Kuwait's central bank governor resigned after 25 years in the post on Monday, protesting against a rapid rise in government spending, state news agency KUNA announced.

KUNA quoted Sheikh Salem Abdul-Aziz Al-Sabah as saying the government's failure to push through economic reforms had created imbalances that could become serious if high global oil prices fell back.

'The challenges facing the local economy amid an increase in public spending to very high levels will hinder the central bank from taking responsibilities in the future to achieve its objectives as defined by the law,' said Sheikh Salem, 60.

Last year's uprisings in the Arab World emboldened workers in Kuwait to stage a string of strikes which added to upward pressure on wages of state employees. A strike at the national airline ended with a 30-per cent wage hike, local media reported; oil sector workers received a wage rise after a strike threat.

Some top Kuwaiti economic policymakers, including Sheikh Salem and the finance minister, publicly urged the government to restrain spending and reduce waste in the budget last year. The finance minister said public sector wages had risen to about 85 per cent of the country's oil revenues, which he called 'a real danger'.

'The resignation is probably linked to monetary policy. If he's trying to keep inflation down, government policy is clearly going to work against that,' said an economist at a global bank, who declined to be named due to the sensitivity of the issue.

He added, however, that Kuwait's economy did not face any major threats for the time being. Although the average inflation rate climbed to a three-year high of 4.8 per cent in 2011, it remains far below levels above 10 per cent hit in 2008, and many analysts expect inflation to ease this year.

And while inefficient planning and tensions between the cabinet and parliament have plagued policymaking, blocking important infrastructure and economic development projects, Kuwait's oil wealth means it is unlikely to face a fiscal crisis any time soon. 

The government posted a budget surplus of $47 billion in the first nine months of 2011, nearly double the surplus in 2010. Analysts expect economic growth to stay comfortable this year at around 3.5 per cent.

In an October interview with Reuters, Sheikh Salem said the world's No. 6 oil exporter needed to reform the government budget and labour market, and strengthen the private sector, to create a broader base for economic growth.

'It is essential and urgent that significant reform steps are taken at this stage, because further postponement and delay will reduce the options available and further increase their cost,' he said at the time.

Politics

Some analysts linked Sheikh Salem's resignation to political change after the Islamist-led opposition won control of parliament in a snap election this month. The early vote was held after street protests against corruption and the storming of parliament by opposition lawmakers prompted the emir, Sheikh Sabah al-Ahmad al-Sabah, to dissolve parliament.

The election results may deepen political tensions if they embolden the opposition to push for constitutional changes and challenge the cabinet, which is appointed by a prime minister hand-picked by the ruling family.

Sheikh Salem's resignation 'is a result of the relationship between the government and the parliament,' said another economist in the Gulf.

'You have seen very little progress with the wider development programme and wider investment projects such as housing and education. Following the elections, it looks more difficult to implement reforms.'

An interim cabinet resigned last week and the Kuwait Times newspaper reported on Monday that a new cabinet was expected to be announced later in the day or on Tuesday. The current oil, public works and commerce ministers are expected to be retained in the new cabinet, the newspaper said.

Kuwait's currency, the only one in the Gulf not pegged to the US dollar, was steady after news of Sheikh Salem's resignation while the stock market rose 0.7 per cent.

Traders said investors were encouraged by strong fourth-quarter corporate earnings while some were also speculating that the government might boost spending further after Sheikh Salem's departure, which could benefit the market. – Reuters