January 19, 2017/IMF

How have lower oil prices affected economic developments and prospects in Kuwait?

The main impact has been a decrease in oil-export revenues and related government receipts, which have hurt the country’s fiscal and external positions. Additionally, with Kuwait so dependent on oil, the lower oil prices have also impacted economic activity in the non-oil sector, with growth there dropping from 5 percent in 2014 to 3¼ percent in 2016.

Nonetheless, Kuwait is well positioned to contain the impact of lower oil prices. Large financial buffers and low debt provide policy space to implement the necessary fiscal consolidation gradually, while increasing public investment to support growth. In addition, the financial sector has remained sound and credit conditions are favorable.

In light of this, non-oil growth is projected to rebound to about 4 percent over the medium term, supported by the country’s ongoing five-year Development Plan. The fiscal and external positions are also projected to improve as adjustment proceeds and oil prices gradually recover.

Why does the IMF recommend further cuts in energy subsidies and control of the wage bill if the government has large financial buffers?

The increase in the government deficit (to close to 17½ percent of GDP) has highlighted the need for reforms to bolster the budget over the medium term. Kuwait has large financial buffers that allow it to proceed gradually, but they do not exempt the country from these reforms.

The IMF recommends that these reforms address underlying budget vulnerabilities. One area in which we have advocated reform is energy pricing. Energy subsidies are indeed very costly, amounting to close to 6 percent of GDP in 2015/16. There are two other strong arguments for reforming energy subsidies: one, by maintaining artificially low prices, energy subsidies encourage the over-consumption of energy and two, they are not well targeted, as they also benefit high-income households who do not need them. Significant steps have been taken by the government over the past year to bring energy prices (fuel and electricity prices in particular) closer to market prices. Yet, energy subsidies remain significant, and further reforms would help achieve greater energy efficiency and fiscal savings. That said, they should be accompanied by measures that protect the most vulnerable and promote energy efficiency.

Another reform area is that of Kuwait’s wage bill, which is quite high compared to peer countries. There are two dimensions to the needed reforms in this area. One is designing mechanisms that allow for better control over future wage growth. The other is to limit the growth of the public sector workforce itself, since the new oil price reality cannot sustain it. Of course, it will be important to do this while promoting private sector job creation to avoid an increase in unemployment.

Why does the IMF support the authorities’ intention to raise nonhydrocarbon revenues, including the introduction of value-added and business-profit taxes?

Raising nonhydrocarbon revenue is needed because of the significant medium-term fiscal adjustment needs and the lack of revenue diversification. Introducing value-added and business-profit taxes will contribute to a more balanced fiscal consolidation package. It will also help reduce the susceptibility of public finances to oil price fluctuations. At the same time, relatively low rates will help limit the impact of these new taxes on businesses. Indeed, other GCC countries facing the same constraints are also considering introducing new taxes, including a value-added tax at a rate of 5 percent. For the same reasons, the IMF also supports the government’s plans to gradually adjust the price of government services and to raise certain excise taxes.

What type of reforms does the IMF advocate in order to boost economic growth and job creation for Kuwaiti nationals?

Boosting economic growth and job creation for Kuwaitis requires a more prominent private sector and greater economic diversification. In this respect, labor market reforms and efforts to promote the role of the private sector are an important component of the reforms advocated by the IMF. For example, better managing expectations about the limited availability of public sector jobs in the future would encourage jobseekers to look toward the private sector. Sustaining the recent efforts to streamline public sector wages and benefits would also help make the private sector more attractive and encourage more hiring by private-sector firms. Reforming the education system to ensure young graduates’ skills are aligned with the needs of private firms is also paramount.

As set out in the government’s six-pillar reform strategy, greater use of privatization and partnerships with the private sector will also help boost productivity, private sector investment, and job creation. This should be combined with further improving the business environment, including reforms to facilitate access to land and finance, reducing the burden of administrative procedures and excessive regulations, fostering competition, and expanding the ability of SMEs to access finance.