Dubai: Sustained political gridlock has hobbled reforms and increased macroeconomic vulnerabilities of Kuwait, but a new high-level effort offers hope for resolving the impasse, the International Monetary Fund (IMF) Staff said in their latest Article IV Consultation report.
The IMF said the authorities have responded swiftly and decisively to address the COVID-19 pandemic and its fallout, paving the way for economic recovery.
“In the near term, supporting the recovery and mitigating the impact of the pandemic remains a priority. Over the medium term, strong fiscal consolidation is needed to reinforce sustainability,” the IMF said.
Political hurdles
Commenting on the impact of political hurdles to fiscal reforms in Kuwait, the IMF Staff Report noted that several important reform bills, including a new debt law needed to ensure orderly financing of fiscal operations, await parliamentary approval with no clear timeline for approval.
The IMF staff said, led by the Amir, efforts are underway to resolve the political impasse between government and parliament ahead of the next parliamentary session starting October 26, which could pave the way for accelerating the reform momentum.
Post-pandemic recovery
The economy is expected to gradually recover from the pandemic. Besides the direct impact of COVID-19 on economic activity, sharp declines in oil prices and cuts to oil production under the OPEC+ agreement weighed on the oil sector. Real GDP is estimated to have contracted 8.9 percent in 2020, with non-oil growth at -7.5 per cent and oil growth at -9.8 per cent. Non-oil GDP growth of 3 percent is projected for 2021, as economic activity gradually recovers and the global environment improves, rising to about 3.5 per cent over the medium term.
Oil production is projected to rebound as OPEC+ quotas are relaxed. Overall, GDP is projected to grow around 2.7 percent over the medium term. Inflation is expected to average 3.2 percent in 2021 given increases in food prices and costs of travel-related services and stay at about 3 percent over the medium term.
Fiscal balance
The IMF staff expects a sharp improvement in FY 2021/22 fiscal balance given the rebound in oil prices, but thereafter the fiscal position would deteriorate in the absence of consolidation.
The fiscal balance (including investment income) sharply deteriorated in FY 2020/21 to a deficit of 15.4 per cent of GDP, reflecting lower oil revenue, fiscal support measures to ease the effects of the pandemic, and a slump in economic activity. In FY 2021/22 the fiscal balance is projected to improve to a surplus of 2 per cent of GDP owing to a rebound in hydrocarbon revenue, significantly higher nominal GDP that reduces the expenditure to GDP ratio, spending cuts, and the withdrawal of some COVID-19 related fiscal measures.
The debt law is expected provide sufficient flexibility for adequate debt management and avoid legislating restrictions such as on debt maturities, sizes or use of financing, which are best managed at the operational level. Absent the passage of the debt law and with no legal provision to tap the much larger Future Generations Fund (FGF), fiscal financing has relied primarily on drawing down General Reserve Fund’s (GRF) liquid assets. Early resolution of the political gridlock in parliament is needed to pass the debt law in a timely fashion.
