Kuwait debates the wisdom of a bailout

While it has grown into a major political fracas in Kuwait, a proposed 6.7 billion dinar (Dh85.79bn) bailout of consumer loans may pack more bark than economic bite, analysts say. A bill to enact the bailout passed in Kuwait's parliament on Wednesday, to the dismay of the government and several members of parliament, who called it financially irresponsible and constitutionally unsound. Mustafa al Shimali, the minister of finance, dubbed it "an inapplicable law in reality, with unconstitutional doubts in some of its articles".

But despite its passage in a 35-to-22 vote after hours of heated debate, few observers expect the measure to become law. Kuwait's emir is expected to veto it, and a two-thirds parliamentary majority would be required to reverse that decision, meaning the 35 who voted in favour this week would need to convert a few bailout-averse colleagues. And even if the bill does pass, its effects on heavily indebted consumers, the Kuwaiti banking system and the country's flagging stock market may be muted.

"It's not a new positive trigger in my view," said MR Raghu, the head of research at Markaz, a Kuwaiti investment firm. "It's a matter between the parliament and the government. This is something that's been happening for a very long time, so the market has discounted that factor a long time back." Kuwait boasts the Gulf's most vibrant civil society but also its most fractious political system. Parliament has been dissolved twice during the past two years amid scrappy political infighting and drawn-out talks on insignificant legislation.

The fierce debate over the bailout bill thus fits well with Kuwait's disorderly political culture, where sparring for tactical advantage often takes precedence over the fundamental merits of legislation. Many politicians won their elections on the basis that they would promote a consumer bailout, which went over well with Kuwaitis who have, on average, US$22,000 (Dh80,804) in consumer debt. "A lot of people in parliament were elected based on pushing the government to cancel consumer debts," one observer said, declining to be named because of the political sensitivity of the issue. "Their support depends upon it. There could be another set of elections, and they're thinking, 'I'm re-elected if I vote for this law.' Still, I think amongst a lot of legislators, the thinking is that this is not a sound move as far as the long-term performance of the economy goes."

Indeed, the feasibility and economic soundness of the bill have already been challenged from many sides. Kuwait's central bank said this week that it was so littered with bureaucratic complexity that it would present "an intolerable burden on the central bank to the extent that will result in total paralysis of its supervisory tasks". Yet even if it can be implemented, it remains unclear whether the expensive bailout would be a boon for consumers or for the Kuwaiti economy.

While the bill's provisions are almost universally decried as vague, the legislation appears to require banks to stop collecting interest on consumer loans. Banks would then reschedule the debt of consumers whose monthly payments amount to 35 per cent or more of their salaries, allowing them more time to pay back what they owe. In exchange for forcing lenders to give up interest income and reschedule loans, the government would put 8.5bn dinars in interest-free deposits into local banks. The banks could then generate income with that money by lending it out and charging interest.

There has been some suggestion that this plan would spur borrowing and spending, not to mention a possible surge in the local stock market as cash that once went towards debt payments was freed up for investment. Still, analysts point out that despite their indebtedness, few Kuwaitis devote more than 35 per cent of their incomes towards loan repayments, meaning only a small percentage would have their debts rescheduled and be able to borrow more.

"The impact of debt rescheduling would only affect a small number of consumers," said an economist in Kuwait. "As for the others, why would wiping out some of their debt encourage them to borrow again? If they wanted to borrow they could already borrow, so I'm not sure if it will lead to renewed surge in borrowing." The bailout could be equally uneventful, and perhaps even detrimental, for banks. It is far from certain that they could lend out government deposits at rates similar to those they earned on consumer loans on which the interest was cancelled, which could put a dent in profits. If the new injection does not stimulate consumer lending, the central bank may also sell bonds to the banks and take the deposits made by the government off their hands at low rates of interest.

"If banks can manage to lend those fresh funds, it could have an expansionary effect on the economy and stock prices and so forth," the economist said. "But my suspicion is they will not be able to lend these funds for productive uses." While the bailout bill appears to offer few benefits outside of a reprieve for Kuwait's most heavily-indebted consumers, most of whom are already covered by a 500 million dinar "defaulters' fund" set up last year, implementing it could entail enormous costs for the government. By giving zero-interest deposits to banks, the government would give up returns it could have earned on that money elsewhere. Mr al Shimali, the finance minister, estimated last month that the Kuwait Investment Authority, the country's sovereign wealth fund, would lose 2.86bn dinars in the plan.

The bailout bill is complex and few observers expect it to be a much of a blessing for consumers or banks, but in Kuwait's chaotic political arena, the measure - and the debate - marches on. @Email:afitch@thenational.ae