The International Monetary Fund on Monday urged OPEC member Kuwait to introduce a package of reforms that includes imposing taxes and phasing out subsidies to plug a chronic budget deficit.
Kuwait, which heavily depends on oil for almost 90 per cent of its revenues, has been hit hard since crude prices crashed in mid-2014 and earlier this month approved a budget with a huge shortfall for the sixth year in a row.
Nevertheless spending, mostly on hard-to-reverse categories such as salaries and social aid, expanded by 25 per cent only in the past two fiscal years while the public wage bill has grown by a bout 6.0 per cent annually, the IMF said.
Kuwait, which pumps 2.7 million barrels of oil per day, has huge fiscal reserves estimated at $644 billion by the IMF.
Unlike other Gulf states, Kuwait has a lively parliament which has repeatedly blocked government plans to impose taxes or charges on public services.
“Delays in fiscal reforms would further amplify fiscal financing needs while slow progress on the structural front would dampen growth,” the IMF said in a report.
Kuwait’s economy grew by just 0.7 per cent last year and is forecast by the IMF to grow by 1.2 per cent this year.
The IMF said that without reforms, the government’s financing needs are projected to grow rapidly, accounting for $180 billion over the next six years.
The global lender proposed specific reforms over the next decade to help the Gulf state adjust its finances.
The plan calls for gradually reducing public spending and curtailing the public wage bill, which accounts for nearly half of public expenditures, by making private sector jobs more attractive.
The government should phase out fuel, electricity and water subsidies and social aid, which currently account for 7.5 per cent of GDP or $10.3 billion annually, IMF said.
It called on the government to follow in the footsteps of Saudi Arabia, the United Arab Emirates and Bahrain in imposing a five per cent value-added tax and excises on luxury goods, as well as broadening profit tax on domestic companies.
“To gain broad support, the proposed fiscal measures should be part of a comprehensive reform package that fosters private sector growth and jobs, reduces waste and improves the quality of public services, and strengthens government accountability and transparency,” the IMF said.