Decline of inflation rates to salvage Kuwait economy

Sun, 10 Jan 2010
By:Jameel W. Karaki
KUWAIT: The global crisis affected the Kuwaiti economic sectors in many areas by having a strong negative impact on the US dollar's exchange rates, banks' international operations and on the real estate development in the local and regional market. However, these negative effects will gradually be reversed, if we take into consideration the other side of the recession: the decline of inflation rates. Declining inflation rates help the Kuwaiti economy achieve economic stability, as the fall in the price of construction materials will lead to a reduction in the cost of real estate development. Later on, when the recession has passed, the prices of other products and services will also decline.
Banks and investment companies in Kuwait have also been affected by the crisis. Many banks invested in foreign assets, looking to increase their profits, but when the US sub-prime crisis arose, numerous depositors withdrew their money from the banks, complicating matters and causing a severe crisis. This has led countries to take precautions and implement measures to regulate loan and deposit procedures. Due to the lack of risk management measures in some of the Kuwaiti banks and lack of liquidity, Kuwaiti banks started to impose strict lending conditions for leasing projects or any operations in a way it caused a recession and a delaying in the economic development projects especially in urbanization and a reduction in the purchasing power of individuals too.
As for the real estate sector, there was an increase in basic property value. As a result, when the crisis hit, many investors and developers lost their liquidity and were unable to continue development, causing heavy damage on the market. In the short term, it is expected that real estate and construction sectors will expand rapidly and additional funds will be pumped into these sectors to achieve growth and to add an additional value to the Gross Domestic Product (GDP).
Moreover, the total and personal income rate was affected by the crisis because investors preferred to hold their liquid money rather than investing in order to avoid any risks. As all of the market sectors are interconnected to each other, any fluctuation in any one of these sectors will eventually affect the other sectors as well. This will, in turn, affect spending rates, including consumption and investment expenditure, as well as the income rates for firms and individuals.