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Jun 25 2012

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IMF Says Kuwait�s 2012 Economic Outlook Positive Despite Political Instability

Kuwait�s real GDP growth in 2011 is estimated at around 8.4%, supported by a 15% increase in oil production, the IMF said in its Article IV consultation with Kuwait, published on 15 June. Higher oil revenues resulted in an increase in Kuwait�s current account and fiscal surpluses to over 41% and 30% of GDP respectively. The IMF noted that growth in non-oil economic activity was estimated at about 4.5% in 2011, driven primarily by higher government expenditure, and added that the government wage bill and capital expenditure are estimated to have increased by almost 20% in fiscal year 2011-12. Headline inflation in 2011 increased to about 4.75% from 4% in 2010, as food inflation rose to almost 9.25% from 8.25% in 2010. But the IMF highlighted the changes in the political environment in Kuwait which add to instability: �The policy making landscape changed significantly in 2011 and early 2012. After six cabinet resignations in the past five years, the prime minister resigned in late 2011 and new parliamentary elections were held in early February 2012, producing significant gains for the opposition. A new government was formed shortly after.�

Kuwait: Selected Economic Indicators, 2007�13

Source : Data provided by the authorities; and IMF staff estimates and projections.

1. Also includes government entities.

2. Kuwaiti fiscal year ending 31March, eg 2007 refers to fiscal year 2007-08.

3. In 2006-07, KD2bn was transferred to partly cover the actuarial deficit of the Public Pension Fund.

In 2008-09, KD5.5bn were transferred. KD1.1bn is budgeted for each year from 2010-11 to 2014-15.

4. Excludes debt of Kuwait�s sovereign wealth fund related to asset management operations.

5. Excludes special drawing rights and IMF reserve position.

6. Change in the Kuwait Stock Exchange as of May 9 2012 for 2012.

7. Does not include external assets held by Kuwait Investment Authority.

The IMF goes on to state that the banking sector remained well capitalized, liquidity conditions continued to be favorable and lending to some sectors strengthened. But it added that �banks� profits remained largely flat due to a significant build-up in provisions.�

Looking ahead, the IMF executive directors said that the economic outlook for 2012 is broadly positive. �Economic recovery is expected to strengthen, led by high government expenditure � particularly wages and capital expenditure. High fiscal and external surpluses are expected to persist. Inflation is projected to moderate slightly due to a decline in global food inflation. Low implementation rates of the capital budget and legislative bottlenecks could however, dampen the recovery.�

Kuwait has significant fiscal space, but the IMF notes that the country is now at a crossroads with regards to conserving wealth for its future generations. �Rising public sector wage and pension costs and rapid population growth are expected to exert pressures on public finances in the medium term. If Kuwait is to preserve wealth equally for its future generations, fiscal consolidation will be needed in the medium term,� it said. In general the IMF states there is a need to improve the productivity and welfare impact of government spending.

In a preview of the Article IV consultation in May, the IMF sounded an alarm bell when it noted �that government expenditure will exhaust all oil revenues by 2017� and warned that fiscal consolidation is needed in the medium term if current trends continue (MEES , 21 May). But economists played down this scenario because Kuwait has adequate reserves to draw on.

© Copyright MEES 2012.

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