IMF calls for slashing public sector wages, imposing taxes

Global lender warns that without reforms, Kuwait’s financing needs will grow rapidly

KUWAIT: The International Monetary Fund yesterday urged OPEC member Kuwait to introduce a package of reforms that includes imposing taxes and phasing out subsidies to plug a chronic budget deficit. Kuwait, which heavily depends on oil for almost 90 percent of its revenues, has been hit hard since crude prices crashed in mid2014 and earlier this month approved a budget with a huge shortfall for the sixth year in a row. Income from investments held through the government’s sovereign wealth fund is not included in the budget.

Spending, mostly on hard-to-reverse categories such as salaries and social aid, expanded by 25 percent only in the past two fiscal years while the public wage bill has grown by about 6.0 percent annually, the IMF said. Kuwait, which pumps 2.7 million barrels of oil per day, has huge fiscal reserves estimated at $644 billion by the IMF. Unlike other Gulf states, Kuwait has a lively parliament which has repeatedly blocked government plans to impose taxes or charges on public services. “Delays in fiscal reforms would further amplify fiscal financing needs while slow progress on the structural front would dampen growth,” the IMF said in a report.

Kuwait’s economy grew by just 0.7 percent last year and is forecast by the IMF to grow by 1.2 percent this year. The IMF said that without reforms, the government’s financing needs are projected to grow rapidly, accounting for $180 billion over the next six years. The global lender proposed specific reforms over the next decade to help the state adjust its finances.The plan calls for gradually reducing public spending and curtailing the public wage bill, which accounts for nearly half of public expenditures, by making private sector jobs more attractive.

The government should phase out fuel, electricity and water subsidies and social aid, which currently account for 7.5 percent of GDP or $10.3 billion annually, IMF said. It called on the government to follow in the footsteps of Saudi Arabia, the United Arab Emirates and Bahrain in imposing a five-percent value-added tax and excises on luxury goods, as well as broadening profit tax on domestic companies. “— Agencies