Tuesday, Sep 19, 2006


 
   By Andrew Peaple 
   Of DOW JONES NEWSWIRES

SINGAPORE (Dow Jones)--Kuwait has to find an alternative source of revenue from oil and allow greater private sector involvement in the economy to encourage long-term economic growth, the country's Central Bank Governor said Monday.

"We have to do our best to encourage the private sector to increase their role in the domestic economic activity," Abdul-Aziz Al Saud Al Sabah said in an interview with Dow Jones Newswires. "This mainly could be done by privatization."

Around 95% of Kuwaiti nationals are now employed in the public sector.

Al Sabah said Kuwait's central bank has put forward a plan for privatization of state-owned assets, which was now being considered for approval by the Kuwaiti government.

Al Sabah said it was necessary for Kuwait to have a longer term perspective on its future and deal with what he called "structural imbalances".

"The country must have a plan - we need a very clear vision for the future," central banker said, on the sidelines of the annual meetings of the World Bank and International Monetary Fund. "This is what I always have in my mind, a 25-year plan."

In the shorter term, Al Sabah said the Kuwaiti economy was on course for strong growth this year, despite a sharp correction in regional stock markets earlier this year. He said the Kuwaiti economy had escaped any major impact due to the resilience of the banking sector and central bank monitoring of the situation.

"It is proven that despite the correction, the profits of our banking system went up, so we do not need to worry about our banking system," he said. "It's also had an important psychological impact on traders, who now understand that markets can't always go up."

He added that he expected consumer price inflation to remain under control this year, after spiking up to 4.1% in 2005 from 1.7% the year before.

"So far inflation CPI has gone down this year to 2.2%. We hope we can maintain that level," the central bank head said.

With regards to investment opportunities, Al Sabah said that by reforming and promoting higher growth, some countries could provide a more conducive investment environment for countries such as Kuwait which have built up high levels of foreign currency reserves.

"In order for there to be a kind of attraction to the management and flow of foreign reserves of surplus countries, there must be a counterparty that provides investment opportunities, with performance that can really attract," he said.

But with regard to the Central Bank of Kuwait's own reserves, Al Sabah said there was little likelihood of a sudden change in policy. Another Gulf country, the United Arab Emirates, said earlier this year it would shift its allocation of reserves in euros to 10% from 2%, while reducing its dollar holdings.

"Since the sixties the investment strategy of Kuwait has been to diversify investment," he said. "We have not changed that policy."

Kuwait is one of several oil-exporting countries to have built up substantial foreign exchange reserves during the recent long period of high oil prices. In addition,the country had a current account surplus worth over 40% of gross domestic product by the end of 2005, and external debt worth just 22% of GDP.

The rise in foreign currency reserves among Gulf states, and their contribution to global imbalances, has been receiving greater scrutiny. Kuwait's neighbor Saudi Arabia has been invited by the IMF to join ongoing multilateral consultations on the imbalances along with China, Japan, the euro zone and the U.S.

Al Sabah appeared content with the level of the Kuwaiti dinar against the dollar. The dinar is allowed to trade within a band of plus or minus 3.5% from a reference rate of KD0.29475:$1. The dinar was allowed to rise to the top of this band in May, to offset the impact of imported inflation due to the dollar's relative weakness.

He said there were no immediate plans to adjust that position.

Regarding the plans of six Gulf countries - Kuwait, Saudi Arabia, Qatar, Oman, Bahrain and the U.A.E. to form a currency union by 2010, Al Sabah said he was "very comfortable" that all six would be able to meet the convergence criteria.

He said it was likely that the currency union would lead to the creation of one central bank for the region, with one president or governor in charge.

-By Andrew Peaple, Dow Jones Newswires; +44 207 842 9270; andrew.peaple@dowjones.com

(END) Dow Jones Newswires

09-19-06 0206ET

Copyright Zawya Dow Jones Newswires 2006