Im­ple­men­ta­tion of six-pil­lar re­form plan: The key chal­lenge for Kuwait

Con­clud­ing state­ment of IMF Mis­sion’s visit to Kuwait

Kuwait Times - - BUSINESS -

KUWAIT: Kuwait’s fis­cal and ex­ter­nal ac­counts have been ad­versely af­fected by the lower oil prices, and fi­nanc­ing needs have emerged. Re­silient nonoil ac­tiv­ity and strong over­sight by the Cen­tral Bank of Kuwait have kept the fi­nan­cial sec­tor sound. 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. These should be sus­tained to grad­u­ally raise fis­cal sav­ings, fo­cus­ing on fur­ther ra­tio­nal­iz­ing en­ergy sub­si­dies, con­tain­ing the wage bill and in­creas­ing nonoil rev­enue, which will cre­ate space for higher growth-en­hanc­ing cap­i­tal out­lays. 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 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.

I. Re­cent Macro-Fi­nan­cial De­vel­op­ments

1. Eco­nomic ac­tiv­ity in the nonoil sec­tor has con­tin­ued to ex­pand, al­beit at a slower pace, re­flect­ing the im­pact of lower oil prices. Non­hy­dro­car­bon growth slowed from 5 per­cent to an es­ti­mated 31/2 per­cent in 2015, as lower con­fi­dence weighed on con­sump­tion. Not­with­stand­ing an im­prove­ment in project im­ple­men­ta­tion un­der the five-year De­vel­op­ment Plan, avail­able in­di­ca­tors point to a fur­ther mod­est soft­en­ing in nonoil growth this year. How­ever, with oil pro­duc­tion re­cov­er­ing af­ter three con­sec­u­tive years of de­cline, over­all growth is on track to reach about 31/2 in 2016. In­fla­tion, which has been hov­er­ing at around 3 per­cent, is set for an uptick to about 31/2 this year, re­flect­ing the re­cent gaso­line price in­creases.

2. The fi­nan­cial sec­tor has re­mained sound and credit con­di­tions fa­vor­able. As of June 2016, banks fea­tured high cap­i­tal­iza­tion (cap­i­tal ad­e­quacy ra­tio of 17.9 per­cent), ro­bust prof­itabil­ity (re­turn on as­sets of 1 per­cent), low non­per­form­ing loans (ra­tio of 2.4 per­cent), and high loan-loss pro­vi­sion­ing (206 per­cent cov­er­age). Bank liq­uid­ity has im­proved, sup­ported by a re­cov­ery in de­posits of gov­ern­ment en­ti­ties. Credit to the pri­vate sec­tor has been in­creas­ing at a solid pace (about 63/4 per­cent year-over-year in Septem­ber 2016), driven mainly by in­stall­ment loans. Nev­er­the­less, a few sec­tors to which banks have siz­able ex­po­sures have shown some weak­en­ing. The real es­tate sec­tor is con­fronted with a fur­ther slow­down in the vol­ume and the value of sales. Non­fi­nan­cial cor­po­rate earn­ings have con­tin­ued to de­te­ri­o­rate. Stock prices have reg­is­tered broad-based de­clines since mid-2014 and have re­mained volatile. Banks’ ex­po­sure to In­vest­ment Com­pa­nies has been re­duced to 3 per­cent on av­er­age, but the lat­ter are ex­posed to real es­tate and lo­cal and regional eq­ui­ties.

3. 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. Even when in­clud­ing in­vest­ment in­come and be­fore trans­fers to the FGF, fis­cal sur­pluses have van­ished. The un­der­ly­ing (non-oil) fis­cal po­si­tion has nev­er­the­less im­proved over the past two years, re­flect­ing a de­cline in the sub­sidy bill, non-re­cur­rence of one-off spend­ing, and ef­forts to cur­tail cur­rent ex­pen­di­ture. The com­po­si­tion of gov­ern­ment ex­pen­di­ture has also im­proved in fa­vor of growth-en­hanc­ing cap­i­tal spend­ing. The ex­ter­nal cur­rent ac­count sur­plus has also de­clined sig­nif­i­cantly, reach­ing 51/4 per­cent of GDP in 2015 and is set to fall fur­ther to 41/2 per­cent in 2016

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

II. Macro-fi­nan­cial Out­look and Risks

5. Growth is ex­pected to gain mo­men­tum over the medium term, sup­ported by in­fras­truc­ture in­vest­ment. A con­tin­ued im­prove­ment in project im­ple­men­ta­tion un­der the Kuwait De­vel­op­ment Plan will sup­port a grad­ual re­cov­ery in real nonoil GDP growth to about 31/2 per­cent in 2017 and 4 per­cent there­after. 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 41/2 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.

6. 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 $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. Un­der this base­line sce­nario, the gov­ern­ment fis­cal bal­ance af­ter trans­fers to the FGF is pro­jected to de­cline from about 171/2 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. These are as­sumed to be cov­ered by a con­tin­ued draw­down of as­sets in the GRF, mea­sured amounts of do­mes­tic bond is­suance to avoid crowd­ing out pri­vate sec­tor in­vest­ment, and some ex­ter­nal bor­row­ing.

7. This macro-fis­cal en­vi­ron­ment is ex­pected to re­main broadly sup­port­ive of fi­nan­cial sta­bil­ity and credit growth. Growth en­hanc­ing cap­i­tal ex­pen­di­tures will sup­port bank prof­itabil­ity and in­ter­nal cap­i­tal gen­er­a­tion. While there are down­side risks to as­set qual­ity, loss ab­sorp­tion buf­fers are high. Credit growth has been ro­bust, but the sig­nif­i­cant con­tri­bu­tion of in­stall­ment loans that are se­cured by salary as­sign­ments mit­i­gates con­cerns of a build-up of fi­nan­cial risks.

8. How­ever, 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. Kuwait would, there­fore, be faced with the trade­off of is­su­ing more do­mes­tic debt, at the risk of squeez­ing do­mes­tic liq­uid­ity and crowd­ing out pri­vate sec­tor credit, or al­low­ing read­ily avail­able buf­fers to run lower. Other risks in­clude re­form set­backs or slow De­vel­op­ment Plan im­ple­men­ta­tion, which could en­tail a larger fis­cal deficit and slower growth. Height­ened se­cu­rity risks could also af­fect in­vestor con­fi­dence and more volatile global fi­nan­cial con­di­tions could in­crease bor­row­ing costs. The mis­sion and the au­thor­i­ties’ bank­ing stress tests in­di­cate that the fi­nan­cial sys­tem is re­silient to se­vere sol­vency and liq­uid­ity shocks, but a pro­tracted pe­riod of lower oil prices has the po­ten­tial to in­crease liq­uid­ity and credit risks, ex­ac­er­bate stock mar­ket volatil­ity, and neg­a­tively af­fect real es­tate prices.

III. Pol­icy Dis­cus­sion A. An­chor­ing macroe­co­nomic sta­bil­ity

9. A grad­ual but sus­tained fis­cal ef­fort is needed to re­duce vul­ner­a­bil­i­ties and bring gov­ern­ment sav­ings closer to lev­els con­sis­tent with in­ter­gen­er­a­tional equity. Un­der the mis­sion’s base­line pro­jec­tions, ris­ing gross gov­ern­ment debt and large fis­cal fi­nanc­ing needs make the fis­cal po­si­tion more vul­ner­a­ble to shocks. In ad­di­tion, the nonoil bal­ance is pro­jected to di­verge from lev­els con­sis­tent with in­ter­gen­er­a­tional equity by some 20 per­cent of nonoil GDP by 2021, call­ing for a sig­nif­i­cant ad­di­tional in­crease in fis­cal sav­ing. At the same time, large fis­cal buf­fers and low debt al­low for a grad­ual ap­proach to con­sol­i­da­tion that sup­ports growth and fi­nan­cial sec­tor sta­bil­ity.

10. The mis­sion rec­om­mends an ad­just­ment path that will al­low for achiev­ing the in­ter­gen­er­a­tional equity over a ten-year pe­riod. This would en­tail re­duc­ing the gov­ern­ment deficit (af­ter trans­fer to the FGF) from a pro­jected 171/2 per­cent of GDP in 2015/16 to about 7 per­cent by 2021 and broadly elim­i­nat­ing this deficit by 2025. This pro­posed path, which strikes a bal­ance be­tween achiev­ing nec­es­sary fis­cal sav­ings and mit­i­gat­ing the im­pact of ad­just­ment on growth, can be achieved through a com­bi­na­tion of the main ex­pen­di­ture and rev­enue re­forms in­cluded in the gov­ern­ment’s six-pil­lar re­form plan.

11. The mis­sion sup­ports the au­thor­i­ties’ plan to raise non-hy­dro­car­bon 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. These mea­sures will be im­ple­mented in the con­text of the regional GCC agree­ment and could gen­er­ate ad­di­tional rev­enue in the order of 13/4 per­cent of GDP. The mis­sion en­cour­ages the au­thor­i­ties to step up tax ad­min­is­tra­tion re­forms so as to im­ple­ment the VAT as early as pos­si­ble. In ad­di­tion, the au­thor­i­ties are pre­par­ing a busi­ness profit tax re­form that will ap­ply to all en­ter­prises. At a rate of 10 per­cent, it could raise an ad­di­tional 11/2 per­cent of GDP in rev­enue by 2020. Staff also sup­ports the gov­ern­ment’s plans to grad­u­ally ad­just the price of gov­ern­ment ser­vices.

12. Fur­ther sub­sidy re­form is crit­i­cal. The gov­ern­ment has taken im­por­tant steps this year to raise gaso­line and util­ity prices. The mis­sion en­cour­ages the au­thor­i­ties to move ahead with their plans to fur­ther ra­tion­al­ize en­ergy sub­si­dies (es­ti­mated to have amounted to about 6 per­cent of GDP in 2015/16). Grad­ual im­ple­men­ta­tion would help re­duce the in­fla­tion­ary im­pact and give time to busi­nesses to ad­just. Mit­i­gat­ing mea­sures should be de­signed so as to tar­get the most vul­ner­a­ble house­holds and pro­mote en­ergy ef­fi­ciency. A well-de­signed com­mu­ni­ca­tion strat­egy, high­light­ing the bud­getary costs and dis­tor­tions gen­er­ated by en­ergy sub­si­dies, as well as their dis­tri­bu­tional im­pact and the planned com­pen­satory mea­sures, would help build con­sen­sus for these re­forms.

13. The mis­sion wel­comes the au­thor­i­ties’ in­ten­tion to con­trol the wage bill as part of the medium-term fis­cal ef­fort. The bor­row­ing from di­ver­si­fied in­vestors and draw­downs in GRF as­sets would help main­tain ad­e­quate buf­fers, take ad­van­tage of the cur­rent fa­vor­able bor­row­ing con­di­tions, and mit­i­gate po­ten­tial neg­a­tive macro-fi­nan­cial im­pli­ca­tions.

17. Con­tin­ued progress to­ward strength­en­ing the in­sti­tu­tional and le­gal frame­works for debt man­age­ment and in­creased trans­parency would help. The es­tab­lish­ment of a high-level debt com­mit­tee, backed by the cre­ation of new debt man­age­ment unit (DMU) at the min­istry of fi­nance, pro­vides a strong ba­sis for co­or­di­na­tion across all rel­e­vant gov­ern­ment bod­ies. Fur­ther ef­forts are on­go­ing to clar­ify re­spon­si­bil­i­ties and im­prove in­sti­tu­tional co­op­er­a­tion and fully op­er­a­tional­ize the DMU. It would also be im­por­tant to put in place a medi­umterm debt strat­egy. The mis­sion wel­comes the au­thor­i­ties’ in­ten­tion to ad­dress le­gal hur­dles that con­strain the amounts and type of in­stru­ments that can be is­sued, in­clud­ing Sukuk, hence help­ing broaden the in­vestor base. Main­tain­ing a debt ceil­ing would, how­ever, help main­tain fis­cal dis­ci­pline. Im­proved dis­clo­sure of the gov­ern­ment’s as­sets and li­a­bil­i­ties, mov­ing to more com­pre­hen­sive fis­cal ac­counts, and im­prov­ing time­li­ness of in­tra-year bud­getary ex­e­cu­tion data would help strengthen in­vestor con­fi­dence and re­duce bor­row­ing costs. Pro­mot­ing a deep and liq­uid gov­ern­ment debt mar­ket that fa­cil­i­tates pri­vate debt is­suance is im­por­tant to fos­ter cap­i­tal mar­ket and pri­vate sec­tor de­vel­op­ment. In­tro­duc­ing reg­u­lar auc­tions, com­mu­ni­cat­ing trans­par­ently, and de­vel­op­ing sec­ondary markets would help in this re­gard.

18. The mis­sion con­sid­ers the peg to an undis­closed bas­ket ap­pro­pri­ate, as it has pro­vided an ef­fec­tive nom­i­nal an­chor. The au­thor­i­ties are fully com­mit­ted to the cur­rent ex­change rate regime. The mod­est de­pre­ci­a­tion against the dol­lar since mid2014 (7 per­cent) on ac­count of hav­ing a bas­ket rather than dol­lar peg has been help­ful dur­ing a pe­riod of dol­lar strength. Staff’s ex­ter­nal sec­tor as­sess­ment sug­gests a mod­er­ate cur­rent ac­count gap, the bulk of which would be closed by in­creas­ing fis­cal sav­ings as rec­om­mended over the medium term. The mis­sion notes that over the longer term, as the econ­omy di­ver­si­fies, the ben­e­fits of greater ex­change rate flex­i­bil­ity may in­crease.

B. Safe­guard­ing fi­nan­cial sta­bil­ity

19. The CBK has been proac­tive in strength­en­ing reg­u­la­tory over­sight and mit­i­gat­ing fi­nan­cial sta­bil­ity risks. Banks are un­der Basel III reg­u­la­tions for cap­i­tal, liq­uid­ity, and lever­age. Macro-pru­den­tial mea­sures-to prevent ex­ces­sive debt build up by house­holds and limit banks’ ex­po­sure to real es­tate and eq­ui­ties-are be­ing en­forced to min­i­mize sys­temic risks. A new cor­po­rate gov­er­nance frame­work has also re­cently been in­tro­duced. In light of the po­ten­tial risks from a sus­tained fur­ther de­cline in oil prices, and given high loan con­cen­tra­tions, com­mon ex­po­sures and in­ter­con­nect­ed­ness of the fi­nan­cial sys­tem, the CBK’s en­hanced sur­veil­lance bodes well for early iden­ti­fi­ca­tion of fi­nan­cial sta­bil­ity risks. In par­tic­u­lar, the mis­sion wel­comes the on­go­ing ini­tia­tives to strengthen stress test­ing tech­niques, de­velop early warn­ing in­di­ca­tors, step up ef­forts to mon­i­tor de­posit trends, and iden­tify emerg­ing pres­sures in cor­po­rate and house­hold bal­ance sheets.

20. A num­ber of steps would help fur­ther strengthen fi­nan­cial sec­tor re­silience. The mis­sion un­der­scored that a for­mal frame­work for op­er­a­tional­iz­ing macro-pru­den­tial mea­sures would help main­tain ap­pro­pri­ate cov­er­age of risks over time and the bal­ance be­tween pre­empt­ing the buildup of ex­ces­sive risks and al­le­vi­at­ing pos­si­ble liq­uid­ity shocks and pro-cycli­cal­ity in credit and as­set markets. Re­forms to strengthen the in­sol­vency regime are on­go­ing in col­lab­o­ra­tion with the World Bank. Progress on this front, com­bined with ju­di­cial re­forms to in­tro­duce com­mer­cial courts and ex­pe­dite en­force­ment, would help min­i­mize losses-given-de­fault. While the CBK is well-equipped to deal with pos­si­ble liq­uid­ity short­ages-as it ap­plies five liq­uid­ity re­quire­ment in­stru­ments, in­clud­ing the liq­uid­ity cov­er­age ra­tio and the net sta­ble fund­ing ra­tio-de­vel­op­ing a liq­uid­ity fore­cast­ing frame­work would also help an­tic­i­pate po­ten­tial sys­tem-wide pres­sures. Sus­tain­ing ef­forts to stream­line non­core bank ac­tiv­i­ties where cor­po­rate struc­tures are com­plex would fa­cil­i­tate risk iden­ti­fi­ca­tion and ef­fec­tive su­per­vi­sion.

21. Strength­en­ing the cri­sis man­age­ment frame­work would pro­mote mar­ket dis­ci­pline and safe­guard fis­cal re­sources. A spe­cial res­o­lu­tion regime for banks has not yet been put in place. A blan­ket guar­an­tee cov­ers all bank­ing sys­tem de­posits. Con­sid­er­a­tion should be given to es­tab­lish­ing frame­works that al­low for least-cost and ef­fec­tive res­o­lu­tion in the event of stress in the bank­ing sys­tem. For­mal­iz­ing ar­range­ments be­tween key reg­u­la­tory in­sti­tu­tions would also help im­prove cri­sis pre­pared­ness. The mis­sion wel­comes the ad­vanced ar­range­ments for tech­ni­cal co­op­er­a­tion with the IMF in these ar­eas. au­thor­i­ties’ pro­posed wage re­form is in­tended to help sim­plify and har­mo­nize the wage struc­ture and cen­tral­ize wage pol­icy de­ci­sions. In view of the al­ready high to­tal gov­ern­ment wage bill-in­clud­ing in com­par­i­son with peers-the re­form should be de­signed in a way to en­sure that the over­all wage bill does not rise fur­ther, and that any ini­tial costs of mov­ing to the new wage grid are off­set by sav­ings in al­lowances and bonuses. More­over, to al­low bet­ter con­trol over fu­ture wage growth, the re­form should pro­vide flex­i­bil­ity in set­ting wage in­creases. Over time, this would help re­duce the wage gap with the pri­vate sec­tor, re­duce na­tion­als’ reser­va­tion wages, en­hance pri­vate sec­tor com­pet­i­tive­ness, and fa­cil­i­tate di­ver­si­fi­ca­tion of the econ­omy in a way that max­i­mizes the par­tic­i­pa­tion of na­tion­als. The mis­sion also en­cour­ages the au­thor­i­ties to limit em­ploy­ment growth, while pro­mot­ing pri­vate sec­tor job cre­ation for na­tion­als, and com­mu­ni­cate early on about its ob­jec­tives to help re­set ex­pec­ta­tions.

14. Fur­ther stream­lin­ing other cur­rent spend­ing will cre­ate space for higher growth-en­hanc­ing in­vest­ment. Con­tain­ing trans­fers to en­ter­prises and house­holds and goods and ser­vices would con­trib­ute to the ad­just­ment ef­fort, while al­low­ing for higher cap­i­tal out­lays. This would in turn mit­i­gate the con­trac­tionary im­pact of fis­cal ad­just­ment, pro­vided it is ac­com­pa­nied by pub­lic in­vest­ment man­age­ment re­forms to im­prove im­ple­men­ta­tion ca­pac­ity and ef­fi­ciency. In this re­gard, the mis­sion wel­comes the ef­forts un­der­way to bet­ter pri­or­i­tize projects through strength­ened ap­praisal pro­cesses, with em­pha­sis on en­cour­ag­ing di­ver­si­fi­ca­tion and em­ploy­ment op­por­tu­ni­ties for na­tion­als. Sys­tem­atic ex-post eval­u­a­tion and ef­fec­tive im­ple­men­ta­tion of the anti-cor­rup­tion frame­work are also im­por­tant.

15. A medium-term fis­cal frame­work is needed to guide fis­cal con­sol­i­da­tion and re­duce im­ple­men­ta­tion risks. The mis­sion 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. These re­forms should take place within the con­text of a com­pre­hen­sive medium-term frame­work, guided by an over­ar­ch­ing long-term fis­cal pol­icy ob­jec­tive (for ex­am­ple based on in­ter­gen­er­a­tional equity con­sid­er­a­tions) and set­ting a con­sis­tent path for an in­ter­me­di­ary tar­get (a nonoil fis­cal bal­ance ob­jec­tive would help delink spend­ing from oil rev­enue volatil­ity). In this con­text, the mis­sion un­der­scores 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.

16. Bor­row­ing and in­vest­ment de­ci­sions should be guided by a com­pre­hen­sive as­set-li­a­bil­ity man­age­ment strat­egy that takes into ac­count macro-fi­nan­cial im­pli­ca­tions. 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. The macro-fi­nan­cial im­pact of these op­tions should also be as­sessed care­fully, tak­ing into con­sid­er­a­tion the im­pli­ca­tions of build­ing up debt and the im­pact of bor­row­ing on do­mes­tic liq­uid­ity, credit, and cen­tral Note: bank re­serves. In this re­gard, co­or­di­na­tion with CBK will re­main im­por­tant. A bal­anced ap­proach en­tail­ing do­mes­tic and ex­ter­nal

C. Pri­vate sec­tor-led growth and eco­nomic di­ver­si­fi­ca­tion

22. Cre­at­ing jobs for a grow­ing young na­tional pop­u­la­tion will re­quire ad­dress­ing la­bor mar­ket in­ef­fi­cien­cies and en­cour­ag­ing pri­vate sec­tor de­vel­op­ment and di­ver­si­fi­ca­tion. La­bor mar­ket and civil ser­vice re­forms should aim at im­prov­ing in­cen­tives for na­tion­als to take up jobs in the pri­vate sec­tor, in­clud­ing by man­ag­ing ex­pec­ta­tions about the limited fu­ture avail­abil­ity of pub­lic sec­tor jobs. Sus­tain­ing the re­cent ef­forts to stream­line pub­lic sec­tor wages and ben­e­fits would also con­trib­ute to mak­ing the pri­vate sec­tor more at­trac­tive and en­cour­age the hir­ing of na­tion­als by pri­vate-sec­tor firms. Boost­ing the pri­vate sec­tor de­mand for na­tion­als’ la­bor will also re­quire fos­ter­ing an ed­u­ca­tion sys­tem that re­duces skill mis­matches.

23. The mis­sion wel­comes 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. While the pri­va­ti­za­tion pro­gram is still in its early stages, sev­eral Build-Op­er­ate-Trans­fer projects are in the pipe­line. Con­tin­ued progress to­ward es­tab­lish­ing clear timeta­bles, ad­vanc­ing prepara­tory work to strengthen un­der­ly­ing as­sets, and pro­mot­ing a tran­spar­ent en­vi­ron­ment that fos­ters com­pe­ti­tion and re­duces hid­den costs and con­tin­gent li­a­bil­i­ties for the gov­ern­ment will help stim­u­late pri­vate sec­tor in­vest­ment and boost pro­duc­tiv­ity.

24. 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. Given the cen­tral role SMEs can play in eco­nomic di­ver­si­fi­ca­tion and job cre­ation, a sim­i­lar ini­tia­tive is planned for SMEs. The mis­sion em­pha­sized the need to sus­tain re­forms to fa­cil­i­tate ac­cess to land and fi­nance, re­duce the bur­den of ad­min­is­tra­tive pro­ce­dures and ex­ces­sive reg­u­la­tions, and fos­ter com­pe­ti­tion. It wel­comed the au­thor­i­ties’ in­ten­tion to im­prove the func­tion­ing of the Na­tional Fund for SMEs de­vel­op­ment to free up re­sources for small busi­nesses. Con­sid­er­a­tion could be given to re­view­ing the hur­dles to SMEs’ ac­cess to fi­nance, in­clud­ing the po­ten­tial im­pact of the cap on lend­ing rate spreads.

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