Economy

Kuwait needs to push reforms for economic growth, says IMF

October 11, 2024, 3:47 PM

Shoppers in Kuwait's Avenues Mall – the IMF says the country needs to encourage private sector employment

Economy down 3.2% this year
Dependent on hydrocarbon revenue
IMF wants more FDI

Kuwait must accelerate the introduction of fiscal and structural reforms that are needed to increase private sector-led growth and diversify its economy away from hydrocarbons, the International Monetary Fund said on Friday.

Kuwait’s economy will contract by 3.2 percent this year because of an Opec+ oil production cut, but will grow by 2.8 percent in 2025 as the cuts get unwound and will grow broadly in line with potential thereafter, the IMF said. It was making its assessment after annual bilateral discussions – known as Article IV consultations – with the Kuwaiti government.

Government spending remains overwhelmingly dependent on oil and gas revenues, with little progress made on diversifying the economy away from hydrocarbons, or in reducing the huge burden of government salaries and welfare payments.

The government’s fiscal balance swung from a surplus of 11.7 percent of GDP in the 2022-23 financial year to a deficit of 3.1 percent of GDP in 2023-24, on the back of lower oil prices and production, and an increase in spending.

The public sector wage bill accounted for 5.7 percent of GDP, while 3.4 percent was spent on subsidies.

The political turmoil that has stalled reforms in recent years was broken in May when Kuwaiti emir Sheikh Mishal Al-Ahmad dissolved the recently elected parliament and suspended parts of the constitution for up to four years, allowing reforms to be expedited.

The IMF said Kuwait should introduce structural reforms that improve the business environment and attract foreign investment to boost private sector-led inclusive growth.

Fiscal reforms should also be implemented for future generations, while Kuwaitis should be incentivised to apply for jobs in the private sector.

Last week, the Central Bank of Kuwait (CBK) said robust spending and “long due” structural reforms will help Kuwait’s economy overcome its challenges.

The CBK’s 12th annual Financial Stability Report said the local banking sector proved resilient against “the combined shock of lower oil prices and production faced by the Kuwaiti economy, which brought back the deficit in the fiscal budget”.

It said the “double-whammy” of lower oil prices and production is putting increasing pressure on the liquidity of the General Reserve Fund, which holds the national energy revenues and other investments.

“Against this backdrop, diversifying national sources of income, coupled with more prudent and targeted spending remain essential to instilling investor confidence and long-term financial stability,” CBK said.

One of the reforms needed is tighter controls on money laundering and terrorist financing, the Paris-based Financial Action Taskforce (FATF), a global financial watchdog, said earlier this week.

On Tuesday it said: “Kuwait has an adequate legal and supervisory framework to address illicit finance, but has serious shortcomings delivering effective outcomes, including its understanding, investigation and prosecution of money laundering and terrorist financing.”