Government subsidies, strength of the dinar keeps down inflation in Kuwait

The inflation rate in Kuwait is similar to the rest of the world’s economies where the consumer price index has risen to historical levels. But despite this, inflation levels in Kuwait remain at 4.7%, much lower compared to the Western economies, which exceeded 9%, for example, in the United States of America.

This difference is due to subsidies, especially fuel subsidies, which have a bearing on the prices of other commodities and services, in addition to the strength of the Kuwaiti dinar against the US dollar, in addition to Kuwait’s trade surplus thanks to record increases in oil prices. The difference in inflation rates also explains one of the factors on which the Central Bank of Kuwait relied in its decision to raise interest rates, but at rates lower than the US Federal Reserve.

The standard inflation rate in Kuwait rose by 4.7% on an annual basis during the month of April, after it recorded a rise of 0.16% on a monthly basis. The sectors of education (+18.95%) and food and beverages (+9.13%) topped the rise in the inflation rate in Kuwait, while the impact of subsidies on other sectors such as transportation (+4.82%) and health (+1.7%) was evident.

The price of a liter of gasoline in Kuwait (95 octane) ranges around 105 fils (equivalent to about 0.3 to 0.4 US dollars), which is a fixed price. Despite the fact that the Kuwaiti dinar exchange rate was not fixed against the US dollar, the dinar maintained its strength against the runaway dollar strongly throughout the last period, which significantly reduced imported inflation, especially in a country that relies on importing most strategic commodities, especially food.

The exchange rate for the Kuwaiti dinar against the US dollar ranged between 302 and 307 fils throughout the first half of this year, reflecting the steadfastness of the Kuwaiti dinar against the dollar, while the US dollar index rose by about 8.1% since the beginning of this year compared to the main currencies, reaching 103.8 points compared to its levels of 96 points at the end of last year.

For example, the Central Bank of Kuwait took a decision to unlink the Kuwaiti dinar from the US dollar in May 2007, when the dinar exchange rate was linked to a basket of currencies, in which the US dollar has a large share, without announcing the details of the relative weights of the currencies within that basket.

Many countries, especially among developing and emerging economies, suffer from the lack of foreign exchange resources that help them import their needs amid the rising strength of the dollar and the shrinking supply of strategic commodities globally.

Preliminary data published by the Central Administration of Statistics showed a surplus in the trade balance for the year 2021 amounting to 9.4 billion dinars, after the value of exports amounted to 19 billion dinars, compared to imports amounting to 9.6 billion dinars.

This is mainly due to the rise in oil prices, as the value of oil exports reached 17.4 billion dinars, and they account for more than 91.5% of the total value of exports. Despite the increase in the value of imports by about 13% on an annual basis, the increase in the total value of exports was greater and contributed to the provision of foreign currencies, especially the US dollar, in sufficient size to finance all imports, as usual in light of the huge oil exports.

The price of Kuwaiti oil rose by about 41% since the beginning of this year until the end of the first half, reaching about 111 dollars during the last week of June, compared to its levels of 79 dollars at the end of last December.

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