Kuwait is expected to swing back into surplus this year on higher oil prices, but the third largest Arabian Gulf crude producer still remains overly reliant on hydrocarbons for income, Moody’s Investors Service said on Thursday.

Kuwait's fiscal surplus this year will reach 7 per cent of the country's gross domestic product, the rating agency said in a statement. Moody’s rates Kuwait Aa2 with a stable outlook.

“Kuwait's key credit challenge is its very high dependence on oil and the resulting volatility for its economy, exports and government finances,” Moody's said. “The country has been slower than its regional peers in developing its non-oil and private sectors.”

Kuwait, like its peers in the six-member economic bloc of GCC, relies heavily on the sale of hydrocarbons for revenues to fuel its economy. The fall in crude prices from the mid-2014 peak of $115 per barrel has forced the government to cut spending and borrow from international debt capital market.

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

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The country, though, has slowed down the pace of reforms, such as the introduction of VAT, as oil prices that touched a three-year high of $80 a barrel last month, gave it breathing space.

However, the decision to postpone VAT implementation till 2021 may cost Kuwait up 1.6 per cent of its $114 billion of GDP in foregone revenues, although the net fiscal effect will be more than offset by the recent rise in oil prices, the rating agency said last month.

Public and private investment are projected to sustain non-hydrocarbon growth rates of 3.5 per cent to 4 per cent between 2018 and 2021, Moody’s said on Thursday.

“Institutional strength and government effectiveness were tested during the oil price slump, with Kuwait's pace of reforms being much slower than for other GCC peers,” said Moody’s. "Reform

implementation is likely to be further delayed as oil prices rise."

Kuwait’s real non-hydrocarbon economic growth is expected to expand by 2.5 per cent in 2018, the International Monetary Fund said in January. However, a cut in oil output by close to 6 per cent, reflecting Kuwait’s compliance to a global production cut, is expected to have led to a 2.5 per cent GDP contraction in 2017, the fund added.