Prasad Ananthakrishnan, Mission Chief for Kuwait, Middle East and Central Asia Department

Wafa Amr, Senior Communications Officer, Communications Department

MS. AMR: Thank you for joining us today. This is Wafa Amr from the Communications Department. Welcome to the conference call on Kuwait’s 2015 Article IV Consultation. Mission Chief Prasad Ananthakrishnan is going to speak, and then take your questions.

MR. PRASAD: Yes, thank you, for listening in. Let me give a short introduction. You all know that a decline in oil prices has adversely affected Kuwait's fiscal and current account balances, and it has slowed down growth in 2014 and 2015. In the government's presentation, when you exclude the mandatory transfers to the Future Generations Fund, and the investment income from the Fund, the fiscal position will get into a deficit, but because they already have high financial buffers, and they have borrowing space, the governments will be able to smooth the adjustments, but since the oil price decline is very steep, the adjustments should start now.

And what we have been recommending to the authorities is that adjustments should be smooth, over the medium term, and many of the cuts should fall on the current spending while they should maintain the capital spending so that the impact on growth is mitigated.

Now, in the medium term, the fiscal and external positions in the current trend of oil prices will deteriorate further, and the main objective of the authorities should be, for the longer term, to diversify the economy, creating high productivity jobs for Kuwaitis, and also to depend, Kuwait’s -- or we can say dependency on oil revenue. Now, the government has already started focusing on many of these issues, and more needs to be done in the area of private sector investment and job creation. Thank you. I'll stop at this stage, and I will see if you have any questions.

MS. AMR: Okay. So, we'll take questions from you now.

QUESTIONER: Hi. My question is, obviously, the decline in the oil prices, and you said it has impacted liquidity, and unfortunately, this has impacted -- it seems like it has impacted the Kuwaiti dinar in the forward market. What are your thoughts on tightening liquidity in the Kuwaiti banking system? And do you think it would put pressure on the economy and the currency, I guess, you know, just in general?

MR. PRASAD: Yes. You see, at this point in time, when you look there you will see there has been slower growth in the profits and in the credit, but the Kuwaiti economy is still flush with liquidity. When you see the balance sheet of the banking system, they have a lot of excess liquidity sitting in the Central Bank. And at this point there's no issue with liquidity, but definitely as the oil prices go down, and if there is no adjustment in the fiscal, there could be some tightening in the banking system liquidity.

But our assessment as far as the economy and exchange rate is concerned, is that given the structure of Kuwait, the currency pegged is appropriate, and it's been serving Kuwait well, in terms of delivering monetary stability, and Kuwait has enough reserves with the Central Bank, have also with the government to maintain the banks. But, in the longer term, given the large terms of great shock, fiscal consolidation will be needed to support the exchange rate peg over the longer term.

QUESTIONER: Hello, Mr. Prasad.

The question is, is there a need to issue bonds to finance the needs of the budget this year?

MR. PRASAD: Okay. You see, now Kuwait, as I said, according to the definition of the authorities, which is that they have a rule of transferring 10 percent of their total revenues to their General Reserve Fund, then there is a deficit. Now, either they can draw on buffers, or they can borrow. So that particular gap in the fiscal deficit will have to be financed. So, either they take the money to the General Reserve Fund, and then bring it back to close the gap, or they borrow. So it's their choice; right?

And to some extent, if they have a good strategy for borrowing, which takes into account the impact on the liquidity in the banking system, the impact on clouding out of credit, the impact on the reserves, of the foreign exchange reserves of the Central Bank, when you take all these into accounts, there is space for borrowing, and the government can borrow within the space to -- which will also help developing the domestic debt market.

But then there is a choice of buffers, or domestic borrowing or international borrowing. And that mix will have to be determined carefully.

QUESTIONER: Hi, Prasad. What are your thoughts on this -- you know, the Kuwaitis are reviewing potentially the subsidies. I mean, do you think that there is a strong need for a subsidy cut? What is your kind of feedback from discussing with authorities on the issue of subsidies?

MR. PRASAD: Yes. As I said, the main instrument that Kuwait has for its macroeconomic management is fiscal, right. And they have to reduce their dependency on oil if they have to adjust their fiscal position. And it has to naturally fall on the expenditure side, and within the expenditure side, on current. And subsidy is a very natural candidate, and at this point in time. Even both from a fiscal point of view, and from an efficiency point of view, subsidy is a candidate for adjustment.

And they have the -- Kuwait has already started subsidy reform on diesel, and kerosene, and aviation fuel, and they are naturally extending it to other products, broad products, and the authority's view is that they would go very gradually, they will make sure that people who deserve those subsidies are not affected, and they have a sequencing that they would go into fuel subsidies first, because it also does not need any legal changes, and electricity and water, these subsidies will require some legal changes, and that will come further down the line. It is essential, and there is a willingness to do it.

QUESTIONER: Thank you. And my second question, I mean, are you maintaining your GDP growth forecast for Kuwait, or is there a revision? What are the variables?

MR. PRASAD: What do you mean by this then, sorry?

QUESTIONER: Are you revising potentially your -- Are you maintaining your GDP growth forecast for Kuwait, the real GDP growth forecast, or are you maintaining them as is? And what are the potential dangers?

MR. PRASAD: Yes. We are maintaining them as is, in the Article IV Report that got published three days back; that growth is slowing down from 3000 -- 3.2 per -- Okay, I'll talk about non-oil growth, okay, because the oil sector growth depends on the production, that can change. If Kuwaitis produce more oil than the oil -- real oil GDP growth can change. The non-oil GDP, we have 3.2 percent in 2014, which will go down in 2015 and 2016 to 3 percent.

And given the fiscal projections that we have there, where we have shown a path of capital expenditure, as of now, that will see some improvements in the non-oil GDP growth in the outer years. At this point in time, this is what's been happening. So we have --

QUESTIONER: Sorry. Can you repeat that, on the capital expenditure?

MR. PRASAD: You see, we have a projected profile of capital expenditure spending in our Article IV Report. Right?

QUESTIONER: Mm-hmm.

MR. PRASAD: Based on a set of oil prices that we are showing there. So, on that trajectory, then growth, non-oil growth will improve in the outer years.

QUESTIONER: Well, sorry. I can't hear you properly.

MR. PRASAD: Improve, improve in the outer years.

MS. AMR: Okay. Thank you very much for joining this conference call on Kuwait.