SOAS Research Online

Abstract

This thesis examines money problems and policies in Kuwait, a capital plenty economy, during the period studied. Kuwait's balance of payments surplus has allowed it to continue to cover the domestic note issue by foreign reserve until today, whereas most developing economies have found this a constraining vestige of monetary arrangements in British colonial days and have legislated to give their central banks more flexibility. Due to the country's surplus, the commercial banks built up large holdings of foreign assets over the period 1962-1980, chiefly in the form of short-term money market deposits with banks abroad. Whereas the Central Bank of Kuwait started implementing monetary reforms from 1973, the independence of the commercial banks due principally to their liquidity, meant the central bank had little success in controlling the money supply until 1979, when it exploited the growing lack of liquidity among commercial banks to strengthen its control over their reserves. The analysis of the determination of the growth of the stock of money in Kuwait over the period 1962-80 needs to take account of the role of the commercial banks and their foreign assets in the rapid growth in lending, which began in 1972. Whereas we find high-powered money an important determinant of the growth of the money stock, the bank reserve ratio plays a significant role. The growth of the stock market in Kuwait was the main cause of the growth in lending after 1972. The Central Bank of Kuwait saw its main objectives as controlling the speculation and credit explosion connected with the stock market. The Kuwaiti Dinar was established by Britain at the time of Kuwait's political independence. The benefit to a country like Kuwait of having a separate currency would appear to be extremely limited. The Kuwait government have followed a policy of exploring possible monetary integration with neighbouring states, although we find this does not answer any specific economic problem in Kuwait. Meanwhile, the Central Bank of Kuwait has pursued a policy of maximum stability of the currency throughout the period under study, in order to minimize the risks of currency loss by the financial community, including the commercial banking system, which had substantial foreign asset holdings. This is of considerable importance because the commercial banks do not appear to behave in such a way as to hedge their foreign currency exposure.