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Tue 29 Jan 2019 02:16 PM

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IMF urges Kuwait to implement deeper economic reforms

International Monetary Fund says further measures needed to secure adequate savings for future generations

IMF urges Kuwait to implement deeper economic reforms
Kuwait’s non-oil growth is set to increase to about 3.5 percent in 2020, from 2.5 percent last year.

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).