IMF urges Kuwait to implement deeper economic reforms

KUWAIT CITY: Kuwait needs to implement deeper reforms to secure adequate savings for future generations despite forecasts of stronger growth in its non-oil economy, the International Monetary Fund (IMF) has said.

It said Kuwait’s non-oil growth is set to increase to about 3.5 percent in 2020, from 2.5 percent last year, as higher oil prices is expected boost capital spending.

But the IMF urged greater reforms, saying that even if implemented fully and on time, the measures under consideration would not close the intergenerational equity gap.

It said in a new report that the government’s non-oil balance would fall well short of levels needed to ensure equally high living standards for future generations — a gap of 13.5 percent of non-oil GDP by 2024.

Additional fiscal consolidation will therefore be needed to close this gap, which would also reduce financing needs and preserve liquid buffers, the IMF noted.

It said the country must curtail the public wage bill (18 percent of GDP) to encourage nationals to seek opportunities in the private sector, thereby enhancing its productivity and competitiveness.

It also urged Kuwait to gradually phase out fuel, electricity, and water subsidies and transfers saying that despite earlier reforms, at 5.3 percent of GDP, the fuel and utility subsidy bill remains large.

“Not only are these subsidies costly, they also encourage excessive consumption and inefficient investment and, being untargeted, disproportionately benefit the wealthiest,” the IMF said.

It also urged broadening the coverage of the profit tax and introducing an excise on luxury goods. Applying the profit tax to all companies operating in Kuwait would raise non-oil revenue while leveling the playing field.

An excise tax on luxury goods would contribute to a more socially-balanced adjustment mix. A personal income tax on high-income individuals could be an alternative, it noted.

The IMF said the country’s banking sector remains sound while real estate is starting to recover, and equity markets have outperformed regional peers.

Growth is expected to strengthen. As capital project implementation accelerates, non-oil growth is projected to increase to about 3.5 percent in 2020. Inflation is expected to rise in 2019–20 to about 2.5 percent as the deflationary factors in 2018 unwind.

The underlying fiscal position is projected to gradually improve over the medium term, assuming the introduction of excises on tobacco and sugary drinks in 2020/21 and a value-added tax (VAT) in 2021/22, small increases in fees for government services, and stricter enforcement of eligibility rules for transfers.

Last week, Kuwait announced a 2019/20 budget that included a 4.7 percent rise in spending to KD22.5 billion ($74.15 billion).

The International Monetary Fund (IMF) said the Albanian authorities should use the current favourable economic environment to further advance policies and structural reforms to entrench macroeconomic stability, build buffers, and foster sustainable and inclusive growth.

Albania should continue additional fiscal consolidation to build stronger buffers, lower the fiscal deficit further and accelerate the reduction of public debt, the executive board of the IMF said in a statement late on Monday, after it concluded an 2018 Article IV consultation with Albania.

“Directors recommended containing fiscal risks, including those stemming from public‑private partnerships (PPPs),” the IMF executive board noted.

The IMF also highlighted the need to consolidate and strengthen the decision‑making processes in public investment management and underscored the importance of ensuring value for money for PPP projects through competitive bidding.

The executive board called for strong measures to address the bottlenecks to credit growth and to improve the effectiveness of monetary transmission.

“They encouraged the authorities to expedite the implementation of de‑euroization measures, and to address structural weaknesses in the provision of credit, including continued high NPLs. Strengthening property rights and insolvency regimes will be helpful in this regard,” the IMF added.

IMF’s executive board called for resolute structural reforms to improve the business climate, with emphasis on strengthening the rule of law.

“Welcoming the progress thus far, they underscored that it is important to complete the ongoing judicial reform and strengthen anti‑corruption efforts. Directors emphasized the need to reduce the pervasive informality, by maintaining a simple and fair tax system, sustaining improvements in tax collection, and by increasing the quality of public services,” the IMF noted.

Economic growth is estimated at 4.2% in 2018, the fFund said, adding that the growth is projected to stay close to this level over the medium term, supported by stronger exports, including tourism, and investments in infrastructure.

However, Albania’s gross domestic product (GDP) is expected to slow down to 3.7% in 2019.

“The exchange rate has appreciated sharply since March 2018, putting downward pressure on inflation, which is expected to rise gradually to reach its 3% target by 2021,” the statement noted.