Kuwait is expected to continue to depreciate the dinar against a strengthening dollar to help stimulate the Gulf Arab state's economy by boosting oil revenues, economists said yesterday.
The Opec member has let the dinar fall below the levels of its old peg to the dollar to offset a recent rise in the dollar and support government efforts to shore up the economy.
The weaker the dinar is, the more oil revenues, Kuwait's main income source, pour in. "Kuwait is likely to further weaken the dinar in line with any dollar strengthening as government policy will continue to focus on growth and maximising revenue in dinar terms," said Monica Malik, a regional economist at EFG-Hermes in Dubai.
The world's seventh-largest oil exporter broke ranks with fellow Gulf Arab states in May 2007 and dropped the peg to help fight then-soaring inflation as it pays for a third of its imports in euros.
With the dollar firming and inflationary pressure easing, the dinar has been falling since the start of the year after being up eight per cent for a good part of 2008. The dinar was up four per cent at the start of January.
Yesterday, the central bank let the dinar reference rate tick higher slightly but still to remain 0.59 per cent below dollar levels since the depegging. "As long as the dollar continues to strengthen or at least hold its value and we have good news on the inflation front, I think the central bank will continue to let the dinar rate crawl in same direction," Malik added.
The central bank was not immediately available for comment. The central bank, which has not disclosed the composition currency basket and only says the dollar plays a key role.
Faced with demands for more spending to prop up growth, Kuwait's budget is under pressure as oil prices fall. Kuwait depends on oil revenue for over 97 per cent of state revenue. Benchmark crude prices have slumped to around $40 a barrel from a peak of over $147 in July last year. The cabinet has unveiled a stimulus worth KD1.5 billion but approval in parliament is uncertain. The assembly is due to discuss the bill on March 3.
Some analysts have argued Kuwait may at some point return to a dollar peg to prepare for a long-planned Gulf monetary union but others see no move right now.