Kuwait's money supply rockets

Strong growth in credit pushed Kuwait's money supply higher in 2001. M2 registered a 13% (KD 1.07 billion) increase in 2001, more than double its growth in 2000 to reach KD 9.23 billion. Growth in credit facilities to residents increased by 16.6% after two years of slow growth in the 4% range.

Domestic credit rose by KD 874 million to reach KD 6.13 billion during the year. Loans to non-bank financial institutions saw the biggest increase, more than doubling in size. They were followed by personal facilities and real estate loans, rising by 20% and 36%, respectively. Loans to the trade sector were up by 11%.

An equally important factor behind the growth in liquidity were the incoming payments from the United Nations Compensation Committee (UNCC) for losses due to the Iraqi invasion. Almost KD 900 million was received from the UNCC in awards for Kuwaiti individuals and institutions, public and private, as part of an on-going program to settle more than KD 54 billion in claims. Actual awards are expected to be only a fraction of the claims submitted, but should take several years to settle. In 2000, payments received from the UNCC were slightly above KD 600 million.

The sizeable inflows from the UNCC were reflected in the foreign assets of the Central Bank of Kuwait (CBK) that rose to KD 2.85 billion at end 2001 from KD 2.01 billion in 2000. This is due to the fact that the payments are first transferred to the central bank, then converted to local currency for distribution. In contrast, net foreign assets at local banks registered a big drop. This was due to a rise in foreign liabilities, primarily in the form of deposits from non-resident banks.

Most of the growth in money was held in KD time deposits. Time deposits were up 16.2% (KD 736 million). Sight and savings deposits also showed strong growth of 18.1% and 11.0% respectively. As a whole KD deposits were up 15.5% to reach KD 7.9 billion by year end. Meanwhile, foreign currency deposits gyrated sharply during the year.

After rising by 36.8% during the first quarter, most likely due to higher oil receipts, they lost all their gains during the second quarter and ended the year down 0.3%. At KD 892 million, foreign currency deposits represented 10.1% of private deposits, versus 11.5% a year earlier and 17.1% at end 1996.

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.

Meanwhile, liquid assets consisting of public debt instruments and claims on the CBK rose to 23.9% of total assets by end December versus 21.1% at the end of 2000. When we expand the definition to include deposits at other banks, the ratio becomes 33.8%, versus 34.2% in 2000.

The rise in liquid assets was primarily in the from of time deposits at the central bank. This one-month deposit scheme has been the main instrument used by the central bank to mop up excess liquidity in the system arising from the large inflows in UNCC compensations. Time deposits at CBK more than doubled to reach KD 1.4 billion.

In contrast, holdings of public debt instruments were little changed at KD 2.1 billion. However, the mix of instruments was changed, with more three and six month bills issued than those maturing, and just the opposite with bonds. Treasury bills outstanding represented 35% of the outstanding value of public debt instruments. Banks held 85% of the total outstanding.

Overall, total assets of local banks jumped 9.2% to cross the KD 15 billion mark. Claims on the government represented 22.6% of the total while claims on the private sector were 45.5%. Foreign assets were 13.5% and assets at the central bank reached 10%.

Following the trend in global markets, the CBK lowered its discount rate seven times during 2001 by a total of three percentage points. The last cut on October 30th dropped it to 4.25%. As a result, rates on loans and deposits also fell, though the average rate on deposits fell to a lesser degree due to intensified competition.

In December 2001, the average rate on newly issued three month bills stood at 2.99% versus 6.25% a year earlier. Six month bills typically pay an eighth to a quarter percent more. The yield on a one-year bond was 3.75% versus 6.875% in December 2000.

Meanwhile one month time deposits with the central bank typically pay a rate close to the yield on 3-month bills.
The central bank set the rate paid on DPBs 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.