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Conduct of Monetary Policy in Kuwait - Essay Example

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Conduct of Monetary Policy in Kuwait

The International Monetary Fund (IMF) noted: "The fastest pace of economic expansion since the 1990 Gulf war, combined with the oil-related terms of trade gains, has boosted per capita income by 34.5% during 2003-04 and helped build up assets for future generations at a record pace." It added: "With oil prices likely to remain firm over the medium-term, Kuwait's medium-term outlook has improved and is likely to remain favourable, supported by large fiscal and current-account surpluses, and low inflation.
The Kuwait economy is characterized by sound creditworthiness which in turn reflects sustained macroeconomic stability, good governance, twin surpluses (the government budget and current-account), manageable domestic debt (17% of GDP in 2005), the sophisticated banking sector and huge net (official) external assets.
Overall GDP growth has been increasing at a steady rate from 2001 to 2005 due to the stability of the money supply. Through a judicious application of effective open market operations, the central bank was able to mop up excess liquidity in the system resulting in a stable economic growth. The Central Bank of Kuwait (CBK) has imposed a ceiling on the credit to deposit ratio. It was implemented in order to address prudential concerns over rapid expansion of credit to the private sector in recent years without a parallel increase in bank deposits. Kuwaiti banks are, however, heavily capitalised and liquid. The capital adequacy ratio remained comfortable (17.3% as of end-September 2004), well above its minimum regulatory level (12%). In 2004-05, asset quality improved further and net profits and returns on equity/total assets also rose significantly. The Kuwait central bank had reined in liquidity growth in order to attain macroeconomic stability. This policy resulted in a minimal increase in M2 supply from 9646.3 million Kuwait dinar (KD) in 2001 to 10401.2 million KD in 2002. This strict monetary policy resulted in a high increase in the Gross Domestic Product (GDP) growth rate of 11584 .5 million KD in 2002 to 14253.5 million KD in 2003. At the same time, inflation remained at respectable levels from 0.89 percent to 0.98 percent during the same period. The GDP climbed steadily from 14253.5 million KD in 2003 to 17466 million KD in 2004. The M2 supply increased only slightly from 10401.2 million KD in 2003 to 11655.2 million KD in 2004. The GDP scored a big leap from 17466 million KD in 2004 to 23588 million KD in 2005. Steady monetary policies kept the M2 supply level from 11655.2 million KD in 2004 to 13088.2 million KD in 2005.


On the macroeconomic front, the authorities have pursued prudent monetary/fiscal policies, thus underpinning price stability and the exchange rate peg. Consumer price rises have averaged just 1.4% annually over 2000-05, thanks to a stronger currency and subdued import prices. The Kuwait central bank has maintained very stable exchange rate levels to maintain stable inflation rates. This effective policy has resulted in minimal inflation rates. The Kuwait dinar has been appreciating vis-a-vis the US dollar from 2001 to 2005. The exchange rate was 307.36 dinar to 1 US$ dollar in 2001 compared to 299.7 dinar to 1 US$ in 2002. Inflation rate at 2002 was only .89 percent. The local currency further appreciated from 299.7 dinar to 1 ...Show more
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Summary

Kuwait, the third largest country of the Gulf Cooperation Council (GCC) six-member economies, is in buoyant shape. The removal of a major geopolitical risk from neighbouring Iraq, coupled with recent liberalisation measures have improved business optimism-evident by a surge in private sector investment over the past two years…
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