The latest IMF Article IV consultation, released on 29 March, unsurprisingly painted a positive picture of the state's economic performance over the past 12 months. However, the fund urged the government to press ahead with further economic reforms while the overall macroeconomic situation remained favourable.
According to the IMF, real gross domestic product (GDP) grew by an average of 7.8 per cent in 2004 and 2005, as a result of higher oil production and buoyant non-oil activity.
Per capita GDP grew by 44 per cent over the same two years to $26,000. But inflation last year climbed to 4 per cent due to rising non-oil activity, abundant liquidity and the delayed effect of the depreciation of the dinar against the euro and the yen.
IMF directors commended the government for its management of the economy. 'The high pace of economic expansion, driven in part by oil-related inflows and terms-of-trade gains, boosted per capita income and contributed to large fiscal and current account surpluses as well as to the rapid accumulation of external assets for future generations,' the report said. 'Looking ahead, directors agreed that Kuwait's financial position is likely to remain strong over the medium term given the favorable outlook for oil prices.'
But the fund also urged the government to up the pace of reform by gradually increasing capital expenditure, rationalising subsidies and achieving a better balance between productive expenditure and fiscal savings. It also noted that 'efficient management of the rapidly growing public sector savings will be key to Kuwait's long-term fiscal viability.'
The report suggested that the government should consider introducing value-added tax (VAT) in co-ordination with other GCC states. It also said that consideration should be given to phasing out the ceiling on the loans-to-deposits ratio, reducing income tax imposed on foreign companies and making the state's Kuwaitisation policy more flexible.