The General Reserve and The Borrowing Principle

The latest official figures available regarding the size of the general reserve for the country is about 16 months old or till the end of June 2018. Those figures may not be accurate after the State’s final account for the fiscal year 2018/2019 achieved a substantial deficit by KD 3.346 billion after deducting the 10% from total revenues for the Future Generations Reserve. The increase in actual expenditures over the estimate in the budget was a precedent that has not occurred in Kuwait for 24 fiscal years. This is an indication to the extent of the uncontrolled fiscal policy. Actual expenditures for the fiscal year 2018/2019 exceeded the actual expenditures for the fiscal year 2017/2018 by KD 2.601 billion, or 13.5%. This deficit has supposedly been withdrawn from the liquid balance of the general reserve. We also believe that the government has repaid due loans from outside the public budget and it is likely it has doubled withdrawals from the general reserve.

While the non-liquid assets scored about half of that reserve or about KD 13 billion in the end of June 2018. It is assumed that the withdrawal was from the other liquid half, which is supposed to have been corroded  by  half  as  well. This means that what the government or the international financial institutions’ forecasts say about the depletion of liquid assets of that reserve, either by the end of March 2020 or March 2021 is a real probability.

What we disagree with and believe it is an extremely dangerous approach is the use of the probability of the general reserve liquid assets’ depletion as an excuse for the government to be allowed to pass a law that gives it the right to borrow to finance the public finance deficit. Allowing the government to borrow is prohibited until it presents a program with three legally binding targets. First, it should present a project in figures to reduce waste in public expenditures within a declared time frame; let the reduction in the current and upcoming budgets expenditures by known percentages be the start. The second goal is a declared and harsh position against corruption. It is irrational for the government to ignore bribed deputies whose trading news in millions of dinars has filled the media, and then it promotes the principle of rationalization of expenses and imposing fees and taxes. The third goal is for the government to present its project for spending the borrowed money. Unless their return is higher than the cost of their borrowing and unless they are projects that create indigenous jobs opportunities, their borrowing authorizing is meaningless.

What the government should realize is that sustainability of public finance in accordance with its current policy and with the current and future oil market conditions is impossible. Overcoming short-term pressures by resorting to borrowing has unbearable consequences on the country. We believe that its option is to balance between the cost of its survival and the country’s stability risks. Success if it wants it is to promote the country to the Norwegian model while failure means to drop to the Venezuelan model. The financial policy so far is moving towards the latter.