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Kuwait's economic recovery is ongoing but risks to the oil producing nation's outlook "remain substantial" and gridlock between the government and parliament continues to delay reforms, the International Monetary Fund said on Wednesday.

The IMF's executive board, in an assessment following "Article IV" consultations with the Kuwaiti government, said real gross domestic product (GDP) is seen slowing to just 0.1% this year after 8.2% growth in 2022, mainly due to oil production cuts.

Kuwait is part of OPEC+, a producer group comprising the Saudi-led Organization of the Petroleum Exporting Countries and Russia-led allies, which has been cutting crude output since November to prop up prices.

The IMF in May had forecast real GDP to slow to 0.9%. Despite the expected stagnation, the IMF on Wednesday forecast real non-oil GDP growth at 3.8% this year from 4% in 2022.

"Given Kuwait's large fiscal and external buffers, it can undertake needed reforms from a position of strength. However, political gridlock between the government and Parliament could continue to delay reforms," the IMF said.

Feuding between successive appointed cabinets and elected parliaments has hampered fiscal reform for years, including passing a debt law that would allow Kuwait to borrow international debt. It resorted to palliative measures to temporarily boost finances after the pandemic slammed oil prices in 2020.

"Resolving the impasse is critical to accelerate reform momentum, and to thereby boost growth and diversify the economy," the IMF said.

The IMF said higher spending in Kuwait's draft budget for the fiscal year that began on April 1 "is appropriate given the negative non-oil output gap" but said that starting from April 2024, fiscal consolidation should target higher non-oil revenue "and tackle current spending rigidities while increasing capital outlays to raise potential growth."

Kuwait has a lavish cradle-to-grave welfare system and salaries make up more than half of total expenditure in the 2023-2024 draft budget. Oil accounts for 88.2% of projected revenues.

Measures to boost revenues could include introducing excise and value-added tax under a common framework of the six-country Gulf Cooperation Council, the IMF said.

Kuwait is the only GCC country that has no excise taxes, and is joined by Qatar as an outlier in having no VAT.

Kuwait in June elected its third parliament in two and a half years. Sheikh Ahmad Nawaf Al-Ahmad Al-Sabah, the son of Kuwait's ruling emir, was then reappointed as prime minister.

(Reuters)