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Kuwait: 2014 Article IV Consultation-Staff Report Press Release

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by International Monetary Fund. Midd Dept.
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Kuwait: 2014 Article IV Consultation-Staff Report Press Release by International Monetary Fund. Midd Dept.

KEY ISSUES Context. High oil prices and production have contributed to sizable fiscal and external surpluses. Non-oil growth has picked up, mainly driven by consumption and investment. Political developments in the last few years have had an adverse impact on the implementation of public investment program. A new five-year Development Plan for 2015-19 has been proposed to the Parliament. The authorities are initiating subsidy and public wage reforms, as well as fiscal and financial institutional and regulatory reforms. Kuwait is at an inflection point as economic diversification, a key policy priority, has to start now to generate a higher and sustainable growth path. Recent oil price developments. The recent decline in oil prices further highlights current challenges. While the consultation with the authorities took place when oil prices were projected to decline from $105 per barrel in 2014 to $96 per barrel in 2019, since then they have fallen by about 20-25 percent. Staff's policy recommendations on the pace of fiscal and structural reforms remain valid if the current drop in oil prices is temporary. Staff also developed with the authorities a downside scenario, with oil prices lower by $20 over the five year period. Under this scenario, with substantial buffers that have been built-up, a decline in oil prices should not trigger immediate spending cuts, especially in capital expenditure, but it places more urgency on implementing the government's medium-term consolidation plans to contain current spending consistent with intergenerational equity. Political setting. Since the formation of the last Parliament after elections in July 2013, some tensions resurfaced in early 2014 (six parliamentary elections were held during 2006-13). It is vital for the government and the parliament to agree on an agenda to place the public investment program on track and continue structural reforms. Outlook and risks. Kuwait's near- and medium-term economic outlook is favorable. Non-oil GDP growth in Kuwait is expected to pick up to 4.0-5.0 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 lower global oil demand and prices. Macroeconomic policies. The current strong fiscal position notwithstanding, spending rigidities and reliance on oil revenues have highlighted fiscal risks. Containing current spending growth by restraining the wage bill and reforming subsidies (combined with targeted mitigating measures and a well-designed communication strategy) is important 2 INTERNATIONAL MONETARY FUND for ensuring fiscal sustainability. Developing a supportive fiscal policy framework underpinned by medium-term macroeconomic and expenditure frameworks, while preparing for an adoption of fiscal rules, would strengthen the reform process. In the context of the exchange rate basket peg, the central bank should continue to be proactive in liquidity management. Enhancing financial stability. Prudent regulation and supervision by the central bank has ensured banking system stability. Risks to the financial system from investment companies are contained, although a few companies continue to make losses and deleverage and restructure their balance sheets and operations. Enhancing the macroprudential policy framework would further strengthen systemic stability. Economic Diversification. Reforms are needed for improving the business environment, public investment efficiency, and education and skills. In addition, measures to realign incentives for firms and national workers to promote entrepreneurship and private sector employment are required. These would include increasing private sector competition, reducing wage gaps between the public and private sector, and containing public employment.

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Ebook Details
Pages: 61
Size: 7.4 MB
Date published:   2014
ISBN: 9781498389723 (DRM-EPUB)

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