27/05/2018 09:07 AST

Kuwait’s decision last week to delay the implementation of VAT is “credit-negative” for the country as it signifies a slowing down of fiscal reform efforts amid rising oil prices, according to a Moody’s report.

The decision may cost Kuwait up 1.6 per cent of its $114 billion of gross domestic product in foregone revenues, although the net fiscal effect will be more than offset by the recent rise in oil prices, the rating agency said.

“The decision clearly illustrates how if oil prices remain around their current levels, the resolve for reform among some GCC countries is likely to weaken,” the report said. “It significantly increases the probability that some countries may delay or even cancel their VAT plans.”

Kuwait announced last Tuesday it would delay the introduction of a 5 per cent VAT until 2021, three years after the original implementation date agreed with the other GCC countries to reduce their dependence on oil revenues. Only Saudi Arabia and the UAE have implemented it so far, while the remaining countries have notionally agreed to implement it this year or at the start of 2019.

Kuwait’s failure to implement VAT highlights “idiosyncratic weaknesses in its institutional capacity”, which also prevented the country from responding more quickly to the oil price shock in 2014, Moody’s report said. Kuwait has $500bn-plus in fiscal reserves and the lowest breakeven oil price in the GCC, so arguably there is less incentive to diversify its economy than its neighbours.

As such, hydrocarbon revenues continue to account for about 90 per cent of Kuwait’s revenues, although the government has launched reforms, including the Kuwait 2035 economic diversification strategy, to plug the shortfall that occurred in 2015 for the first time since 1999.

The VAT decision is “not entirely surprising”, Moody’s said. “Nonetheless, the government’s inability to implement new non-oil revenue measures has prevented Kuwait from making more meaningful progress in insulating government revenue from future oil price volatility, and is therefore credit negative.”

Even if the government does introduce VAT, it is unlikely to have a major impact on the Kuwaiti economy, the report added. The inflationary impact of VAT in Saudi Arabia and the UAE has so far been softened by exemptions that comprise around 40 per cent of the consumer basket, Moody’s said.

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