1.6 percent in FY2018/19. Next year ’s KUWAIT budget projects a rise of 5 percent in gov- Recent developments ernment spending (over the last budget), marking an increase for the third consec- Growth recovered to an estimated 1.6 utive year, and a deficit target (excluding percent in 2018, after contracting by 3.5 investment income and before SWF trans- Table 1 2018 percent in 2017. High frequency data for fers) of about 14 percent of GDP. Howev- P o pulatio n, millio n 4.2 2018 suggest that the recovery was sup- er, as in past years, actual outturns should GDP , current US$ billio n 133.3 ported by higher oil prices and rising be considerably better given conservative GDP per capita, current US$ 31749 public sector employment that bolstered budget assumptions. Fiscal reforms are a household spending. Kuwait also in- proceeding slowly; the implementation of Scho o l enro llment, primary (% gro ss) 100.6 Life expectancy at birth, years a 74.7 creased oil production, helping to com- the VAT has been postponed until 2021. pensate for an unexpected drop in oil Large fiscal financing gaps since 2014 Source: WDI, M acro Poverty Outlook, and official data. Notes: prices towards the end of the year. The have been financed by a mix of draw- country is the fifth largest OPEC oil pro- downs from the General Reserve Fund (a) M ost recent WDI value (2016) ducer, and one of the few OPEC members (GRF) and debt issuance. Parliament is with spare oil production capacity. Bank expected to approve over the coming lending to consumers, underpinned by months a new debt law raising the debt public sector pay, remains strong, rising ceiling from KD 10 to KD 25 billion by 5.2 percent in 2018. The banking sector (US$83 billion) and increasing the maxi- remains healthy albeit with a concentrat- mum bond tenor from 10 to 30 years, ed balance sheet. At 18.4 percent, bank which should enable a shift in Kuwait’s GDP growth has recovered in line with capital adequacy ratios are above the cen- debt profile away from domestic debt oil sector developments, and external and tral bank’s required 13 percent. Inflation towards longer tenor international bonds. fiscal balances improved amidst higher was subdued at around 0.6 percent in The external position remains strong. Fi- energy prices in 2017-18. A loose fiscal 2018 due to declining housing costs and nancial buffers held by the Kuwait Invest- persistently weak food price growth. The ment Authority are estimated at 465 per- stance and rising public infrastructure central bank used the flexibility in the cent of GDP at end-2017. Higher oil prices spending will buttress growth in the me- managed peg to tighten monetary policy have boosted export receipts, leading to dium term. Continued volatility in oil more slowly than the US Fed during 2018, the current account (CA) to shift back into prices underscores the need to accelerate reflecting concerns about growth. surplus in 2017. Improving trade balances Fiscal pressures eased in 2018 in line with lifted the CA surplus to an estimated 10 key fiscal reforms. The slow pace of struc- the recovery in oil prices; however, the percent in 2018. tural reforms needed to diversify away deficit –excluding investment income and Kuwait is an oil-rich country, where abso- from hydrocarbons and support private before transfers of oil revenue to the sov- lute poverty and involuntary unemploy- sector activity is a key challenge. ereign wealth fund (SWF)—remained ment are virtually nonexistent. Eighty per- large at close to 9 percent of GDP in cent of employed Kuwaiti nationals work FY2017/18. Higher revenues and a small in the public sector. In contrast, migrants, reduction in current expenditures over who make up two-thirds of the popula- the past year should lower it to around tion, constitute the bulk of lower-income FIGURE 1 Kuwait / Real GDP growth FIGURE 2 Kuwait / Central bank policy rates Percent yoy Percent 15 8 Aggregate Kuwait central bank discount rate Oil 7 10 U.S. fed funds target rate Non-oil 6 5 5 0 4 3 -5 2 -10 1 -15 0 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-00 Mar-03 Mar-06 Mar-09 Mar-12 Mar-15 Mar-18 Sources: Haver, World Bank. Sources: Haver, World Bank. MPO 160 Apr 19 residents. Additional concerns for migrant and its hinterland countries with China ’s consolidation, expenditure rationalization workers include unpaid or delayed wages, Belt and Road Initiative, beginning with and revenue mobilization reforms over difficult working conditions and fear of a the operation of the new Mubarak al - the medium term. However, parliamen- crackdown. About 18 percent of the total Kabeer port. Growth could prove higher tary opposition to critical fiscal reforms population lives on less than half the medi- if Gulf Gateway projects are implement- remains a key challenge. an income level—this number is 1.5 per- ed. The delay in VAT reforms and higher Longer term challenges relate to the econ- cent for Kuwaiti nationals and 34 percent government spending are expected to omy’s heavy dependence on oil. Notwith- for others. keep the public sector in a deficit over the standing Kuwait’s large oil reserves, the medium term. The CA surplus is ex- global shift to cleaner energy threatens pected to moderate to about 6 percent of economic and fiscal sustainability over the Outlook GDP as infrastructure-related import spending increases. long term. Instead of being used to build “above ground wealth” through invest- ments in human and physical capital, oil OPEC+ oil output cuts in the first half of rents (which are derived from a depleting 2019 are expected to keep growth sub- dued at 1.6 percent in 2019. In the medium Risks and challenges resource) have been channeled into an expanding public-sector workforce, and term, the economy is expected to grow at generous wage, subsidy and transfer ben- around 3 percent as higher government Key external risks include spillovers from efits, in turn depressing the long-term spending supports the non-oil sector. geo-political tensions and conflict, global productivity potential of the economy. Plans to invest US$115 billion in the oil financial volatility, and volatility in oil Private sector development and job crea- sector over the next five years should fur- prices. A slowdown in global growth tion has been modest. Kuwait ranks 97 out ther boost oil production, if they can be could prompt a decline in energy prices, of 190 economies in the 2019 World Bank implemented – a long standing challenge. which would add pressure on fiscal and Doing Business Report – the lowest Resumption of production in the shared external balances. Lower oil prices in re- among its GCC peers – reflecting on the fields (Khafji and Wafra) with Saudi Ara- cent years have, in the meantime, resulted bureaucratic procedures and suboptimal bia offers a more immediate prospect of in a depletion of liquidity buffers; further business environment. Comprehensive an oil sector boost. drawdowns from the GRF could erode reforms are needed that are focused on In March 2018, the government an- these further. To mitigate these risks, and innovation, private sector entrepreneur- nounced the Northern Gulf Gateway to secure fiscal sustainability, the govern- ship and job creation, and improving the project, which aims to connect Kuwait ment will need to persevere with fiscal quality of its labor force. TABLE 2 Kuwait / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 2.9 -3.5 1.5 1.6 3.0 2.9 Private Consumption 1.1 2.9 4.0 4.0 4.0 4.0 Government Consumption 0.6 4.0 8.3 3.6 2.7 5.9 Gross Fixed Capital Investment 11.6 5.2 5.0 3.0 5.0 6.0 Exports, Goods and Services 2.5 -3.3 1.8 2.3 3.2 3.2 Imports, Goods and Services 4.2 11.5 10.0 6.0 5.0 7.0 Real GDP growth, at constant factor prices 2.2 -2.9 1.5 1.8 2.9 2.9 Agriculture 3.6 3.4 3.3 3.3 3.1 3.1 Industry 2.3 -6.3 1.9 2.8 3.3 3.1 Services 1.9 2.8 1.0 0.1 2.3 2.5 Inflation (Consumer Price Index) 3.2 1.6 0.6 1.0 2.5 2.0 Current Account Balance (% of GDP) -4.6 5.9 10.4 7.6 6.1 5.7 Net Foreign Direct Investment (% of GDP) -3.8 -6.5 -5.9 -5.8 -5.5 -5.3 Fiscal Balance (% of GDP) -13.9 -9.0 -1.6 -3.4 -1.6 -2.6 Debt (% of GDP) 10.3 19.1 21.9 26.6 30.0 33.3 Primary Balance (% of GDP) -13.9 -8.8 -1.3 -3.0 -1.2 -2.1 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. MPO 161 Apr 19