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Mon 21 Apr 2014 01:48 PM

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Kuwait central bank warns against rising gov't spending

Governor says Kuwait's rising public spending is preventing sustainable economic development

Kuwait central bank warns against rising gov't spending
(Photo for illustrative purposes only)

Kuwait's rising public spending and dependence on oil revenues are preventing sustainable economic development, the Gulf state's central bank governor said, echoing warnings from the International Monetary Fund.

Mohammad al-Hashel, who rarely comments on policy issues, said Kuwait needed to reduce wasteful spending in the state budget and "rationalise" subsidy programmes, state news agency KUNA quoted him as saying late on Sunday.

One of the world's richest countries per capita, Kuwait provides heavily subsidised petrol and utilities to its 3.8 million residents and does not charge income tax.

The IMF says the major oil producer's spending could exceed revenues as early as 2017 under a worst-case scenario. Kuwait's government predicts this could happen by around 2021.

Hashel's predecessor Sheikh Salem Abdulaziz al-Sabah, who is also a former finance minister, resigned as central bank chief in February 2012 after 25 years in protest against the state's wasteful spending.

Structural imbalances in the budget "hinder the process of promoting growth and development of the national economy on a sustainable basis," Hashel said in a briefing to local media, according to KUNA.

He said the government needed to "diversify the sources of national income" and make sure that it was able to collect all payments for services such as electricity and water. He also called for an "increasingly sophisticated tax system", KUNA said without giving details.

The government started a review of the subsidies' system last year saying that cheap services should go to those who need them. The finance minister has said the review should be completed this year.

Subsidies are expected to cost KD5.1 billion ($18.2 billion) in the current fiscal year, which began this month.

Kuwait's progress with the review is relevant to other Gulf Arab states which do not charge income tax and rely on a patronage-style system of handouts that has helped to shield them from regional unrest.

Local newspapers have reported that Kuwait, which pegs its dinar to an undisclosed currency basket believed to be dominated by the US dollar, may start charging foreigners more for products such as petrol and continue to subsidise petrol for Kuwaitis.

Foreigners make up around two thirds of the country's population, with large numbers from India, Bangladeshand the Philippines working in the construction and services sectors.

Kuwait plans to raise its budget spending by 3.2 percent this fiscal year, a cabinet statement said in January, a much slower rise than the past decade's double-digit average.

The plan suggests the government is following other Gulf states in adopting a more cautious fiscal policy.

Hashel also called for Kuwait to put forward legislation to allow the government to issue sukuks, or Islamic bonds, KUNA said without giving details.

At the moment, the central bank issues three- and six-month bills as well as mostly one-year local currency Treasury bonds on a regular basis.

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