Francisco Quintana KUWAIT CITY – The Kuwaiti parliament recently passed a bill forgiving interest payments on outstanding bank loans for Kuwaiti citizens. Only loans taken between 2002 and 2008 are included. The rationale for this bill argues that banks lured citizens into getting debt and charged “abusive” interest rates on them. The government will buy outstanding loans and the 47,000 citizens benefiting from the plan will continue the payment of the loan principal to the government, under comfortable terms. In its first draft, the bill also included a compensation of 1,000 Kuwaiti dinars for the 400,000 Kuwaiti citizens without bank debts. Any debt due by these citizens to the government would be deducted from this compensation. The final draft of the bill released by the National Assembly did not include this grant, but it is unclear whether some form of compensation for citizens will be passed in a separate bill later on. According to the Ministry of Finance, the implementation of this bill will cost KD744 million ($2.6 billion) to the state. Again, it is not clear if this estimate includes the cost of the KD1,000 grant, but, in any case, it implies a substantial fiscal disbursement by the state. This fiscal pattern is not unique to Kuwait. Saudi Arabia included loan forgiveness programs in its 2011 budget, and only in 2012, the UAE wrote off citizens' debt on two occasions. Over the last few months, the debate about this bill in the parliament has been centered on issues like the inclusion of expats' loans, the inclusion of loans from Islamic funds, the maximum amount that should be written off or the size of the grant that should be given to those citizens who did not take loans. However, no discussion has been held on the economic impact of this measure on the nation. Most of the impact of debt reduction or grant programs can generally be seen in consumption levels. In this particular case, it is unlikely that the debt write-off will have any significant impact on consumption. In general, households with higher levels of debt consume less, either because they set a limit on their level of leverage and reduce consumption once that limit is reached, or because banks are less willing to lend to those that already have a lot of debt. But the link between debt and consumption is not very strong. In the last decade consumer spending grew at around 7 percent every year in Kuwait. In the OECD countries it has been found that a reduction in debt equal to the annual income of an individual boosts consumption growth by two to three percentage points. If we apply this rate to the case of Kuwait we find that the impact of the debt write-off on the economy would be very low – around five to ten million KD. In the hypothetical case of a cash handout of KD1,000 being approved, it would have a larger impact than that of the debt reduction, but it would still not be significant. The 400,000 citizens that would receive the grant would probably spend around half of that money (after having deducted outstanding utility bills) within this year. Overall, we estimate that out of the KD400 million that the government would have spent on grants only, less than 150 million would translate into consumption, increasing gross domestic product (GDP) by 0.3 percent. However, part of that consumption would translate into imports, which must be deducted from GDP, reducing the potential impact even further. It is important to remember that the cost of this bill is also relatively small. In the first ten months of the fiscal year, until the end of January 2013, the budget surplus in Kuwait was KD17.2 billion. Using the Ministry's estimate, the bill would represent only 4.3 percent of that surplus. As a reference, the 2011's decree cost twice as much, injecting KD1.4 billion in the economy, but the impact on GDP was four times larger, around 700 million or 1.6 percent of Kuwait's GDP in 2011. In summary, the recent bill on debt forgiveness, whether it includes the KD1,000 grant or not, could be considered economically irrelevant. Does that mean that it has no impact at all? No. The issue with this bill is of a different nature. First, it creates a problem of social justice. The bill, in its current form, benefits a very small percentage of the population, less than 4 percent of Kuwaitis could write off up to KD70,000 per person. The factor that differentiates these individuals from the rest is simply that they decided to take loans. The bill does not take into account the economic situation of the beneficiaries or whether the loan was taken for basic needs or luxury spending. Second, it creates a situation of moral hazard. Citizens might take further loans now hoping that debt forgiveness will again be in the agenda of the Parliament's candidates in the next elections. Those citizens who were financially cautious in the past have no incentive to be so in the future.
Third, it poses a sustainability problem since constant rising subsidies and bailouts are now widely expected by Kuwaiti citizens. The funds for this program could have been placed at the Fund for Future Generations but instead they become current spending today. Debt reduction could be a useful instrument in economies crippled with high unemployment and weak consumption. But that is not the case in Kuwait - or anywhere else in the Gulf - where, on the contrary, the costs of the debt reduction probably outweigh the benefits.
— The writer is a senior economist at Asiya Investments
