Tuesday , December 18 2018

Kuwait inflation set to hit multi-year low, IMF report – Non-oil growth on track to reach 2.5% this year: Executive Directors

WASHINGTON, Jan 24, (KUNA): A International Monetary Fund report released Wednesday finds non-oil growth in Kuwait has picked up modestly over the past two years and inflation “is on track to reach a multiyear low.” The report comes after IMF’s Executive Board concluded the Article IV consultation with Kuwait in mid-January. It finds that after ‘coming to a standstill in 2015, real non-hydrocarbon growth has recovered and is on track to reach 2.5 percent this year, driven by improved confidence.’

IMF Executive Directors concurred that Kuwait is facing “lower-for-longer” oil prices “from a position of strength given large financial buffers, low debt, and sound financial sector,” according to the report.

The Directors noted that non-oil growth is expected to continue to recover gradually over the medium term, with the fiscal and external positions remaining broadly balanced. While noting the “short-term upside risks from the recent recovery in oil prices”, they saw a “further drop in oil prices over the medium term, tighter global financial conditions, heightened regional security and geopolitical risks, and delays in project and reform implementation as the main risks to the outlook.”

A cut in Kuwait’s hydrocarbon output by nearly six percent, reflecting implementation of the deal between Organization of the Petroleum Exporting Countries (OPEC) member states and other oil producing countries, will bring overall real gross domestic product (GDP) down by about 2.5 percent in 2017. Notwithstanding the impact of higher energy and water prices, inflation is on track to reach a multiyear low of 1.75 percent in 2017, due to a decline in housing rents and favorable food price developments.

Noting the sharp decline in oil prices had adversely affected fiscal and current account balances,the Directors commended the Kuwaiti government’s recent efforts to “streamline current spending, diversify revenue, and improve the business climate, and stressed that the new environment calls for deep and sustained reforms.” The Kuwaiti government’s underlying fiscal position has improved on the back of spending restraint, but financing needs have remained large, the report finds. According to the IMF “overall fiscal accounts remained broadly balanced in 2016/17, the fiscal balance which excludes mandatory transfers to the Future Generations Fund (FGF) and investment income posted a large deficit (17.5 percent of GDP) for a second year in a row.

The corresponding financing needs were covered through a drawdown in readily available General Reserve Fund (GRF) assets, domestic borrowing at various maturities, and a successful debut international sovereign bond sale. The external current account recorded its first deficit in many years in 2016.” The banking sector has remained sound, and deposit and credit growth have slowed somewhat, the IMF reported.

“The Directors welcomed the banking system’s sound position and the authorities’ prudent regulation and supervision. Given the downside risks to asset quality, high loan concentrations, common exposures, and interconnectedness of the financial sector, they welcomed ongoing initiatives to identify and address emerging pressures,” the IMF reported.

The Directors encouraged the authorities to proceed with the planned introduction of excises and the value added tax (VAT) and to further curtail current expenditure. They highlighted the need for deeper reforms to reduce financing requirements more rapidly, create space for growth-enhancing capital outlays, and achieve intergenerational equity, they recommended further steps to contain the wage bill. Directors commended the introduction of medium-term expenditure ceilings and encouraged the authorities to further strengthen the medium-term fiscal framework to help underpin Consolidation.

“They welcomed the government’s balanced financing approach and noted that further strengthening of the related institutional and legal frameworks would make debt management more effective and support the development of capital markets,” the IMF reported.

The Directors stressed that better aligning public and private sector compensation would enhance nationals’ incentive to consider private sector jobs and support competitiveness, and recommended limiting public sector employment growth as more private sector jobs are created.

They also stressed that moving from a public sector-led growth model to one driven by the private sector “requires creating incentives for risk-taking and entrepreneurship and emphasized the importance of education reform to “equip new graduates with the relevant skills for private sector jobs and saw merit in greater use of privatization and partnerships with the private sector to boost productivity, investment and job creation,” according to the IMF report. Additionally, Directors concurred that “the peg to a basket remains appropriate for the Kuwaiti economy, as it continues to provide an effective nominal anchor,” noting that recommended fiscal adjustment “would largely close the moderate current account gap over the medium term.”

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