Social workers have strongly urged all overstayers to take immediate steps to regularise their status within the stipulated time frame
The central bank said it had withdrawn a temporary facility to guarantee the availability of dinars at a fixed rate on the interbank lending market -- and would instead cover only dinar positions of the commercial customers of banks.
The statement confirmed what bankers told Reuters on Monday. Kuwait's three-month interbank rates rose to 2.75 percent on Wednesday from 2.68 percent on Tuesday.
Local banks facing high demand for dinars from foreign speculators will no longer have unlimited access to dinar funding from the central bank, making it more expensive to bet on the dinar, which is fixed to a basket of currencies.
"The central bank has done this to remove speculators from the market because it will no longer guarantee the daily rate," said Jason Goff, head of treasury sales at Emirates NBD, the Gulf region's biggest bank by assets. "We'll begin to see a spread over the central bank's daily fix for non-commercial transactions."
In a statement emailed to Reuters on Wednesday, the central bank of the world's seventh-largest oil exporter said local banks were still free to continue providing liquidity to all of their customers on their own account.
After severing its peg to the dollar in May 2007, the central bank had "temporarily broadened" a facility designed to cover banks' dinar positions to include interbank market transactions to facilitate dinar exchange flows, it said.
"The central bank has ... reverted to the historical process of permitting coverage at the declared rate of customer- generated Kuwait dinar positions only," read the statement from the office of Governor Sheikh Salem Abdul-Aziz al-Sabah.
"(This) in no way restricts the ability of banks to quote Kuwait dinar foreign exchange rates either in the interbank market or to their own customers."
The central bank did not say why it had reversed the move.
More expensive credit
By boosting competition on the interbank market, interest rates and the cost of dinar funding will likely rise, making it more expensive for speculators to bet on the dinar's daily rate.
The central bank generally adjusts the dinar reference rate versus the dollar every morning at 8 a.m. local time based on how the dollar performed on global markets a day earlier -- and giving speculators an opportunity to bet on how it will move.
"Everybody's been playing that game. But a spread of 0.25 percent to 1 percent above the central bank daily fix would stop speculation completely," Goff said.
In trying to weed out speculators, Kuwait risks shaking the confidence of foreign investors, bankers said. The central bank said it would continue to guarantee the dinar rate for commercial transactions.
"The risk is that by not making its rules clear and official, the central bank could slow foreign investment," said Elyas al-Gaseer, Calyon Bank Middle East's head of capital markets.
"How are they going to differentiate between what's speculative and what's investment? If there is a lack of transparency, foreign investors could take their money and leave."
Kuwait said this year it would undertake a five-year plan to diversify away from oil by focusing on finance and attracting foreign investments.
Earlier on Wednesday, the treasurers' committee of Kuwaiti banks issued a statement to Reuters to clarify that the central bank had imposed no curbs on dinar trading, saying local and offshore banks are free to quote spot dinar prices.
Kuwait severed its dinar's peg to the dollar to fight inflation, which hit a near-record 11.1 percent in May. Raising interbank rates would make corporate borrowing costs more expensive.
One Kuwait dinar is equivalent to about $3.76.
Social workers have strongly urged all overstayers to take immediate steps to regularise their status within the stipulated time frame
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