The fiscal and monetary policies are critical topic, which a layperson should be aware of and understand their significance, impacts and objects, since such policies generally reflect on the individual’s day-to-day affairs including feeling of price hikes, difficulty in obtaining a loan or imposition of new taxes, etc.
The implementation of fiscal and monetary policies by a state is intended to achieve the economic stability, which means realizing a higher rate of economic growth in view of prices stability and full utilization of resources and expenses.
Fiscal Policy
The fiscal policy basically refers to the utilization or regulation employed by the State, represented by Ministry of Finance, in directing its economic programs. The fiscal policy tools include the government spending and taxes.
An appropriate fiscal policy to control the inflation resulting from increase in demand can be attained through increasing taxes, reducing governmental spending or both…
A tax increase may lead to decreasing the individuals’ purchasing power, which would result in reducing consumer spending; a component of overall expenditure. Therefore, a decrease in consumer spending will trigger a drop in overall expenditure, which would eliminate inflation in many cases, even if this occurs at different rates.
Furthermore, decreasing government spending leads to a decline in overall expenditure, which leads to shrinking the deflationary gap.
An appropriate fiscal policy to control recession (overall demand is lower than overall supply) can be attained through tax cuts, increasing governmental spending or adopting both approaches at different rates.
The impact of governmental spending on income is greater than that of taxes on income. That is why GCC countries have recently been focusing on the governmental spending.
Additionally, tax cuts result in increasing individuals’ purchasing power, which leads to increasing consumer spending and, accordingly, increasing overall expenditure that ultimately eliminates recession.
An increase in the government spending will result in increasing overall expenditure and hence, shrinking the recession gap.
Monetary Policy
Monetary policy refers to a set of actions and measures taken by a central bank to influence money supply and cost of funds in order to achieve the economic policy goals.
Influence on money supply takes place by employing open market policy, i.e. buying and selling bonds with view to reducing or increasing money supply.
If a state aims to increase the quantity of money, it will purchase bonds to individuals, which would lead to increasing bond prices. Further, purchasing bonds from individuals will lead to increasing bank deposits and hence, increasing the volume of lending extended to business people at a lower interest rate due to increased liquidity with commercial banks.
However, if a state aims to reduce the quantity of money, it will sell bonds from individuals, which would lead to increasing bond prices. Further, sales of bonds to individuals will lead to decreasing bank deposits and hence, interest rate will go up and the volume of lending will decline.
This policy is frequently employed by advanced countries such as USA given significant development of financial markets, which represents a prerequisite for the implementation of open market policy (daily trading volume in Wall Street Exchange is approximately USD 25 billion).
The most important monetary tools include the statutory reserve requirements, which are widely used in the developing countries due to absence of developed or weak financial markets.
If a state aims to expand the money supply, it will decrease the statutory reserve percentage, which would lead to increasing the capabilities of commercial banks to extend loans. However, if a state aims to reduce the money supply, it will increase the statutory reserve percentage, which would lead to limiting the commercial banks’ capabilities to extend loans.
To control economic downturn, a state will implement an expansionary monetary policy, where it will expand the money supply, which will lead to decreasing interest rates, and hence, promoting investments and ultimately increased overall demand.
On the other hand, to control inflation, a state will implement a deflationary monetary policy in order to reduce the money supply, which will lead to increasing the interest rates that will entail a decline in investments and hence, the overall demand will go down.
Which to adopt: fiscal policy or monetary policy?
Most countries use both policies concurrently to achieve economic stability and attain the desirable economic goals even though fiscal policies have long term impacts while monetary policies have quick short term impacts.
Adoption of expansionary or deflationary fiscal policies will be dependent on the economy condition and if a state suffers recession or inflation.
If an economy encounters a recession condition, an expansionary fiscal policy will be adopted, where the state will increase the governmental spending or reduce taxes in order to increase the overall expenditure. At the same time, an expansionary monetary policy will be implemented, which will lead to lowering interest rates, resulting in increased investments and higher overall demand.
However, if an economy encounters an inflation condition, deflationary fiscal policy will be adopted, where the state will decrease the governmental spending or increase taxes in order to decrease the overall expenditure. At the same time, deflationary monetary policy will be implemented, which will lead to increasing interest rates, resulting in decline in investments and lower overall demand.
Wednesday, February 24, 2016
Sunday, February 14, 2016
Streamline Recognition and Measurement of the Financial Statements IFRS 9 to replace IAS 39
On July 24th, 2014, the International Accounting Standards Board (IASB) published the final version of IFRS 9 in replacement of the IFRS 39 in terms of the financial instruments. The Standard has a mandatory effective date for annual periods beginning on or after 1 January 2018. However, the Standard is available for early application.
The new IFRS 9 is built on a single logical approach for classification and measurement of financial instruments as regards to the expected losses, the value degradation model, and the approach of sustainable improvements in the hedge accounting.
Classification and Measurement
The classification identifies the way of calculating the financial assets and liabilities in the financial statements, particularity the way of continuous measurement of assets and liabilities. The IFRS 9 introduces a logical approach for classification of financial assets led by the characteristics of the cash flow and the business model used to maintain the asset. Such principle based approach is to replace the current rule based approach which is generally more difficult and complicated in terms of application. The standard addresses also the deterioration of value of assets through a single way for all financial statements, which consequently removes the source of complications related to the previous accounting requirements.
Deterioration of Value in the Financial Instruments
During the financial turmoil of 2008, the resultant late recognition of the credit losses in terms of loans (as well as other financial instruments) was considered as a weak point in the financial standards applicable at that time. Therefore, the IASB has incorporated the IFRS 9 with a new model to record the losses expected from the deterioration of value. The standard requires the rapid recognition of the expected credit losses; it requires business entities to record the expected credit losses on timely basis in order to recognize the financial instruments. In addition, the expected losses throughout the life of the financial instruments must be recognized in a timely fashion. The IASB has already expressed its intention to establish a group of transitional resources to support the stakeholders throughout the transition to the new requirements of the deterioration of value of the financial instruments.
Hedge Accounting
The IFRS 9 introduces the largely reformed model of hedge accounting, while improving the disclosures related to the activities of the Risk Management Department. The new model marks a comprehensive structural amendment of the hedge accounting, which allows alignment between the accounting treatment and the activities of the Risk Management Department and enables the business entities to better reflect such activities in their financial statements. In addition, and as a result of such amendments, the users of the financial statements will be provided with better information regarding risk management and impact of the hedge accounting on the financial statements.
Self Credit
The IFRS 9 eliminates the fluctuations of profits and losses, arising from the change of the credit risks of the liabilities required to be measured at the fair value. Such change in the change accounting indicates that the profits arising from the decrease of any entity’s self credit risks of such liabilities are no longer realized in the statement of profit or loss. IFRS 9 permits early application of such improvement in the financial reports before any other amendments in the accounting of financial instruments.
In this regard, Mr., Hisham Sorour – Managing Partner of Baker Tilly Kuwait, pointed out that such substantial amendments incorporated in IFRS 9 are very important, especially in the time being, will enhance the presentation of the financial statements, and are in line with the stability requirements and the taking of provisions for loan losses. He added that the application of the new standard will improve the investor’s trust in bank’s balance sheets and the financial system as a whole.
The Central Bank of Kuwait requested the local banks to study the effects that would arise from the application of the new standard on the financial statements of banks, and to proposed solutions to address the expected effects of application.
In addition, on December 30th, 2009, the Ministry of Commerce and Industry, represented by the Technical Committee, decided to postpone the early application of any accounting standard, unless by virtue of a notice from the Ministry that allows such application.
Baker Tilly Service
Noteworthy is that Baker Tilly, which ranks 8 among international firms in the field of audit, provides accounting consulting services to the banks and investment companies desirous to study the effects arising from the application of IFRS 9 on their financial statements before the effective date of application on January 1st, 2018. In addition, Baker Tilly provides training and workshop services for financial managers and accountants wishing enrich their knowledge of the new standard.
The new IFRS 9 is built on a single logical approach for classification and measurement of financial instruments as regards to the expected losses, the value degradation model, and the approach of sustainable improvements in the hedge accounting.
Classification and Measurement
The classification identifies the way of calculating the financial assets and liabilities in the financial statements, particularity the way of continuous measurement of assets and liabilities. The IFRS 9 introduces a logical approach for classification of financial assets led by the characteristics of the cash flow and the business model used to maintain the asset. Such principle based approach is to replace the current rule based approach which is generally more difficult and complicated in terms of application. The standard addresses also the deterioration of value of assets through a single way for all financial statements, which consequently removes the source of complications related to the previous accounting requirements.
Deterioration of Value in the Financial Instruments
During the financial turmoil of 2008, the resultant late recognition of the credit losses in terms of loans (as well as other financial instruments) was considered as a weak point in the financial standards applicable at that time. Therefore, the IASB has incorporated the IFRS 9 with a new model to record the losses expected from the deterioration of value. The standard requires the rapid recognition of the expected credit losses; it requires business entities to record the expected credit losses on timely basis in order to recognize the financial instruments. In addition, the expected losses throughout the life of the financial instruments must be recognized in a timely fashion. The IASB has already expressed its intention to establish a group of transitional resources to support the stakeholders throughout the transition to the new requirements of the deterioration of value of the financial instruments.
Hedge Accounting
The IFRS 9 introduces the largely reformed model of hedge accounting, while improving the disclosures related to the activities of the Risk Management Department. The new model marks a comprehensive structural amendment of the hedge accounting, which allows alignment between the accounting treatment and the activities of the Risk Management Department and enables the business entities to better reflect such activities in their financial statements. In addition, and as a result of such amendments, the users of the financial statements will be provided with better information regarding risk management and impact of the hedge accounting on the financial statements.
Self Credit
The IFRS 9 eliminates the fluctuations of profits and losses, arising from the change of the credit risks of the liabilities required to be measured at the fair value. Such change in the change accounting indicates that the profits arising from the decrease of any entity’s self credit risks of such liabilities are no longer realized in the statement of profit or loss. IFRS 9 permits early application of such improvement in the financial reports before any other amendments in the accounting of financial instruments.
In this regard, Mr., Hisham Sorour – Managing Partner of Baker Tilly Kuwait, pointed out that such substantial amendments incorporated in IFRS 9 are very important, especially in the time being, will enhance the presentation of the financial statements, and are in line with the stability requirements and the taking of provisions for loan losses. He added that the application of the new standard will improve the investor’s trust in bank’s balance sheets and the financial system as a whole.
The Central Bank of Kuwait requested the local banks to study the effects that would arise from the application of the new standard on the financial statements of banks, and to proposed solutions to address the expected effects of application.
In addition, on December 30th, 2009, the Ministry of Commerce and Industry, represented by the Technical Committee, decided to postpone the early application of any accounting standard, unless by virtue of a notice from the Ministry that allows such application.
Baker Tilly Service
Noteworthy is that Baker Tilly, which ranks 8 among international firms in the field of audit, provides accounting consulting services to the banks and investment companies desirous to study the effects arising from the application of IFRS 9 on their financial statements before the effective date of application on January 1st, 2018. In addition, Baker Tilly provides training and workshop services for financial managers and accountants wishing enrich their knowledge of the new standard.
Monday, February 1, 2016
Kuwait Direct Investment Promotion Authority (KDIPA) convening itsfirst promotional conference “Kuwait Investment Forum”
Kuwait Direct Investment Promotion Authority (KDIPA), announces that it is convening its first promotional conference “Kuwait Investment Forum” under the patronage of H.H. the Amir of Kuwait Shaikh Sabah Al Ahmad Al Jaber Al Sabah, on March 8-9, 2016 at the Courtyard Marriott Hotel-Kuwait. The Forum intends to advance KDIPA’s promotional role in positioning Kuwait as a lucrative investment location, presenting a whole host of investment opportunities in the various priority sectors, as well as introducing the distinctiveness of Kuwait’s investment climate, and the incentives granted in accordance with its establishing Law No. 116 of 2013 regarding the Promotion of Direct Investment in the State of Kuwait.
The “Kuwait Investment Forum” will provide a profound platform, catering for both local and international audiences, and will highlight the crucial legislative and economic developments that Kuwait is witnessing. It will do so through touching upon several overriding themes that demonstrate the fundamentals of its core economic and financial policy formulation; the benefits under the new laws and legislations; the country’s strategic directions embedded in the new five year development plan; Kuwait’s attributes as an attractive investment destination; the availability of mega investment opportunities in a multitude of economic sectors; in addition to showcasing Kuwait as a recognized major world player in humanitarian aide and economic field; while touching upon the broad financing options available given the sound and solvent financial sector.
The Forum is well-timed to capture the positive impact of the accelerating favorable developments the Kuwaiti economy is witnessing, including the ongoing undertaking to improve the business climate to become more favorable for attracting quality investments; and offering a host of incentives, exemptions, and guarantees, above all allowing foreign ownership up to 100% equity. Such emerging changes will duly leverage efforts to enroll Kuwait amongst the leading economies in attracting value added direct investments, both local and foreign. Adding to that the benefits of Kuwait’s strategic geographic location, with extended access to a growing market in the neighboring GCC countries, and to West and Central Asia and beyond; along with a host of strategic opportunities under the approved new development plan with an allocated investment expenditure around US$ 103 billion, in vital sectors including oil, manufacturing, energy generation, communications, transport, urban and human development. This is further supported by notable advance and deepening of the local financial market and a leading role of the private sector in the economy, with focus on small and medium enterprises.
KDIPA is keen to ensure outstanding participation in the Forum by respective ministers, prominent personalities, renowned international experts, and other high ranking government officials. It will also seek to have a distinguished role by Kuwait Chamber of Commerce and Industry, and an equivalent effective representation of major foreign chambers of commerce and industry. In addition to inviting leading local and international investors, bankers, financial and investment executives, as well as professional unions and societies, and the specialized media.
In order to achieve the intended objectives of “Kuwait Investment Forum”, KDIPA will coordinate with all the stakeholders and concerned parties to succeed in presenting the promising features of the new Kuwaiti economy, its ability to generate rewarding business and investment opportunities, and how it is re-emerging as a vibrant and growing market, gaining increased attention by interested investors. This is further supported by sustaining a healthy dialogue between the government and the investors community based on renewed confidence, and effective collaboration. The Forum will also provide an opportunity to show success stories of settled investments that brought about the aspired goals of technology transfer, job creation and training for Kuwaiti youth, diversification of the economy, building the pillars of the knowledge economy that fosters innovation and entrepreneurship, which will be leading to achieve sustainable development and welfare.
The “Kuwait Investment Forum” will provide a profound platform, catering for both local and international audiences, and will highlight the crucial legislative and economic developments that Kuwait is witnessing. It will do so through touching upon several overriding themes that demonstrate the fundamentals of its core economic and financial policy formulation; the benefits under the new laws and legislations; the country’s strategic directions embedded in the new five year development plan; Kuwait’s attributes as an attractive investment destination; the availability of mega investment opportunities in a multitude of economic sectors; in addition to showcasing Kuwait as a recognized major world player in humanitarian aide and economic field; while touching upon the broad financing options available given the sound and solvent financial sector.
The Forum is well-timed to capture the positive impact of the accelerating favorable developments the Kuwaiti economy is witnessing, including the ongoing undertaking to improve the business climate to become more favorable for attracting quality investments; and offering a host of incentives, exemptions, and guarantees, above all allowing foreign ownership up to 100% equity. Such emerging changes will duly leverage efforts to enroll Kuwait amongst the leading economies in attracting value added direct investments, both local and foreign. Adding to that the benefits of Kuwait’s strategic geographic location, with extended access to a growing market in the neighboring GCC countries, and to West and Central Asia and beyond; along with a host of strategic opportunities under the approved new development plan with an allocated investment expenditure around US$ 103 billion, in vital sectors including oil, manufacturing, energy generation, communications, transport, urban and human development. This is further supported by notable advance and deepening of the local financial market and a leading role of the private sector in the economy, with focus on small and medium enterprises.
KDIPA is keen to ensure outstanding participation in the Forum by respective ministers, prominent personalities, renowned international experts, and other high ranking government officials. It will also seek to have a distinguished role by Kuwait Chamber of Commerce and Industry, and an equivalent effective representation of major foreign chambers of commerce and industry. In addition to inviting leading local and international investors, bankers, financial and investment executives, as well as professional unions and societies, and the specialized media.
In order to achieve the intended objectives of “Kuwait Investment Forum”, KDIPA will coordinate with all the stakeholders and concerned parties to succeed in presenting the promising features of the new Kuwaiti economy, its ability to generate rewarding business and investment opportunities, and how it is re-emerging as a vibrant and growing market, gaining increased attention by interested investors. This is further supported by sustaining a healthy dialogue between the government and the investors community based on renewed confidence, and effective collaboration. The Forum will also provide an opportunity to show success stories of settled investments that brought about the aspired goals of technology transfer, job creation and training for Kuwaiti youth, diversification of the economy, building the pillars of the knowledge economy that fosters innovation and entrepreneurship, which will be leading to achieve sustainable development and welfare.
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