By Majd Othman

KUWAIT: Have you ever heard the term financial stability and wondered what it means? And how it helps countries grow their economies?  In an interview with Kuwait Times, economist Marwan Salamah explained the meaning of the term and its significance and implications in the financial world today.

He started explaining the term by applying it to an example to simplify the idea. "Financial sustainability is a modern fancy term for an ancient concept, which means that if you don't preserve your resources and have the ability to produce in the future, you will not be able to continue and it will lead to failure," he said.

"History tells us that in the first agrarian revolution, 10,000 years ago, early humans realized that if they did not save part of their crop seeds for replanting (investment) in the next season, they were likely to starve, and if they did not take care of their garden plot (environment), it would deteriorate, and that their harvests shrink year after year. Lastly, if they mistreat their farm workers and animals (poor governance), they will suffer from a labor shortage in the following season," he said. "This is an ancient example of today's concept of the three pillars of financial sustainability - economic, environmental and social," Salamah explained.

"The social and environmental part of sustainability comes within the responsibility and control of the government, which should enact and enforce the laws that ensure they are addressed by the private sector. As for the profitability part, that is purely within the realm of the private sector. The entrepreneurs should ensure that their projects or businesses are economically feasible, and then set out to manage them wisely to ensure they generate a profit, without damaging the environment or their societal responsibilities," he specified.

Definition of financial stability

The term financial sustainability is the financial situation in which the state is able to continue with its spending policies in the long term without reducing its financial solvency, exposure to bankruptcy risks, or non-fulfillment of its future financial obligations in light of its current financial revenues.

Fiscal sustainability depends on spending expectations, as well as long-term future revenues, and according to these expectations, current policies are modified, whether by increasing expenditures, or by reducing expenditures or revenues, the growth of spending program costs, or allowing them to grow within certain rates, or finding new sources of revenue, or raising the current rates of revenue.

Activities under the theme of sustainable finance include, but are not limited to, sustainable funds and green bonds, impact investing and microfinance, active ownership and credits for sustainable projects, and the development of the entire financial system in a more sustainable way. In addition to that, sustainable finance refers to any form of financial services which integrates environmental, social and governance (ESG) criteria into business, or investment decisions for the lasting benefit of customers and society as a whole.

Fiscal sustainability depends on long-term expectations of future spending and revenues; according to these expectations, current policies are modified, whether by increasing or decreasing expenditures or revenues.

On other hand, there is a difference between financial sustainability and sustainable development, as the latter refers to achieving economic growth, taking into account environmental dimensions that ensure the preservation of natural resources and not to waste them. It increases to include taking into account social dimensions, including social protection programs for low-income people and those negatively affected by rapid economic growth and its policies.

Benefits of financial stability

Sustainability encourages people, politics and business to make decisions on a long-term basis, and in this way, to act sustainably includes a timeframe of decades, rather than a few months or years, and is considered more than the profit or loss involved.

The strategic plan sets out the organization's strategic goals for the next three to five years, with an accompanying budget for how much it is likely to cost. The funding strategy sets out how the organization plans, to bring in funds to cover those costs, which will help the funding strategy to be as an integral part of determining the opportunities and activities that your organization will pursue.

While to ensure the continued financial sustainability of countries, it is necessary to have the legal and economic ability to limit the growth of the costs of the current spending programs, or to allow them to grow within certain rates, or to find new sources of revenue or to raise the current rates of revenue.

Effect of loss of the financial stability

Countries are seeking to achieve a financial sustainability situation in order to be able to borrow and to cover the financial deficit on concessional terms, the loss of financial sustainability by countries or the decline in market confidence in their ability to meet their obligations leads to creditors stopping lending to them, or raising interest rates on their loans to high levels and setting controls and conditions for their borrowing.

Achieving financial sustainability enables countries to obtain the necessary funding to expand spending on public projects and provide services to their citizens, fiscal sustainability reflects the level of success of fiscal policies and gives confidence to the private sector to invest in the countries that enjoy it.

Also, the rapid increase rates in the ratio of public debt to GDP are the most negatively affecting factors in the continued enjoyment of financial sustainability by countries. There are many other factors that affect the financial sustainability of countries, the most important of which are real interest rates, real GDP growth rates and expenditure and revenue growth rates.