Use fiscal policy to pep growth – Kuwait central bank

FISCAL FIX: Kuwait's annual inflation eased to 10.8 percent in Sept. from about 11.6 percent in Aug. (Getty Images)

Kuwait's central bank has urged the Gulf Arab state to use fiscal policy to stimulate growth and tackle a decline in asset and real estate prices amid a global crisis, its governor said in remarks published on Sunday.

The comments came hours before Sheikh Salem Abdul Aziz Al Sabah was due to give a news conference after the government agreed on a package of rescue measures to soften the impact of a global credit crunch on the OPEC country.

He was expected to address the plan involving state guarantees for banks and other measures to tackle a credit crunch increasingly hitting Kuwait despite its oil wealth.

Al Sabah said the country's key discount rate was at an "appropriate" level. He was responding to a question about the possibility of an interest rate change.

The government will guarantee 50 percent of new loans extended by local banks to investment firms in 2009 and 2010, he said.

The central bank governor had already in January urged the government to keep spending stable in the new fiscal year starting in April.

The OPEC country plans to cut spending by some 7 billion dinars ($23.77 billion) to 12.05 billion dinars in the new fiscal year based on preliminary figures, the head of parliament's budget committee said last week.

The cabinet still has to approve the figures and the drop comes mainly from lower contributions to social welfare funds after a one-off payment worth 5.4 billion dinars last year. But infrastructure investments will fall by more than 400 million dinars.

Daily Al Wasat quoted Central Bank Governor Sheikh Salem Abdul Aziz Al Sabah as saying he "confirmed the importance of adjusting average spending to strengthen and preserve average growth rates in appropriate limits."

He gave no details but added the state should particularly address a decline in financial assets and to a lesser extent also real estate prices as part of efforts to tackle a global financial crisis hitting Kuwait.

Sheikh Salem also reiterated Kuwait would not disclose the composition of a currency basket it introduced after dropping a dollar peg in May 2007.

"Pegging the dinar to (several) currencies instead of one provides a bigger flexibility for the exchange rate of the Kuwaiti dinar to soak up parts of sharp fluctuations in the dollar exchange rate to other major currencies," he said.

Kuwait has let depreciate the dinar below its old dollar peg as analysts said it plans to offset a rise in the dollar against the euro and to help boost oil revenues paid in dollar to stimulate the economy.

The move has prompted some analysts to speculate Kuwait may return to the dollar peg at some point to prepare for monetary union for 2010 but see no imminent move.

He also said the central bank remained committed to fighting inflationary pressure in the only Gulf Arab state without giving details or a forecast for inflation.

Kuwait's annual inflation eased to 10.8 percent in September from about 11.6 percent in August, the latest published figure. (Reuters)

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