When Did Kuwait Revalue Their Currency?

A currency revaluation occurs when a country’s monetary authority officially adjusts the value of its currency relative to another currency or a currency basket, making it stronger. This increases the purchasing power of the revalued currency in international markets. Kuwait has undertaken such a revaluation of its national currency, the Kuwaiti Dinar (KWD).

Background to Kuwait’s Currency Policy

Kuwait’s economy is heavily reliant on its substantial oil reserves, which form a significant portion of its gross domestic product and export revenues. Oil exports provide the primary source of national income. This dependence on oil revenues, typically denominated in U.S. dollars, has historically influenced Kuwait’s exchange rate policy.

From January 5, 2003, until May 19, 2007, the Kuwaiti Dinar was formally pegged to the U.S. Dollar. This peg involved maintaining the Dinar’s value within narrow margins around a central rate of 0.29963 Kuwaiti Dinars per U.S. Dollar. Prior to this, from March 18, 1975, to the end of 2002, the Dinar had been pegged to a weighted basket of currencies. Pegging to a single currency like the U.S. Dollar is common for oil-exporting nations, as it can import monetary credibility from the anchored nation and reduce vulnerabilities to exchange rate swings for smaller economies.

The 2007 Currency Revaluation Event

On May 20, 2007, the Central Bank of Kuwait announced a shift in its exchange rate policy. This decision involved abandoning the Dinar’s peg solely to the U.S. Dollar and reverting to a system where its value was determined by an undisclosed weighted basket of international currencies. The new policy became effective immediately, marking a return to the exchange rate regime in place before January 2003.

The re-pegging of the Kuwaiti Dinar to a currency basket was approved by the Council of Ministers on May 20, 2007. This change meant the Dinar’s exchange rate would now reflect Kuwait’s foreign trade and financial relations more broadly. While the exact composition and weights of the currencies within the basket were not publicly revealed, the intent was to diversify the Dinar’s anchor.

This policy adjustment allowed the Kuwaiti Dinar to appreciate against the U.S. Dollar. Reports indicated the Dinar appreciated by approximately 1.7% against the U.S. Dollar following this change. This appreciation reflected the new valuation mechanism, which aimed to stabilize the Dinar’s purchasing power against a wider range of international currencies rather than being solely tied to the U.S. Dollar’s fluctuations.

Motivations for the Policy Shift

The Central Bank of Kuwait cited several reasons for its decision to revalue the Dinar and shift its currency peg in 2007. A primary motivation was to combat imported inflation. The sustained depreciation of the U.S. Dollar against other major global currencies had made imports more expensive for Kuwait, contributing to rising domestic inflation rates. By un-pegging from the U.S. Dollar, the Central Bank aimed to protect the purchasing power of the national currency and contain these inflationary pressures.

Another driver for the policy change was to regain greater flexibility in monetary policy. Under a strict U.S. Dollar peg, Kuwait’s monetary policy was largely constrained by U.S. Federal Reserve actions, which could sometimes be misaligned with Kuwait’s domestic economic needs. The shift to a currency basket provided the Central Bank of Kuwait with more control over its exchange rate movements and its ability to manage domestic economic conditions. This move allowed the central bank to better manage short-term changes in exchange rates and minimize their impact on domestic prices.

The decision also reflected an effort to manage Kuwait’s substantial oil revenues more effectively. With significant earnings in U.S. Dollars, the weakening of the dollar reduced the real value of these revenues when converted to other currencies or used for imports from non-dollar regions. Reverting to a currency basket system was seen as a way to diversify exchange rate risk and stabilize the value of these revenues in a broader international context. The central bank had exhausted attempts to absorb the adverse effects of the U.S. Dollar’s depreciation, making the policy shift a necessary step.

Immediate Economic Adjustments

Immediately following the revaluation, the Kuwaiti Dinar appreciated against the U.S. Dollar. This strengthened the Dinar’s value, which had a direct impact on the cost of imported goods. Since a stronger local currency means foreign goods become cheaper, the price of imports into Kuwait would have decreased. This adjustment was expected to help alleviate inflationary pressures that had been building due to the weakening U.S. Dollar.

The revaluation also had implications for the value of Kuwait’s foreign assets. A stronger Dinar meant U.S. Dollar-denominated foreign assets held by Kuwait would have a lower value when converted back into the local currency. Conversely, assets held in currencies that appreciated against the U.S. Dollar would see their value maintained or even increase in Dinar terms, depending on their weighting in the new basket. Market reactions included an initial appreciation of the Dinar against the dollar, exceeding initial market expectations.