IMF urges Kuwait to cut current spending

Kuwait needs to curb subsidies, wage increases and other parts of its current spending as part of overall reforms intended to spur growth after weak  performance in its economy last year, the IMF said Thursday.

The Washington-based Fund said Kuwait’s economy, one of the largest Arab economies, shrank by around 4.5 per cent in 2009 to emerge as the weakest performer in the Gulf but is projected to rebound in 2010.

Concluding its fourth consultation article with the Gulf emirate this month, the International Monetary Fund said the sharp fall in Kuwait’s real GDP last year was caused by flat growth in the non-hydrocarbon sector and a steep decline in the oil sector as a result of output cuts in line with OPEC’s quota accords.

The IMF said the 2010 economic outlook for Kuwait depends largely on government spending and the associated private investment.
 
It said the external risks to the outlook include a weaker than expected global recovery and a deterioration in the regional economic or political environment.

“The overarching domestic risks would be associated with the inability of the government to meet the spending targets set out in the development plan. Political gridlock could delay necessary reforms and impact implementation, and bureaucratic hurdles could discourage private sector participation,” it said.

“The macro policy mix is adequate but growth of current expenditures should be contained. Increases in recent years in wages, subsidies, and transfers could undermine long-term fiscal sustainability and should be moderated…as monetary policy remains constrained by the exchange rate, macro-prudential policies should ensure financial stability if inflationary pressures were to reemerge.”

The IMF said the successful implementation of the authorities’ growth agenda would require”progress in structural reforms.”

“In this context, the passage of recent key laws, namely the Capital Markets Law, the Labor Law, and the Privatization Law is welcome. The authorities should move ahead with an efficient implementation of these laws and the amendment of other key legislation, particularly the Companies and Tender Laws. The implementation of the development plan should take into account project viability, absorptive capacity, and supply constraints.”

The IMF’s figures showed Kuwait’s economy was severely affected by the 2008 global fiscal crisis and ensuing collapse in crude prices and demand, prompting the emirate and other OPEC producers to slash supplies.

In 2009, real Gross Domestic Product (GDP) is estimated to have contracted by about 4.5 per cent—the weakest performance among Gulf Cooperation Council (GCC) countries—on account of a decline in real oil GDP of more than 11 per cent, and flat real non-oil GDP, mainly reflecting weaker activity in the financial and construction sectors, according to the IMF.

Lower domestic demand and a 12 per cent drop in import prices reduced average consumer price inflation to four per cent, it said.

“The economic outlook is broadly positive. The economy is expected to rebound in 2010, and to grow steadily over the medium term as global recovery boosts the demand for oil and the government implements its four-year development plan, starting with an expansionary budget in 201020/11….the fiscal and current account balances are expected to remain stable in 2010–11 and improve in subsequent years, as oil receipts and investment income recover.”

But the report added that Kuwait’s financial sector is expected to continue to face challenges in the immediate term.
“Rising NPLs and large concentrations in banks’ loan portfolio—particularly in real estate, ICs, and equities—are a source of concern,” it said.

Nevertheless, aggregate financial soundness indicators show that the banking sector is well capitalized and highly liquid, which should help the system to remain stable. On the other hand, challenges facing ICs will be more extensive.”
 

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