By Massoud A. Derhally
Report forecasts strengthening in recovery after government spending and higher oil revenues
Kuwait's economic recovery is expected to strengthen on the back of higher government spending and higher oil revenues, the International Monetary Fund said this week.
The country's economic growth will slow to 6.6 percent this year after growing 8.3 percent in 2011 as oil production increased 15 percent boosting current account and budget surpluses, the IMF said.
Non-oil economic activity is expected to expand about 5.5 percent in 2012, compared with 4.5 percent the year before, while fiscal and external surpluses are projected to remain over 30 percent and 40 percent of GDP, respectively. Inflation is expected to moderate slightly to 4.4 percent, due to a decline in global food inflation.
"The near-term macroeconomic policy stance is expected to remain supportive," the IMF said in a 51-page report. "Risks for the outlook include low implementation rates of the capital budget and legislative bottlenecks, which could dampen the recovery. Like other countries, Kuwait is exposed to external risks, including the intensification of the European crisis, but these risks are manageable."
The oil rich emirate has posted fiscal and external surpluses for the past 13 years which provide a buffer.
Government spending in 2012 is forecast to increase 15 percent, including a 16 percent increase in the public sector wage bill and a 30 percent increase in capital expenditure, the Washington-based organisation said.
Kuwait's stock of financial assets will help ease the impact of a temporary decline in oil prices, it said. If the debt crisis in Europe worsens oil prices and demand for oil may slow in conjunction with the risk of further tightening of global financial markets. This in turn could affect Kuwait’s fiscal and external revenues and the private sector’s debt roll-over risk, further weakening the financial situation of investment companies.
Kuwait has "significant fiscal space, but rising public sector wage and pension costs and rapid population growth are expected to exert pressures on public finances in the medium term," the report added. "If Kuwait is to preserve wealth equally for its future generations, fiscal consolidation will be needed in the medium term."
The country's banking sector remains "resilient, but conditions in the investment companies sector have deteriorated," the IMF said, adding that authorities should continue to be "vigilant regarding existing and emerging risks," as adverse external shocks could also impact the valuation of Kuwait’s cross-border investments, estimated at over US$51bn in 2010 or 41 percent of GDP.