Kuwait's fiscal position is currently strong but restraint in current spending is needed to preserve buffers and increase saving for future generations, according to the International Monetary Fund (IMF).
The IMF's Executive Board said in a statement that the Gulf state requires a medium-term fiscal strategy to drive reforms, which should include containing current expenditure growth, particularly subsidies and wages, prioritising capital expenditure, and increasing non-oil revenue.
Officials said subsidy reform needs to be supported by an effective communication strategy raising awareness about the cost of subsidies and the benefits of reform, and accompanied by targeted mitigating measures, especially to protect the vulnerable segment of the population.
"The proposed wage reform would be more effective if it operates within overall expenditure limits, aligns incentives for reducing the wage gap between public and private sector jobs and contains public employment," the statement said.
It added that prioritising capital expenditure towards social and physical infrastructure projects would help strengthen growth while higher capital spending should be accompanied by improved efficiency of public investment.
The IMF said Kuwait must learn lessons from the current Development Plan (2010–14), which fell short of targets, by setting realistic targets for the new plan (2015–19).
The IMF said economic activity in Kuwait picked up in 2014. Non-oil growth is projected at 3.5 percent driven by a combination of continued increase in domestic consumption and some pick-up in government capital spending and private investment.
Flat oil production would keep the overall real GDP growth positive at 1.3 percent while the average inflation rate is forecast to remain at about 3 percent and the current account and fiscal surpluses are expected to remain high, it added.
The IMF report said banks are amply capitalised and liquid with stable profits and the medium-term economic outlook is favourable.
Non-oil GDP growth is expected to pick up to 4-5 percent in the medium term, supported by government investment in infrastructure and the oil sector, and by consumption.
The main downside risk to the outlook arises from a sustained decrease in oil prices as well as slow implementation of the Development Plan.
The IMF report added: "Economic diversification into areas with potential for national employment should constitute a key policy priority. Improving the business environment, infusing stronger governance in public administration, and providing a greater role for small and medium-sized enterprises, are needed to take this agenda forward.
"In addition a number of policy measures such as strengthening private sector competition, implementing labour market reforms, and limiting government employment could help realign incentives for firms and national workers to promote entrepreneurship and pursue private sector jobs."