OPEC+ Oil Production Cuts Impact Kuwait’s Economy

Kuwait’s economy remains in recession due to the production cuts announced by OPEC+ nations, but a recovery has begun in the non-oil sector, and inflation is moderating, the International Monetary Fund (IMF) said after concluding the Article IV consultation with the Gulf nation.

The real GDP contracted by 3.6% in 2023, led by a 4.3% contraction of the oil sector given an OPEC+ production cut, and reinforced by a 1% contraction of the non-oil sector primarily reflecting lower manufacturing activity.

More recently, real GDP contracted by 1.5% y-o-y in the second quarter of 2024, driven by a further 6.8% contraction of the oil sector that was partially offset by a 4.2% rebound of the non-oil sector while headline CPI inflation declined to 3.6% in 2023, reflecting lower core and food inflation. More recently, headline CPI inflation moderated further to 2.6% y-o-y in September 2024, the IMF said.

The IMF also noted that lower oil prices and production have weakened the external and fiscal balances, while financial stability has been maintained.

The external position remained strong, with the current account surplus moderating to 31.4% of GDP in 2023, and official reserve assets amounting to $47.6 billion at end-2023, equivalent to 9.2 months of projected imports.

The fiscal balance of the budgetary central government has weakened, swinging to a deficit of 3.1% of GDP in the FY 2023-24. Nonetheless, the fiscal balance of the general government, including estimated SWF investment income and SOE profit transfers, was 26.1% of GDP in FY 2023-24.

Credit growth slowed in 2023 given higher interest rates, but banks maintained strong capital and liquidity buffers, while NPLs remained low and well provisioned for, the IMF said.

Real GDP to Expand

“The economy is projected to remain in recession under the baseline in 2024, then to recover over the medium term. Real GDP will contract by a further 2.8% in 2024 due to additional OPEC+ production cuts, then will expand by 2.6% in 2025 as the cuts get unwound,” the IMF noted.

The incipient recovery of the non-oil sector will continue in 2024 alongside a pickup in real credit growth, with non-oil GDP expanding by 2% despite fiscal consolidation. Headline CPI inflation will continue to moderate to 3% in 2024 as excess demand pressure dissipates and imported food prices fall.

The current account surplus will moderate further to 27.2% of GDP in 2024 as lower oil prices and production reduce the trade surplus. The fiscal deficit of the budgetary central government will increase to 6.6% of GDP in FY 2024-25 as lower oil revenue more than offsets expenditure rationalisation.

The risks around these baseline economic projections are skewed to the downside. The economy is highly exposed to a variety of global risks through its oil dependence, in particular to commodity price volatility, a global growth slowdown or acceleration, and the intensification of regional conflicts.

“Domestic risks are primarily associated with the implementation of fiscal and structural reforms, which could get further delayed or accelerated. These reforms are needed to diversify the economy away from oil, which would enhance its resilience and promote private investment,” the IMF said.