Kuwait's central bank governor said yesterday (March 24) there was no need for now to reduce the Gulf state's benchmark discount rate further and that the bank was selling treasury bonds to absorb excess liquidity.

Sheikh Salem Abdul-Aziz al-Sabah also said he expected the economy of the world's seventh-largest oil exporter to contract this year as oil prices slump and economic activity is hit, while inflation levels would also fall to an average seven per cent.

Kuwait has reduced its discount rate, which guides bank lending and deposit rates, by 200 basis points since October to 3.75 per cent as states across the world's biggest oil-exporting region strived to shore up their banking systems.

'We are monitoring on a daily basis the need for moving it either up or down. At present now we don't see a need to reduce it. At present we are satisfied with the rate,' said Sheikh Salem.

'We need to be very very cautious and technically speaking looking for the benefit of affecting positively the economic situation of the country.'

Kuwait's government resigned this month and threw into question the approval process of an economic support package designed to enable banks to lend about KD4 billion ($13.82 billion) in the coming two years.

The plan, which would cost the government about KD1.5 billion and is projected to include guarantees on new loans, is still awaiting government approval, he said.

'The government should take a decision very soon in my opinion,' Sheikh Salem said.

'With the passing of this new law, I think we will have credit growth of not less than 19-20 percent this year,' he said, adding that credit growth was about 17 per cent in 2008.

'Without the law I will not expect more than 10 per cent.'

Last year, Kuwait was forced to step in and rescue Gulf Bank, one of its largest banks, after the lender suffered steep derivatives losses.

Since then, the country has reduced interest rates, introduced new short-term repurchase agreements, guaranteed deposits and had its sovereign wealth fund pump cash into stocks to stabilise the market.

Kuwait's central bank has also issued bonds worth about 400 million dinars in the last two months to soak up 'ample liquidity' in the banking system, he said.

Currency flexibility 

The only Gulf state that does not peg its currency to the US dollar, Kuwait has been allowing its dinar -- which tracks a basket of currencies -- to depreciate against the greenback, taking it to levels below when it severed the peg in May 2007.

Sheikh Salem said the weaker currency enabled the country to reduce import costs for goods from some major trading partners and helped bolster the state's dollar-denominated oil revenues.

'We are reducing the cost of imports in the economy. If the Kuwait dinar is appreciating against the euro, commodities produced in the Euroland will be cheaper. This is definitely good for inflation,' he said.

'Also, when the dollar has improved against other major currencies and oil prices went down ...the revenue side of the government in terms of oil revenues transferred into Kuwaiti dinars is much more.'

Kuwait would be able to finance a projected budget deficit with oil income and general reserves without selling foreign assets, the governor said, urging the government not to cut fiscal spending in its 2009-2010 budget as currently planned.

'In difficult economic times, the fiscal stimulus is the main vehicle that should be used to increase the activity of the economy,' he said.

'There has been a decline in the fiscal expenditure for the coming fiscal year. Now it is under discussion for the government.' 

Sheikh Salem said Kuwait's oil-dependent economy is likely to shrink this year after oil<