Tuesday, May 15, 2012

DUBAI (Zawya Dow Jones)--Kuwait needs to introduce fiscal reforms, restrain public spending, and lower its dependency on oil revenues if it to avoid seeing its budget fall into deficit in five years from now, the International Monetary Fund warned Tuesday.

In its latest Article IV report on Kuwait, the IMF said a combination of higher wages and a rising population risks consuming all the country's oil revenues by the year 2017, which would prevent Kuwait from setting aside surplus oil wealth for future generations.

"The (IMF) mission estimates that government expenditure will exhaust all oil revenues by 2017," the IMF said.

Kuwaiti officials have warned repeatedly that the country's increased spending on wages and social security payments is eating up the country's oil revenues, and exposing the emirate to any sudden drop in oil prices.

Oil minister Mustafa al Shemali has said that public spending on wages and social security costs amounts to nearly 50% of government expenditure, and as much as 85% of the country's oil revenues. He warned last November that Kuwait might have to resort to radical measures including the devaluation of the currency and the sale of public assets if government spending continued to accelerate.

In February, former central bank governor Sheikh Salem AbdulAziz al Sabah resigned his post, complaining that his warnings about increased public spending had been disregarded.

In its report, the IMF said that Kuwait still has a substantial fiscal cushion that would help it in the event of any near-term drop in oil prices, following 13 consecutive years of budget surpluses. In the eleven months to March 31, 2012, Kuwait posted a budget surplus of 13.3 billion Kuwaiti dinars ($47.7 billion).

But the IMF urged Kuwait to introduce fiscal reforms such as a value added tax and contain spending on public sector wages and pension costs.

"A medium-term budget framework and a well-designed fiscal rule could help contain pressures to increase government expenditure and improve the management of future oil cycles," it said.

-By Leila Hatoum, Dow Jones Newswires; +971-4-4461686; leila.hatoum@dowjones.com

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15-05-12 1542GMT