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Wednesday , November 25 2020

‘Short-term and long-term’ borrowing not the solution

MOST, if not all, oil producing countries are knocking on the doors of financial institutions and international banks seeking for some kind of borrowings due to the huge deficits in their daily revenues. This has been going on for more than six years due to the weakening of oil prices.

Kamel Al-Harami

Oil – producing countries have been betting against the weakening trend in oil price under the hope that it will improve, with their own mechanism of tightening up supply, reducing production, and calling for the cooperation of all oil producers.

This way, it did succeed in achieving some sort of market price stability, but it will neither lead to a benign oil price level nor achieve the comfort zone that oil producers are looking for to satisfy their financial needs. Therefore, all oil producers are depending on borrowed money during this time and they will continue to do so until they become addicted to it.

They are doing so by using their oil reserve as collateral to get their economy running and pay the wages and salaries of their citizens. Kuwait is not different from the rest of the oil producing countries, as we also use oil as our main source of daily income. We are in the process of borrowing, with the first batch of borrowing of KD 20 billion. This is after we finished all of the internal money reserve.

The question or the challenge is ¨C What next? What about the future years? We know it is very hard to see any improvement in the oil price for it to hit anything above $ 60 per barrel in the next few years. Certainly, it is difficult to assume any level above $ 70, even after a cure is found for COVID-19. There is simply too much oil floating, and in the reserve which is not used by the current producers as well as the ones waiting to pump millions of barrels like Iran and Venezuela.

Easy and low cost oils are in the ground in need for some small investments. In Iraq and Iran, the overall state¡¯s financial requirements of minimum $ 75 and above is necessary for meeting the state¡¯s budget requirements; this is assuming there is no increase in annual budget. This is definitely another and tougher challenge.

There is plenty of oil but none of the oil producing countries¡¯ minimum financial needs are met. Short-term and long-term borrowing is not the solution. We in Kuwait need to think and dig deeper for a more sustained solution. We need to work harder to improve our productivity.

The government has to ease its grip on the various institutions and corporations, and free them to the private sector. This will also be another source of income but sustainable in building and investing in the upcoming young Kuwaitis to show us their commitment and dedication in a more challenging environment.

By Kamel Al-Harami Independent Oil Analyst
Email: naftikuwaiti@yahoo. com

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