CBK GOVERNOR ON DROPPING THE DOLLAR PEG AND

C O N F I D E N T I A L SECTION 01 OF 02 KUWAIT 000878 SIPDIS SIPDIS NOFORN STATE FOR NEA/ARP, EB TREASURY FOR DAS AHMED SAEED, JONATHAN ROSE; E.O. 12958: DECL: 06/04/2017 TAGS: EFIN ECON PREL PGOV KU SUBJECT: CBK GOVERNOR ON DROPPING THE DOLLAR PEG AND STAGNATION OF ECONOMIC REFORMS REF: A. KUWAIT 806 ¶B. U/S ADAMS - GOVERNOR AL-SABAH LETTER DATED 15-MAR-2007 Classified By: Ambassador Richard LeBaron for reasons 1.4 (b) and (d). ¶1. (C/NF) Summary: On June 3, Ambassador called on CBK Governor Shaykh Salem Abdulaziz Saud Al-Sabah. Al-Sabah described Kuwait's May 20 decision to un-peg the dinar from the dollar in favor of a basket of currencies as a move that "had to be done" to address rising inflation. He acknowledged that the decision caught Kuwait's GCC neighbors off guard but said the GOK remains committed to the GCC Monetary Union "when the necessary preparations have been concluded." The Ambassador also raised possible USG technical assistance, sought previously by the Central Bank, to facilitate the GCC Monetary Union, but Al-Sabah said the GCC was lukewarm to the idea. The Ambassador expressed disappointment that, during his almost three years at post, Kuwait still had not adopted anti-money laundering procedures in line with international standards. The Governor shared the Ambassador's concern and blamed the parliament for stalling a range of legislation that would promote economic reform. Ambassador told the Governor that foreign banks (such as Citigroup, which opened in Kuwait in 2006 and is the only American bank in Kuwait) brought services, innovation, and expertise to the banking sector but faced restrictions that impeded their ability to operate competitively. The Ambassador said he would follow up with a letter with specific areas of concern, which Al-Sabah said he would welcome. End Summary. Basket is the Right Move -------------- ¶2. (C/NF) CBK Governor Al-Sabah said that things are moving "in the right direction" following Kuwait's May 20 decision to un-peg the dinar from the dollar and move to a basket of currencies, and he saw no "unintended consequences" from the decision. As reflected in a number of public statements, Al-Sabah stated that CBK's main objective in un-pegging from the dollar was to ease inflationary pressure. He explained that CBK compared statistics from first quarter 2006 with first quarter 2007 and found a four and a half percent increase in inflation. He attributed this increase to three factors: the exchange rate, huge expenditures by the GOK, and increased liquidity in Kuwait and the rest of the Gulf. Al-Sabah said he has thus far detected no irritation among his GCC neighbors but admitted that they were surprised by Kuwait's decision to drop the dollar peg. GOK Committed to Monetary Union -------------- ¶3. (C/NF) Al-Sabah reiterated the GOK's commitment to the GCC Monetary Union but noted that "a lot of preparation is needed." He said Kuwait was ready to move forward once needed legislation and other institutional and organizational preparations were concluded by GCC states. The Ambassador asked whether the GOK remained interested in Treasury's early 2007 offer of technical assistance (ref B). Al-Sabah said yes but noted that he had raised the issue during the last meeting of Central Bank Governors and "the mood was not there." He noted that Saudi Central Bank Governor Hamoud Bin Saoud Al-Siyari received the same offer from Treasury in April 2007 and had agreed to prepare a written response. As Al-Siyari is also the Chair of Central Bank Governors, Al-Sabah said it is best to allow him to take the lead. Lack of Legislative Momentum Frustrating -------------- ¶4. (C/NF) Ambassador expressed disappointment with the lack of momentum in economic policy in Kuwait, noting that key legislation pending when he arrived in the country almost three years ago remains stalled. "It is frustrating," echoed Al-Sabah, as "Kuwait knows the direction it wants to go, and people want to succeed but everything is slowed by parliament." Despite the inability to get things moving, Al-Sabah noted that Kuwait is making progress in some areas. With a more stable environment in Iraq and Iran, he said the economic boom in the Gulf would be even greater, but progress is Kuwait is hindered by parliamentary inertia. Al-Sabah, who also leads a GOK committee charged with transforming Kuwait into a financial center, said "rosy outlooks" can be achieved on paper but cannot be implemented without new KUWAIT 00000878 002 OF 002 legislation. ¶5. (C/NF) Ambassador noted specifically that amendments required to bring Kuwait's AML/CTF regime into alignment with international norms have not been passed. Al-Sabah said he believed the new draft law would include "all the requirements" and that it would go to the cabinet for approval soon. This time all things have been included, he said, "because we admit that the existing law does not meet all requirements." Al-Sabah believed that growing Arab consensus on the definition of terrorism, as reflected during the March 2007 Arab League Summit, would give Kuwait's anti-money laundering legislation a boost. Foreign Banks Need Room to Expand -------------- ¶6. (C/NF) Conveying concerns expressed by executives from foreign banks operating in Kuwait, including Citigroup's Country Manager, Ambassador encouraged CBK to review current regulations restricting the operations of foreign banks in favor of Kuwaiti institutions. He lauded the increased competition, innovation, and expertise that foreign banks bring to the Kuwaiti market and stressed that their operations should be encouraged. Al-Sabah said he would welcome a letter from the Ambassador outlining specific areas of concern. ********************************************* * For more reporting from Embassy Kuwait, visit: http://www.state.sgov.gov/p/nea/kuwait/?cable s Visit Kuwait's Classified Website: http://www.state.sgov.gov/p/nea/kuwait/ ********************************************* * LeBaron