IMF Warns of ‘Substantial’ Risks to Kuwait’s Economic Recovery
According to the International Monetary Fund, Kuwait is still in the process of economic recovery, but challenges to the oil-producing nation’s future prospects are significant. The ongoing deadlock between the government and parliament is further stalling crucial reforms, posing additional risks to the country’s recovery journey.
Following discussions with the Kuwaiti government under the “Article IV” consultations, the IMF’s executive board has noted that the real gross domestic product (GDP) is expected to decelerate to 0.1% this year, a significant drop from the 8.2% growth seen in 2022. This slowdown is primarily attributed to oil production cuts.
Kuwait is a member of OPEC+, a coalition led by Saudi Arabia’s Organization of the Petroleum Exporting Countries and Russia’s allies. Since November, this group has been working together to reduce crude oil production in order to support and stabilize prices in the market.
The IMF in May had forecast real GDP to slow to 0.9%. Despite the expected stagnation, the IMF on Wednesday forecast real non-oil GDP growth at 3.8% this year from 4% in 2022.
“Given Kuwait’s large fiscal and external buffers, it can undertake needed reforms from a position of strength. However, political gridlock between the government and Parliament could continue to delay reforms,” the IMF said.
Feuding between successive appointed cabinets and elected parliaments has hampered fiscal reform for years, including passing a debt law that would allow Kuwait to borrow international debt. It resorted to palliative measures to temporarily boost finances after the pandemic slammed oil prices in 2020.
“Resolving the impasse is critical to accelerate reform momentum, and to thereby boost growth and diversify the economy,” the IMF said.
The IMF said higher spending in Kuwait’s draft budget for the fiscal year that began on April 1 “is appropriate given the negative non-oil output gap” but said that starting from April 2024, fiscal consolidation should target higher non-oil revenue “and tackle current spending rigidities while increasing capital outlays to raise potential growth.”
Kuwait has a lavish cradle-to-grave welfare system and salaries make up more than half of total expenditure in the 2023-2024 draft budget. Oil accounts for 88.2% of projected revenues.
Measures to boost revenues could include introducing excise and value-added tax under a common framework of the six-country Gulf Cooperation Council, the IMF said.
Kuwait is the only GCC country that has no excise taxes, and is joined by Qatar as an outlier in having no VAT.
Kuwait in June elected its third parliament in two and a half years. Sheikh Ahmad Nawaf Al-Ahmad Al-Sabah, the son of Kuwait’s ruling emir, was then reappointed as prime minister.
(Reuters)
