The International Monetary Fund called on Kuwait to control public finances to enhance financial sustainability and achieve equality between generations, explaining that in terms of increasing public revenues, the extent to which the value-added tax and selective tax should be applied should be considered, and the scope of the corporate income tax should be expanded to include local companies, and the application of property tax for the purpose of increasing government revenue.
In a press statement on the occasion of the conclusion of the 2021 consultations with Kuwait under Article 4 of the agreement establishing the IMF, he pointed out that on the public spending side, the public sector wage bill, subsidies and social benefits must be reduced, the new public debt law be approved, and strong medium-term financial frameworks be put in place, reports a local Arabic daily.
Establishing clear financial pillars that reduce procyclical policy risks, the IMF said, enhance credibility and reduce financial risks, and improve the ability to manage adverse shocks.
Moreover, strengthening financial governance and the principle of transparency would significantly improve public financial management, the daily added.
The IMF added that despite the rise in international oil prices and their positive repercussions on oil revenues and the acceleration of growth, an atmosphere of uncertainty still dominates expectations.
This, the IMF said, requires the Kuwaiti authorities to exert more efforts in order to meet the challenges associated with the heavy dependence on the oil sector and achieve financial sustainability.
On the exchange rate, the IMF sources said, “The policy of linking the dinar exchange rate to a basket of currencies remains appropriate for the Kuwaiti economy, as it provides an effective support for monetary stability.
The banking system in Kuwait is resilient, and the Central Bank of Kuwait also pursues prudent supervisory policies. In the context of uncertainty around expectations, work must continue to assess the quality of banking assets and accompanying measures to support capital and liquidity reserves, in a way that contributes to achieving the resilience of the financial system.
The sources stated that easing the ceiling on interest rates on commercial loans and strengthening the credit information infrastructure would contribute to improving access to finance, including for small and medium-sized enterprises as well as continuing efforts to strengthen the frameworks for combating money laundering and terrorist financing.
IMF stressed the need for Kuwait to gradually implement a number of structural reforms, including social safety nets, the labor market, regulatory frameworks and the business environment, in order to diversify sources of income and promote growth led by the private sector by addressing issues related to climate challenges, including support for green infrastructure, and the promotion of standards for energy efficiency.
The directors note that enforcement of the anti-corruption strategy is critical to strengthening governance and improving the business environment.
Noting that local economic activity is witnessing a recovery supported by the rise in international oil prices and the easing of social distancing restrictions, the IMF indicated that growth in the non-oil sectors strengthened to an estimated 3.4 percent in 2021, and is expected to rise slightly to reach about 3.5 percent in 2022, driven by the gradual recovery of local economic activity in conjunction with the global economy.
The IMF suggested a recovery in oil production, after easing production restrictions in light of the (OPEC +) agreement. As a result, the local economy is expected to grow by about 2.7 percent in the medium term.
The annual inflation rates also rose to 3.4 percent, driven by the rise in both food prices and the costs of travel-related services, and the inflation rate is expected to rise further to reach about 4.4 percent in 2022, to reflect the turmoil in the global supply chain, before it drops to about 2.4 percent in the medium term.
The IMF sources pointed out that the public budget deficit (calculating government investment income) rose to 16.6 percent of GDP in the fiscal year 20/2021 and explained that this reflects the widening of the public budget deficit, the Kuwaiti authorities’ adoption of fiscal stimulus measures with the aim of facing the repercussions of the Corona pandemic, in addition to the decline in oil revenues by about 13.9 percent of the gross domestic product, and the decline in economic activity.
The sources noted that in the absence of both the public debt law that allows local authorities to borrow, and the laws that allow the government to withdraw from the Future Generations Reserve Fund, spending funding has been approved to draw from the liquid assets of the General Reserve Fund, expecting it to achieve the balance of the general budget (by calculating investment income).
The government generated a surplus of 3.7 percent of the GDP in the fiscal 2021/22 supported by the rise in oil revenues, in addition to the reduction in public spending that was announced in August 2021, and the noticeable rise in the nominal GDP following the rise in oil prices. In global markets, which in turn led to a rise in the GDP deflator.
The current account surplus is expected to rise to about 16.1 percent as a percentage of GDP, driven by the rise in oil exports.
The financial sector, the sources pointed out, that the Kuwaiti financial sector has passed the crisis well, given that banks enjoy high capitalization rates and abundant liquidity, as the capital adequacy ratio in the banking sector reached about 18.6 percent during the third quarter of 2021, which exceeds the required minimum and maintains a net rate Non-performing loans (NPL’s) after deducting the specified provisions are low while the provisions for loan losses are high.
The sourced stressed that the atmosphere of uncertainty still dominates expectations, as the rapid spread of the Omicron variable poses new global challenges to controlling the epidemic.
Delays in fiscal and structural reforms may increase the risks of procyclical fiscal policies, undermine investor confidence, slow progress towards greater economic diversification and competitiveness, and enhance social pressures.
This, and fluctuations in global oil prices will have significant repercussions on both the outlook and macroeconomic performance. A stronger recovery in global economic activity than expected will lead to a boost in oil revenues, which should reduce the risks to the outlook. Resolving the political deadlock and consolidating public finances can significantly improve investor confidence.