Kuwait’s Economy at Risk, Stalled Reforms Linked to Politics

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KUWAIT CITY, Sept 10: According to the International Monetary Fund (IMF), despite the continued economic recovery in Kuwait and efforts to contain inflation, the risks are still high, especially those related to the fluctuation of oil prices and oil production. Resolving the political stalemate in Kuwait can accelerate the required financial and structural reforms, enhance investor confidence, and stimulate private investment, reports Al-Rai daily. In a press statement issued following the conclusion of the 2023 consultations with Kuwait, the IMF explained that the large financial and external buffer margins that Kuwait enjoys enable it to carry out the necessary reforms from a position of strength, but the political stalemate between the government and the National Assembly may continue to delay reforms.

Delaying the required financial and structural reforms may lead to aggravating the risks of pro-cyclical fiscal policy and undermining investor confidence. These delays impede progress towards diversifying the economy, which makes it more vulnerable to the risks of climate change. There is a need for comprehensive and supportive fiscal control in order to enhance the sustainability of public finances and support intergenerational justice. Starting from the next fiscal year, non-oil revenues should be increased and the stagnation in current spending should be addressed.

Also, the capital expenditure should be increased to increase potential growth. The public revenue reform measures could include the imposition of selective tax and value-added tax, and the expansion of corporate income tax to include local companies. Public spending measures should focus on reducing the wage bill and the gradual abolition of energy subsidies while improving targeted income support measures. IMF stressed the need to follow up the controlling of public finances to support intergenerational justice, and structural reforms to diversify the economy, indicating that there is a need for strong growth in non-oil sectors led by the private sector to accommodate new entrants to the labor market. It affirmed that, in order to motivate Kuwaitis to search for jobs in the private sector, there is a need for labor market reforms to enhance the wage structure so that it is compatible with the market, especially the gradual harmonization of wages and working conditions at the level of the public and private sectors, in addition to implementing social safety net reforms in parallel with ensuring social protection sufficient for citizens during the transitional period.

Regarding the banking sector, the IMF said the Kuwaiti banking system is considered stable and immune to systemic risks, and is supported by a strong precautionary framework that must continue to be strengthened. Kuwait has witnessed a significant recovery in its economy in 2022, with real GDP growth rising to 8.2%, at a time when nominal growth slowed to 0.1% in 2023, reports Al-Qabas daily. However, this decline on paper is the result of the country’s declining production of oil more than any major swing in its economic fate according to recent MEED report.

The report pointed out that it is natural that reducing the country’s oil exports would have a significant impact on the main growth, as it announced in April a reduction of 128 thousand barrels per day, which is equivalent to about 10% of the total reductions of the OPEC group amounting to 1.15 million barrels per day and about 1%. 5 produced by Kuwait. In May and June, Kuwait pumped 2.55 million barrels per day of crude oil, down from 2.65 million barrels per day in April. For 2024, the country’s share is 2.676 million barrels per day, reports Al-Qabas daily. MEED reported that behind fluctuations in Kuwait’s main real GDP growth are due to oil production and prices, the country continues to enjoy domestic demand and strong non-oil growth, with non-oil GDP growing by 4% in 2022 and projected to grow by 3.8% in 2023.

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