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Sun 6 Jul 2008 11:36 AM

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Weak dollar spurring inflation, says Kuwaiti minister

Mustapha Al-Shamali says struggling dollar is contributing to record inflation levels.

The weak dollar is contributing to inflation in Kuwait, the only Gulf Arab state that does not peg its currency to the dollar, Kuwaiti Finance Minister Mustapha Al-Shamali was quoted as saying on Sunday.

Kuwait severed its link to the US currency in May 2007 and started tracking its dinar against a basket of currencies partly to slow down imported inflation as the greenback tumbled on global markets.

Inflation in Kuwait hit a record 10.1 percent in February.

"We should not neglect that the decline in the dollar's exchange rate versus the dinar could lead to an increase in the level of prices locally. This is a factor that might negatively affect the purchasing power," Al-Watan daily quoted Shamali as saying in a report on Kuwait's economic situation.

"This is negatively affecting the growth of local demand and therefore economic growth," Shamali said.

Shamali warned that subsidies designed to offset the impact of inflation on Kuwaiti citizens were a "great burden" on the budget, and said it is necessary to undertake reforms and diversify the economy.

Last month, parliament passed a bill to increase salaries for Kuwaiti public sector employees by 50 dinars ($188.8).

The government also approved a plan to raise to 500 million dinars, from 300 million dinars previously, the size of a fund to help Kuwaitis repay personal debts.

The weak dollar would hit Kuwait's oil revenues, the state's top source of income, Shamali added, urging the government to reduce its reliance on oil by diversifying its economy.

Kuwait wants to become a regional financial centre, but pushing through regulations to help achieve this, such as establishing a financial regulator, have been stalled due to disputes between parliament and cabinet.