IMF urges Kuwait to reduce oil dependence, boost savings

• The report, based on information available as of March 2, was prepared before the coronavirus outbreak became a pandemic, the Washington-based international lender said.
• Kuwait has lagged behind other Gulf states in introducing reforms aimed at diversifying its economy after oil prices dropped in 2014/2015.

DUBAI: Kuwait needs to urgently reduce its dependence on oil revenues and boost savings, despite its vast financial buffers and low levels of debt, the International Monetary Fund said on Monday.

Kuwait - a major oil exporter - saw its overall economic growth decline to 0.7pc last year from 1.2pc in 2018, as oil production cuts agreed with OPEC and non-OPEC partners weighed on its oil sector, the IMF said in a report.

The report, based on information available as of March 2, was prepared before the coronavirus outbreak became a pandemic, the Washington-based international lender said.

"It, therefore, does not reflect the implications of these developments and related policy priorities ... The outbreak has greatly amplified uncertainty and downside risks around the outlook."

Kuwait's fiscal financing needs, excluding investment income and discounting compulsory transfers to the country's Future Generations Fund (FGF), remained large at 7.7pc of GDP in the fiscal year 2018-2019. Kuwait's fiscal year starts on April 1.

"The challenge to reduce dependence on oil and boost savings has become more urgent ... Kuwait has large financial buffers and low debt, but the window of opportunity to tackle its challenges from the position of strength is narrowing," the IMF said, citing subdued forecasts for oil revenues.

Kuwait has lagged behind other Gulf states in introducing reforms aimed at diversifying its economy after oil prices dropped in 2014/2015.

Every year, the country deposits 10pc of total revenue into the its sovereign wealth fund, FGF.

"At current policies, the overall fiscal balance would turn into a growing deficit, which, after mandatory savings in the FGF, would give rise to large financing needs over the medium term," the IMF said.

In January, Kuwait said it expected a budget deficit of 9.2 billion dinars ($29.26 billion) in the fiscal year starting on April 1, after taking into account the 10pc deposit into FGF.

The IMF said authorities should reform Kuwait's large public sector bill and shift from generalised subsidies to targeted compensation schemes. The government should also continue to work on the introduction of a value added tax.

"Taxes on corporate income, luxury items, and personal income of the wealthy could be also considered for a more socially-balanced adjustment mix," it said.

To boost the private sector and incentivise Kuwaitis to seek private sector jobs, public sector wages should be aligned with those in the private sector, said the fund.