Kuwait, inflation a concern (page 2 of 2)

The Consumer Price Index reveals a slowdown in the inflation rate across all four quarters of 2002.

However, with the specter of a sharply weakening dollar, the forecasted rise in inflation has to some extent materialized as inflation has reversed its declining trend to pick up once again. Inflation in the first quarter of 2003 shows a year-on-year increase of 0.8% as compared to the fourth quarter increase of 0.4%.

It has further appreciated to 1% and 1.8% in the second and third quarter of 2003 respectively. Although inflation is currently not an issue of concern, even with the reversing trend, the high level of liquidity seems to be driving prices of stocks and real estate properties to unprecedented levels.

Inflation in producer prices (wholesale price index) which had observed an increase of 3.3% from 2001 to 2002, witnessed a 3% y-o-y increase for the first quarter of 2003. The manufacturing sector receives nearly 94% of the weight, therefore it is not surprising to see an increase/decrease in the inflation level almost exclusively due to increases/decreases in the prices of this sector.

The growth of inflation in producer prices has slowed since the end of the third quarter of 2002, and it may be expected that the end of the Iraqi regime which has resulted in reductions in insurance premiums may continue to drive slow growth in producer prices.

With risk premiums reduced, the cost of manufacturing will decline, as many of the capital goods as well as raw material are imported from abroad.

This hypothesis holds true for the second and third quarters of 2003 with the wholesale index growing at a slower y-o-y percentage of 2.7% and 1.5% respectively. It is of interest to mention here that mining & quarrying, which had been constant since the end of 2000, made a spurt of 9.7% in the third quarter to clock 170.0 in its index.

Despite the US federal reserve decreasing the discount rate again during August, Central Bank of Kuwait held firm to the current interest rates in the local market. Therefore, the discount rate has remained steady at 3.25% since last November's cut.

After having recorded a modest growth of 4.75% in 2002, the broad money supply as measured by M2 grew by 10.8% in the first nine months of 2003 to reach KD10.7bn. While the first three months of the year 2003 saw the M2 grow by only 1.2%, the second quarter of 2003 saw the money supply record nearly 7.8% growth over its first quarter level.

The third quarter saw a slowdown in the money supply growth rate with M2 growing only by 1.6%. Most of the YTD growth came about as a result of the nearly 31.4% growth recorded by the sight deposits. The currency in circulation had also gone up by nearly 4.8% by the end of the third quarter, although it has been contracting since it reached a high of KD516mn by the end of March 2003.

Cash with local banks had also shrunk to KD57mn by the end of the third quarter as compared to KD82mn at the start of the year, representing a decline of 30.5%. Also while the first quarter of the year 2003 saw the Quasi money decline, the second and third quarters saw the quasi money recovering and registering a growth of 6.8% over its 2002 level.

Keeping with the growth in the money supply the total banking assets in Kuwait increased by 10.1% to KD18.8bn at the end of September 2003. But the key aspect of this growth in the total banking assets was the growth in the credit facilities to the private sector which grew by 20.7%.