Inflation in Kuwait

Part A

Moderate and stable inflation rates greatly promote the economic growth and development processes within a country. Since economies rely on the transactions that take place within the country, it is important to understand how inflation affects activities such as trade so as to find a way to help the country reach inflation rates that are likely to influence growth and development. Moderate inflation for example is responsible for enhancing investments and supplementing returns to savers and this greatly promotes economic growth within a country. It is therefore important for a country to understand the state of inflation as this places it in a better position to promote economic growth within the country.

            In a country like Kuwait, the inflation rate has been on the rise and it is expected to triple by 2019 especially due to the imposed Vat taxation that is expected to be implemented in the country. If successful, the taxation will rise to 4.5% by 2019, making an increase of 1.5% from what was recorded in the previous year (Saaed, 2007). While it is yet unclear the weather inflation affects the economic growth of a country, there is enough research on the topic to suggest that inflation could have both positive and negative impact on the economic growth of a country and must therefore be analyzed and understood so as to achieve positive outcomes. When the inflation is low and remains stable, it is likely to have a positive impact on a country’s economic growth while a high and unstable inflation is likely to slow down the economic growth in Kuwait. However, since frequency and stability are not adequate enough to determine what actions can be taken, the country could conduct more research so as to better understand the acceptable level for low inflation such that it does not slow down the economic growth of the country (Saaed, 2007). Since the effects of a low economy vary across different countries, governments and relevant organizations must also identify the nature of the economy that exists as different countries have different structures.  If, for example, a country studies its structural break effect, it will be able to identify the threshold where inflation stops having a positive impact on the economic growth (Chapter 13). Since the negative effects of inflation occur when it reduces the efficiency of investments within the country, measures can be taken to ensure that the negative outcomes are addressed accordingly and that strong economic growth is maintained.

            A close comparison of Kuwait’s GDP and CPI reveals that there is a negative relationship between the country’s economic growth and inflation rates. The discovery has important policy implications for policy makers within the country as they are pushed to find a way to lower the inflation rates within the country and make it stable enough to promote economic growth within the country (OBG, 2008). To begin with, the country does not index inflation rates for wages and salaries, the cost of living and people’s purchasing power is likely to increase if the inflation rates continue to rise. Furthermore, the monetary authority in the country has a hard time adjusting nominal interest rates above the actual interest rates using contractionary monetary policy due to the challenges faced when trying to balance the credit requirements from the public and private sectors in the country (Chapter 14). The monetary authority in Kuwait must therefore find a way to lower the inflation if it is to live up to what citizens and stakeholders expect from the country in terms of economic growth.

Part B

            Inflation and unemployment are some of the major challenges that a country faces and with the high inflation rates in Kuwait, the government is tasked with the decision of what policies can be implemented to resolve the inflation issue in the country. Since high inflation can also result in high unemployment, the government’s commitment to lower inflation is likely to resolve issues related to unemployment as well as promote economic growth (IMF, 2012). Since inflation results in an increase in the price of commodities within the country, the Philips curve can greatly assist in finding ways to lower Kuwait’s inflation. If, for example the unemployment rate is estimated to be 3 percent and an unemployment rate of 9 percent, increasing the inflation rate to 6 percent is likely to lower the unemployment rate to 5 percent and in doing so, create job opportunities that not only lowers unemployment rates but also boosts economic growth as employees with a salary are more likely to purchase goods and services from within the country (Saaed, 2007). However, while the Philips curve was useful in lowering inflation in the past, it has been replaced with more effective and efficient alternative methods such as the Demand Pull inflation approach.

            The Demand Pull Inflation results from growth in a country’s aggregate demand which often grows when money supplied by the government or government expenditure increases. This is especially because the price of commodities increases once the government increases its expenditure (Saaed, 2007). If prices are raised but the wages paid to workers remain the same, firms are pushed to hire more workers and in so doing, reduces the level of employment in the country. However, creating employment does not solve the problem experienced in the country because the wages paid are unable to meet the requirements needed to purchase goods and services especially with the increased prices by the government and this greatly contributes to the high inflation rates in the country.

Part C

            Policy makers could learn a lot from the impact that inflation has on the economic growth of a country. Instead of raising prices, they could come up with policies that help Kuwait to target international markets so as to create demand for its products on an international level and boost the economy (Espinoza, 2018). To achieve this, the policy makers must first identify its absolute advantage so as to determine which goods and services should be sold in the international markets. Absolute advantage involves producing goods in one country and selling them to another because the country producing them produces more units per resource used therefore reducing the cost of production.

            Policy makers can also take advantage of the international markets by exploiting the country’s comparative advantage. The advantage is brought about by either technological developments or endowments such as labor or other resources that may be found in abundance in one country but scarce in another (Saaed, 2007). In the case of Kuwait, endowments like oils, mineral fuels and chemicals place the country at an advantage in the international market. The strong manufacturing sector in the country further ensures that the country can greatly benefit from its comparative advantage if only it was able to fully utilize the opportunities in the international market.

            Other than implementing new policies to try and lower inflation, the country can also improve the policies that are already in place such as the tariffs and quotas that have already been implemented. In an attempt to raise government revenue, the country introduced taxations on trade through quotas and import tariffs. Since the country has a lot of products doing well on the international market, imposing tariffs on imported goods help raise capital as well as boosting the economy through trade (Saaed, 2007). Quotas also have the same impact as they push importers to get licenses which limit the number of imports in the country and in so doing, promotes local goods and services.

Conclusion

            The high inflation in Kuwait has caused great challenges in the country especially when it comes to achieving the desired economic growth. Since inflation tends to raise the cost of prices and may at the same time lower, or fail to increase wages, citizens are forced to live in a country where they don’t earn enough yet commodity prices keep rising. If Kuwait is to overcome these challenges, it must first understand the impact that inflation has on things like wages, prices and the growth of the economy. Policy makers should also identify areas such as the international market that offers opportunities to boost economic development especially with the country’s endowments. If well implemented, the policies could help in reducing the inflation in Kuwait and at the same time boost the economy to ensure that such occurrences do not keep reoccurring and that the country maintains a stable economy.

 

 

 

References

Espinonza R, (2018) ESTIMATING THE INFLATIONGROWTH NEXUSA SMOOTH       TRANSITION MODEL. S.l.: INTERNATIONAL MONETARY FUND.

International Monetary Fund,. (2012). Kuwait: Staff Report for       the 2012 Article IV Consultation. Washington, D.C: International Monetary Fund.

Oxford Business Group. (2008). The Report: Kuwait 2008. London: Oxford Business Group.

Saaed, A.A.J., (2007). "Inflation and Economic Growth in Kuwait: 1985-2005. Evidence from     Co-Integration and Error Correction Model," Applied Econometrics and International             Development, Euro-American Association of Economic Development, vol. 7(1).