HE Mustafa Al-Shamali Kuwait Minister of Finance

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What are the main challenges and where do you feel are the weak spots in Kuwait`s economy – would it be over-reliance on oil? – lending and credit problems?

The global economic and financial crisis has highlighted the long standing need for further diversification of our economy, and enhancement of the role of the private sector in non-oil activities in order to provide job opportunities to the stream of Kuwaiti nationals entering the workforce. Not only would diversification generate employment, it would also help Kuwait to achieve a steady path of sustainable development. The structural imbalance in the Kuwaiti economy resulting from the overwhelming dominance of the public sector needs to be tackled decisively. There is a need to concentrate the government`s role in economic activities more on regulation rather than provision of goods and services.

This entails, among other things, new forms of partnerships between government and private sectors and overhauling of the current programs of subsidies and entitlements. An important element of the structural reform must address the fiscal situation, to reduce the over-reliance on oil revenues and the dominance of current expenditure in government outlays. Non-oil revenues need to be increased, for example, through re-pricing fees and charges and introducing a modern tax system. Emphasis needs to be given on expanding capital expenditure to increase productivity of the economy, reducing governmental bureaucracy to enhance the effectiveness of government spending, and introducing laws and regulations necessary to improve the investment environment in general, and for foreign investment in particular. A current concern in the aftermath of the global economic and financial crisis is the preservation of financial stability, with particular focus on the banking system, to support confidence and optimism in the market.

Currently, the oil sector is the largest contributor to Kuwait`s GDP. Do you see this changing with the Emir`s vision to turn Kuwait into a financial and commercial center? What sectors would be the future drivers of the growth?

We expect continued investment in the oil sector so that Kuwait, with its significant oil reserves, can remain a major oil producer. Having said this, I must point out that investments in the oil sector do not necessarily imply a neglect of the non-oil sector. Increased investment efforts should be directed to expanding and upgrading non-oil activity in the economy. We foresee a future in which oil and non-oil sectors go hand in hand in a sustainable path of growth and development. Within that overall framework some leading sectors (e.g. finance and logistics) consistent with our comparative advantage will emerge and thrive in line with the Emir`s vision of transforming Kuwait into a regional trade and financial center utilizing oil revenues and building an economy capable of self-sustained growth.

The Kuwaiti government is considering a proposal to give each family a KD10.000 ($34.703) lump sum as an alternative to writing off citizens` loans. How do you see the issue yourself?

The reference in your question appears to be regarding a proposal by a member of the National Assembly. The government is cleat about its position that Law No. 28/2008, regarding the establishment of a fund to address the conditions of citizens unable to repay their consumer and installment loans to banks and investment companies, is the appropriate solution to address the conditions of those citizens. In addition, the government`s view is also clear about the rejection of the Law approved by the National Assembly on January 6, 2010 regarding writing off the accrued interest on citizen`s consumer and installment loans and rescheduling of these loans by banks and investment companies. The government considers that this proposal undermines the banking, financial, and legal systems in the country, and reinforces a disrespect for contracts, increases moral hazard, and prejudices the principle of equality among the people as stipulated by the Kuwaiti Constitution.

Gulf countries are boosting spending to help their economies recover after the global recession but some experts argue that for Kuwait the financial Stability law is not enough. They are urging the government to implement a fiscal stimulus plan – hence the February plan to spend 10,4 billion on major projects. What specific measures can be taken to help buffer Kuwait`s financial sector from future exogenous shocks resulting from the global economic crisis?

At first, I would like to note that we in the State of Kuwait have taken a number of measures to confront the challenges of the global economic and financial crisis on the banking sector in particular and the economy in general. These measure reflect the role played by the Central Bank of Kuwait (CBK) at the level of regulatory and monetary policy, as well as the role played by the authorities in the area of fiscal policy. Both types of measure aim to stimulate economic activity, whether directly or indirectly. In this regard, the CBK has adopted a comprehensive package of measure to ensure adequate liquidity flows with the banking system, and the continuation of the regular flow of funds among the financial sector and other economic sectors in the country, as well as enhancing confidence in the banking sector, and promoting financial stability in the State. In this regard, CBK has proceeded as of the beginning of October 2008 to inject liquidity into the banking system for different maturities.

CBK also took a series of decisions to enhance the liquidity conditions of banks by amending a set of regulatory ratios to ease lending conditions to allow banks to expand their lending capacity, and enable them to exercise a more active and flexible role in enhancing the stability of the economic situation. With respect to monetary policy measures regarding interest rate, CBK has made six reductions in its discount rate since October 8, 2008, most recently on February 7, 2010, bringing the discount rate down to 2,5% from 5,75%. The discount rate in the State of Kuwait is a pivotal rate to which the maximum lending interest rates are ties within certain margins. No doubt that the reductions made by CBK in the discount rate aim to establish a suitable atmosphere for promoting growth in the non-oil sectors of the national economy, as well as to create a conducive environment for the growth of bank credit, thus enhancing the foundations of growth in various economic sectors.

Also, as part of the package of measures taken to address the challenges of the global financial crisis, Law No. 30 of the year 2008 regarding the guarantee of deposits in local banks in the State of Kuwait was issued on November 3, 2008. This law is a precautionary measure to support the other measures, and to support the competitiveness of the Kuwaiti banks. In addition, a Decree-Law has also been issued on March 26, 2009 on Sustaining Financial Stability in the country. It includes precautionary measure to immunize the banking sector in addition to strong incentives to encourage banks to finance productive local economic sectors through State guarantee of up to 50% of the new funding provided by banks to all of their customers: individuals, institutions, and companies in all productive local economic sectors.

It is clear that this aspect of the Decree-Law intends to encourage the flow of credit, and this prevent any possible credit crunch. Actually, in 2009, credit extended by local banks to national economic sectors recorded an annual growth rate of 6% – a clear indication that no credit crunch or even a squeeze exists. In addition, the Decree-Law embodies a set of mechanisms and tools of subordinate funding to immunize the banking sector and strengthen its capital base in order to help sustain economic growth. In this regard, the Decree-Law requires banks to consider capital increases to meet the requirements of their financial instruments not covered by existing legislation, such as issuing Mandatory Convertible Notes (MCN) allocated to the Kuwait Investment Authority, convertible bonds, as well as preferred share that are put up for subscriptions to existing shareholders, and allocating their unsubscribed portion to the Kuwait Investment Authority.

Moreover, the Decree-Law also covered other financial instruments in accordance with the provisions of Islamic Sharia in order to strengthen the rights of the shareholders in banks that operate according to Islamic Sharia and issue these instruments. In this regard, the Decree-Law allows the establishment of Special Purpose Vehicles (SPVs) to acquire assets and securitize them through the issuance of Sukuk or debt securities. It may be noted that facing the effects of the global economic and financial crisis, including stimulating economic activity, is done here through the participation of the principal parties concerned with facing the effects of this crisis including banks, the government, and the supervisory authority. On the other side, the government is aware that stimulating economic activity in times of crisis requires intervention by fiscal policy. Therefore, in addition to the role of the government contained in the Decree-Law referred to above, the government has also presented a give-year development plan that has been approved by the National Assembly during the month of January 2010. The plan includes the implementation of several major projects with an estimated investment of about KH 36 billion (US$125 billion). We are confident that the implementation of this plan will provide a strong impetus to stimulate the economy and it would also be supportive to regulatory and monetary policies implemented by CBK, and this encourage the expansion of domestic demand and the stimulation of economic activity.

Regarding the second part of your question, in addition to the precautionary measure taken in order to fortify the banking sector, CBK is taking necessary measure to promote financial stability and increase the capacity of the banking sector in containing any shocks, whatever the source. In this context, CBK seeks to establish sound frameworks for risk management in financial institutions, and to apply early warning systems to counter any systemic risks. CBK also seeks to enhance governance standards, review the practices concerning conditions of financing, and develop or update banking legislation. It should be noted that CBK has already begun to undertake many actions towards strengthening the regulation of banking business, and in particular with regard to risk management and financial stress tests, and emphasizing various aspects of the application of the second pillar of `Basel II` concerning the regulatory review process, in order to emphasize the importance of the Internal Capital Adequacy Assessment Process (ICAAP) of banks, which aims at ensuring that the capital adequacy ratio is sufficient to face the banking risks in general, and that banks conduct stress tests to establish the methodology of work that is part of risk management. It is also worth mentioning that CBK has issued instructions to Islamic banks on June 15, 2009 on the application if Islamic Capital Adequacy Standard `Basel II` to replace previous instructions, so that the new instructions come in effect as of the end of June 2009.

Furthermore, CBK is currently reviewing the Proposals of the Basel Committee on Banking Supervision on the introduction of amendments to the Capital Adequacy Standard of `Basel II`, which aims to strengthen this standard in the face of various risks that were revealed by the crisis, and to consider the application of new amendments to the local banks after the Basel Committee adopts those amendments. CBK is regularly reviewing its instructions and controls concerning the banking business to update these regulations in line with developments in the international supervision standards.

Many Kuwaiti local financial firms are struggling as a result of the fallout from the slowdown. They are dependant heavily on short term borrowing from local and foreign banks to finance their investment. Is this a cause of concern to you and what could be done to address this issue?

The global economic and financial crisis has affected the economies of many countries, and their institutions were varyingly affected depending on the institution`s financial position, the markets it deals with, and the focus of its business, investments, and the nature of its assets. This matter is not limited to the state of Kuwait and its institutions, the effects of the financial crisis have swept the whole world. The government of the State of Kuwait and the legislative and regulatory authorities, led by CBK, have undertaken serious steps towards reducing the negative effects of the global economic and financial crisis. As indicated above, among the most prominent of these steps is the issuance of Decree-Law No. 2 of the year 2009 on Sustaining Financial Stability in the State of Kuwait in order to enhance the stability of the banking and financial sectors, support the productive local economic sectors, and motivate the banking sector to finance the local economy.

With regard to the financial institutions, the subject of your question, I think you mean investment companies, which were mostly affected by the global economic and financial crisis as a result of the repercussions of various conditions including what you have stated in your question. I would like to make clear in this respect that the Decree-law No. 2 of the year 2009 regarding Sustaining Financial Stability in the State of Kuwait referred to above includes the solutions that have been settled upon to handle the conditions of the investment companies. For solvent companies that suffer from liquidity problems, the State may guarantee up to 50% of the funding provided to them by local banks, as well as possible support that can be given by the shareholders or some governmental bodies. All of this must be decided in the lights of a study and evaluation of the company`s position through a specialized advisory body determined by CBK, or the concerned company and approved by CBK.

As for the companies facing difficulties impending the fulfillment of their obligations or continuation of their activities, the Decree-Law has introduced specific provisions for protection from creditors that protect a company from its creditors until the completion of the implementation of the company`s restructuring plan to resolve its condition under the supervision and follow-up of CBK. I believe that the solutions contained in the Decree-Law referred to above represent a comprehensive framework for addressing the situation of investment companies facing various financial problems and difficulties, in addition to the internal solutions that can be followed by some companies, as one of the major investment companies has so far succeeded in doing.