Kuwait: Monetary policy is a key pillar of the economy in free market economies.
When the US Federal Reserve makes adjustments, such as raising or lowering its discount rate, financial markets react positively or negatively, and there are knock-on effects across the economy.
Recently, central banks around the world have used monetary policy to deal with economic stagnation or price inflation — and with good results.
GCC countries — which depend heavily but to varying degrees on oil revenues to meet current capital spending — have also used monetary policy tools. Their central banks tend to track the actions of the Federal Reserve when it adjusts its discount rate.
Gulf countries also manage the value of their national currencies according to the dollar exchange rate, with the exception of Kuwait, which relies on a currency basket in which the dollar is the main component — up to around 70% of its weight.
It is to protect those exchange rates that central banks in the GCC alter their monetary policies in reaction to the Federal Reserve, and to deter outward flows from their own currencies into the dollar.
Inflation challenge
In 2022, inflation emerged as the most critical global economic challenge and the Federal Reserve raised its discount rate several times taking it from 0.25% at the beginning of the year to 4.50% by the end.
US monetary policy undoubtedly helped tame high inflation. However, at the same time, it also led to a decline in the performance of financial markets in the US and other major industrial countries.
Gulf central banks typically raised their equivalent rate by the same amount each time the Federal Reserve did so in the United States, in increments of between 0.25% and 0.75% over the past year.
Some economists claim that monetary policies in GCC countries have limited impact on economic activity, due to the typically dominant role of the state, arguing that its real impact comes in protecting currency exchange rates.
While monetary policy and public spending tools remain crucial, the impact of monetary policy varies from one Gulf country to another. The structural transformations taking place in Saudi Arabia and the UAE also reinforce the pivotal role the banking sector plays in enhancing economic activity.
Concern over interest rates
Interest rates are already an important concern for business owners from non-oil sectors in the region’s national economies. Here, there is already significant dependence on financing from the banking sector.
In the past year, the performance of the real estate sector typically did not decline despite high financing costs. According to a report from KAMCO Invest, the Kuwaiti asset manager, real estate deals in the GCC amounted to $143 billion in 2022, up from $137 billion in 2021.
This uptick reflects the continuous demand for housing in particular, due to the growing number of professionals and high living standards.
But that is not the case in all Gulf markets, according to a report by AlShall, a leading financial and business consultancy firm based in Kuwait. It found that that real estate liquidity decreased in 2021 from 3.9 billion Kuwaiti dinars ($12.8 billion) to 3.8 billion dinars ($12.4 billion) — a drop of around 3%.
This decrease reflects the sensitivity of the real estate sector in Kuwait to the cost of financing and the dependence of many businessmen on the banking system, as is the case for many who wish to own or build private housing.
Gulf nations tend to behave as rentier economies, where profits can be levied by means that do not generate meaningful change or progress in wider society.
This means monetary policy does not match the level of importance reached in major capitalist countries, where bank financing defines the extent to which businesses expand or diversify.
