Kuwait embraces socio-economic change
The recent elections in Kuwait has come as a shot in the arm for a government looking at taking on the financial crisis with an economic stimulus package the election of four women MP's adds to the country's image
 

By Dr Jasim Husain Ali

Kuwait is implementing a slew of socio-economic and socio-political changes to combat the economic crisis and to get a modern image. The government has introduced fresh initiatives designed to boost confidence in the country’s economy in general and the financial system in particular. The other evidence relates to ballot voting of four females to the national assembly for the first time in 12 parliamentary elections. In April, the authorities implemented a $14bn dollar financial stability law designed to restore confidence in the country’s financial sector. The plan requires the government to guarantee 50 per cent of loans extended by local banks in 2009 and 2010. In addition, the scheme calls on the state to provide guarantees for 15 years against any drop in investment and real estate portfolios besides old loans extended to local firms. Total outstanding debt burden on some 99 local investment firms is estimated at $18bn including $7.6bn owed to foreign financial institutions. Yet, the new scheme provides local companies the opportunity to use fresh credit to repay debt commitments to local and foreign banks.

No giveaways
Indeed, the amount is sizable by virtue of comprising about 10 per cent of state revenue in the last fiscal year and nearly five per cent of the country’s gross domestic product (GDP). Yet, the scheme is not a giveaway, with prospective companies required to make financial and administrative changes including enhancing their capital base. In other words, only serious companies willing to undergo change in the way they run their business need to apply.

The government’s seriousness about the initiative can be traced to Kuwait investment authority’s (Kia) commitment to buy the remaining shares of overhauled companies in case existing shareholders fail to fully subscribe to increases of capital resources. Kia serves as the country’s investment arm or the sovereign wealth fund (SWF). By one account, Kia controls some $250bn, in turn the third largest SWF within the gulf cooperation council (GCC) states after the UAE and Saudi Arabia.

Other initiatives
The financial stability law is only the third such initiative undertaken by Kuwaiti authorities in dealing with the consequences of the on-going financial crisis. In 2008, financial officials decided to guarantee all deposits in the banking system after gulf bank, the second largest lender in the country, reported a loss of $1bn from its derivatives activity. In another move, the government called on state institutions led by the Kia to buy shares of firms listed on the Kuwait stock exchange (KSE), as a part of its efforts to restore confidence in the economy. The fund is long-term in nature with investments remaining at the bourse for five years.

To be sure, Kuwait has a history of having undertaken exceptional steps in addressing financial challenges. In 1982, the government accepted responsibility for $20bn of difficult loans in the aftermath of the crash of an unofficial bourse. And following the country’s liberation after Iraq's invasion in 1991, the authorities wrote off all consumer loans taken by Kuwaiti nationals.

A friendlier parliament
Much to the delight of authorities, the election results of the parliamentary contest held on may 16, 2009 suggests that the new national assembly would most likely endorse the financial stability law. The authorities opted for the scheme weeks after the country’s ruler dissolved the 11th national assembly in march. The government adopted the package under what is known as the necessity law. Yet, the national assembly has the power to approve, reject or amend laws introduced during absence of the national assembly. Visiting Kuwait during election times, i learned that the business community paid close attention to elections issues and positions of candidates on challenges facing the economy. The interest partly reflects the fact that the newly elected assembly would decide the fate of a multi-billion dollar package designed to restore confidence in Kuwait's financial system in the aftermath of the global financial crisis.

in addition, business leaders would like to see legislators speeding up the privatisation programme. The programme includes selling off shares in banks, insurance companies and light industries that the government had purchased through kia after the collapse of the stock market in 1982 and the Iraqi invasion in 1990.

Plus the authorities desire to privatise certain activities of Kuwait petroleum corporation and the buses operated by the Kuwait public transport company. Other areas that are likely to be privatised include postal services and ground communication stations as well as x-ray laboratories and security at public hospitals. Earlier, the authorities succeeded in privatising petrol stations. The privatisation drive should help broaden the sources of revenue and reduce the country’s reliance on oil. The petroleum sector accounts for 90 per cent of total treasury income, making Kuwait the most oil dependent nation oil amongst fellow GCC countries.

Fuelling the economy
One positive aspect of Kuwait's parliamentary elections relates to the financial contribution to the local economy. By one account, total expenses incurred on the elections in 2009 amounted to $200mn in a span of two months. The figure increases further via the notion of a multiplier effect, as every dollar spent generates an additional three dollars in the form of spending on food, tents, compensation for staff and media sources.

To be sure, the latest parliamentary election only strengthened a trend started during elections in 2008 which involved the elaborate use of television appearances while discussing solutions to problems facing the nation. Some candidates joined forces in setting up special television channels dedicated to broadcasting messages to their constituents.

Undoubtedly, additional spending into the economy could not be more timely, as the country tries to cope with the adverse effects of the on-going global financial crisis. Amongst other negative developments, the financial crisis undermined confidence in the economy, exemplified by the reluctance of banks to grant credit facilities due to anxieties about borrower’s ability to repay. Clearly, Kuwait stands out within GCC states for its willingness to experiment with bold initiatives to overcoming major financial problems like the contemporary credit crunch. These moves, notably the financial stability law should serve the goal of not allowing the financial crisis turning into an economic one. The election of four females as mps, only adds value to Kuwait's image.
 
The author is an eminent economist and Member of Parliament, Bahrain

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