Kuwait's government is showing a willingness to push forward fiscal reforms including subsidy cuts needed to support its currency in an era of low oil prices, a senior IMF official said.
Gulf states, including Kuwait, traditionally relied on petrodollar revenues to fuel public sector spending and social programs, but the slump in the oil price since the middle of last year has forced governments to make difficult decisions to reign in significant budget deficits.
Kuwait's budget for the year that began on April 1 projects a deficit of 8.18 billion dinars ($27 billion), after the transfer of 10 percent of the revenues to the Future Generations Fund, part of Kuwait's sovereign wealth fund.
There now seems to be a "willingness" to introduce reforms on subsidies and boost the country's fiscal position, Prasad Ananthakrishnan, IMF mission chief to Kuwait, told reporters in a conference call.
"Authorities will go very gradually to ensure that the people who deserve those subsidies are not affected," Ananthakrishnan said.
They may cut fuel subsidies first, as no legal changes are required, but electricity and water require legislation and may be introduced later, he said.
The Kuwaiti government is studying whether to raise fees for its services as part of a wider project that aims to rationalise spending, review subsidies and diversify sources of revenue, finance minister Anas al-Saleh told the local al-Rai newspaper, in a report published on 22 November.
The Kuwaiti dinar fell sharply against the US dollar in the forward market at the end of November, bankers told Reuters on 24 November, reflecting a shortage of dinars in the cash market amid low oil prices.
"There has been slightly slower growth in profit and credit, but the Kuwaiti banking system is still flush with liquidity sitting in the central bank," Ananthakrishnan said.
"At this point in time, there is no issue, but definitely as oil prices go down and there's no adjustment in the fiscal system, there should be some tightening," Ananthakrishnan added.
Given the structure of the Kuwaiti currency peg, which is tied to a basket of currencies including the US dollar, it is doing well in delivering monetary stability and enough reserves, he said.
In the longer term, however, given potential trade shocks, fiscal consolidation will be needed to support the currency, he added.