Interpreting Middle East Economic News and Analyzing Market Trends

Kuwait approves debt relief for a select few

http://www.amnesty.ie/sites/default/files/image/kuwait-parliament%2016_04_12%20(2).jpg

 

The parliamentary debate, which has been going on for months, finally came to an end yesterday with a vote of 50 in favor and 4 against.  The bill calls for the government to buy personal loans of some citizens, write-off interest and reschedule payments.  The total expected cost is $2.6 billion.

 

Finance Minister Mustapha al-Shamali said on Tuesday the government was expecting to pay 744 million dinars ($2.6 billion) for the plan, which covers personal loans taken out before the end of March 2008 from commercial banks.

The bill passed with 50 votes for, four against and three abstentions.

It also said banks would have to pay back any overcharged interest to citizens. This would apply to interest charged at more than 4 percent over the discount rate.

Many lawmakers elected in December made debt relief in the oil-rich state a priority of their campaigns. Economists and government officials have voiced concerns about the long-term sustainability of such measures.

Lawmakers had originally sought a complete bailout of billions of dollars of household debt but were met with strong resistance from policymakers who said the plans were not feasible.

The International Monetary Fund said last year Kuwait will have exhausted all of its oil savings by 2017 if it kept spending money at the current rate.

Read the full story from Reuters.

 

The puzzling part is the highlighted portion above.  The debt relief applies to personal loans taken out before the end of March 2008, this is over five years ago.  Why doesn’t the bill cover personal loans taken out during the financial crisis only before?  What about people who paid off their loans on time, why are they being punished for paying while those not paying are being rewarded?  This is good for the banks and shifts bad debts onto the government.  However, it sets a bad precedent for future debt problems.  Kuwait is not alone in this, the rest of the GCC seem to be following this same strategy.  We covered Saudi Arabia and the UAE’s bad debt strategy in this earlier post.