The Central Bank of Kuwait, at the end of the mission of experts from the International Monetary Fund to Kuwait from Sept 26 to October 10, 2021, said according to the vision of the IMF experts financial reforms will take several years.
The mission was in line with periodic consultations in accordance with Article 4 of the agreement establishing the Fund during which the members met with the Governor of the Central Bank of Kuwait and the bank’s senior officials to discuss topics related to monetary policy, control and supervision of banking and financial sector units.
The IMF final statement emphasized implementing fiscal reforms is likely to take several years, and therefore a medium-term fiscal framework is needed to support sound policymaking and a rigorous assessment of reform options. Moreover, given the sensitivity of the main fiscal balance to oil prices, the objective of the non-oil structural primary balance — which would be strong vis-a-vis oil prices and cyclical fluctuations — could be to establish an appropriate fiscal underpinning to support fiscal consolidation efforts.
In this context, the Al-Anba daily quoting the Central Bank of Kuwait Governor Dr. Muhammad Al-Hashel said the statement highlighted the nature of the structural challenges facing the Kuwaiti economy and ways to confront them. The mission statement welcomed the efforts of the Central Bank of Kuwait to enhance the strength of the banking and financial sector and increase its fortification.
The governor explained the final statement of the mission includes five main axes — the recent developments, expectations and risks in Kuwait, short-term policies to support economic recovery, fiscal policy to enhance financial sustainability, promoting growth in the non-oil sectors and employment and monetary and financial policies to protect financial stability.
However, the mission saw that the Kuwaiti authorities responded quickly and firmly to the Corona pandemic crisis, as the mission indicated that strict measures to contain the pandemic and health support reduced cases of infection and deaths, and the various financial and monetary support measures taken by the government and the Central Bank of Kuwait contributed to alleviating the burdens on both households, businesses and the financial sector, reducing the damage caused by the pandemic.
Thanks to the tireless efforts made by the Kuwaiti authorities in distributing vaccines — about 80% of the target population was vaccinated with the first dose and more than 70% were vaccinated with two doses as of mid-September 2021 — and the rate of infection slowed down significantly, which allowed for the recovery of economic activity.
IMF experts expect the Kuwaiti economy to gradually recover from this pandemic, in which the direct effects of the Corona virus pandemic on economic activity were accompanied by sharp declines in oil prices and reductions in oil production under the (OPEC +) agreement and its consequences for the oil sector.
The mission expected that the real GDP would contract by 8.9% (the non-oil sectors contracted by 7.5%, and the oil sector by 9.8%) in 2020. It also expected the output of the non-oil sectors to grow by about 3% in 2021, with the gradual recovery of economic activity and the improvement of the global environment, and to grow by about 3.5% in the medium term.
It is also expected that oil production will recover with the revision of quotas according to the (OPEC +) agreement. Overall, GDP is expected to grow by about 2.7% over the medium term and that the average annual inflation will reach about 3.2% in 2021 due to the increases in food prices and the costs of services related to travel, and that it will remain at about 3% in the medium term.
The Kuwaiti financial sector weathered the crisis well, benefiting from the prudent regulation and close supervision of the Central Bank of Kuwait, in addition to the strong buffers it had before the crisis entered. The IMF mission noted that the measures taken by the Central Bank of Kuwait helped support annual credit growth of 3.6% at the end of 2020.
As for growth prospects, they are surrounded by a state of uncertainty, with the balance of risks tilting to the negative side, as the mission indicated that the continuation of the pandemic may affect the expected economic recovery.
Delays in adopting fiscal and structural reforms may exacerbate risks associated with pro-cyclical fiscal policies, undermine investor confidence, and impede progress towards greater economic diversification and increased competitiveness. Fluctuations in oil prices will have a significant impact on macroeconomic expectations and balances.
On the level of fiscal policy to enhance fiscal sustainability, the Fund’s experts believe that fiscal sustainability and rebuilding the protective buffers require launching an ambitious and credible plan to stabilize financial conditions and be suitable for growth in the medium term.
The mission also stated that a potential adjustment path that would close the intergenerational savings gap and reduce financing needs requires reforms in public revenue and spending, and measures on the public revenue side could include the introduction of a 5% value-added tax, tobacco taxes, and an expansion of the corporate tax to include local businesses, the implementation of property tax.
The final statement of the Fund’s experts referred to the urgently needed reforms to boost growth in the non-oil sectors, and given the demographic structure in Kuwait, it is expected that more than 100,000 young people will enter the labor market in the medium term, and taking into account the retirement cases, the government will have to provide about 64,000 new jobs in the medium term.
The mission indicated with the financial pressure limiting employment in the public sector, the growth of the non-oil sectors must double to provide sufficient opportunities for job seekers in the private sector.
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