Kuwait, inflation a concern (page 1 of 2)

When the FDI law becomes fully functional, on condition that it is not accompanied by the usual red-tape, wide-spread bureaucracy and over-taxation, the local market will most likely see an influx of additional liquidity in the form of FDI, thereby leading to further improvement in the local economy.

At the same time, government's long-term borrowing as depicted in table 08 above, which has continued to fall (the new issues of treasury bonds) from KD1,600mn in 1999 to KD910mn at the end of 2002 is set to pick up for 2003.

Thus far in 2003, the government has already issued KD1,030mn worth of T-bonds, already topping issues in 2002. The new bond issues which occurred in the third quarter of the current year, and specifically in August were met with strong investor demand.

The issues have been stated by the press to have been over subscribed nearly 65 times from local banks and listed companies. This strong demand is mainly due to the availability of high levels of liquidity with limited investment channels, mainly in the capital and real estate markets. Companies use such government vehicles as a diversification instrument to decrease the overall risk of portfolios.

To the contrary of 2002 when the government increased short-term borrowing to reach the highest issue rate after the invasion, treasury bill issues have gone through a change of momentum in the first nine months of 2003.

Maturing issues have thus far outweighed new issues which has turned around the growth in the outstanding balance of treasury bills, which unless becomes more active in the fourth quarter is set to close on a declining note.

At the end of September 2003, the balance of treasury bills stood at KD1,195mn. The total outstanding public borrowing at the end of the third quarter of the current year stood at the same level as in December 2002. But it seems the government has returned to long term borrowing as its preferred source.

With economists believing that the worst is behind and recovery is on the horizon, the average interest rate on 6 month treasury bills also depict a similar tale. After they had declined from 5.48% at the end of 2001 to 2.06% at the end of Dec. 2002, they started their ascent in the first quarter of 2003.

The interest rates on treasury bills increased from its Dec. 2002 level to reach 2.31% by March end and continued an ambiguous sideways trend through the third quarter to close at an average of 2.304%, above the closing in 2002. KIBOR rates show a similar fashion. After they had receded to close 2002 at 2.5%, they crawled up to 2.75% for 1 year and 3.18% for 3 years by the end of September 2003.

Consumer inflation which increased by 1.4% in 2002, has remained relatively stable in 2003 as well. Kuwait is generally seen to be a low inflation economy, although an upturn may be expected, largely due to the elevation in the imports of non-oil commodities whose average dollar price is set to pick up.

Continued weakness of the dollar, vis-à-vis other currencies which also forms a major part of Kuwait's imports, may also lead to higher levels of inflation, as the KD is currently pegged to the dollar.

The government, though, counters this strain by maintaining price subsidies on basic goods as well as constraining price growth. In addition, UNCC payments dispersed in 2003 will add to the liquidity of the domestic economy, placing a strain on prices.


The inflation level, as measured by the CPI, recorded a growth of 1.4% in 2002 compared to a growth of 1.7% the previous year.