KUWAIT: Kuwait needs to expedite the diversification of its economy further to scale up the non-oil sector in tune with the economic transformation taking place across the world. Government-led reforms and the growth of private sector investment in new sectors could push non-oil economic growth in the country despite a marginal slowdown in the growth due to OPEC+ production cuts, said a senior IMF official on Tuesday.

Jihad Azour, IMF’s director for Middle East and Central Asia Development, told a press briefing on the impact of recent global and regional developments on the economies of countries in the Middle East and North Africa on Tuesday following the Article IV consultation with Kuwaiti officials on economic developments and policies.

The event was held at IMF-Middle East Center for Economics and Finance in Kuwait. Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year.

“We now project that the Kuwait economy will contract by 0.1 percent in 2024 due to OPEC+ oil production cuts, then expand by 4.2 percent in 2025 as these production cuts unwind,” said Azour. However, he said the country’s non-oil economy would remain resilient, underpinning the IMF’s medium-term projection of 2.6 percent. The IMF projects that Kuwait’s consumer price index (CPI) inflation to average 2.9 percent in 2024 and gradually fall to 2 percent subsequently provided that global food and energy prices are stable, he added.

“Diversification is now the priority for most oil-exporting countries and what is needed today is the acceleration of this transformation in order to benefit from all the new developments and new opportunities that are being created,” Azour told Kuwait Times on the sidelines of the meeting. He said the global economy is moving fast, where promising segments in technology such as artificial intelligence, digital money, etc are helping this development. “A new approach to climate change will also offer new opportunities,” he said.

Transformation

“What is happening in this region is the acceleration of this economic transformation. Kuwait has a lot to gain from this transformation as it has huge potential, capabilities and a very strong infrastructure in terms of human capital and financial resources. Open the horizon to the private sector further,” Azour said. “Encouraging Kuwait to accelerate this transformation will allow the economy to rely more on non-oil sector and be less dependent on oil. This will also create opportunities to open up new sectors and create jobs for the young population,” Azour stated.

The slowdown in Kuwait’s GDP growth is primarily due to the decline in oil output following the OPEC+ production cuts. The global economy has also slowed down because of the monetary policies that were initiated to rein in rising global inflation. “And we had a catch-up period in 2021-2022 following the COVID-19 pandemic, and therefore it was expected that growth would gradually normalize. Yet potential growth is still higher. This is being achieved by investing in improving the business environment and strengthening access to market and finances, which will in turn allow the economy to pick up,” he said.

“The risks to Kuwait’s economic outlook are two-sided and are mainly associated with volatility in oil prices and production arising from global factors,” said Azour. He said recent data indicate that spillovers to Kuwait economy from the conflict in Gaza have been insignificant so far. The IMF will continue to update its projections to reflect new data and developments, he said.

In GCC countries, non-oil growth continued to improve, recording a growth of 3 percent to 4 percent and in certain cases the growth reached up to 7 percent as a result of economic diversification, he mentioned. Benefiting from high oil prices, Kuwait’s economic recovery continued, and inflation remained largely contained. According to earlier IMF projections, Kuwait’s oil GDP growth declined in 2023 due to oil production cuts while non-oil GDP growth stayed robust, driven by domestic demand.

Kuwait’s real economic growth was negative in Q2 2023 at -1.3 percent y/y, with oil output weighed down by OPEC-mandated production cuts, according to a report released by NBK on Monday. Non-oil growth improved after several negative quarterly readings, but remained disappointingly soft given other, more upbeat high frequency data. The contraction in Q2 2023 GDP was due to a decline in oil sector output of -3.9 percent y/y, the report added.