Kuwait must rein in public spending, especially on wages, and find new sources of income if it wants to keep its fiscal position strong, the International Monetary Fund said.
The OPEC member should also push ahead with its KD30 billion ($106 billion) development plan to diversify its heavily oil-reliant economy, boost foreign investment and create jobs, it said. Kuwait has so far enacted little of the plan.
Kuwait’s budget surplus is forecast to drop to a still robust 27.4 per cent of gross domestic product in the fiscal year that began in April from 33.4 per cent in 2012/13, the IMF said in a statement following regular consultations in Kuwait.
But in view of recent sharp rises in current spending and relatively small non-oil revenues, government expenditure is set to exceed oil revenues by 2017/18, raising the risk from any sustained drop in oil prices, it said based on its projections.
“The mission underlines the need to contain current spending, especially in the public wage bill, to provide fiscal buffers in the case of an oil price shock, and to continue to save for intergenerational equity,” the Fund said.
Kuwait’s fiscal buffers were large even before the oil price needed to balance its budget rose to $70 per barrel in 2013/14, the IMF said. Brent crude is forecast to hover around $107.5 this year in Reuters’ September poll.
“In the medium term, fiscal restraint of about 8 percent of GDP through lower current spending growth and higher non-oil revenues is required to reduce the non-oil deficit gradually,” the Fund said in the statement posted on its website late on Monday.
“The implementation of the proposed measures to contain the non-oil deficit should, however, commence in the near term, since delays would result in the widening of this deficit and require larger adjustment in the future,” it said.
On the expenditure side, scaling down electricity and fuel subsidies is needed, the IMF said, as they are taking money away from the much-needed infrastructure investments.
Like other wealthy Gulf states, Kuwait provides a generous welfare system and does not collect income tax. The subsidies, which were over six per cent of GDP in 2012, “engender wasteful consumption and need to be targeted,” the IMF said.
The state subsidy system for wages, which boosts the salaries of Kuwaitis working in the private sector, has become open-ended and expensive, though it was supposed to be a temporary measure.
Kuwait has lagged peers like the United Arab Emirates and Qatar in competitiveness and foreign investment. It has the most open political system in the Gulf Arab region but infighting and bureaucracy have slowed the development plan, announced in 2010, which includes plans for a new oil refinery, airport, highways and hospitals.
The country needs to develop sources of income other than oil, such as by extending the 15 per cent corporate tax imposed on wholly foreign-owned companies to all firms and by imposing a value-added tax together with fellow Gulf states, the IMF said.