Invasion of Kuwait and Its Financial System - Case Study Example

KUWAIT BACKGROUND Kuwait is surrounded by Iraq and Saudi Arabia. Total Land area of Kuwait is 17818 sq. kilometers and has a total coastline extendedto 195 Km. the location of Kuwait is of strategic importance in the gulf region. Kuwait is an oil producing nation and due to the coastline it enjoys the ease of export. Kuwait had the position of British Protectorate from 1897 to 1961 and was half autonomous. On 19 June, 1961 Kuwait gained the status of independent state and complete autonomy (Kuwait history). Initially Kuwait was a poor city or state completely relying on its pearling, fishing and trade. Later with constitutional democracy it earned the wealth through its oil revenue and now it has modern infrastructure. Kuwait has Islam as the major religion whereas there are also Hindus, Christian and Parsees in the country who enjoy freedom of practicing their religion. Kuwait has a total population of 2,152,775 according to official 1997 counting but there are a lot of international workers in the field of accounting, labor, finance etc who are also living on Kuwait. There are also illegal foreign workers and people entering border illegally which are not included in the figure and due to which the population cannot be determined. An estimated of 70 to 90 percent of the labor force are foreign labor force. Foreign workforce has placed strong role in the development of the Kuwait however the working condition of labor is very poor and violates the labor rights. Low wages and poor living conditions with dangerous work indicates modern form of slavery and has been drawing international attention since long (Kuwait history). INVASION OF KUWAIT Iran-Iraq war occurred during which Kuwait supported Iraq in every way. Kuwait also supported Iraq financially. Soon after the war ended, the friendly relations between two countries started to become soar. REASON FOR CONFLICT Iraq borrowed US$ 14 billion in order to finance its war against Iran. When the war ended, Iraq was in serious financial crisis and it was not in a position to repay the debt. Iraq requested Kuwait to forgive the debt to which Kuwait did not agree and it led to tension between the two countries. Kuwait’s oil production also made it impossible for Iraq to increase the price to generate enough revenue to pay off its debt. Even if there was a decline of 1 dollar per barrel, Iraq lost billion of dollar on its revenue leading to further financial and economical crisis. Iraq asked Kuwait to reduce production or increase price to which Kuwait did not agree. Later Iraq accused Kuwait of slant drilling and stealing its oil. The accusations were dismissed as false and many people indicated that the accusations are being thrown to present a reason for military action. On 2nd August 1990, Iraq invaded Kuwait and despite the condemnation of all major powers of the world, Iraq did not withdraw its forces. After several failed negotiation between Iraq and world powers, US launched US led coalition forces to free Kuwait. Kuwait was freed on 15 March 1991. Kuwait suffered a major financial setback after the invasion (Kuwait history). HISTORY OF ITS FINANCIAL SYSTEM Kuwait relied on trade before oil was explored. Reliance of Kuwait was on its long distance trade at that time. During World War I, there was a blockade on trade from British Empire due to the support of Kuwait to the Ottoman Empire. This put Kuwait financial system in crises. During the world depression Kuwait’s economy faced deep trouble. It was due to the lower demand of good by the Europe due to which long distance trade of the Kuwait was affected. The oil of Kuwait was officially explored in 1951 by a US and Kuwait company. After this Kuwait became financially stronger as the economy was growing and living standards of people improved drastically. The growing economy and infrastructure also attracted foreign workforce to Kuwait further growing the Kuwait’s economy and improving financial conditions (Timewell). CURRENCY DEVALUATIONS AND REVALUATIONS Before independence Kuwait had no official currency and Indian currency was circulated mostly during the period of 1930 to 1960. After independence dinar was introduced in 1961. Notes were issued. In 1969 Central Bank of Kuwait came into existence which took the responsibility of currency regulation. Indian Rupee is the currency in which Kuwait dinar is mostly converted since the beginning. In 1961, Kuwait Dinar equaled 13.33 Indian Rupee. In the period of invasion in 1991 the Kuwait currency devalued drastically. During the short period of invasion, Iraqi currency was used in Kuwait. After the Iraqi forces were removed and Kuwait was liberated again, its currency went back to the pre-invasion rates and new currency notes were issued. Currency code for Kuwait Dinar is KWD and it was the most valued currency in 2013 (Currency). POLITICAL STABILITY AND LIKELIHOOD OF GOVERNMENT NATIONALIZATION/CONFISCATION OF ASSETS Kuwait is a sovereign state and has been stable in its political standing. It is a democratic country and has a national assembly and parliament. National assembly has a total of 50 members. Country has seen political stability until in recent times. There has been political turmoil which has also halted the development projects in Kuwait (Gate). A law was introduced protecting companies and investors against nationalization. According to the law, government cannot nationalize without reason of public interest. Due to this law there has been no case of nationalization since 1974 in which Kuwait government negotiated 40% of the share from British Petroleum and American Gulf Oil Company (2012 Investment Climate Statement - Kuwait). ECONOMIC FREEDOM INDEX Kuwait has the economic freedom score of 62.3 in the 2014 index of economic freedom. This is lower by 0.8 points than years 2013. Since the time Kuwait has been graded on this index, it has lost 4 point in 19 years of time as seen in chart below. (Heritage) Good improvements have been seen in the investment and government spending categories however this has been offset by seven other major categories. Currently Kuwait has the 76th rank in the world in Economic freedom index. See chart below. (Heritage) DEBT-TO-GDP Debt-to-GDP is term used to define the ratio between Government Debt and Gross Domestic Product. The ratio is used by the investor to measure countries ability to repay the debts. Kuwait’s debt-to-GDP ratio is 5.28 and previously it was 6.43. There has been decrease in ratio indicating good figures. The highest was 203.36 during the invasion period in 1991 while the lowest was 1.093 in 1990 before invasion. Debt to GDP ratio is reported by the Central Bank of Kuwait. See table below. Actual Previous Highest Lowest Dates Unit Frequency 5.28 6.43 203.36 1.09 1990 - 2013 Percent Yearly (Kuwait Government-debt-to-gdp) (Kuwait Government-debt-to-gdp) BALANCE OF PAYMENTS It is very less often when countries have trade surplus and balance of payments. Kuwait enjoys a balance of payment due to its surplus of export over imports. The currency of Kuwait is also strong with atleast 50% backed up with Gold reserves. Kuwait Balance of payment was record with a surplus of US$ 16.68 billion in the first quarter of 2013 in comparison to US$ 19.5 billion in fourth quarter of 2012 (NBP). LEVEL AND TRENDS OF INTEREST RATES Kuwait has an interest rate of 2 percent in the year 2014. The previous interest rate was also 2 percent and it has been stable since long. The highest interest rate was record to be 7.25 in April in year 2000. The lowest interest rate has been 2 percent. See table below for trend. Actual Previous Highest Lowest Dates Unit 2.00 2.00 7.25 2.00 1999 - 2014 Percent (Kuwait Interest Rate) (Kuwait Interest Rate) CURRENCY CONTROLS AND OTHER CAPITAL OUTFLOW CONSTRAINTS Currency of Kuwait is controlled by Central Bank of Kuwait. CBK issue regulation regarding the currency controls and measures to avoid money laundering. Kuwait has experienced trade surplus mostly since the time when oil was explored. This indicates that country can spend internal and external. Kuwait has not been able to utilize the surplus in developmental projects inside it economy and it has always invested in external markets of other countries. There is always a huge capital outflow however the it is not returned injected back into the economy of Kuwait for development (Ramadhan, Hussain and Al-Hajji). UNEMPLOYMENT TRENDS Unemployment rate in 2012 has been 2.72 and it has remained same in 2011 as well. The average unemployment rate of Kuwait has been 1.75 percent from 1983 to 2012. Highest unemployment rate was 7.18 in 1994 and lowest was 0.5 percent recorded in 1990 before invasion. See table below. Actual Previous Highest Lowest Dates Unit Frequency 2.72 2.72 7.18 0.50 1983 - 2012 Percent Yearly (Unemployment-rate) (Unemployment-rate) DEMOGRAPHICS AND POPULATION GROWTH Kuwait is a country having job opportunities due to which there is huge percentage of people working in Kuwait. Out of total population of Kuwait there 60 to 65 percent of Arabs who are Kuwaiti and non Kuwaiti and there are 30 to 35 percent of Asian. Remaining 5 percent are others. Most of the population of Kuwait is Muslim with 95% Muslims. Out of 95% of Muslims, 55% are Sunni Muslims and 45 percent are Shia Muslims. There are other religions like Hindus, Christians and Parsees. Male to Female ration is 1.54 males per female. According to 1997 official consensus, population of Kuwait is 2,152,775. However there are a lot of foreign workers working in Kuwait and a lot of illegal immigrants due to which exact figures cannot be estimated (Demographics of Kuwait). INFLATION Inflation rate in Kuwait is 3.16 in 2014 and average rate since 1995 has been 3.06 percent. The highest inflation rate was recorded in the year 2008 to be 11.64 percent and lowest was -1.15 percent in April 1998. Actual Previous Highest Lowest Dates Unit Frequency 3.16 2.70 11.64 -1.15 1995 - 2014 Percent Monthly (Kuwait Inflation) EXISTENCE OF CARTELS AND PRICE FIXING In Kuwait cartel don’t work against consumers and it is not supported by government at all. However there have been price fixing and cartel problems in foreign markets. Kuwait petroleum was found involved in the Bitumen price cartel. Price fixing is an illegal act and Kuwait government is determined to adopt regulations to prevent it. QUALITY OF PRODUCTS AND SERVICES Top five products of Kuwait are: Cyclic Hydrocarbons Ethylene Polymers Crude Petroleum Petroleum Gas Refined Petroleum The major product of Kuwait is oil and it is 50% of the GDP and 89% of the revenue earned by Kuwait. See chart below. Kuwait has by far not successfully diversified and is still highly dependent on oil. Banking system of Kuwait is very strong and National bank of Kuwait is the biggest bank in country and Gulf region. Second major revenue is generated by investing in foreign countries in many sectors. Agriculture in Kuwait totals for 1% of the economy and is mostly used internally. This is also because most of the land is not appropriate for agriculture and the land which could have been used for the purpose was destroyed during the invasion period when Iraqi military set the oil wells on fire. (Global competitiveness) Works Cited 2012 Investment Climate Statement - Kuwait. 6 2012. 8 11 2014 . Currency. n.d. 9 11 2014 . Demographics of Kuwait. n.d. 0 11 2014 . Gate, Syndi. 14 5 2013. 8 11 2014 . Global competitiveness. 2006. 8 11 2014 . Heritage. 2014. 1 11 2014 . Kuwait Government-debt-to-gdp. 11 2014. 9 11 2014 . Kuwait history. 9 11 2014 . Kuwait Inflation. 11 2014. 9 11 2014 . Kuwait Interest Rate. 1 11 2014. 9 11 2014 . NBP. 3 7 2013. 9 11 2014 . Ramadhan, Mohammad, Abdulhameed Hussain and Reem Al-Hajji. "Limitations of Kuwait’s Economy: An Absorptive Capacity Perspective." Modern Economy (2013): 6. Timewell, Stephen. Kuwaits banking industry goes from strength to strength. 2 4 2013. 9 11 2014 . Unemployment-rate. 2014. 9 11 2014 . Read More