CEIC Data Blog

Kuwait Fiscal Policy Back to Support Monetary Policy

 

Database NEWS@lert: With the Kuwaiti Parliament’s approval of one of the most ambitious development plans in the MENA region in 2010, the country might have a turning point in its economy. The plan, with estimated KWD 37 billion (or USD 125 billion) of spending, aims for turning Kuwait into a regional trade and financial hub. It will depend on both pillars of the economy such as government capital expenditure hand in hand with increased private sector participation. Some mega projects are included in the plan like Silk City, railway and metro system, new cities, infrastructure and services and oil sector investments beside additional spending on services especially health and education.

Distribution of General Government Expenditures By Functions
Kuwait Expenditures
Chart provided by: CEIC Data

The announcement of such plan will finally get the fiscal policy back on the same track with monetary policy to complement each other. This is mainly as almost all countries around the world adopted expansionary fiscal policies along with loose monetary policies since the eruption of the financial crisis late 2008 to face recessionary pressures.

On the monetary policy side, the discount rate in Kuwait acts as the pivotal rate to which maximum limits of interest rates on Kuwaiti Dinar lending transactions at local banking and financial system units are linked within specified margins. Thus, in a move towards economic diversification, boosting the non-oil sector and supporting domestic liquidity and economic activity, the Central Bank of Kuwait has cut its discount to reach 3.75% in December 2008, then in May 2009 it declined to 3 % then it was dropped again to reach 2.5% in February 2010 up till now.

Kuwait’s Loose Monetary Policy
Kuwait Monetary Policy
Chart provided by: CEIC Data

The goal of this reduction is to establish appropriate atmosphere to reinforce growth in non-oil sectors in the national economy by reducing credit cost especially with the decline in inflationary pressures in the local economy. Inflation rate decreased at the end of 2010 to 6% compared to 9.03% in December 2008. Besides, dinar deposits in local banks created a suitable climate for this reduction as the dinar currency continued to be attractive and competitive, making it “a local savings pot”. This is shown by the increase in the local banks KWD deposits of the private sector from KWD 19343.2 million in December 2008 to KWD 22672.8 million at the end of 2010 with continuous increase in 2011.

Facts also show that both deposit and lending rates have fallen. As M3 growth provided enough funds to support the country’s overall economic growth, the adopted policy aimed at increasing the domestic liquidity that hit KWD 24919.4 million in December 2009 and KWD 27006.3 million in March 2011. Since the domestic liquidity is directly influenced by levels of domestic public expenditure as well as the net operations of the private sector with the outside world, experts believe that such decision will have a positive impact on the overall economy bearing in mind the actual application of the announced development plan.

By this, Kuwait is seen to be continuing its ongoing loose monetary policy to go hand in hand with the expansionary fiscal policy, aiming at reviving the local economy.

CDM Reference:
Global Database > Kuwait:
Government and Public Finance: Table KW.F04 General Government Expenditure: by Functions
Inflation: Table KW.I01: Consumer Price Index: 2000=100
Monetary: Table KW.KA01: Money Supply, Table KW.KA05: Local Bank Deposits
Interest and Foreign Exchange Rates: Table KW.M01: Discount Rate, Table KW.M02: Deposit Rate, Table KW.M04: Lending Rate: Weighted

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