Kuwait has a different sort of debt issue to tackle

Kuwait has a sterling reputation in the field of sovereign investments and as a pioneer in creating national wealth funds. In fact, the first sovereign fund in the world was set up by Kuwait in the 1960s.

Despite such extensive experience, the political tensions, especially between the government and legislators in the National Assembly, reflect mindsets that negatively affect economic growth.

For example, last August, Minister of Finance Ali Al Sheatan said, “The government may not be able to pay the salaries of employees in November”, and which led the credit rating agency Moody’s to downgrade Kuwait’s rating in September from Aa2 to A1.

Therefore, officials have to be extremely cautious in what they are trying to say - as the Gulf proverb says, ‘Eating dates is not like counting seeds’. The minister’s statement set off a panic in society and on social media, although it did not reflect the reality of the country’s relatively strong financial conditions. Why?

Nature of the malaise

A question needs to be asked here: Is the Ministry of Finance’s liquidity problem “financial” or “administrative”? If it is purely administrative it can be easily overcome, as in financial terms, Kuwait enjoys significant reserves, with the assets of Kuwait Investment Authority valued at $530 billion. It is one of the largest sovereign funds in the world and achieves high annual returns.

In addition, Kuwait’s oil production is approximately 3 million barrels per day and enough to make it the seventh largest oil producer in the world.

So the problem lies in the management of the relationship between the government and the National Assembly, which refuses to give a legal mandate to the government to issue debt bonds that could contribute to solving the liquidity problem.

This is mostly because of the lack of professionalism among MPs, who mistakenly believe adding more public debt is to be avoided at any cost. This should not be the case, as most countries, especially the US, are taking advantage of the lower cost financing opportunities available in the debt markets.

It is not possible to imagine the global economy without debt instruments playing a role. These are supported by effective legal structures and provide the best option under the current circumstances.

Time to tap debt is now

In Kuwait’s case, there are two options to solve the liquidity problem resulting from lower prices and oil revenues. The first is borrowing, especially since Kuwait, despite its recent downgrade, still has a favourable credit rating, which qualifies it to issue bonds or sukuk at ultra low-interest rates.

As for the other option, it is either to withdraw from the general reserves, but requires selling good assets at low prices due to the value erosion caused by the COVID-19 pandemic and the economic downturn.

Let’s be objective, the second option is unprofessional and expensive, unlike the first, which will help not only to resolve liquidity problems but also offer funds for development projects. Cheap money can easily be made available to countries that enjoy a high credit ranking - and Kuwait is one such country.

This matter is not limited to governments only, but also to the private sector, which can benefit from this exceptional situation in the debt markets.

Missing out

In principle, parliaments around the world, including the National Assembly in Kuwait, have the right to impose oversight on the financial affairs of governments. This is required, but this must be done in a professional manner and not pander to the popular mood and win votes.

Doing so will be at the expense of missing out on development opportunities. This issue must be understood by the Kuwaiti citizen when voting for their next representatives as a new election is around the corner.

- Mohammed Al Asoomi is a specialist in energy and Gulf economic affairs.