Kuwait GDP to shrink by 3.2%

Kuwait: The Central Bank of Kuwait announced at the end of the mission of the International Monetary Fund (IMF) experts to the country that the path of economic recovery has slowed down and Kuwait’s real gross domestic product (GDP) recorded a contraction of 3.6 percent in 2023, expecting the contraction to record 3.2 percent in 2024. The Central Bank said in a press statement on Thursday that the mission’s visit to the country during the period from September 24 to October 8 is within the framework of the periodic consultations for the year 2024 in accordance with Article Four of the Fund’s Establishment Agreement.

The Central Bank coordinated with the relevant local authorities to complete the arrangements for that visit, including collecting information and data and arranging meetings with senior officials in governmental and non-governmental bodies to discuss the economic, political, and financial conditions, monetary policy, and the strength of the banking and financial sector. He added that the experts indicated a slowdown in the path of economic recovery during 2023.

According to their estimates, the real GDP recorded a contraction of 3.6 percent, as the oil sector contracted by 4.3 percent, while the non-oil sectors recorded a contraction of one percent, driven by the decline in oil prices and production quantities and the decline in industrial activity in the refining sectors. He pointed out that the mission expected that the real GDP would contract by 3.2 percent this year due to an additional reduction in oil production as part of the OPEC+ decision, while the initial recovery of the non-oil sectors would continue to record growth of 1.3 percent this year despite the fiscal consolidation measures.

Regarding local price levels, the mission said that the annual inflation rate had declined to 3.6 percent last year as a result of a decline in both core inflation and food prices, noting a significant decline in the inflation rate in the recent period to reach 2.9 percent last August as a result of a decline in prices in the housing and transportation groups. The mission also expected the annual inflation rates to continue to decline—to reach 3 percent this year, with the decline in pressures on demand and the decline in prices of imported food products.

Regarding the internal and external balances, the experts indicated, according to the statement, that they declined during the past year as a result of the decline in oil prices and production quantities, as the budget balance shifted from a financial surplus of 11.7 percent of the gross domestic product in the fiscal year to a deficit of 3.1 percent in 2023/2024. The mission attributed this mainly to the decline in oil revenues by 5.8 percent of GDP, driven by lower oil prices and production quantities, while current spending increased by 9.7 percent of GDP.

According to the statement, the public sector wage bill and government subsidies constitute about 5.7 percent and 3.4 percent of the GDP, respectively,

indicating that the current account surplus narrowed to about 31.4 percent of the GDP in 2023, with the trade balance surplus for goods and services declining by 10.3 percent of the GDP as a result of the decline in oil prices.

The strength and solidity of the Kuwaiti banking sector are due to the prudent regulatory requirements of the Central Bank in lending operations and building provisions, as the results of the stress tests conducted by the Central Bank showed that the liquidity and capitalization ratios of the sector exceeded the minimum requirements of Basel III, while the rates of non-performing loans remained low.

The experts praised the Central Bank’s prudence in containing and managing systemic risks, noting that the credit slowdown resulting from the pandemic has begun to gradually recede, as the Central Bank’s position on the macroprudential policy was appropriate given the containment of systemic risks and weak credit growth. Experts stressed that the dinar exchange rate system linked to an (undisclosed) basket of currencies is an appropriate pillar for monetary policy, indicating that this system has contributed to keeping inflation low and stable for many years and that maintaining this successful record of monetary policy requires maintaining the independence of the Central Bank.

They noted that the position of the Central Bank in terms of restricting monetary policy provides relative flexibility, as the current interest rate is in line with containing inflation and stabilizing the output of non-oil sectors. The Kuwaiti economy is exposed to a variety of global risks due to its dependence on oil, especially fluctuations in commodity prices, changes in global growth, and the escalation of regional conflicts. These risks are transmitted to the economy through their impact on oil prices and production. Domestic risks are mainly related to the extent of implementation of financial and structural reforms. These reforms are necessary to diversify the economy away from oil, which enhances its flexibility and stimulates private investment.

Regarding financial reforms, the Fund’s experts said that the Kuwaiti authorities are looking forward to implementing reforms to support the transition to a dynamic and diversified economy, and to achieve that goal, “there is a need to significantly adjust the public finances situation on the public spending side and the non-oil revenue side. They added: “Reducing current spending requires rationalizing the public sector wage bill, gradually eliminating heavy energy subsidies and replacing them with targeted subsidies for the most vulnerable groups, and to increase non-oil revenues, a value-added tax and a selective goods tax must be introduced.”

The mission welcomed the government’s plan to expand corporate income tax to include all major local companies, considering that “the existence of a medium-term framework for public finance and the macro-economy would enhance the government’s ability to analyze and forecast fiscal policy, including setting a framework for fiscal rules with a ceiling on public debt and a target for the general budget balance for non-oil sectors.

They stated that “public financing must be facilitated by issuing a law on liquidity and government financing as soon as possible,” stressing that enhancing economic diversification requires major reforms in the labor market. They explained that to encourage Kuwaitis to seek work in the private sector, compensation and working conditions should be more consistent between the public and private sectors,” indicating that improving the quality of education and aligning it with the needs of the private sector would increase productivity and support economic diversification.