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

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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.

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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/
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LeBaron