Kuwait economy 2025, a door to opportunities
In 2025, Kuwait stands at an economic crossroad having to decide whether to continue down the increasingly unsustainable path of a prodigious welfare state that it has maintained since the country’s independence in 1961, or transition to an economy that is dynamic, diversified, and offers sustainable growth opportunities for present and future generations.
Policymakers are keen to diversify the economy away from its heavy dependence on oil, promote non-oil sector growth and encourage greater private sector participation in the economy. But attempts to introduce the necessary structural and fiscal reforms to achieve the government’s broader aims have been thwarted for over a decade by political turmoil and parliamentary gridlock.
Since 2020, Kuwait has experienced 10 Cabinet resignations and held four parliamentary elections in unsuccessful attempts to break the political impasse between the executive and legislative branches of government. The political instability was resolved only in May 2024, when His Highness the Amir, Sheikh Meshal Al-Ahmad Al-Jaber Al-Sabah dissolved parliament and suspended parts of the Kuwaiti constitution for up to four years.
Disbanding of the National Assembly and the subsequent appointment of a Cabinet headed by His Highness the Prime Minister Sheikh Ahmad Al-Abdullah Al-Ahmad Al-Sabah, to act in lieu of parliament, is expected to expedite the necessary economic, administrative, and social reforms that Kuwait needs, to regain its lost luster as an economic power-house and a pioneer in social and cultural reforms.
A report issued by International Monetary Fund (IMF) staff, at the end of their Article IV Consultation Meetings held in Kuwait in October 2024, emphasized the potential of Kuwait’s economy. The Fund indicated that despite the current economic recession, Kuwait had a window of opportunity to implement the needed fiscal and structural reforms to boost private sector engagement, diversify the economy away from oil, and foster inclusive growth.
In its concluding statement issued in December 2024, on the Article IV Consultation mission to Kuwait, the IMF Executive Board projected that under the baseline assuming current policies, Kuwait’s economy will continue to remain in recession in 2024 before recovering over the medium-term. Real GDP will contract by a further 2.8 percent, due to continuing oil production cuts mandated by the OPEC+ group, before expanding by 2.6 percent in 2025 as production cuts get relaxed.
Additionally, fiscal deficit of the budgetary central government will increase to 6.6 percent of GDP in fiscal year 2024-2025, with lower oil revenue more than offsetting expenditure rationalization. However, the emergence of recovery in the non-oil sector, moderating inflation in 2024, and the strong capital and liquidity buffers of local banks could support an economic revival.
In addition, the significant financial buffers provided by investment income of the sovereign wealth fund (SWF), and profit transfers from state enterprises would withstand any adverse shocks. The Board pointed out that the 2024 Article IV Consultation helps inform policymakers in Kuwait on processes, and emphasizes the importance of a comprehensive and well-sequenced package of fiscal and structural reforms, and provides recommendations to support the transition to a sustainable, dynamic and diversified economy.
The IMF document stresses that reforms pursued should focus on improving the business environment, attracting FDI, and unifying the labor market, along with prudent monetary and financial sector policies to maintain macroeconomic stability. In addition a gradual fiscal consolidation of about 12 percent of GDP could reinforce intergenerational equity. On the business front the environment could be further improved by raising economic competitiveness, increasing efficiency, improving transparency, and promoting private investment.
To support business and investment, public infrastructure needs to be enhanced, digital public service delivery across ministries to be integrated, and business establishment processes further streamlined. Additionally, full foreign ownership of businesses, relaxing foreign ownership restrictions on land, and scaling up public land sales for residential and commercial development, could encourage investment flows to Kuwait.
Labor market reforms are also needed to promote economic diversification. To incentivize Kuwaitis to seek employment in the private sector, compensation and working conditions should be better harmonized across the public and private sectors. Furthermore, enhancing the quality of education and aligning it with private sector needs would raise productivity and support economic diversification.
Support for attracting and employing highly-skilled expatriate workers should be introduced through targeted visa programs and reforming job sponsorship frameworks. Higher female labor force participation should also be encouraged by improving the working environment for women, including by fully implementing the legal requirements for childcare in the private sector.
Other recommendations in the Article IV Consultation statement include regulating the compensation of state employees, which surged in the past decade and is now the highest among the Gulf Cooperation Council (GCC) states. A wage setting mechanism should be introduced to gradually reduce the 41 percent premium that public sector employees have over the private sector. Additionally, a hiring cap should be used to steadily lower the public sector employment share in the labor market and bring it down to the level of other high-income countries.
Hydrocarbon consumption subsidies, which are also the highest in the GCC, should be phased out by gradually raising retail fuel and electricity prices to the level of cost-recovery, while providing targeted transfers to vulnerable groups. Budgetary public investment, which plummeted over the past decade to near the bottom of the GCC, should also be raised to build up the quantity and quality of infrastructure to high-income country levels.
Additionally, the hydrocarbon share of government revenue, which remains the highest in the GCC, needs to be significantly brought down through boosting non-oil revenue mobilization. In the context of the global minimum corporate tax agreement, the Fund welcomed the government’s decision to introduce 15 percent tax on revenues of multinational firms and also urged Kuwait to introduce the GCC-wide VAT and excise tax.
Political turmoil, which had gripped Kuwait over the past several years, had stalled much-needed reforms, crippling the country’s potential economic growth. Since taking office in May 2024, the new government has prioritized economic development and diversification of revenue sources, rationalized spending, expedited the implementation of vital projects, and enacted policies to improve business environment, support growth and attract investments.
The cabinet headed by His Highness the Prime Minister has been implementing a series of plans and policies aimed to revive the economy and boost growth. With the primary focus on accelerating and awarding project execution, the government is reportedly in the final phase of awarding projects worth around KD8 billion this year, mainly in water and energy sectors, to address chronic power shortages that occur in summers.
The cabinet’s commitment to a moderate and gradual reform path has already created a positive atmosphere in the country’s stock market, which, after years of weak performance. recorded the second best performance in the region in 2024.
The imposition of a corporate tax of 15 percent on multinational firms with revenues over KD240 million from January 2025, and the possible enlargement of the tax base to include all firms with turnover of more than KD1.5 million annually by January 2027 could support the country’s budget and boost non-oil GDP.
The announcement of the general-budget for the 2025/2026 fiscal year, expected in the second quarter of 2025, will further indicate the government’s other focus areas and key policies going forward. The government’s actions since taking office and its commitments to welfare of citizens have built trust and support among the public. Analysts believe that this public support will be key to enacting other far-reaching financial and economic reforms that the country needs to ensure a sustained and sustainable future.
