Kuwait’s non-oil GDP growth expected to hit 3 pct in 2017 – Inflation to rise to 4% next year, reflecting energy prices increases in 2016/17: IMF

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KUWAIT CITY, Nov 15, (KUNA): Kuwait non-oil GDP growth is expected to rise to 3 percent in 2017 and 4 percent thereafter, the International Monetary Fund projected in a report after concluding a visit to Kuwait.

A continued improvement in project implementation under the Kuwait Development Plan will support gradual recovery in real non-oil GDP growth to 3 percent in 2017 and 4 percent thereafter, Kuwait Central Bank (CBK) Governor Al-Hashel said in a statement summarizing the content of the report compiled by an IMF mission which visited Kuwait during the period November 6-14.

Growth is expected to gain momentum over the medium term, supported by infrastructure investment, Al-Hashel added, quoting the IMF mission’ report.

Kuwait’s fiscal and external accounts have been adversely affected by the lower oil prices, and financing needs have emerged, he noted.

Resilient nonoil activity and strong oversight by the CBK have kept the financial sector sound, IMF noted.

He added that IMF argued that the key challenge for policymakers is to implement the government’s comprehensive six-pillar reform plan, which aims at promoting fiscal consolidation and boosting private sector growth, diversification, and job creation for nationals.

Notwithstanding large buffers that provide policy space to smooth the necessary adjustment, policymakers have initiated important fiscal reforms, the IMF pointed out.

Sustained

These should be sustained to gradually raise fiscal savings, focusing on further rationalizing energy subsidies, containing the wage bill and increasing non-oil revenues, which will create space for higher growth-enhancing capital outlays, it added.

Better aligning labor market incentives, promoting higher productivity through privatization and partnerships with the private sector, and further efforts to improve the business climate are key to encourage diversification, private sector development and employment opportunities for nationals, the IMF underlined.

The IMF team highly values the candid and comprehensive discussions with the Kuwaiti authorities. Staff would like to express its sincere gratitude to them for their hospitality and excellent cooperation, Al-Hashel made clear.

Economic activity in the non-oil sector has continued to expand, albeit at a slower pace, reflecting the impact of lower oil prices, he said, quoting the mission.

Nonhydrocarbon growth slowed from 5 percent to an estimated 3 percent in 2015, as lower confidence weighed on consumption.

Notwithstanding efforts to contain government spending, the fiscal and external accounts have deteriorated markedly. Dwindling oil revenues have pushed the government’s fiscal balance-excluding investment income and after mandatory transfers to the Future Generations Fund (FGF)-into a large deficit of over 17 percent of GDP in 2015/16, generating significant financing needs, the IMF cautioned.

According to the mission, the external current account surplus has also declined significantly, reaching 5 percent of GDP in 2015 and is set to fall further to 4 percent in 2016 Financing needs have thus far been met mainly by drawing down financial buffers, and the government has also started borrowing. The government deficit has been financed mainly through draw down of General Reserve Fund (GRF) assets.

The issuance of domestic bonds has been stepped up this year, contributing to a net financing of about KD 1.4 billion year to date-over half the targeted amount for 2016/17, he said.

The government has also announced its intention to tap international capital markets to raise up to KD 2.9 billion.

Hydrocarbon output is set to increase by 2 percent annually, consistent with investment in the sector.

Overall, real GDP growth would reach about 3 percent over the medium term. Inflation is expected to temporarily increase to 4 percent in 2017, reflecting energy prices increases in 2016-17, before easing gradually. Higher hydrocarbon exports will lift the current account surplus above 10 percent of GDP by 2021, he mentioned.

The IMF stated that Kuwait’s fiscal position is projected to improve modestly, but financing needs after transfers to the FGF will remain large.

The mission’s baseline scenario assumes oil prices will gradually recover to some USD 60 by 2021.

It takes into account the fiscal impact of the measures recently enacted (increase in gasoline prices and legislated electricity and water price reform) but does not factor in the government’s planned fiscal reforms that have not yet been implemented, he explained.

Under this baseline scenario, the government fiscal balance after transfers to the FGF is projected to decline from about 17 percent of GDP this year to some 13 percent of GDP over the medium term, and cumulative gross financing needs would amount to about KD 35 billion over the next 6 years, the governor state.

The IMF, however, suggested that Kuwait would remain significantly exposed to a number of potential external and domestic risks under the baseline scenario.

The main risk to the outlook is a further sustained drop in oil prices, which would lead to larger deficits and financing needs. Although the government’s strong credit rating (AA) would enable it to tap international markets, investors’ appetite for GCC bonds could decline in case of large regional financing needs.

A gradual but sustained fiscal effort is needed to reduce vulnerabilities and bring government savings closer to levels consistent with intergenerational equity, the IMF recommended.

Under the mission’s baseline projections, rising gross government debt and large fiscal financing needs make the fiscal position more vulnerable to shocks.

The mission recommended an adjustment path that will allow for achieving the intergenerational equity over a ten-year period, he said. This would entail reducing the government deficit (after transfer to the FGF) from a projected 17 percent of GDP in 2015/16 to about 7 percent by 2021 and broadly eliminating this deficit by 2025.

The mission expressed support to the authorities’ plan to raise nonhydrocarbon revenue as part of the medium-term fiscal consolidation program. This includes introducing a value-added tax (VAT) at a rate of 5 percent, as well as raising excise tax on tobacco and sugary drinks, he said.

These measures will be implemented in the context of the regional GCC agreement and could generate additional revenue in the order of 1 percent of GDP.

The mission encouraged the authorities to step up tax administration reforms so as to implement the VAT as early as possible.

The mission also recommend going ahead with plans to further rationalize energy subsidies (estimated to have amounted to about 6 percent of GDP in 2015/16), Al-Hashel said.

Gradual implementation would help reduce the inflationary impact and give time to businesses to adjust.

The mission welcomed the authorities’ intention to control the wage bill as part of the medium-term fiscal effort.

The authorities’ proposed wage reform is intended to help simplify and harmonize the wage structure and centralize wage policy decisions.

The mission also advised Kuwait to limit employment growth, while promoting private sector job creation for nationals, and communicate early on about its objectives to help reset expectations, he pointed out.

The IMF team welcomes the ongoing efforts to strengthen budget planning, including the move from the annual incremental budgets to medium-term budgets starting in FY2017/18 and the planned introduction of three-year expenditure ceilings.

It underscored the importance of developing a top-down approach, strengthening budget processes-including by reducing the fragmentation of the investment budget-and expenditure control mechanisms, and developing reporting and accountability mechanisms.

The appropriate mix between the various borrowing and investment options should be guided by a systematic assessment of their relative costs and benefits, including that of maintaining liquid buffers as insurance against shocks.

It welcomed the focus of the government’s six-pillar reform plan on privatization and PPPs. Building on stronger legal and institutional frameworks, the government aims at a greater use of these options to enhance the role of the private sector in the economy and upgrade infrastructure.

Further improving the business environment is important to foster diversification. Recent efforts include the opening of the Kuwait Business Center, a one-stop window that will help streamline registration and licensing procedures, and steps toward digitalizing administrative procedures, he concluded.

 

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