OCCASIONAL PAPER
•IS-.
Kuwait: From Reconstruction to
Accumulation for Future Generations
Nigel Andrew Chalk, Mohamed A. El-Erian, Susan J. Fennell,
Alexei P. Kireyev, and John F.Wilson
INTERNATIONAL MONETARY FUND
Washington DC
April 1997
VB TU Darmstadt
51641612
Contents
Page
Preface
VII
Introduction
^
Mohamed A. El-Erian
II
Accumulation for Future Generations:
Kuwait's Economic Challenges
2
Mohamed A. El-Erian
. Kuwaitis Economy on the Eve of the Iraqi Invasion
The Economic and Financial Impact of the Invasion
The Authorities' Policy Response and the Challenges Ahead
Emergency Program, Reconstruction, and Rehabilitation
Restoring Financial Balances
Strengthening the Financial Markets
Improving the Functioning of the Labor Market
Conclusions
Bibliography
III
Budget Structure and Implications for Fiscal Policy
2
3
4
5
5
5
6
7
7
8
Susan Fennell
IV
Historical Perspective
Fiscal Developments in 1994/95-1995/96
Structural Aspects of the Budget
Revenues
Expenditure
Implications for Reform
Conclusions
8
10
10
11
12
13
15
The Impact of Fiscal Retrenchment on the Private Sector
16
Migel Andrew Chglk
A Review of the Literature
Impact of Expenditure on Aggregate Private Activity
The ^Sectoral Breakdown
Manufacturing
Construction
Trade, Restaurants, and Hotels
Other Sectors
Summary of Findings
The Impact of Fiscal Policies on Private Consumption Expenditure
Conclusions
16
16
19
19
20
21
22
22
23
24
Appendix: Augmented Dickey-Fuller Tests and Johansen Test Results
Bibliography
25
26
The Kuwaiti Financial System: Structure and Experience
28
John F.Wilson andAlexei P. Kireyev
VI
Overview of Kuwait's Financial Structure
Policy Evolution in the 1980s
Monetary Policy
Interest Rate Policy
Liquidity Issues and Management
Developments in Supervision and Regulation
Monetary and Credit Developments
Conclusions
28
30
30
30
32
34
37
40
An Analysis of Kuwait's Debt Collection Program
42
Alexei P. Kireyev
A Brief History of the DCP
The Souk Al-Manakh Episode
Original Program
Purchase of Bad Debts
Recovery of Bad Debts
The Analytics of the DCP: The Framework
• The Analytics of the ©CP: A Preliminary Application
Conclusions
Bibliography
42
42
43
43
45
45
47
49
49
Tables
3.1
3.2
4.1
4.2
4.3
4.4
4.5
5.1
5.2
5.3
5.4
5.5
5.6
.5.7
J6.1
6.2
6.3
Composition of Revenues for Kuwait and Comparator Countries
Components of Government Expenditure, 1994
Impact of Changes in Expenditure on Total Private Sector Output
Impafet of Changes in Expenditure on Private Manufacturing
Impact of Changes in Expenditure on Private Construction
Impact of Changes in Expenditure on Private Trade, Restaurants,
and Hotels
The Effect of Changes in Public Expenditure
on Private Consumption
Structure of Financial System
Evolution of Monetary Policy Instruments
Selected Monetary Policy Tools
Key Elements of Banking Supervision
Factors Affecting Changes in Domestic Liquidity, 1992-March 1996
Factors Affecting Changes in Domestic Liquidity, 1981-95
Structure of Interest Rates on May 15, 1996
Chronology of the Debt Collection Program, 1986-96
Debt Collection Program
DCP: Outcome of the First Installment Repayment on April 6, 1996
11
13
18
20
21
22
23
29
31
33
35
37
38
40
44
48
49
Figures \
2.f
2.2
2.3
2.4
2.5
3.1
Selected Economic Indicators
Total Revenue and Investment Income
Crude Oil Production
,
Interest Rates
Value and Volume of Shares Traded on Kuwait Stock Exchange
Overall Fiscal Balance
4
4
5
6
6
9
3.2
3.3
5.1
6.1
Developments in Fiscal Revenue
Components of Fiscal Expenditure
Contributions to Liquidity Growth, 1981-95
Kuwait: Individual Debt Laffer Curve
11
12
39
46
Boxes
3.1 The Budgetary Process in Kuwait
3.2 Budgetary Subsidies and Transfers
14