Upcoming Vote On Debt Law Crucial To Economy

In his speech to parliament in mid-August, Finance Minister Barrak Al-Sheetan made an impassioned plea to lawmakers requesting them to approve the draft public debt law, in the face of a looming liquidity crunch and deficit budget.

Despite this fervent appeal, parliament in its sitting on 19 August to discuss the report on the draft bill by the parliament’s finance and economic committee, concurred with the panel and declined to lend its support to the bill. Instead, the MPs referred the draft bill back to the finance and economic panel for further study and to present a new report in two weeks, when the National Assembly would take the matter up for vote.

The next session of parliament is scheduled to be held on Tuesday, 1 September. Under the present scenario, it is highly unlikely that the parliamentary panel will recommend the bill for approval by parliament, or that the government will be able to muster enough lawmakers to pass the bill through the House. It will be one more missed opportunity in the legislature’s long history of missing the reform boat, and in the process the chance to boost economic and social developments in the country.

 

With parliamentary elections to be held by year-end, lawmakers are understandably more concerned about retaining their seats in the National Assembly rather than on more mundane matters such as state finances or economic welfare of the country. Playing to the galleries in parliamentary sessions, with often outlandish demands and claims, may well win lawmakers  support of their voter base and attract new voters, but it does not augur well for the future of the country.

In her comments prior to presenting its report on the bill to parliament, MP Safa Al Hashem, who heads the house panel on finance and economy, said the committee rejected the draft bill “with 4 against and 1 abstention in the panel, because, in the absence of clear and real reform, things won’t be put right.” She added that the government did not provide clarity on how the borrowed funds would be utilized or on the mechanism for repayment. Reiterating this view, lawmaker Adnan AbdulSamad said, “There are real justifications for rejecting the public debt law. It’s difficult to approve the public debt law without budget reform.”

Kuwait is facing one of the worst economic crunches among oil exporters in the six Gulf Cooperation Council (GCC) states, with pressure on state coffers mounting from months of sustained low oil prices that have been exacerbated by the ongoing coronavirus pandemic. The country’s General Reserve Fund (GRF), which the government has been dipping into over the years to tide over recurring budget deficits is all but depleted. 

In his speech calling on parliament to approve the draft debt law and implement much-needed economic reforms, Minister Al-Sheetan warned that failure to do so would totally deplete the GRF and leave the government unable to cover its expenditures. The minister pointed out that much of the expenditure that had led to recurring budget deficits had gone to paying salaries of government employees, subsidies to citizens, current expenditures and construction projects. 

The government is estimated to be withdrawing around KD1.7 billion each month from the GRF. 

Under this scenario, liquidity of GRF could soon dry up, especially if global oil prices continue to maintain their ‘lower for longer’ status, and the country remains mired in its inability to borrow from debt markets. The government’s draft legislation envisages borrowings of up to KD20 billion spread over 30 years through the issue of sovereign bonds on local and international debt markets.

“Had we implemented this debt law in 2017, we wouldn’t be where we are today,” said Al-Sheetan, referring to the previous debt law that had lapsed in October 2017. Since then, various iterations of the draft bill have been presented for discussion in parliament only to be rejected by lawmakers stridently opposed to any borrowings from debt markets. It is worth commenting that the opposition to a new law on borrowing came despite the government’s highly successful debut Eurobond issuance in March 2017.

In his clarification on the bill, the finance minister assured lawmakers that the bill would give the government necessary time to implement economic reforms in a phased manner, and that it would compensate for the fall in oil revenues from sustained low oil prices and rising expenditures, as well as help tackle the exigencies arising from the ongoing coronavirus pandemic. He pointed out that approval of the bill would reduce the impact of much-needed financial and economic reforms on citizens and not compromise investments of the Future Generations Fund (FGF).

In all fairness, while lawmakers returned the draft bill back to the finance and economic committee, it did give its nod to the finance minister’s request for exchange of assets between the GRF and the FGF. Accordingly, the parliament approved an amendment to the long-standing law mandating transfer of 10 percent of annual revenue to the FGF, and instead made the transfer of funds conditional on the annual budget running a surplus. The amendment will now give the government around KD2 billion, which is  a temporary respite that could go mostly to paying state sector employees who are in the most part citizens.

The FGF, which was set up to act as a buffer for future generations when oil reserves invariably deplete and oil revenues eventually run dry. This fund had so far remained untouchable to the government except in national emergencies, such as the 1990 Iraqi invasion when the government had to spend huge sums of money for liberating the country and rebuilding it after the wanton destruction of its infrastructure. But now that the government has been given the go-ahead to dip its toes in the FGF it may not be long before the fund begins to experience shortfalls in its investments and its performance.

Highlighting this danger, the finance minister himself warned, “In several decades, the FGF will run out, affecting the welfare of future citizens and the state.” He reiterated that a much better alternative to borrowing from the FGF was for parliament to approve the debt bill. 

The debt bill, said Al-Sheetan, would allow the government to issue sovereign bonds that are currently available on very favorable terms due to the high rating of Kuwait on financial markets. The country’s low ratio of public debt to its GDP and to its fund reserves, give lenders high confidence in Kuwait, while the longer tenure of the bonds will make them attractive to long-term investors such as large global pension funds.

Outlining how the draft debt bill would be utilized over the coming years the finance minister explained that the public debt bill will provide KD20 billion for 30 years and that 40 percent of this amount would be used to meet expenditures and the remaining 60 percent would be allocated for infrastructure development projects.

All the rationalizations by the finance minister apparently failed to convince lawmakers who sent the draft bill back for further review by the finance and economic panel. Faced with falling revenues from low oil prices, a budget that is expected to widen in 2020-2021 fiscal year to KD14 billion, and an economy that is reeling under the impact of the coronavirus outbreak, many citizens are beginning to ask what will it take to convince the parliament of the urgency of approving the debt law when it comes up for vote in the coming session of the National Assembly. 

In the likely eventuality that the debt bill fails to win parliamentary approval, the government would still be left with the option of issuing the law by decree once the current legislature’s term ends and lawmakers head off for elections. However, the government would also have to keep in mind that the ‘legislators will be back’.

 

SOURCE : TIMES KUWAIT

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