By Fawaz Karami KUWAIT, Jan 27 (KUNA) -- The International Monetary Fund (IMF) issued Monday, the final statement prepared by its mission in Kuwait from January 7 to 20 in the framework of the periodic consultations for 2020, which showed that the growth of the local economy reached 0.7 percent in 2019.
The Governor of the Central Bank of Kuwait (CBK) Dr. Mohammad Al-Hashel, in a statement to KUNA, outlined the mission's final statement content and the nature of the structural challenges facing the Kuwaiti economy and the ways to confront them.
The statement also praised CBK efforts in strengthening the banking and financial sector and increasing its fortification.
The mission statement came within three main axes, the recent macro-financial developments in Kuwait, the macroeconomic outlook and risks and the policy discussions, Al-Hashel said.
The website of the IMF published Monday the statement and praised the improvement in the growth of non-oil sectors in Kuwait, which reached about three percent last year, driven by the power of government and consumer spending.
The IMF statement said that the oil output is expected to contract by one percent, broadly in line with the OPEC+ agreement. Taken together, this would bring overall growth to about 0.7 percent in 2019 from 1.2 percent in 2018.
The mission's expectations indicated that Kuwait's oil production would increase slightly by this year to reach 2.7 million barrels per day, which would lead to real GDP growth of about 0.3 percent.
Supported by government spending, employment, and credit growth, non-oil GDP could expand by three percent in 2020 and accelerate to 3.5 percent over the medium term, as the real GDP growth would be around 1.5 in 2020 and 2.7 percent in the medium term.
On inflation, the mission reported, that the current account surplus is estimated to have narrowed to 8.5 percent of GDP in 2019 on account of lower oil exports. Inflation rose to 1.1 percent, reflecting higher food and transport prices and slower housing rent deflation.
The statement said that the Fiscal financing needs have remained large. The consolidated balance after mandatory transfers to the Future Generations Fund (FGF) and excluding investment income amounted to a deficit of about eight percent of GDP in 2018-2019. With the new debt law awaiting parliamentary approval, the government has been unable to issue debt since October 2017. Instead, it has continued to rely on the General Reserves Fund (GRF) for financing.
It also expected the current account surplus of Kuwait's paid balance to decline by 8.5 percent of GDP in 2019.
The banking system remains sound, the statement said, as the system wide capital adequacy ratio (CAR) reached 17.6 percent in September 2019, and banks have plentiful short-term liquidity. Nonperforming loans net of specific provisions stood at 1.2 percent, while loan-loss provisioning is high at 229 percent. Net interest income has declined due to a narrowing spread between bank lending rates and the cost of funds.
Credit has rebounded thanks to supportive prudential and monetary conditions, the statement said, as credit growth accelerated, spurred by CBK decision in late 2018 to increase ceilings on personal loans and supported by favorable monetary conditions.
The CBK skillfully deployed various monetary policy instruments to support lending to the economy while maintaining the attractiveness of the dinar. As the Fed Funds rate rose in 2018, the CBK kept its policy lending rate unchanged, except in March, raising only the repo rate, a benchmark for deposits. While the CBK skipped the first two US Federal Reserve interest rate cuts in 2019, it followed suit after the October cut. As a result, bank lending rates have remained broadly unchanged since 2018.
The mission commends the CBK for prudent regulation and supervision which have helped keep the banking sector resilient, it also supports CBK's plans to conduct a comprehensive inventory of macro prudential tools to ensure that they continue to promote financial sector resilience, prevent buildup of systemic risks, and carefully balance financial stability and growth objectives. Plans to upgrade stress-testing techniques and early warning indicators are welcome, the mission said, the mission supports the recent decision to remove preferential zero risk weights for exposures to GCC sovereigns in the calculation of risk-weighted assets.
The mission also supports ongoing CBK efforts to strengthen supervisory and regulatory frameworks. To enhance risk-based supervision, the CBK is planning to better integrate its on- and off-site supervision functions, including through cross training of staff. The mission welcomes progress towards establishing a centralized Shariah Board at the CBK, as this would reduce risks from inconsistent interpretation of Shariah law in Islamic banks.
"The Fiscal measures envisaged by the government in the near-term are modest," the mission said. Given the challenging context, the government is focusing on measures that are under its control and do not require legislative changes.
It has identified a menu of streamlining options, which include closing loopholes in various social transfer programs, reprioritizing capital expenditure, and reducing waste, including by improving procurement.
It also plans to raise nonoil revenue by introducing the long-planned excise on tobacco and sugary drinks, repricing government services, and strengthening revenue collection, especially utility payments.
The mission expected government's financing needs are projected to grow rapidly. The consolidated fiscal balance would turn from a surplus of 5.5 percent of GDP in 2019 to a deficit of a similar magnitude by 2025. After compulsory transfers to the FGF and excluding investment income, this would give rise to average annual financing needs of 20 percent of GDP or, cumulatively, some KD 55 billion (UAS 180 billion) over the next six years.
"Covering such large financing needs will present a challenge," it said. Under the current arrangement with respect to the FGF and without recourse to other financing sources, GRF's readily available assets would be exhausted in less than two years, as total Kuwait Investment Authority assets however would continue to increase.
The mission stressed important of curtailing the public wage bill over time. To achieve this, the availability and attractiveness of public sector jobs should be reduced by more closely aligning public sector wages with those in the private sector and containing future wage growth. Harmonizing the public wage grid structure, fostering merit-based compensation, and reducing the very high public-private wage premia would generate sizeable savings. It would also incentivize nationals to seek opportunities and create jobs in the private sector, thereby boosting competitiveness and productivity.
The mission said introducing a five-percent value added tax (VAT) would broaden the tax base, yield stable revenue, help upgrade tax administration capacity, and contribute to a deeper understanding of the input-output structure of the economy.
Broadening the coverage of the profit tax and introducing excises on luxury goods. In addition to generating revenue, extending the business profit tax coverage to domestic companies would level the playing field and encourage FDI.
The mission said that the authorities should continue efforts to strengthen crisis management and resolution framework. Reforms should focus on revamping the existing framework to promote orderly resolution of banks, reduce moral hazard, promote market discipline, and help safeguard fiscal resources. To that end, the authorities have prepared a draft law on banking resolution, currently in the cabinet, and initiated internal discussions on the appropriate setup for a deposit insurance scheme in Kuwait.
The mission welcomes recent amendments to the law on credit information that have enabled the credit bureau to start gathering credit information on businesses and enhance data collection on retail borrowers.
As a comprehensive nationwide rating system is established and banks are better able to price risk, the CBK could consider gradually relaxing the interest rate cap on consumer loans as well.
The mission believes that the CBK has a wide menu of macro-and micro-prudential tools to arrest potential risks to financial stability, while its commendable efforts in strengthening consumer protection, including by enhancing financial literacy, would help mitigate risk to individual borrowers.
The visit of the International Monetary Fund mission to the country came within the periodic consultations for 2020 under the fourth article of the agreement to establish the fund, as the Central Bank of Kuwait, in coordination with the Fund and the concerned local authorities arranged for that visit.
Among these arrangements, collecting of information and data and arranging of meetings with senior officials in various agencies to discuss economic conditions, financial policy, monetary policy and the strength of the banking and financial sector. (end) fnk.tb.sam