JEDDAH: Kuwait’s economy expanded 1.7 percent in the second quarter of 2025 as it rebounded from contraction in the previous year and inflation continued to ease, according to the International Monetary Fund.
The institution’s latest Article IV consultation showed that real gross domestic product growth over the three-month period was led by a 3.1 percent increase in non-oil sectors.
Headline inflation fell to 2.4 percent in November, while fiscal and external positions remained strong, supported by large buffers and a stable financial system.
Despite these early gains, the IMF warned that sustaining non-oil growth will require a comprehensive package of fiscal and structural reforms, including extending the 15 percent corporate income tax to all domestic companies, reforming public sector wages, and increasing energy subsidies to Gulf Cooperation Council-average levels.
In October, Kristalina Georgieva, managing director of the IMF, said that the GCC is expected to remain a bright spot in the global economy despite rising uncertainty, with overall growth projected to approach about 4 percent in 2026 — supported by resilient non-hydrocarbon sectors, the unwinding of voluntary oil production cuts, and expansion of gas output.
In its latest report on Kuwait, the IMF said: “The current account surplus moderated to an estimated 23.6 percent of GDP in 2025, and external buffers remain large. The financial system remains stable and prudently managed.”
Looking ahead, the fund said the economy is expected to recover, with real GDP projected to expand by 3.8 percent in 2026, driven by the unwinding of OPEC+ production cuts and robust non-oil growth, estimated at 3.0 percent of GDP.
Headline CPI inflation is expected to moderate to 2.1 percent in 2026 and then stabilize just below 2 percent over the medium term.
The fiscal deficit of the budgetary central government is forecast to increase to 8.7 percent of GDP in the 2025/26 financial year and 9.4 percent in the following year, reflecting higher spending and lower oil revenue.
The current account surplus is projected to moderate to 19.6 percent of GDP in 2026, primarily reflecting lower oil exports, and gradually decline over the medium term.
“Fiscal reforms should reinforce long-term fiscal sustainability and intergenerational equity while incentivizing Kuwaitis to pursue jobs in the private sector,” the IMF emphasized. In parallel, it added, structural reforms should unify the labor market and improve the business environment.
Specifically, the fund recommended gradual fiscal consolidation at about 1 percent of GDP per year over the next decade.
It also called for extending the 15 percent corporate income tax to all domestic companies and introducing GCC-wide excise taxes alongside a 5 percent value-added tax.
The IMF urged reforming public sector wages with a performance-based system and instituting a hiring cap to gradually reduce public employment.
Energy subsidies, including fuel, electricity, and water, should be gradually raised to GCC-average levels, with targeted cash transfers provided to vulnerable groups, while on-budget public investment should be scaled up by around 2 percent of GDP over the medium term.
On governance, the IMF recommended that Kuwait develop a medium-term fiscal framework with clear rules on debt and non-oil balances, conduct regular assessments of public investment, publish a debt management strategy, and create a sovereign asset-liability framework to manage intergenerational fiscal risks.
On the financial side, the fund said the exchange rate peg remains appropriate and highlighted the need for continued supervision of banks and macroprudential policies to maintain stability.
It also recommended careful management of systemic risks, including adjustments to capital buffers and preparations for mortgage lending under the forthcoming Real Estate Financing Law.
“Systemic risk remains contained and prudently managed,” the IMF said, adding that with a credit cycle upturn underway, the Central Bank of Kuwait “should consider reclassifying part of its country-specific capital buffer as a positive neutral countercyclical capital buffer.”
The fund emphasized broader structural reforms, including reducing the public sector wage premium, scaling up housing supply, deepening financial markets, and improving the business environment.
Strengthening statistical capacity was also flagged as essential, with gaps in national accounts, government finance, and external sector data needing to be filled to support informed policy decisions.
