Kuwait steps up domestic debt issues to finance budget deficit

The finance ministry projected in January that the government would run a deficit of 12.2 billion dinars in the 2016/17 fiscal year

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Kuwait’s government is boosting domestic debt issues to finance a budget deficit caused by low oil prices, selling 600 million dinars ($1.99 billion) of bonds and Islamic tawarruq since the start of this fiscal year on April 1, central bank data showed.

A government source told Reuters on Thursday that the issues, which had maturities of between one and five years and carried rates of between 1.25 percent and 2.50 percent, were equally divided between conventional bonds and tawarruq.


In tawarruq, the government buys an asset at a marked-up price to be paid at a later date, and sells that asset immediately to raise cash.

The source said the central bank had chosen to use tawarruq instead of Islamic bonds, known as sukuk, because a legal structure allowing the government to issue sukuk had yet to be completed and the government did not want to deprive Islamic banks of the chance of subscribing to state debt.

The 600 million dinars of domestic debt issued so far this fiscal year compare with 350 million dinars issued in all of the January-March quarter. The government source declined to give a schedule for future issuance, saying issues would continue depending on the need to finance the deficit.

The finance ministry projected in January that the government would run a deficit of 12.2 billion dinars in the 2016/17 fiscal year, nearly 50 percent higher than the deficit estimated for 2015/16, after contributions by the government to the sovereign wealth fund.

However, the actual deficit this year may not turn out to be as large, since the budget is believed to be based on an average oil price of around $25 a barrel. Brent crude has since risen near $50.

Liquidity in the Kuwaiti banking system has been tightening because of low oil prices, with the one-year Kuwait interbank offered rate climbing to 2.19 percent from 1.69 percent in mid-2015, but the central bank data showed strong demand for the debt issues.

Bids for the 600 million dinars totalled over three times that amount. The source said the budget deficit would continue to be financed this fiscal year through a mix of debt issuance and withdrawals from the state’s financial reserves.

He also said the government was continuing to consider whether to issue bonds and tawarruq denominated in U.S. dollars instead of dinars, but no decision had been made.

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