The Economic Challenges Facing Kuwait and the Region

The IMF Middle East Center for Economics and Finance in Kuwait, jointly with the Arab Fund for Economic and Social Development, held a high-level symposium that discussed the economic policy challenges faced by Kuwait and the Arab world.

The IMF Middle East Center for Economics and Finance (CEF) in Kuwait, jointly with the Arab Fund for Economic and Social Development (AFESD), held a high-level symposium on “The Economic Policy Challenges Faced by Kuwait and the Arab World” on Tuesday, October 31, 2017. The event was hosted at the Arab Fund’s Headquarters. The panel discussion was chaired and moderated by His Excellency Dr. Yousef Al-Ebraheem, Economic Advisor at Al-Diwan Al-Amiri. Mr. Aasim Husain, Deputy Director of the IMF’s Middle East and Central Asia Department and Mr. Stéphane Roudet, who leads the yearly IMF mission to appraise Kuwait’s economic situation (the IMF Article IV Consultation mission) started off the conversation with presentations on economic challenges in the Arab world and in Kuwait. This was followed by a discussion with His Excellency Mr. Warren Hauck, Ambassador of Australia to Kuwait, and exchanges of views with the audience.

In his introductory remarks, His Excellency Dr. Yousef Al-Ebraheem indicated that the symposium was the seventh high-level forum organized by the CEF jointly with the AFESD, aimed at stimulating discussion on emerging economic issues that are of special interest to policymakers and scholars in Kuwait and the wider Arab community. He argued that the topic of economic and financial sector reforms was important in Arab countries, given pressures due to persistent conflicts, a refugee crisis, and, especially for GCC countries, the “lower-for-longer” oil price environment. A common challenge for many countries in the region has been to design and implement reform programs that help lower unemployment and poverty, achieve fiscal consolidation, and raise growth in a manner that is sustainable, inclusive and equitable.

Mr. Husain’s presentation highlighted that the growth outlook was improving somewhat across the region. Pointing to the recent release by the IMF of its Middle East and North Africa Regional Economic Outlook publication, which includes detailed forecasts for each country, he also noted that there was a diverging growth story between groups of countries. In oil exporters, notwithstanding an improvement in non-oil growth to 2.6 percent this year, overall growth was expected to drop below 2 percent due to the OPEC+ cuts in oil production. In contrast, growth in oil importers was seen as recovering to over 4¼ percent this year, reflecting the global recovery, stronger exports and foreign investment, and more tourism receipts. Countries in conflict and their neighbours continued to be affected by a difficult security situation. Mr. Husain also stressed the progress being made in adjusting fiscal positions in the region, particularly in oil exporters, where the sharp decline in oil prices had led to the emergence of large deficits.

Mr. Husain stressed that, in spite of these positive developments, medium-term growth prospects remained muted, especially in light of the job creation challenge in the region. He noted the IMF projections were pointing to some increase in growth over the medium-term for oil importers, but at a lower level than experienced in the past. Prospects for oil exporters were seen as relatively weaker in a “lower-for-longer” oil price environment that implied continued need for fiscal consolidation efforts. At the same time, however, 20 to 25 million youths were expected to enter the labor force by 2022. Mr. Husain stressed that absorbing this rapid increase necessitated much higher growth, driven by the private sector, and rich in jobs to ensure opportunities for all.

Mr. Husain flagged a number of reform areas he saw as critical to achieve these objectives. First, he highlighted the need to improve the quality of education. In particular, he explained training needed to cater to the needs of the private sector as opposed to that of governments. While in some countries, this requires more spending on education, in others, the key is to improve the quality of the education system by reorienting spending. The second area of reforms was aimed at improving the business environment. While some progress has been made in some areas across the region, Mr. Husain made the point that countries outside the Arab world were making more rapid progress and Arab countries are at risk of falling behind in relative terms. That, in turn, could make it difficult to attract foreign investment, which flows to locations with the best business environment. He also highlighted the importance of strengthening access to finance, including in oil exporters, which in spite of having more developed financial markets would benefit from enhanced access to credit, particularly for SMEs. Finally, Mr Husain explained how deeper integration in global value chains would help generate jobs, especially as global economic growth picks up.

Mr. Roudet started his remarks by stressing that, with the yearly IMF Article IV Consultation mission just starting, the event provided an early opportunity to reach out to a broad audience and seek views from various stakeholders on the economic situation and policy challenges in Kuwait. Building on Mr. Husain’s presentation, he highlighted that Kuwait, like other countries in the region, needed to boost growth and job creation for nationals. He noted that doing so in a more constrained budgetary environment required rethinking the economic growth model, moving away from public-sector and oil-led growth and towards a model based on private sector development and diversification.

He focused on a number of important impediments that needed to be addressed as a matter of priority. First, given the limited scope for public sector jobs going forward, he explained that labor market and civil service reforms should encourage Kuwaiti nationals to seek private sector jobs. Mr. Roudet pointed to the large difference between compensation in the public and private sectors, and explained that better aligning public sector wages and benefits in the two sectors would provide more incentives for nationals to seek jobs in private sector firms. This would also help limit wage costs in the private sector and, together with education reforms, aimed at better matching the skills of young graduates with the needs of the private sector, this would in turn encourage Kuwaiti firms to hire nationals, enhance competitiveness, and support higher and more inclusive growth.

Mr. Roudet described other steps critical to private sector development, diversification, and job creation for nationals. This included enhanced reliance on privatization and PPPs, which he saw as important to reduce the influence of the State on the economy and level the playing field. This would in turn foster competition and encourage productivity gains and investment. He also flagged the room to further improve the business climate and facilitate the creation of new businesses and jobs. Mr. Roudet noted the progress already made on this front. He also highlighted areas where further steps could help, including for example facilitating access to finance and land, especially for SMEs given their significant potential in terms of job creation, reducing the burden of administrative procedures, easing trade barriers, reducing excessive regulations and fostering competition, and further alleviating restrictions on foreign direct investment.

Given the lower-for-longer oil price environment, he explained why the IMF was encouraging fiscal reforms in Kuwait, highlighting three broad objectives. First, he noted the importance of saving a sufficient part of the oil wealth for future generations, to allow the economy and its citizens to continue to live prosperously even after oil income dries up. He also suggested reforms would help gradually reduce the government deficit and financing needs, while creating room for growth-enhancing investment over the medium term, to reduce the economy’s dependence on oil. Finally, he explained that delinking government expenditure from volatile oil revenue would help maintain macroeconomic stability by avoiding large swings in spending necessitated by sharp oil price movements.

Recognizing the efforts already made by the Kuwaiti authorities in several important areas, including in curtailing wasteful spending and to raise gasoline and utility prices, Mr. Roudet highlighted a number of important reform areas that would help further raise government savings. He explained that tax revenue in Kuwait constitutes an exceptionally small part of total revenue and that the envisaged VAT and excise taxes and profit tax reforms would help build a non-oil revenue base, thereby reducing vulnerability to oil price movements. Mr. Roudet also flagged several spending areas where significant savings can be achieved by reducing waste and inefficiency. Redirecting such savings to education, infrastructure, and support for the vulnerable would enhance job creation and opportunities for all.

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