Kuwait's money supply surges

November saw M2 register a 1.5% increase, bringing cumulative growth since August to 5.1%. Growth in credit facilities to residents was the main contributing factor behind this. Credit increased by 2.6% in November, and 9.7% in the past three months. Compared to a year ago, M2 was up 12.3%, while domestic credit was 14.1% higher.

Most of the growth in money was held in KD time deposits. During November time deposits were up 2.1%. Savings and sight deposits were up to a much smaller degree. As a whole, KD deposits were up 15% vs. November of last year (KD 1003 million). Foreign currency deposits remained volatile, dropping by 2.1% to reverse most of the gains of the previous month.

Personal facilities, loans to non-bank financial institutions and to the trade sector continued to account for most of the growth in credit. November, however, also saw loans to industry rise significantly (KD 51 million or 11.5%).

NBK estimates that most of the growth in personal facilities so far this year was in the form of salary related consumer and installment loans. The CBK publishes figures on consumer loans only. These discount loans reached KD 631 million in November. Installment loans are classified separately with other personal facilities. NBK internal estimates for aggregate consumer and installment loans extended by banks alone exceed KD 1.8 billion, up by more than KD 300 million or 20% in 2001.

This high growth was propelled when the CBK raised the ceiling imposed on local banks for such loans in 2000. Investment and consumer finance companies also have another KD 400-500 million in consumer credit. This excludes close to KD 2 billion owed to the Savings and Credit Bank.

In a previous Economic Brief on September statistics, NBK noted an abnormally high KD 86 million increase in new consumer loan agreements compared to a monthly value ranging between KD 11-21 million over the previous two years. The figure was revised the following month to KD 18 million.

Bank liquidity in the form of cash, placements with CBK and holdings of public debt instruments was fairly unchanged in November at 22.7% of total assets. Indeed, there were no notable changes in the consolidated balance sheet of banks besides the change in credit and deposits.

Receipt of KD 245 million from the United Nations Compensation Committee (UNCC) in awards for losses resulting from the Iraqi invasion in late November was not fully reflected in money supply aggregates as the awards were not distributed to claimants until early December.

Instead, NBK notes that the foreign assets of the Central Bank of Kuwait (CBK) rose by KD 212 million, and government deposits at CBK increased by 129 million. Around KD 140 million is expected to have been paid to private and oil sector institutions and individuals in December, which should be reflected in money supply figures once they are released. Government institutions are believed to have received KD 74 million.

UNCC payments to Kuwait during 2001 are estimated at KD 740 million. They have been a major contributor to the excess liquidity in the banking system. Most of this liquidity was absorbed by the CBK. Local banks' time deposits with CBK were up KD 535 million through November. UNCC awards to the private sector also helped settle a good part of difficult debts, thus contributing to the redemption of KD 189 million in the Government's debt purchase bonds (GDPBs). These bonds now represent only 8.7% of total assets of local banks compared to 11.1% a year ago.

The central bank set the rate paid on GDPBs for the second half of 2001 at 3.74%, down from 4.95% in the first half and 5.62% a year earlier. The drop in yield reflects the falling cost of deposits as CBK typically pays banks the average cost of deposits on these bonds.

On October 30, the CBK cut the discount rate by 50 basis points to its current level of 4.25%. This caused the weighted average cost of deposits to fall by 20 basis points during November. Almost 42% of all deposits at local banks (excluding KFH) now pay less than 3% compared to 21% at the beginning of the year before the wave of discount rate cuts started.

The discount rate has been cut by three percentage points since December of 2000, while the average cost of deposits has fallen by 1.9%. Meanwhile, the average yield on three month treasury bills dropped by 360 basis points to 2.95%.