The Kuwaiti Parliament passed an historic law that requires the government to forgive close to two billion dinars (US $ 6.65 billion) of interest on debts of Kuwaiti citizens and reschedule the principal debt over at least 10 years. Thirty-five MPs voted for the controversial legislation in its second and final round of voting, 22 opposed it while one lawmaker abstained. The government swiftly said it will reject the law because of its technical, constitutional and procedural shortcomings which make it very difficult to implement.

Governor of the Central Bank of Kuwait Sheikh Salem Abdulaziz Al-Sabah said the amount of interest and returns on personal and consumer loans covered by the law amount to KD 1.818 billion. Finance Minister Mustafa Al-Shamali told reporters after the vote that the government will reject it because it cannot be implemented. Under the law, the government can reject legislation passed by parliament, but MPs also have the right to override the government's rejection, by a fresh vote if two-thirds majority can be obtained or postpone for the next term for a simple majority. In this case, the law becomes compulsory and the government has to implement it.

The law requires the government to first write off all outstanding interest on personal and consumer loans taken out by Kuwaiti citizens from banks and investment companies until 14 Dec 2009. Then, the law stipulates these banks and investment firms have to reschedule the remaining debt in interest-free monthly installments that must not exceed 35 percent of the debtors' income. The repayment must be made over a period of at least 10 years, according to the law. The government has said that the total amount of loans and its interest is KD 6.7 billion. Under the law, the government will use returns on its deposits of KD 8.5 billion at local banks to finance the cost of the scheme.

During the debate, MPs rejected an amendment that calls for the state to pay any fines resulting from a delay in the repayment of the installments. The approval of the law came after two days of heated debate that was marred by heated arguments in which supporters and opponents of the scheme traded accusations.

More than 80 percent of the citizen workforce is employed by the government and their average monthly salary is US $3,500. Per capita income in 2008 was about $40,000.

January 7, 2010



Analysis and Forecast: Increasing Risk

The passage of this law carries many political, economic and social risks. The risks are summarized as follows:

  1. Political: The clear and stark difference between the parliament and government positions could lead to a political confrontation between parliament and the government. Given the popular support for parliament’s position in this case, a political escalation of this issue could lead to eroding popular support for the government, which is already shaken. Although at this stage the dissolution of parliament is too early to predict, such an eventuality could lead to civil unrest;
  2. Economic: Practical implementation of the law will be very difficult to control and will be subject to corruption. Banks will suffer due to limiting re-payments of debts as well as possible insufficiency of government deposits to cover interest. If passed, it will affect the credibility of the economic system of Kuwait and its independence, as well as difference in treatment between Kuwaitis and expatriates;
  3. Social: Leading religious figures have condemned the law and cleric Ajeel Al-Nashmi issued a fatwa saying that the law discriminates between citizens. This is particularly the case as the law covers blanket loans, including loans given to buy luxury cars. It could therefore lead to a backlash.