Kuwait's non-oil GDP is expected to increase modestly to three per cent, driven by a combination of a continued increase in domestic consumption as a result of the 2012 public wage hike and some pick-up in government capital spending, said a report.

The IMF report said the growth in the non-oil sector is expected to increase to 4.4 per cent next year on the back of public capital spending, thus driving inflation to 3.5 per cent.

In 2012, the non-oil economy recovered considerabley rising to 2.2 per cent from 0.9 per cent the previous year, after three years of negative growth in 2008–10, the data stated.

The growth in the oil sector continued to be strong in 2012 with crude production reaching capacity, keeping overall projected growth at a similar rate of 6.2 per cent compared to 6.3 per cent the year before, .

The high oil prices have benefited Kuwait by generating high fiscal and external current account surpluses. However, the recent domestic political developments have had an adverse impact on fiscal and economic developments in Kuwait.

The implementation of the 2011-2014 Development Plan (DP), a public investment program, has lagged behind, and large increases in the public-sector wage bill have undermined the government’s efforts to encourage Kuwaitis to join the private sector.

It is vital to agree on an agenda to place the DP on track, improve the business environment and investment climate, and strengthen non-oil growth. The long-term objective should aim toward diversification and job creation for Kuwaitis in the private sector, the report stated.

Building human capital, improving the efficiency of public administration, and removing impediments to physical, legal, and business infrastructure would support these goals. The financial situation of banks is strong, and the banking system is well-regulated by the Central Bank of Kuwait (CBK). Investment companies (ICs) are still deleveraging and restructuring, it said.

Establishing a strong fiscal policy framework, 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, the report added.

On the inflation, the Kuwait data said the average consumer price inflation decelerated to 3.2 per cent in 2012 from 4.9 per cent in 2011. The average inflation in June 2013 was about 3 per cent (year-on-year).

Despite rising current expenditures, the fiscal surplus remained high at 33 per cent of GDP in 2012, reflecting high oil prices and production. Spending rose by 13 per cent, mainly because of a 25 per cent public wage hike in April 2012, it stated.

The country's capital expenditure underperformed the budget allocation, as continued political uncertainty stalled the implementation of investment projects.

High oil export revenues contributed to an estimated external current account surplus of 43 per cent of GDP in 2012.

According to experts, Kuwait's economic outlook is expected to improve in 2013-14. Fiscal and current account surpluses are expected to remain large in 2013 at 27 and 39 per cent of GDP, respectively.

In 2014, the non-oil growth is expected to increase to 4.4 per cent supported by public capital spending, driving inflation to 3.5 per cent, they stated.

Over the medium term, non-oil growth is projected to accelerate to almost five per cent. "A moderate increase in oil production is expected to further support overall growth. Inflation is projected to increase slightly as growth picks up. The fiscal and current account surpluses are projected to taper if spending continues on the current growth trajectory.

However, the experts cautioned that the downside external risks to the outlook could arise from a worsening of global economic conditions, including a slowdown in key emerging market countries, that would translate into lower oil demand and prices.-TradeArabia News Service