Creative Monetary Policy to Spur Kuwaiti Economy

Kuwait, a major oil producer hit by last year’s price slump, is leaning towards a more creative monetary policy to help spur its economy, banking sources said.

“There is a clear emphasis on encouraging the use of money in productive ventures, rather than having it all tied up in interest bearing investments which have no direct productive outlet,” one banker said.

Kuwait’s Central Bank yesterday cut one key money market rate and abandoned another which had been used since February 1986 to direct inter-bank borrowing and lending costs.

The bank reduced to six pct from 6-1/2 pct the rate at which it will offer funds of one month to one year in the inter-bank market. This, in turn, affected retail rates.

The cut, the third this year, followed a major overhaul of interest rate policy last month which Central Bank Governor Sheikh Salem Abdul-Aziz al-Sabah said was designed to revive the economy.

One banker said “There is growing flexibility, creativity, in interest rate policy, amid an awareness of the need to diversify the economy by stimulating the non-oil sector.”

For the first time in nearly three years domestic interest rates are now significantly below those for the U.S. Dollar, a favourite haven for Gulf speculative and investor funds in the past, banking sources said.

Despite uncertainties generated by the 6-1/2 year old Iran- Iraq war on Kuwait’s northern doorstep, bankers play down the prospect of any significant capital flight.

The Kuwaiti dinar, whose value is set by the Central Bank and was fixed today at 0.27095/129 to the dollar, is stronger now than for several years.

Fears that the dollar may fall further will prompt second thoughts among Kuwaiti investors prepared to consider switching funds into the U.S. Currency, the sources said.

“There is a distinct exchange rate risk,” they added.

Bankers said the dollar slump hurt many investors behind the last major capital outflow in 1984, encouraged then by 18 pct U.S. Interest rates and the start of Iranian attacks on neutral shipping in the Gulf.

The Central Bank calculates its dinar exchange rate against a basket of currencies. Bankers do not know the basket’s exact make-up but say it is weighted heavily in favour of the dollar.

Some bankers believe any strengthening of the dinar beyond 0.27000 to the dollar might provoke investors into shifting funds into the U.S. Currency. “They may ask:When will the dollar be so cheap again?” one said.

And with dinar interest rates now roughly one pct below those for the dollar, they say the Central Bank faces a delicate balancing role requiring further flexibility.

Bankers said the current, expansionary interest rate policy is only part of a broader attempt to encourage local investment and strengthen the backbone of the economy.

They estimate the economy, measured in terms of GDP and allowing for inflation, shrank 19 pct in 1986 after an 8.1 pct contraction the previous year.

Bankers also noted recent measures to stimulate stock market activity, capped today by sharp cuts in brokerage fees to make it cheaper for investors to trade.