Large financial assets, low debt and a sound banking sector underpin the resilience of Kuwait’s economy, however, the country must implement a new set of measures, including a value added tax, to offset the risks of lower oil prices and uncertain output, the International Monetary Fund said
Supported by government spending, employment and credit growth, Kuwait’s non-oil gross domestic product could expand by 3 per cent this year and accelerate to 3.5 per cent over the medium term, the Washington-based lender said in a statement on Monday after concluding its Article IV consultations with Kuwait.
A rise in consumer spending, on the back of credit growth in Kuwait, has also underpinned the country’s non-oil economic growth, it noted.
With oil exports broadly flat and imports rising, the current account surplus of Kuwait would dissipate over the medium term, according to the IMF. It expects inflation in the country to increase to 1.8 per cent this year from 1.1 per cent in 2019, as house rents begin to recover.
The banking system in the country remains sound and the system-wide capital adequacy ratio climbed to 17.6 per cent as of September 2019 – well above the required regulatory ratio – with banks in the country flushed with short-term liquidity.
Kuwait’s equity markets also outperformed the country’s Gulf peers in 2019, partly benefiting from portfolio inflows after inclusion of Kuwaiti equities in the FTSE Russel and MSCI emerging markets indexes. MSCI Kuwait surged 29 per cent last year, compared to a 15 per cent rise in MSCI GCC and MSCI Emerging Markets indexes. Market capitalisation of Borsa Kuwait, the oldest bourse in the region, also climbed to an all-time high of $35 billion (Dh128.5bn) in December 2019, the IMF noted.
Assets of the Kuwait Investment Authority, the country’s sovereign wealth fund, surpassed 410 per cent of the country’s GDP by the end of 2019. Its Future Generations Fund also continued to receive mandatory contributions from the government, as it generated strong returns on its assets, which bodes well for the economy, according to the IMF mission’s estimates.
Kuwait, like its GCC peers, has embarked on fiscal and structural reforms of its economy including improvements in its business climate, a reduction of the government’s role in the economy, deepening capital markets, and prioritising development of small and medium-sized enterprises. The aim is to boost private sector growth, however, the fiscal adjustment needed is “proving difficult” due to the public’s opposition to reducing the public wage bill, subsidies and introducing new taxes, the IMF said.
Introduction of a 5 per cent VAT would “broaden the tax base, yield stable revenue, help upgrade tax administration capacity and contribute to a deeper understanding of the input-output structure of the economy”, the IMF said. “This would also bring Kuwait in line with Bahrain, Saudi Arabia and the UAE, which have recently implemented the tax as part of the GCC-wide agreement.”
Delays in fiscal reforms, the IMF said, would amplify the country’s fiscal financing needs, while slow progress on the economy’s structural reforms could dampen growth.
Weaker-than-expected global growth could drive oil prices lower and a sustained drop in crude prices would generate “unfavourable macro-financial dynamics, with weakening fiscal and current account balances and widening financing needs”, the IMF added.