KUWAIT- Kuwait is trying to cover its fiscal shortfall through asset swaps and tapping its sovereign wealth fund as a standoff between government and parliament pushes the cabinet to look for palliative measures while structural reforms remain deadlocked.

The Gulf state, hit hard by lower oil prices and the COVID-19 pandemic, faces near-term liquidity risks, largely because parliament has not authorised government borrowing.

The cabinet submitted a draft bill to parliament last week that would allow it to withdraw up to 5 billion dinars ($16.54 billion) per year from the country's Future Generations Fund.

The fund, a nest egg for when oil runs out that is managed by Kuwait Investment Authority (KIA), has only been tapped once, during the first Gulf War. 

But the proposal may not be approved and government sources said in any case it would only buy some time without addressing longer-term budgetary needs.

"Five billion dinars will not solve the problem ... The proposal is not a substitute for the public debt law, which parliament must pass," said one source.

He said the proposal is part of a four-step approach to addressing the deficit, estimated at around $40 billion in fiscal 2021/2022.

Those steps include reducing government spending, increasing non-oil revenues, having the ability to borrow, and finally using the liquidity of the Future Generations Fund only if a deficit is still outstanding.

Over the past few months, the fund has transferred around 6 billion to 7 billion dinars to the General Reserve Fund, a smaller state fund used to plug the deficit, said the government source.

Of those, over 4 billion were in exchange for asset swaps, while 2 billion were returned to the General Reserve Fund after a law last year halted a mandatory annual transfer of 10% of state revenues to the Future Generations Fund.

The source said future asset swaps may find resistance from KIA, which according to ratings agency Fitch had over $580 billion in foreign assets as of the end of last year, accounting for most of Kuwait's sovereign net foreign asset position of 652% of GDP.

"The failure to efficiently manage government finances does not trigger an economic crisis because the sovereign wealth fund is so large, but it depresses expectations of what the country can achieve outside oil revenues even further," said Hasnain Malik, head of equity strategy at Tellimer.

Parliament Speaker Marzouq al-Ghanim on Tuesday called the proposal to allow withdrawal from the Future Generations Fund "a very dangerous matter" because it is wealth the current generation does not own. He added it would be cheaper to borrow.

"At a conservative estimate, the cost of borrowing 5 billion dinars from global markets today would be around 75 million Kuwaiti dinars, while the cost of liquidating investments would be around 300 million Kuwaiti dinars," he said.

"Why liquidate assets that bring returns of six, seven, or eight (percent) instead of borrowing at one percent"

($1 = 0.3022 Kuwaiti dinars)

(Reporting by Ahmed Hagagy in Kuwait and Davide Barbuscia in Dubai; editing by Larry King and Angus MacSwan) ((Davide.Barbuscia@thomsonreuters.com; +971522604297; Reuters Messaging: davide.barbuscia.reuters.com@reuters.net))