KUWAIT- Kuwait's sovereign wealth fund has reached an initial agreement with Kuwait Petroleum Corporation (KPC) on new payment terms for over $20 billion in accrued dividends, a government source said, as the Gulf state seeks ways to counter a liquidity squeeze.

KPC has owed for years about 7 billion Kuwaiti dinars ($23 billion) in dividends to the General Reserve Fund (GRF), one of Kuwait's sovereign funds.

GRF, which is used to cover state deficits, has been squeezed by the coronavirus-driven drop in oil prices and a continued stand-off between government and parliament on implementing measures such as a law to allow state borrowing.

The agreement between GRF and state-owned KPC on a new payment schedule has not been signed yet but the government source said it would be submitted to the finance and oil ministries for approval.

He was confirming a report by Kuwaiti newspaper Al-Rai, which said KPC and the Kuwait Investment Authority - which manages Kuwait's sovereign wealth funds - reached an initial agreement to transfer the dividends to the public treasury within a 15-year timetable.

The report said the accrued funds amounted to about 7.75 billion dinars.

The source did not specify a time frame for the payment but said the final terms would not impact the financial position of the company or its ability to honour obligations linked to its investments.

Kuwait has taken several steps to mitigate the depletion of the treasury's liquid assets, including raising funds for the GRF through asset swaps with Kuwait's Future Generations Fund - a nest egg for when the country's oil runs out.

Such steps may push back the risk of a liquidity crunch to the third quarter this year, Bank of America said last month. 

"This agreement (with KPC) will not solve the problem of financing Kuwait's budget. The government still needs to reach an agreement with the National Assembly on how to finance the budget deficit," the government source told Reuters.

(Editing by Ghaida Ghantous and Mark Potter) ((Davide.Barbuscia@thomsonreuters.com; +971522604297; Reuters Messaging: davide.barbuscia.reuters.com@reuters.net))