While Kuwait’s economic recovery is underway, the International Monetary Fund (IMF) recently warned that there are “substantial” risks to the country’s economic prospects. Among its concerns include the impasse between the government and parliament that is delaying vital fiscal reforms.
This assessment emerged from the IMF’s recent bilateral discussions with Kuwait. Under Article IV of its Articles of Agreement, the organization holds periodic talks with its members, discussing economic developments and fiscal policies.
“Given Kuwait’s large fiscal and external buffers, it can undertake needed reforms from a position of strength. However, political gridlock between the government and Parliament could continue to delay reforms,” remarked IMF.
Persistent conflicts between appointed cabinets and elected parliaments have been hindering fiscal reforms for a prolonged period. One of the most important reforms is the passing of a debt law to facilitate international borrowing. In response to the oil price decline caused by the 2020 pandemic, Kuwait resorted to interim measures to temporarily stabilize its finances.
Slowed economic progress
According to the IMF’s executive board, Kuwait’s real gross domestic product (GDP) will slow down to 0.1 percent this 2023. In 2022, the country saw an 8.2 percent increase.
This deceleration is primarily attributed to cuts in oil production. Since November, Kuwait has been curbing crude output to stabilize oil prices. The Middle Eastern country is a member of OPEC+, a group of oil-producing nations led by Saudi Arabia and Russia.
In May, the IMF had initially projected a GDP growth slowdown of 0.9 percent. Despite the expected sluggishness, the IMF’s latest projection estimated a 3.8 percent growth in real non-oil GDP for this year. This is lower compared to 2022’s 4 percent.
The IMF emphasized that resolving deadlock is important for expediting reform efforts, which would consequently stimulate economic growth and promote diversification.
Kuwait’s draft budget
During the recent discussion, the IMF also addressed Kuwait’s draft budget for the fiscal year 2023 to 2024, which commenced on April 1.
The organization noted that the country’s higher spending “is appropriate given the negative non-oil output gap.” Nonetheless, it recommended that the country must eye higher non-oil revenue beginning April 2024. Additionally, Kuwait must “tackle current spending rigidities while increasing capital outlays to raise potential growth.”
In the Middle Eastern nation, over 50 percent of the draft budget’s expenditure is allocated for a comprehensive welfare system. Under the country’s social welfare scheme, citizens get a range of social benefits including access to affordable housing, healthcare, and education.
Read: Saudi, UAE, Kuwait and Qatar household wealth among highest globally
As for the projected revenues, oil is estimated to account for 88.2 percent of the country’s revenue.
In order to boost revenues, the IMF suggested that Kuwait could adopt measures such as implementing excise and value-added taxes (VAT) under a common framework under the Gulf Cooperation Council (GCC).
Of the six countries comprising GCC, Kuwait is the sole member to have no excise taxes. Meanwhile, Kuwait and Qatar are the only nations with no VAT.
Earlier in June, media reported that the finance ministry is considering applying 10 to 25 percent VAT on tobacco and its derivatives, jewelry and precious stones, luxury watches, and luxury cars. If it pushes through, the state treasury can potentially earn around KD 500 mn every year.
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