Exchange Rate under Oil Price and Public Expenditure Fluctuations Kuwait as a Case Study for the Period 1990–2024

Abstract

The research aimed to analyze the economic framework of the relationships among the variables included in the estimated model, drawing upon economic literature that has addressed the impact of both oil prices and public expenditure on the stability of the exchange rate. In its practical aspect, the study focused on measuring the effect of changes in both oil prices and public expenditure on the Kuwaiti dinar exchange rate during the period from 1990 to 2024. This was based on several hypotheses, the most notable being that, although the exchange rate of the Kuwaiti dinar is influenced by external fluctuations stemming from developments in global oil and financial markets, it maintains a degree of relative stability due to its pegging to a basket of international currencies. This arrangement enhances its flexibility and mitigates its immediate response to shocks.

     The research also presupposed the existence of both long-term and short-term equilibrium relationships (cointegration) among the model variables, reflecting the reciprocal economic interactions that change over time, with varying levels of impact between the short and long terms. To test these hypotheses, the autoregressive distributed lag (ARDL) methodology was employed. The estimation results within the standard model revealed a long-term relationship among the variables, while indicating limited statistical significance in the short term. This supports the validity of the hypotheses upon which the research was based.

      The research yielded a set of results and conclusions that illuminate the reciprocal relationship between public spending policy and fluctuations in oil prices on one hand, and the exchange rate of the Kuwaiti dinar on the other. Although the findings indicated that the direct impact of both oil prices and public spending on the exchange rate was relatively limited, this does not imply a weak relationship. Rather, the influence of these variables manifests indirectly through various economic channels, such as the balance of payments, foreign reserves, inflation rates, and consumer and investment spending behaviors, which collectively contribute to affecting the exchange rate, particularly in the medium to long term.

      In light of the aforementioned, the research proposed several recommendations aimed at enhancing the resilience of economic policy in Kuwait, thereby contributing to greater stability of the exchange rate in the face of external shocks.