quality and availability of key economic statistics.