Kuwait passes $23bn bail-out bill

Kuwait’s parliament on Wednesday approved a bill that could force the government to buy all $23.3bn of consumer loans in the country, write off the interest and reschedule the payments, despite government opposition to the plan.

The government plans to ask the emir, Sheikh Sabah al-Jaber al-Sabah, to reject the law, and the central bank has said that the bill includes legal and technical violations and cannot be applied, according to Kuna, the state newswire.

Nonetheless, the Kuwaiti parliament, which has been locked in a long-standing conflict with the Sabah-dominated government, passed the bill on Wednesday to help indebted nationals.

Thanks to the US invasion of Iraq in 2003 and soaring oil prices, Kuwait’s economy has surged for much of the last decade and spurred locals to go on a borrowing spree. While the government has run a series of healthy budget surpluses thanks to oil exports, the global recession has hurt many Kuwaitis, who borrowed to invest in wilting real estate and stock markets.

This has led to a populist clamour for the government to bail out its indebted citizens, as it did on at least two previous occasions – after the Souk al-Manakh stock market crash in 1982 and following the Iraqi occupation in 1991.

“It’s good news for Kuwaiti consumers, who are highly leveraged, and anything that helps them is good from a macro perspective. But as an economist it’s difficult to be positive on something like this,” a Kuwait-based economist said on Wednesday.

“There’s a question of moral hazard, and how this will affect consumer behaviour in the future,” he added.

The law – which stipulates that the government use KD8.5bn ($29.5bn) in state deposits at local banks to bail out all consumer loans – can be rejected by the government, but the assembly can overrule that with a two-thirds majority.

If the bill is implemented the Kuwait Investment Authority, the country’s sovereign wealth fund, would incur a loss on returns of KD2.9bn ($9.9bn), Mustafa al-Shimali, the finance minister, told parliament last month. This would cost the government up to KD3.7bn ($12.8bn), he said.

As a compromise, the government had proposed expanding a KD500m “defaulters fund” already set up to help Kuwaitis unable to repay loans. But the passing of the bill ratchets up the heat in a drawn-out conflict between the executive and legislative branches in one of the Gulf’s few near-democracies.

Sheikh Nasser al-Sabah, the Kuwaiti premier, survived a non-co-operation vote in parliament on December 16, but a political stand-off between the government and parliament in recent years has stymied economic development and halted important projects, experts say.

A joint venture between Kuwait and Dow Chemical was scrapped in December 2008 due to opposition from parliament, and a planned fourth oil refinery was put on hold in March.

An economic stimulus bill had to be passed by the government when parliament was out of session due to an election last year, the third in as many years. Following elections in May last year, Sheikh Nasser was re-appointed prime minister by his uncle the emir, to head his sixth government since 2006.END