Kuwait: 2013 Article IV Consultation

KEY ISSUESContext. High oil prices and increased production have enabled the government to continueto record high fiscal and external surpluses and build strong buffers. Large infrastructureinvestments are expected to support the growth momentum.Outlook and risks. Overall real non-oil gross domestic product (GDP) growth is projected toincrease modestly to 3 percent in 2013, driven by an increase in domestic consumptionand pick-up in public investment and to 4.4 percent in 2014. The overall averageconsumer price inflation (CPI) is projected at 3 percent in 2013. The fiscal and externalsurpluses are projected at 27 percent of GDP and 39 percent of GDP, respectively, in 2013,reflecting high oil prices. The main downside risks to the outlook are a sustained fall in oilprices and renewed political gridlock.Macroeconomic policy mix. The government should increase capital spending, while overthe medium- to longer-term, oil wealth should be conserved for future generations throughlower current spending growth, particularly in wages and public employment, and higher nonoilrevenues. Monetary conditions are expected to remain supportive of credit growth.Financial stability. The banking system is resilient to credit and market risks. Investmentcompanies (ICs) are still deleveraging and restructuring. Providing greater institutional andfunctional autonomy for the central bank, and developing a more formal macroprudentialinstitutional and policy framework would help strengthen macroeconomic and financialstability. A review of the investment companies (ICs) segment, with particular focus on theirobjectives and role in the economy, and financial viability is needed.Diversifying the economy and creating jobs for nationals in the private sector. ReducingKuwait's dependence on oil in the future will require economic diversification, particularly inexport-oriented industries, which calls for further structural reforms to improve the businessenvironment and governance. Creating incentives for employment of nationals in the privatenon-oil sectors would entail containing growth in public sector wages and jobs. An integratedplan for job creation in the private sector is called for, some elements of which will includeenhancing the educational quality and vocational training, promoting female labor forcetraining, and encouraging entrepreneurship by developing the small and medium-sizedenterprises (SMEs) sector.