Summary: KEY ISSUES Context. High oil prices and increased production have enabled the government to continue to record high fiscal and external surpluses and build strong buffers. Large infrastructure investments are expected to support the growth momentum. Outlook and risks. Overall real non-oil gross domestic product (GDP) growth is projected to increase modestly to 3 percent in 2013, driven by an increase in domestic consumption and pick-up in public investment and to 4.4 percent in 2014. The overall average consumer price inflation (CPI) is projected at 3 percent in 2013. The fiscal and external surpluses are projected at 27 percent of GDP and 39 percent of GDP, respectively, in 2013, reflecting high oil prices. The main downside risks to the outlook are a sustained fall in oil prices and renewed political gridlock. Macroeconomic policy mix. The government should increase capital spending, while over the medium- to longer-term, oil wealth should be conserved for future generations through lower current spending growth, particularly in wages and public employment, and higher nonoil revenues. Monetary conditions are expected to remain supportive of credit growth. Financial stability. The banking system is resilient to credit and market risks. Investment companies (ICs) are still deleveraging and restructuring. Providing greater institutional and functional autonomy for the central bank, and developing a more formal macroprudential institutional and policy framework would help strengthen macroeconomic and financial stability. A review of the investment companies (ICs) segment, with particular focus on their objectives and role in the economy, and financial viability is needed. Diversifying the economy and creating jobs for nationals in the private sector. Reducing Kuwait’s dependence on oil in the future will require economic diversification, particularly in export-oriented industries, which calls for further structural reforms to improve the business environment and governance. Creating incentives for employment of nationals in the private non-oil sectors would entail containing growth in public sector wages and jobs. An integrated plan for job creation in the private sector is called for, some elements of which will include enhancing the educational quality and vocational training, promoting female labor force training, and encouraging entrepreneurship by developing the small and medium-sized enterprises (SMEs) sector.

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