Kuwait’s real GDP galloped by 8.3 per cent in 2011 and growth will remain as high as 6.6 per cent in 2012 because of massive public spending fuelled by high oil prices and production, according to the IMF.

In its article IV consultation with Kuwait, the Washington-based International Monetary Fund expected the Gulf emirate to continue recording fiscal surpluses in the coming years after having such surpluses over the past 13 years.

But the IMF stressed that Kuwait, a key OPEC member, needs to restrain expenditure and take measures to improve its investment laws as part of its drive to expand its non-hydrocarbon income and lessen reliance on volatile oil sales.

“The economic outlook for 2012 is broadly positive. Economic recovery is expected to strengthen, led by high government expenditure—particularly wages and capital expenditure,” the report said.

“High fiscal and external surpluses are expected to persist. Inflation is projected to moderate slightly due to a decline in global food inflation.”

The report showed real GDP growth surged from 2.4 per cent in 2010 to 8.3 per cent in 2011 because of high oil prices and output. It forecast growth would slip to 6.6 per cent in 2012 before dipping to 1.6 per cent in 2013.

A breakdown showed growth last year was stoked by the oil sector which soared by 14.9 per cent. In 2012, the oil sector is projected to grow by around 8.4 per cent while the non-oil sector will likely swell by 5.5 per cent.

The report expected inflation in the emirate, which controls nearly six per cent of the world’s proven oil deposits, would edge down from 4.7 per cent in 2011 to 4.4 per cent in 2012 and around 4.1 per cent in 2013.

“Near term economic policies should continue to remain supportive. While the supportive fiscal stance is appropriate and has been called for in recent years in view of still moderate economic growth and low inflationary pressure, the recurrent nature of expenditure growth increases the rigidity of the budget and complicates short-term fiscal management,” the IMF said.

It noted that Kuwait, which pumps an average 2.5 million bpd of oil, has significant fiscal space but added the country is now at a “crossroads” as regards conserving wealth for its future generations.

Kuwait’s non-oil primary deficit is above the estimated baseline benchmarks that take into account intergenerational equity in the distribution of oil wealth, it said. Furthermore, rising public sector wage and pension costs and rapid population growth are expected to exert pressures on public finances in the medium term, the report said, adding that if Kuwait is to preserve wealth equally for its future generations, fiscal consolidation will be needed in the medium term.

“Overall, there is a need to improve the productivity and welfare impact of government spending. Reallocating government expenditure toward capital expenditure would enhance non-oil GDP growth and improve the long-term outcomes of the fiscal accounts, while improving the productivity of government expenditure and contributing to the diversification objectives of the four-year development plan (approved in 2010) ,” it said.

“In this connection, the authorities are encouraged to improve the government’s capacity to implement the capital budget, contain the growth of the public sector wage bill, avoid a further buildup of the pension system’s unfunded liabilities, and avoid new measures that would further increase current expenditures.”

The IMF said legislative and other reforms are needed to improve Kuwait’s business environment and employment opportunities for Kuwaitis.

Specific attention should be given to upgrading the education system to make it attuned to the needs of the business sector, it added.

“Corporate governance should be enhanced by strengthening institutions’ board member composition and member roles, and enforcing the appropriate implementation of auditing and reporting standards,” it said.

“On the legislative side, the authorities should proceed with modernizing legislation to enhance the business environment, taking into account best international practices to avoid the pitfalls of recent legislative experience. Finally, the authorities are encouraged to undertake a comprehensive review of business procedures and requirements with the view to streamlining them.”