Kuwait’s government has started reducing some state subsidy payments and is an advanced stage of preparing a plan to cut subsidies for kerosene and electricity, the International Monetary Fund said.
Subsidy cuts are an important economic reform for Kuwait because lavish subsidies, mostly on energy, swallow about KD5.1 billion ($17.7 billion) annually, or roughly a quarter of the government’s projected spending this fiscal year, according to government figures.
Despite Kuwait’s vast oil wealth, such spending threatens to push the state budget into deficit later this decade, the IMF has warned.
So far, the government – like other governments in the Gulf Arab region – has shied away from major reform of its subsidy system because of political sensitivities.
But in a report released this week after regular consultations with Kuwaiti authorities, the IMF said some reforms had now started.
“Subsidies have been eliminated for diesel (with potential saving of 0.5 per cent of GDP), and the government is in advanced stages of sending a proposal to the cabinet for reducing subsidies for kerosene and electricity,” the report said.
“Moreover, the government recently rationalised some allowances for Kuwaitis traveling for healthcare abroad,” it added.
The IMF did not give details of the reforms and government officials were not available for comment. Plans for subsidy cuts have received little publicity in the Kuwaiti media, perhaps because of their political sensitivity.
The IMF has been urging Kuwait to restrain spending on public wages and subsidies to make its finances more sustainable in the long term.
The government said in June that it had decided in principle to remove subsidies on diesel fuel, pending a study on how to deal with the negative impact on consumers, according to state news agency KUNA. That measure was expected to save around $1 billion a year.
Kuwait has posted budget surpluses since 1995 but rising government spending is projected to slash the surplus to around 12.1 per cent of gross domestic product in 2019, the IMF estimated in April. It expects a surplus of 26.3 per cent of GDP in 2014, the report showed.
“Staff’s analysis shows that a $20 decline in oil prices relative to the baseline would result in reversing of the fiscal position – excluding investment income – from a surplus to a deficit in the medium term,” the IMF said in its latest report.
“Fiscal restraint in the medium term is…needed to help reduce fiscal vulnerabilities and bring the fiscal stance closer to benchmark sustainability level.”
The budget surplus edged up to KD12.9 billion dinars in the last fiscal year to March as government spending fell, largely because of a drop in capital expenditure.
In its latest report, the IMF slashed its GDP growth forecasts for Kuwait to 1.3 per cent this year and 1.7 per cent next year, from 2.6 per cent and 3.0 per cent predicted in April.
It also estimated that Kuwait’s economy shrank 0.2 per cent in 2013, its first contraction since 2010, compared with its previous estimate of 0.8 per cent growth.
The downturn was mainly due to a 1.8 per cent drop in oil-related GDP as growth in the non-hydrocarbon sector accelerated to 2.8 per cent, the report showed.
The figures suggest Kuwait underperformed other Gulf Arab oil exporters by a large margin last year; businessmen blame red tape, slow progress in building infrastructure and domestic political tensions for the economy’s weakness.