Middle East Economic News Report

I. New Directions for Syrian Economy?

A senior official of an international financial institution met the late President Hafez Al-Assad. He told him: Mr. President, the Syrian economy needs fresh air. Why don't you follow the Chinese model by opening the windows a little bit to let in some fresh breeze while keeping the political system unchanged?

Assad asked: But did you know what happened in China? According to Deng [the late leader/reformer of modern China], when China opened the windows two large flies got in: one was greed and the other was anarchy.

Syria is a country of 16 million people with a per capita income of about $1,000. It has a fast growing and very young population that is demanding jobs and pressuring economic and social infrastructure. After growing at a healthy rate of 5-7 percent in the 1990-1995, thanks to reform measures taken in early 1990s and a major oil discovery, economic growth has slowed significantly to 1.5% in 1999 and 2000 and contracted further in 2001. Even 1.5% is a negative growth in real terms in a country whose population is growing at 2.6% per annum. The poor performance in recent years resulted in part from severe drought (agricultural sector directly generates 30 percent of GDP. Moreover, due to unfavorable growing conditions over much of Syria, only about 30% of the land is cultivated. Much of the tilled land needs to be irrigated, even in regions which receive large amounts of rainfall, because most of the rain falls during the winter, rather than in the growing season. Soil exhaustion, due to overuse and insufficient use of fertilizers, is also a problem. But this is only part of the problem. The other part has to do with centralized and rigid political controls, dysfunctional markets, inadequate pricing mechanism, non-competitive public sector, suffocating bureaucracy and an antiquated banking and financial system, to list but a few factors that have held back Syrian economic growth.

Oil and its derivatives and phosphates represent 80% of Syrian exports. It should be recalled, however, that oil exports from Syria are only possible because of the supply by Iraq of 200,000 b/d free. Syrian economy could suffer serious shocks should Iraq decide to cease pumping oil to Syria.

President Bashar Al-Assad's succession of his father in June 2000 raised expectation about reforms, both in the political and economic domains. Shackled by the old guard and by his own lack of experience, President Al-Assad moved cautiously on all fronts. A sign of change came in December 13, 2001 when the government was reshuffled and new faces were brought in to the economic ministries. One significant change is the appointment of Ghassan Al-Rifa'i as Minister of the Economy, replacing Muhammad Imadi, an old guard architect of Syrian socialist economy. Al-Rifa'i with almost 30 years of experience in the World Bank will bring with him a philosophy of market economy and free trade which has been the mainstay of the bank's economic orientation in recent years. However, having lived outside Syria for more than 30 years, and with no political roots in his country, Al-Rifa'i has to prove his mettle (He is expected to take over the ministry in early February). There were also changes in the Ministries of Finance, Supply, and Tourism.

2001 – A Year of Big Transformation

Al-Hayat, the London-based Arabic daily, carried a comprehensive review of Syrian economy in 2001 under the title: "Syria: 2001 the year of major transformation, difficult decisions, and the economic openness toward Iraq and the world," written by Samer Azamshali and Ranya Ismail.

In 2001, 113 laws and decrees were issued, described by economic experts as an "economic revolution" that would transform the Syrian economy from "closeness" to "openness." According to the authors, there is, however, incongruence between "the executive body" and "the thinking brains" which has impeded the implementation of the laws. One of the significant laws is the one authorizing the establishment of "Money and Lending Council" which will oversee the creation of private banks and financial markets. There are 100 applications pending to open private banks but none have been approved so far. For the moment, following 40 years of nationalization, Syria has a central bank and 7 other state-owned "specialized banks" with entrenched bureaucracy which may soon face competition from private banks.

While the government has decided against the privatization of public sector enterprises which have sustained considerable losses over the years, Syrian approach to reform will proceed from two angles: first, the Syrian economy can grow as a result of a synergy between the public and private sectors; and second, Syria is facing "the challenges of the Israeli enemy" and cannot deal with its economic problems independently of the political situation.[Perhaps no less significant is the concern of the regime that privatization will result in the loss of jobs which could further exacerbate the unemployment problem in the country.]

To underscore the enormous financial losses sustained by the public sector, the authors illustrate the case of the paper plant built in 1976 in the town of Deir Al-Zor at a cost of $115 million. The plant was a complete failure and was eventually closed in 1981. As part of the economic reforms, the government signed an agreement with an Austrian company to renovate the plant and renew production.

On the Arab front, Syria has normalized its relations with Iraq. As a result, trade between the two countries has registered a sizeable increase from $500 million to $3.5 billion in 2001 per annum and may reach as high as $5 billion in 2002. [Iraq, which has to deal with the Security Council sanctions, will continue to reward Syria generously since Syria will occupy a seat on the Council for the next two years.] Free trade with Lebanon is more problematic for Syria because of the issue of "certification of origin" which is discussed below.

On the international front, Syria is seeking to rejoin GATT (General Agreement on Trade and Tariffs) after it had suspended its membership in 1951 following the admission of Israel to that body. Syria's membership in GATT, which is being resisted by the United States, provides Syria both "material and moral benefits." Materially, membership would open new markets to Syrian products and a mechanism for adjudicating conflicts on trade issues. Morally, it will provide a green light that Syria is open to foreign investment which has to be protected against illicit measures, e.g., nationalization.

The four rounds of negotiations with the European Union in 2001 have made no tangible progress regarding Syrian partnership agreement with the Union. The authors argue that the lack of progress is a result of fear which dominates the Syrian negotiators about the risks to the Syrian protectionist economy from association with 15 advanced and open economies. The balance of trade with the EU has so far been in Syria's favor, largely because 80% of its exports to the EU are oil. Total European Union's export to Syria is but 0.3% of its exports.[1]

Syria: Investment Laws Don't Attract Investments

In an interview with Al-Hayat, the President of Arab Businessmen Federation, Hamdi Al-Tabba', said that the current investment laws in Syria do not respond to the investor's expectations. He cited a particular law No. 24 which prevents dealings in foreign currency. He added: "it is said that capital is coward; I say capital is smart and has the right to be invested in a place which provides the best opportunities." He also said that "Syria is in need of a condensed and transparent economic program that would satisfy the Arab investor and transcend bureaucracy." Finally, Al-Tabba' called on Syria to train its civil servants to be able to deal with the private sector and to expedite the issuing of licenses to private banks whose absence deters the foreign investor.[2]

Syria: Economic Reforms Progressing Slowly

The President of the Syrian Chamber of Industrialists, Samer Al-Debes, complained that the current laws in Syria do not permit competitiveness, and that economic reforms are moving slowly. In fact, he said, political decisions override economic decisions in Syria's foreign relations. Among the subjects that need reform are tax legislations, establishment of private banks, creation of a stock market and tax exemption on primary commodities that are required for Syrian manufacturing industry. [3]

Challenges Before Syrian Industrialists

At a lecture at the "Tuesday Economic Forum" held weekly in Damascus Fu'ad 'Aref Al-Lahham highlights the difficulties which impede the development of the Syrian industrial sector:

• Incompatibility of products, in terms of quantity and quality, with domestic and international markets and tastes
• Shortcomings in human skills
• Surplus in administrative staff and shortage of production workers
• Absence of a suitable wage policy to retain skilled and specialized workers
• Poor education levels—61% of workers have the equivalent of a primary education or less
• Severe centralization of management
• Random approach to technological innovation
• Shortage of capital and raw material

The proposed solution is the reconstruction of the industrial sector including the closing of companies which pose a burden on the sector, the merger of other companies to create complementarities and connectivity, and their relocation geographically. [4]

Syria: Absence of Syrian Goods in Lebanese Markets

Despite political attempts by both sides, the prime ministers of Syria and Lebanon complained about the lack of products of their respective countries in each other's market. Jacques Sarraf, the President of the Industrialists Association in Lebanon attributed the absence of Syrian products in Lebanese markets to poor marketing efforts by the Syrians. He admitted, however, that Arab products are of poor quality and specifications.

On their part, the Syrians argued that the certification of origin issued by the Lebanese is too lax, and this could provide unfair competition to Lebanese products in Syrian markets. Moreover, Lebanon has abolished tariffs on primary raw material which will give Lebanese products a competitive advantage over the Syrian manufactured goods because Syrian industrialists often pay as much as 35% tariffs on imported raw material.[5]

New Telecom Law in a Year

To spread internet usage, the Syrian government is expected to finalize the establishment of its digital telecom infrastructure in August, according to Mohammed Bashir Al Munajid, Syrian Minister of Telecommunications. The project would provide 200,000 lines for subscribers and would be fairly priced.

Though Syria has no plans to privatize its General Telecommunications Corporation, it will allow the private sector to offer services while the state-owned company owns the infrastructure. The minister stressed that Syria "would privatize the company only if this is for the welfare of citizens." Syria's amended telecom law with modern concepts will be ready in a year. [6]

II. Regional Economic News

Arab GDP Reaches $709 Billion in 2000

The unified Arab Economic Report for the year 2000 offers interesting data. The population in the Arab world in 2000 was 279 million, of which 43% was below the age of 15. Population growth is 2.2% per annum, the highest rate in the world. Illiteracy rate stands at 25%.

The Arab population is distributed between rural areas (47%) and urban areas (53%). Unemployment of the 180 million working force is estimated at 20%. The rate of unemployment among females is twice the rate among males. Income distribution varies widely with an income of $21,000 per capita in some oil rich countries and $500 per capita in other countries. Total GDP has reached $709 billion, rising from $629 billion, the previous year (mainly due to higher oil prices). The agricultural production component in GDP has declined in 2000 because of drought and other climactic conditions. [7]

Arab Labor Organization Considers Implications of September 11

The Arab Labor Organization (ALO) reported to the International Labor Organization (ILO) of increased racial discrimination after September 11 against Arab emigrant workers, particularly in the United States. The number of the Arab emigrant workers is estimated at 15 million worldwide.

Ibrahim Quweider, the Director General of ALO said that a number of Arab governments are seeking from the United States an amicable solution to these difficulties. If these efforts fail, the subject will be placed on the agenda of the Arab Labor Conference which will be held in Cairo in March. [8]

According to Quweider the following are the questions of concern to his organization:

1. Does the treatment of Arab emigration and communities in the West represent a reaction to media offensive or is it an indication of a permanent policy?
2. Was it an old policy which surfaced as a result of September 11 or is it a new policy representing a new world order?
3. Is it a war against Islam and Arab culture or is it a reaction to the conflict of civilizations?
4. What is the impact of the new treatment on Arab communities? Will there be a counter-emigration and where to? Would it be from America to Europe or to Asia? Or would it be to the country of origin? And, are these countries prepared to absorb them and provide them with employment?[9]

Between Rhetoric and Reality – Foreign Investments in Arab Markets

A Saudi economist, Hussein Shabakshi addresses the difficulties of investing in Arab markets. His thesis is that the Arab economy remains "a permanent victim of political decisions in the Arab world. All that is said about reforming economic policies to attract investment has amounted only to a competition of rhetoric." He adds that liberalizing foreign investment is not by itself a sufficient factor for the development of financial markets. Liberalization must be accompanied by fundamental reforms that would cover legal, institutional, economic and even social aspects. Liberalizing policies regarding foreign investments will amount to nothing without corresponding major changes in foreign investment laws as well as the laws of commercial enterprises, without providing effective protection to investors against unjustified encroachments from that state and without introducing international measurement and quality standards.

The author also points out that Arab markets are relatively small—their total transactions are smaller than the Brazilian or even the Mexican markets. He also underscores these problems: lack of complementarities among regional economies, most companies are family-owned, various restrictions imposed by the states either with regard to the foreign investors' share in the enterprise or their legal right to own real estate, and the weakness of the legal system to adjudicate contractual or commercial conflicts. [10]

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Gulf Investments Abroad Estimated at $1 Trillion

The Secretary of the Ministry of Finance in Dubai, Jow'an Salem Al-Dhaheri, estimates the size of Gulf countries investments overseas at $1 trillion, divided between industrialized countries (70%) and developing countries (30%).

Despite optimistic expectations by Arab bankers in the region, the size of repatriated capital since September 11 is estimated at $3 billion.[11] Elsewhere, Prince Abdallah Faisal Al-Sa'ud, President of the Public Authority for Investments in Saudi Arabia, pointed out that there were high expectations that as much as $8 billion will be repatriated. He said the figure was too high and the estimates now stand at $4 billion [which is a drop in the bucket.][12]

OPEC Production Exceeds Quotas

In its monthly report for December 2001, OPEC said that oil production was 20.23 million b/d which was 453,000 b/d over the production ceiling established by the Cartel. Nigeria led the pack of quota bustars with 200,000 b/d over its quota. Iraq, a potentially major oil producer, is currently exempt from OPEC's quota system.[13] Iraq's oil exports fluctuate by as much as 1 million b/d because of its on-going disagreements with the UN over the sanctions regime and because of oil smuggling operations through a pipeline to Syria, oil trucks to Turkey and oil tankers to various destinations.

Islamic Bankers Confer in London

A conference of Islamic bankers opened in London on January 23 with the participation of 150 representatives of various banking and financial institutions. In his opening speech, Abdallah Saif, the Minister of Finance of Bahrain (the center of the largest number of Islamic banks in the world) said that "the Islamic financial institutions, like traditional financial institutions, are concerned with economic and financial activities that are clean and beyond suspicion." However, the speaker warned that these institutions could be subjected to illegal practices by "wicked individuals." Hence, these institutions must be alert to protect their reputation.

Another speaker was Sheikh Nidham Ya'acoobi from the Shari'ah Council in Kuwait. He said that an Islamic banking regime means more than the prevention of interest. It means the establishment of social and economic justice in the Muslim society. Islamic banks and financial institutions are governed by the rules of the Shari'ah (Muslim law) which "advocate trust and fair trade, and prohibit monopoly and transactions in the black market."

Islamic banks, he said, attract savings from individuals who refuse to save their money in banks which deal with interest. They also divert Arab savers from banks which invest in projects that run contrary to Islamic Shari'ah.[14]

U.S. Embargo on Export of Advanced Technology to Some Arab Country

President Bush has approved the sale of high-speed computers to Russia, China, India and "countries in the Middle East." However, the embargo on export of high-speed technology is still in force with regard to North Korea, Iraq, Iran, Libya, Cuba, Sudan and Syria.[15]

III. Country Economic Issues

Unemployment in Egypt: How big is the problem?

In an interview on Egyptian TV on January 22, Egypt's Prime Minister Atef Obeid has estimated the unemployment rate in Egypt at 7.8%, or 1.5 million in a labor force of about 19.3 million. He thought the number of the unemployed was not unusual given unemployment rates in Europe of 7 to 20%. He attributed the unemployment problem in Egypt to population growth, free education for all and the entry of women into the labor market which introduces a degree of rigidity because women, due to social constraints, are not mobile (they cannot be assigned outside their home districts.) The Prime Minister admitted that there was a discrepancy between the skills needed by the labor market and what the educational system was producing. [16]

Under the title "The unemployment conundrum," author Niveen Wahish of Al-Ahram takes issues with the prime minister about the real size of the unemployment. She refers to a statement by Mahmoud Ayoub, the World Bank's representative in Egypt who pointed out that "one should not just count the openly unemployed, but also the people who have become discouraged and have given up hope of finding a job, as well as the under-employed, who may only be working for as little as an hour each day. If adjustments were made, the unemployment rate would rise to 14-15%."

Samir Radwan of the International Labor Organization estimates the average number of entrants into the job market will exceed 600,000 annually at a time when the capacity of the Egyptian economy to create jobs has not surpassed 450,000 annually during the last decade.[17]

Egypt's Use of Nile Waters

At the conference of the Nile Basin countries, held recently in Cairo, Egyptian Prime Minister stressed that his country's cooperation with the basin countries is central to its water policy.

At a press conference, following the conclusion of the meeting, the minister of water resources and irrigation in Ethiopia asked the Egyptians to remove any concern about the participation of Israel in water projects in Ethiopia that would impact the flow of water to Egypt. He denied "the Israeli presence in Ethiopia."[18]

Egypt Receives $1.6 Billion from UN for Gulf War Compensation

Egypt has received $1.6 billion from the UN Sanctions Committee as a compensation for losses sustained by its citizens during the Gulf War. The compensation will cover (a) compulsory departure of workers; (b) injury and loss of life; and (c) loss of property of Egyptian citizens in Kuwait up to $100,000 per claim. [19]

Egypt: Wholesale Promotion of Civil Servants

The Prime Minister, Atef Obeid, will soon put into effect the procedures that would offer one grade promotion to all employees of the central and local government and state enterprises. The government will also introduce a program that would include 500 categories of public service that would eliminate the need for a direct contact between the public and the government employees.[20] The promotion program will cover 1.5 million employees out of an estimated 8 million state employees.[21]

Problems with Book Fair in Egypt

Arab publishers have decided to close their displays despite an extension of 5 days offered by the organizers. Sales have been slow compared with previous years and many publishers were unable to cover the cost of their participation. Worse yet, many publishers, including Syrian, Lebanese and Iraqi have complained that their book were released from customs despite the fact that they have passed government censorship and received Al-Azhar's approval. Promises to release books "have gone with the wind."[22] It will be recalled that Egypt has denied Israel the right to participate in the book fair.

Egyptian Company Invests in Russian Aircraft Company

Egyptian company, Cato Airomatique, has signed an agreement whereby it will invest $300 million in the production of passenger aircraft TY204. The agreement must be approved by the Russian Government and ratified by Russian parliament. [23]

Iraq Attributes Slow Oil Exports to UN Price Scheme

Iraq's Oil Minister Amir Muhammad Rasheed blamed the sluggish oil sales under the oil-for-food program to the United Nations' retroactive pricing scheme of Iraqi oil. "This is unprecedented procedure in the oil industry that the price of crude is approved one or more months after selling the crude oil," said the minister. The pricing scheme was introduced at the behest of the United States and Britain to eliminate illicit payments to Iraq via oil sales. UN officials say retroactive pricing will stay unless Baghdad revokes its surcharge of 25 to 30 cents a barrel outside the UN system. Iraq has denied requesting any extra fees.[24] {A surcharge of $0.25 on 2 million b/d would translate into an income of approximately $180 million per annum which would fall outside the control of the UN Sanctions Committee.]

Central Bank of Iraq Calls for Euro Accounts

The Central Bank of Iraq has instructed government and private banks to open accounts in Euro. It said it will take appropriate measures to ensure the availability of the Euro on local markets.[25]

Elsewhere, Hikmat Al-'Azzawi, Iraqi Deputy: Prime Minister and Minister of Finance, stressed that his government's decision to adopt the Euro as the principal currency for its commercial transactions has proven that the Euro is an international currency that will put an end to the "hegemony of the dollar since the end of World War II."[26]

Indian Companies will Build Sky Bus in Baghdad

Iraq and India signed an agreement for the construction of a sky bus in Baghdad. The bus will be running on elevated bridges capable of servicing 40 electrically-operated carriages, each with a capacity to carry 250 passengers. The appraisal of the project indicates that it is cheaper to construct an underground metro.[27]

Saudi Arabia Suspends Import of American Rice

The Saudi Ministry of Trade announced the suspension of rice imports from the United States because lead was found in the rice bags. [28]

PA: Civil Servants Salaries to Benefit Workers

Chairman Arafat has ordered that approximately 500 Israeli Shekel ($125) should be sequestered from the salaries of the employees of the Palestinian Authority for the benefit of the unemployed labor. This measure will amount to 11 million Shekel, or $2.75 million a month, and will create 15,000 jobs.

This measure was dictated by the refusal of most Arab and foreign countries to provide any assistance to unemployed workers since the outbreak of the Intifada.[29]

PA: 20 million Euros Damage to Palestinian Installations

A spokesman for Chris Patten, the European Union's head of external relations, estimated the damage to Palestinian installations built with European support at 20 million euros "paid by European taxpayers."[30]

*Dr. Nimrod Raphaeli is Senior Analyst of MEMRI's Middle East Economic Studies Program.