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Kuwait Economic Brief
25.09.2025Overview
Recent data releases continue to signal a broadly improving growth climate, from robust domestic credit growth and rising real estate activity to higher project awards and still-solid non-oil PMI readings. Economic growth is also being boosted – for the first time in two years – by increased crude oil production as Kuwait accelerates the unwinding of two previous tranches of the OPEC-mandated production cuts. Monetary policy remains on a more accommodative path, with the central bank in September cutting its benchmark interest rate. Meanwhile, the government’s fiscal deficit came in smaller than expected in FY24/25, providing a stronger baseline for this year. We have revised down our oil price outlook for 2026 to $65/bbl (from $70 previously) and this will likely result in a wider deficit next year, but with sovereign debt issuance now proceeding apace, the liquidity picture looks less constrained. Higher oil production has led us to upgrade our forecast for GDP growth in 2025 and 2026 to 2.4% and 4.1%, respectively, with non-oil growth also improving to 3.2% in 2026 from 2.2% this year helped by refining sector gains.
Latest developments
• The price of Kuwait Export Crude stood at around $72/bbl in mid-September, and has managed to keep its head above the symbolic $70/bbl level for much of Q3 (averaging $71.4/bbl) despite oversupply concerns and global macro and oil demand worries due to global trade tariffs. This is likely related to stockpiling in Asia, weaker-than-expected production increases outside the OPEC-8 group and the prospect of further sanctions on Russian and Iranian oil supplies. Nevertheless, amid uncertain oil demand prospects, the decision by the OPEC-8 group to accelerate the unwinding of the second tranche of voluntary supply cuts (1.65 mb/d) from 2023 after completing the first tranche (2.2 mb/d) in September one-year ahead of schedule has intensified the bearish bias to the oil price outlook, with the consensus now seeing the oil market tip into oversupply and stock builds in 2026. Kuwait’s production target for October is 2.56 mb/d (+11 kb/d m/m).
• The economy returned to growth in Q1 2025, with total GDP up 1% y/y versus -0.7% in Q4 24 and the first expansion since Q1 2023. This was driven by a much smaller contraction in oil GDP of only 0.3% y/y compared to 5.7% in the previous quarter as the base effects from voluntary production cuts faded. (Chart 1.) (Full GDP report here.) Meanwhile, growth in the non-oil economy eased to 2% y/y from a rapid 4% in Q4 24, with notable slowdowns in the manufacturing (4.3%), real estate (3.2%), and transport (4.5%) sectors. Growth accelerated in the public administration & defense (1%) and financial intermediation (3.2%) sectors, the two largest components of non-oil GDP.
• Non-oil private sector activity softened in August, with the PMI retreating to 53, the slowest rate of growth since March albeit well above its historic average of 49. (Report here.) Growth in both output and new orders eased with the former continuing its four-month decelerating trend – though both remained at solid mid-50s levels. Employment grew marginally in both July and August.
• Local consumer spending (proxied by card transactions data from the CBK) fell 5.4% y/y in Q2 2025, logging a second straight year-on-year decline. (Chart 2.) Much of this weakness in our view reflects payback after a period of extremely strong growth in earlier years (especially 2021 and 2022). But in addition, fiscal restraint on the part of the government (especially moves to control the wage bill) and still elevated (if declining) borrowing costs compared to previous years are playing a role.
• CPI inflation edged up to 2.4% in July on rising prices in the food & beverages category, which grew 5.6% y/y, its fastest increase in 10 months. (Chart 3.) Housing services inflation was steady at 1%, though. Most CPI components were unchanged last month, helping keep the core inflation rate steady at only 2.1% and lower than the 3%+ rates recorded most of last year. (Report here).
• Real estate sales in August hit their highest level since mid-2018, continuing the strong overall trend seen through the traditionally slower summer months. (See here.) Sales in August came in at KD472 million, almost 84% higher year-on-year and the highest monthly reading in more than seven years. (Chart 4.) Annual gains were driven by the residential (+51% y/y to KD133m) and especially commercial sectors (+293% to KD240m), the former benefitting from August 2024’s low base, while the investment sector logged a decline (-8% to KD99m) in August. The real estate sector will welcome the news in September that the draft housing finance law was submitted for final approval and that the Public Authority for Housing Welfare plans to develop three residential zones in partnership with the private sector in Al-Mutlaa City, East Saad Al-Abdullah, and West Saad Al-Abdullah.
• Projects awards jumped in August after the signing of the Al-Zour North IWPP project (Phases 2 & 3). Total awards stand at KD2.05 billion YTD, according to MEED Projects (KD2.6bn in full-year 2024). The power & water sector accounts for the bulk of activity this year, followed by transport.
• Closing fiscal accounts for FY2024/25 revealed a smaller deficit. The government posted in FY2024/25 (ending March) a deficit of KD1.05 billion (2.2% of GDP), improving on the deficit of KD1.6 billion in the previous fiscal year and significantly below the KKD5.6 billion deficit projected in the budget. (See Chart 7. Report here). The smaller deficit was driven by reduced current spending, which declined 8.3% y/y to KD23.1 billion amid reduced outlays for goods and services (-30%) and grants (-11%). Capex also fell, to KD1.1 billion, a historical low. Oil revenues, impacted by a decline in both crude oil production and prices, fell 10.8% y/y, pushing total state revenues down by 6.7% y/y. Helping to soften the decrease was robust growth in non-oil revenues of 28% y/y, driven by a rise in collected taxes and fees.
• Following the approval of the public debt law in April, the government via the central bank issued KD1.3 billion in public debt from June to mid-September. The dinar-dominated debt has tenors of 1, 3, 5, 7 and 10 years. In addition, the government is expected to tap international markets for FX-denominated debt, likely from Q4 onwards. These recent issuances will boost liquidity and help in the implementation of vision 2035-related projects. Following recent issues, outstanding public debt stands at 5.6% of GDP, still very low by international standards.
• Kuwait’s population edged over 5 million in June 2025 for the first time, according to data from the Public Authority for Civil Information (PACI). The total population rose by 3.7% y/y to 5.1 million, driven by non-Kuwaitis (3.7% y/y). The number of Kuwaitis logged a rare decline (-0.6% to 1.55 million) linked more to government policy than the underlying demographic trend. (Report here). Overall employment grew by a solid 3.2% y/y but Kuwaiti employment dropped by 3.4%.
• Domestic credit grew by a solid 0.9% m/m in July, helped by a broad-based increase in lending. (Chart 5.) This pushed up the year-on-year rate to a more than 2-year high of 7.5%. Credit to households recorded the fastest monthly increase in three years, while lending to businesses rebounded following a weak reading in June. Meanwhile, strong growth in private sector deposits lifted overall resident deposits by 4.2% y/y in July. (Report here).
• The Central Bank of Kuwait followed the US Fed in cutting interest rates in September. The bank reduced its key discount rate by 25 bps to 3.75% after the Fed cut its benchmark rate by the same amount. This was only the second CBK cut since the Fed embarked on its monetary easing cycle last September (-50 bps cumulatively versus -125 bps for the US Fed).
Forecast
Economic growth to turn positive in 2025-26
Economic growth will turn positive in 2025 (2.4%) after two years of oil sector-led declines, and accelerate further in 2026 (4.1%). This is an upgrade from our previous forecast of 3.5% in 2026. An increase in oil GDP (by 5.1% in 2026) will be the primary impetus, thanks to higher crude production as OPEC-8 completes the unwinding of one tranche of productions cuts (+135 kb/d for Kuwait) and begins the process of tapering the second in 2025-2026 (+128 kb/d) one year ahead of schedule. Kuwait’s crude production should rise to 2.60 mb/d on average in 2026 from 2.47 mb/d in 2025 on a conservative estimation. (Chart 6.) Meanwhile, a developing supply glut has led us to adjust our average oil price forecast for 2026 down by $5 to $65/bbl.
The non-oil sector is forecast to see a further acceleration in growth to 3.2% in 2026 from 2.2% in 2025. Some of this is due to a pick-up in oil refining output, which has underperformed so far in 2025. But it is also due to cyclical forces such as lower interest rates, improved business optimism, solid order books and a potential new capex cycle. Some of this is already visible in the performance of various gauges of non-oil activity such as the PMI, credit growth and real estate activity. (See Latest Developments section above.)
We still see the non-oil growth dynamic being shaped by a combination of government efforts to rein in the fiscal deficit and softness in consumer spending on the one hand, but signs of a pick-up in business and investment spending on the other. Declines in consumer outlays – partly payback from a period of super-strong growth in 2021-22 but also tight control of government wage spending – should fade by next year, but we do not expect a sharp improvement once this adjustment is over. Rising investment is reflected in higher project awards, stronger business credit growth, steadily increasing real estate activity and potential interest rate cuts ahead. Government efforts to speed up execution of key development projects will help, despite a small cut in budgeted capex this year.
One upside risk to growth is the expected passage of the housing finance (‘mortgage’) law over coming months (it was submitted to the cabinet for approval in September), which would trigger higher household borrowing and related consumer spending. However, the full impact of the law once approved will be felt more over time than right away, given the parallel requirement for a major infrastructure rollout. The law is one part of the government’s plan to promote private sector growth and diversify the economy away from oil under the Vision 2035 agenda.
Ongoing fiscal deficits, consolidation proceeding
The fiscal deficit came in lower than expected in FY24/25 at KD1.05bn (2.2% of GDP, NBK forecast KD1.9bn), providing a stronger baseline for this year and next. (Chart 7.) The outlook also is helped by various government measures over the past year to address fiscal sustainability such as repricing government fees and services, hiking fines and penalties and the introduction of a 15% minimum top-up tax on multinationals from January 2025 in line with the OECD BEPS program. Moreover, spending in the FY25/26 budget was unchanged from the previous year at KD24.5bn (a real terms cut). Despite this restraint, we see the deficit widening to 4.3% of GDP in FY25/26, mostly reflecting lower expected oil receipts. This would be the tenth deficit in the past eleven years.
Improving fiscal sustainability will be a multi-year event, meaning another tight spending round and more revenue-boosting measures in FY26/27. Our forecast assumes the introduction of excise taxes on tobacco and sugary drinks from FY26/27, and VAT at 5% a year later, which together could yield 1-2% of GDP (versus non-oil receipts of 6% this year). We factor in spending growth of only 1% per year this year and next, consistent with the government’s push for efficiencies and savings across the public sector, and potentially some subsidy cuts. However, within the overall total we see scope for higher capex, which was cut by a cumulative 35% in the past four budgets to help address the deficit. Tight fiscal policy would inevitably weigh on demand and spending in the economy but contain the deficit to 5.4% of GDP in FY26/27 given the projected drop in oil prices.
Passage of the public debt law in April (following an eight-year hiatus) provides increased flexibility in financing any future deficits and eases pressure on liquid reserve drawdowns at the General Reserve Fund, about which officials have warned in recent years. Most of this year’s forecast KD2.1bn deficit has already been covered by YTD debt issuance of KD1.3bn, with more debt expected to be issued by year-end. Even if all of this and next year’s projected deficits were debt financed, the government’s debt-to-GDP ratio would rise to 13%, which is still very low by international standards. The debt law and progress on fiscal reforms more generally also helps to address concerns of credit rating agencies who have cut the sovereign rating since the pandemic.
Inflation low and steady, interest rates easing
We see CPI inflation remaining close to current levels (2.4%) for the rest of 2025 and into 2026, amid moderate non-oil growth and subdued consumer spending, though an acceleration in food price inflation over the summer months, likely linked to local factors, will bear watching. There is also some upside price risk in 2026 from possible subsidy cuts or hikes in indirect taxes.
The Central Bank of Kuwait has lowered interest rates (discount rate currently at 3.75%) at a more gradual pace than the US Fed, in line with local macro conditions. Futures markets now expect 50 bps of further US Fed cuts this year and 75 bps in 2026.
Reforms would unlock faster economic growth
Longer term, unlocking sustainably faster rates of non-oil economic growth will require a range of structural reforms (such as to the business climate, the labor market and public sector efficiency) and higher rates of investment – both areas where Kuwait has lagged its Gulf peers in recent years amid political and bureaucratic constraints. The government formed in May 2024 has been more active on laws and economic reforms (especially fiscal policy) than its predecessors, though presentation of its multi-year work agenda was delayed in April 2025, around the time of major global market volatility due to tariffs.
In the oil sector, earlier OPEC-related cuts have left domestic output 15-20% below capacity of 3.0 mb/d, implying strong growth potential if global oil market conditions allow. State oil firm KPC plans to raise capacity to 4.0 mb/d by 2035, having recently completed a big expansion of the refining sector.