Kuwait economy to recover gradually: IMF

Sustained political gridlock has hobbled reforms and increased macroeconomic vulnerabilities, but a new high-level effort offers hope for resolving the impasse.

The authorities have responded swiftly and decisively to address the COVID-19 pandemic and its fallout, paving the way for economic recovery. In the near term, supporting the recovery and mitigating the impact of the pandemic remains a priority.

Over the medium term, strong fiscal consolidation is needed to reinforce sustainability. Comprehensive structural reforms, including to social benefits, the labor market, land allocation, and the business environment are needed to promote strong job-rich private sector growth, and alleviate fiscal strains. With large financial assets and a sound banking sector, Kuwait can enter the reforms from a position of strength.

The IMF mission welcomes the candid discussions with the authorities and expresses its gratitude for their continued cooperation. Sustained political gridlock has impeded progress in addressing fiscal risks and implementing growth enhancing structural reforms. Several important reform bills, including a new debt law needed to ensure orderly financing of fiscal operations, await parliamentary approval with no clear timeline for approval.

However, efforts led by the Amir are underway to resolve the political impasse between government and parliament ahead of the next parliamentary session starting October 26, which could pave the way for accelerating the reform momentum. Moreover, the government has been actively preparing a comprehensive reform plan-the Program of Action for the Sixteenth Legislative Term (2021/2022 2024/2025)-which aims to address the structural imbalances in the economy and public finance and promote sustainable and inclusive growth.

The authorities responded swiftly and decisively to the COVID-19 crisis. Stringent containment measures and health support to combat the COVID19 crisis have limited the cases and fatalities despite waves of infections. Fiscal, monetary, and financial support measures introduced by the government and the Central Bank of Kuwait (CBK) eased the burden on households, firms, and the financial sector, limiting the damage from the pandemic. Thanks to the authorities' strong vaccination efforts, about 80 percent of the target population had been at least partially vaccinated and over 70 percent fully vaccinated as of midSeptember 2021, and the pace of infection has slowed significantly, allowing for a pickup in economic activity.

The economy is expected to gradually recover from the pandemic. Besides the direct impact of COVID-19 on economic activity, sharp declines in oil prices and cuts to oil production under the OPEC+ agreement weighed on the oil sector. Real GDP is estimated to have contracted 8.9 percent in 2020, with nonoil growth at -7.5 percent and oil growth at -9.8 percent. Non-oil GDP growth of 3.0 percent is projected for 2021, as economic activity gradually recovers and the global environment improves, rising to about 3.5 percent over the medium term. Oil production is projected to rebound as OPEC+ quotas are relaxed.

Overall, GDP is projected to grow around 2.7 percent over the medium term. Inflation is expected to average 3.2 percent in 2021 given increases in food prices and costs of travel-related services and stay at about 3 percent over the medium term.

A sharp improvement in the fiscal balance is expected for FY 2021/22 given the rebound in oil prices, but thereafter the fiscal position would deteriorate in the absence of consolidation. The fiscal balance (including investment income) sharply deteriorated in FY 2020/21 to a deficit of 15.4 percent of GDP, reflecting lower oil revenue, fiscal support measures to ease the effects of the pandemic, and a slump in economic activity.

In FY 2021/22 the fiscal balance is projected to improve to a surplus of 2.0 percent of GDP owing to a rebound in hydrocarbon revenue, significantly higher nominal GDP that reduces the expenditure to GDP ratio, spending cuts, and the withdrawal of some COVID-19 related fiscal measures. However, in subsequent years continued expenditure pressures and declining oil prices would result in a widening deficit and significant decline in government net assets over the medium term absent strong consolidation efforts.