Monetary and financial sector frameworks
The mission considers the pegged exchange rate regime to be appropriate. The peg to an undisclosed basket has provided an effective nominal anchor and limited exchange rate flexibility during a period of dollar strength. The pegged exchange rate puts a greater onus on fiscal policy to support stability and facilitate external adjustment. The mission’s external sector assessment shows that the estimated current account gap would close under the proposed fiscal adjustment. The mission notes that, as the economy becomes diversified, the arrangement should be periodically reviewed to ensure that it continues to serve Kuwait well.
The mission commends the CBK for prudent regulation and supervision which have helped keep the banking sector resilient. The mission supports CBK’s plans to conduct a comprehensive inventory of macroprudential tools to ensure that they continue to promote financial sector resilience, prevent buildup of systemic risks, and carefully balance financial stability and growth objectives. Plans to upgrade stress-testing techniques and early warning indicators are welcome. The mission supports the recent decision to remove preferential (zero) risk weights for exposures to GCC sovereigns in the calculation of risk-weighted assets.
The mission supports ongoing efforts to strengthen supervisory and regulatory frameworks. To enhance risk-based supervision, the CBK is planning to better integrate its on- and off-site supervision functions, including through cross-training of staff. The mission welcomes progress towards establishing a centralized Shariah Board at the CBK, as this would reduce risks from inconsistent interpretation of Shariah law in Islamic banks.
The authorities should continue efforts to strengthen crisis management and resolution framework. Reforms should focus on revamping the existing framework to promote orderly resolution of banks, reduce moral hazard, promote market discipline, and help safeguard fiscal resources. To that end, the authorities have prepared a draft law on banking resolution, currently in the cabinet, and initiated internal discussions on the appropriate setup for a deposit insurance scheme in Kuwait. To promote greater coordination between agencies overseeing the financial sector, the CBK has updated the memoranda of understanding with the Capital Markets Authority and the Ministry of Commerce and Industry. A draft law, currently in parliament, assigning the CBK an explicit financial stability mandate and establishing a Financial Stability Committee (FSC) would create a more structured framework for supervision and crisis resolution. Given the banks’ dominant share in the financial system, the CBK should take a leading role in the technical work of the FSC.
The mission sees scope to further enhance the liquidity management framework. With IMF assistance, the CBK has operationalized its liquidity forecasting tool, including through formalization of information sharing agreements with relevant entities. The mission is encouraged by progress in extending the forecasting framework beyond the short-run horizon. This has allowed the CBK to better anticipate potential system-wide pressures. The mission recommends further refinements in the liquidity management framework to allow market forces to play a bigger role in the pricing and allocation of liquidity.
The mission recommends a gradual relaxation of lending rate caps. While established corporations already borrow at below the applicable lending rate cap, a gradual relaxation could expand access to credit to a wider segment of the corporate sector and SMEs. It would also reduce concentration of loans over time and promote lending at longer maturities, which would encourage investment. The mission welcomes recent amendments to the law on credit information that have enabled the credit bureau to start gathering credit information on businesses and enhance data collection on retail borrowers. As a comprehensive nationwide rating system is established and banks are better able to price risk, the CBK could consider gradually relaxing the interest rate cap on consumer
loans as well. The mission believes that the CBK has a wide menu of macro- and micro-prudential tools to arrest potential risks to financial stability, while its commendable efforts in strengthening consumer protection, including by enhancing financial literacy, would help mitigate risk to individual borrowers.