Subdued oil prices and output are weighing on near-term growth prospects and external and fiscal balances in Kuwait, according to the International Monetary Fund (IMF). The current conjuncture and the exhaustible nature of oil underscore the need to diversify the economy and ensure adequate savings for future generations, it said following an official visit by IMF staff to the Gulf nation.
While large financial assets, low debt, and a sound banking sector underpin Kuwait’s resilience, the recent run-up in spending has worsened the fiscal position and eroded liquid buffers, the IMF said, adding that without a course correction, the fiscal and financing challenges would intensify.
The IMF report said non-oil growth in Kuwait strengthened in 2019, but lower oil prices and output are weighing on the oil sector. Taken together, overall growth is about 0.7 percent in 2019 from 1.2 percent in 2018 while inflation rose to 1.1 percent, reflecting higher food and transport prices and slower housing rent deflation.
The IMF mission proposed an adjustment path that would close the intergenerational savings’ gap in 10 years including curtailing the public wage bill over time, phasing out generalised subsidies and reforming transfers and introducing a 5 percent value-added tax (VAT) to bring Kuwait in line with Bahrain, Saudi Arabia, and the UAE.
The IMF also said the government needs to build consensus for fiscal adjustment, adding that the proposed fiscal measures should be part of a comprehensive reform package that fosters private sector growth and jobs, reduces waste and improves the quality of public services, and strengthens government accountability and transparency.