March 25, 2002 No. 28

Regional Economic News

March 25, 2002 | By Dr. Nimrod Raphaeli*
No. 28

A Notice to Our Readers:
The Economic Report will be on vacation for the next two weeks. It will resume publication on April 15.

The Economic Consequences of Peace between Israel and its Neighbors: An Arab View
It has always been the Israeli side which underscored the economic benefits of peace between Israel and the Arab neighbors. It was therefore interesting to read an article on the subject in Al-Quds Al-Arabi, bylined in Amman, Jordan.

The article's key premise is that peace with Israel cannot guarantee a long-term prosperity unless Egypt, Lebanon, Syria and Jordan carry out major reforms to avoid losing the benefits that analysts anticipate if the bloodshed is stopped. The article quotes critics who maintain that state intervention in the economy, annoying bureaucracy and corruption are so rooted in the Arab countries that the political will for peace must be transformed into reality if it were to be felt. One anonymous banker said that the absence of genuine reforms stems from a failure to overcome vested interests throughout the Arab world. This banker expressed the concern that, paradoxically, the increase of revenues from tourism and foreign aid which is likely subsequent to peace would give governments an excuse to delay reforms. Reforms may also be delayed if some countries were to receive large amounts of money in reparations for Palestinian refugees staying within their borders.

On the other hand, other analysts argue that peace will remove the impediments to foreign direct investments because fears of war discourage capitalists from investing in the area. A spokesman for the Lebanese Government said he could not estimate the value of lost opportunities for investment because of the conflict.

The persistent conflict has also meant lost opportunities to improve the lot of the Arab populations. Using data from the World Bank the article says that per capita income in Egypt, Lebanon, Jordan and the West Bank has risen very little in recent years while in Syria it has declined between 1996 and 2000. By contrast, many other regions in the world have benefited from the American economic expansion.

Peace would accomplish two things: first, it would increase the re-flow of expatriated capital as well as national talent currently abroad; and second, it would allow the divergence of money from weapons into basic needs; e.g., health and education. The fall of the Berlin Wall in 1989 was cited as a case in point. [1]

FAO Warns of Food Shortage in the Middle East
In a statement to the regional meeting of the U.N. Food and Agriculture Organization (FAO) held in Tehran March 12-13, the Director General of FAO, Jacques Diouf, said the region will be further away from its food targets in 2015 than it is today. He attributed the decline of food production to two primary causes: insufficient rains and man-made factors such as civil disturbances and wars. As a result, food deficits have grown, resulting in larger imports of grains, milk products, sugar and vegetable oils.

In the Near East area which includes 20 Arab countries in addition to Turkey, Cyprus, Afghanistan, Malta, Pakistan, Kyrgyz Republic, Tajikistan and Turkmenistan, the import of grains and floor must satisfy 50% of these countries' needs. As a result, the import of grains has increased from 6.5 million tons in 1960 to 55 million tons in 1999. The value of agricultural imports is $30 b. which is three times the value of agricultural exports from these countries.

Diouf said the region is also one of the world's poorest regions in water. The region comprises 6.2% of world population and 8.6% of arable land, but only 1.5% sources of renewable water.[2]

Al-Azhar Imam Supports Family Planning
The Imam of Al-Azhar, Muhammad Sayyid Tantawi, said family planning is permitted "subject to social circumstances" and subject to "the agreement of the couples" or for medical reasons. Tantawi said that "population growth could have negative results in terms of the absence of a suitable environment for raising children." According to figures issued by the Egyptian statistical office a few days earlier, a baby is born in Egypt every 23.6 seconds whose population has reached 67.8 million. Some commentators argue that the rapid population growth in Egypt is due to the improvements in health services which reduce mortality among the new born.

The former Egyptian Minister of Health and Population, Isma'il Salam, said President Mubarak has refused in the past to sign a decree limiting couples to 2 children because he felt education and public awareness will convince Egyptians to limit the number of children.[3]

Tantawi's views were rejected by two scholars at the Al-Azhar University. Dr. Abd Al-Azeem Al-Mat'ani characterized family planning "as one of the first means used by colonialism to fight the [human] sources of strength in the Muslim world." Dr. Fu'ad Mukhaimar said population planning is "strictly forbidden [haram] religiously." He said Allah is the provider and he will not reduce the sources of livelihood to parents having more children. [4]

Islamic Banks Ready to Receive Billions of Expatriated Dollars
Participants in a conference of Islamic financial institutions held in Beirut last week said there were no reasons for concern that Islamist organizations would use the Islamic financial institutions to finance their terrorist activities.

Islamic banks have registered a 10% growth annually since their coming into being in the mid- 1970s. However, they lack primary and secondary markets for Islamic financial instruments; therefore, they are forced to maintain a high rate of liquidity with low rate or no return at all.

These financial institutions have been subjected to strong criticism by the International Monetary Fund which urged the governments in the region to impose greater and more transparent restrictions on them.

The Islamic banks operate in 40 countries and have deposits of $250 billion. They expect a large repatriation of Islamic capital from overseas following 9/11 but they have no records on the volume of such repatriation. Lebanese banks have attracted $800 million from Gulf countries [these deposits came primarily in support of the Lebanese Lira and may have little to do with 9/11.] [5]

The Kuwaiti Minister of Finance, Dr. Yousef Ibrahim, said that the American delegation under Treasury Secretary Paul O'Neil, which visited the Gulf region recently, was "amazed" by the excellent system of control over the Islamic banks in the area.[6]

OPEC Exceeds Its Production Quotas
OPEC exceeded its production ceilings by 779,000 b/d in February. Excluding Iraq which is subject to international sanctions and hence is not included in the quota system, the other 9 members of OPEC produced 22.5 million b/d instead of the approved ceiling of 21.7 million b/d.[7] The culprits were not identified. With prices inching upward, the temptation to "cheat" remains high.

In the meantime, Dr. Muhammad Al-Saban, Adviser to the Saudi Minister of Oil, has reconfirmed that Saudi Arabia with excess capacity of 2-3 million b/d will meet consumer needs "for whatever reason." He said the events of 9/11 have demonstrated that oil flow will not be affected by political events. [8]

Federation of Arab Economists Calls for Support of Palestinian Economy
The Federation of Arab Economists held its meeting in Baghdad, March 7-10. In its concluding statement the federation called on restoring the Palestinian economy within the framework of Arab economic complementarities. It also called for making preparations for the use of "Arab heavy economic tools," including the use of the oil weapon. Finally, the federation urged that all efforts should be taken to prevent "the normalization with the alien Zionist regime."[9]

Kuwaiti Loan to Egypt for a Gas Pipeline
The Kuwaiti Fund for Economic Development will lend Egypt 31 million Kuwaiti dinars ($101 million) to finance a natural gas pipeline from Egypt to Jordan. The pipeline will carry natural gas from El-Arish in the Sinai Peninsula to the Jordanian Port of Aqaba, on the Red Sea. The pipeline which will be 250 km (156 miles) long will connect between El-Arish and Sheikh Zweid in northern Sinai, then to Taba and across a body of water to Aqaba. The total cost of the project is $260 million and is due for completion in 2003. [10]

Kuwait, U.S. and Turkey Largest Beneficiaries of Iraqi Oil
Since the introduction of the "Oil for Food" program in December 1996, Iraq exported oil worth $52 billion but received only $18 billion (35%) because of the sanctions. Iraq is the second largest Gulf exporter of oil to the U.S., after Saudi Arabia. Kuwait has so far received $10 billion in compensation for the invasion of its territory. Turkey has received $961 million in the form of transit tax on Iraqi oil.[11]

New Rules for Ships Passing Through Red Sea and Gulf of Eden
The riparian countries on the Red Sea and the Gulf of Eden are seeking a new regional agreement to allow any one of them to board and inspect ships in its harbors to determine whether the ship meets international standards in terms of its safety and maintenance and whether it discharges waste into the water that could harm the coral reef in the area. The countries involved are: Jordan, Djibouti, Sudan, Somalia, Egypt, Yemen and Saudi Arabia.[12]

II. Country Economic News

Decline in Domestic Sales by Egyptian Companies
"The business barometer" issued by the Egyptian Center for Economic Studies shows that sales by most Egypt companies have declined more in the domestic than in the international markets. This is attributed to the devaluation of the Egyptian currency which renders Egyptian goods more attractive to the external than to the local buyers. The Center calls for urgent steps "to revive economic growth, achieve stability, and renew confidence." That means an expansionary monetary policy together with a conservative fiscal policy (no new taxes) and that foreign exchange should not be made to carry the entire burden of achieving external trade balance. [13]

Egypt to Introduce Genetically-Modified Agricultural Products
Egypt is cooperation with specialized American companies to introduce a new technology for genetically modified agricultural products such as cotton, corn, wheat, tomatoes and potatoes on an experimental basis. Such technology is especially attractive in Egypt because of its limited arable land and the shortage of water. In addition, the technology increases productivity as well as resistance to pestilence, draught and salinity. [14]

Egypt-- One of Best Countries in terms of Income Distribution
A study by Lyn Squire, director of Global Growth Company and formerly a senior economist at the World Bank shows that Egypt is among the best countries in the world in terms of income distribution among 100 countries covered by the study over a period of 30 years.

One of the most important findings of the study, however, is that contrary to Kuznets's theory that inverse relationship between income distribution and rapid rate of growth is prerequisite for rapid economic growth during the early phases of development, the study argues that it is possible to achieve equity in income distribution as well as reasonable economic growth rates simultaneously. [15]

U.S. to Expedite Transfer of Another $300 million to Egypt
David Walsh, American Ambassador in Cairo, said the U.S. government is seeking to overcome legal and administrative difficulties for the transfer of another $300 million to Egypt, as part of an aid package of $1 billion agreed upon after 9/11. An earlier transfer of $500 million has been completed. [16]

Egypt: Israel Will Not Participate in Cairo International Fair
Egypt's annual international fair opens its doors in Cairo on March 24 with 76 countries and 3500 companies taking part.

For the first time, Israel has not asked to participate after the past 6 prior attempts to participate were turned down because of threats by Arab countries that they would withdraw if Israel participated. The paper speculates that "Israel's reluctance to participate may have to do with the organizing committee's decision to allocate to the Palestinian Authority the space previously occupied by Israel."[17]

Saudi Arabia to Address its Debt Problem
Saudi Arabia was expected to launch a new program to liquidate its domestic debt within 10 years. Current domestic debt stands at SR630 b. ($168 b.) and would increase to SR660 b. ($176 b.) in 2002, or approximately 120% of GDP. The program will consist of privatizing public companies, to be followed by selling the government's shares in commercial banks to the Social Security Agency.

Dr. Omar Salem Baq'ar, professor of economics at King Abd Al-Aziz University, said the problem with the domestic debt was started when the government has begun borrowing secretly since 1986 until the situation has run out of hand. Moreover, he estimates the value of government assets in public companies at market price at no more than $6.4 b. but may fetch $9.6 b., if publicly auctioned. However, the sale of these assets will deprive the government of an annual income of $1.5 b.[18]

Saudi Arabia: Conflict Intensifies About Investments in Large Gas Projects
The negotiation between Saudi Arabia and major American companies-- Exxon-Mobil in partnership with Occidental and Marathon-- to invest in large Saudi natural gas projects has run into a snag. These companies are not convinced about the validity of the privatization policy of Saudi Arabia in the energy sector, given their experience in the last 25 years. Any new agreement is not likely to be reached before the end of the year. [19]

Iraqi Minister of Oil Visits Moscow
The Iraqi Minister of Oil, 'Amer Rashid, was in Moscow recently to discuss the economic relations between the two countries "in the event economic sanctions on Iraq are lifted." Russian news agency, Itar Tass, quoted Rashid saying: "In the light of the strategic nature of relations between Russia and Iraq, our fundamental objectives is to strengthen certain sectors."

Iraq has an outstanding debt to Russia estimated at $6 billion. Russian oil companies have signed "huge agreements for the explorations of Iraqi oil and its eventual sale as soon as the United Nations lifts the sanctions on Baghdad."[20]

In a press conference a day later, Rashid called on the Russian oil companies to enhance their explorations for Iraqi oil by digging 2000 wells. He said there were73 oil fields in Iraq but only 24 were exploited. He said Iraq's short-term plan is to reach a production of 4 million b/d and a longer-term plan to reach a production of 7 million b/d. [21]

The largest volume of Iraqi oil is sold to Russian companies which, in turn, sell it to American companies, earning in the process a hefty commission.

Iraq Signs Economic Cooperation Agreement with Viet Nam
Iraq and Viet Nam signed an economic cooperation agreement to enhance their trade relations and the execution of joint projects. Iraqi imports $600 million annually from Viet Nam within the framework of "Oil for Food" program. According to the Iraqi newspaper Babil, Viet Nam, which was "subjected to a heavy American bombardment in 1964/73, has called for the lifting of embargo on Iraq."[22] No information was provided on the nature of Iraqi imports from Viet Nam.

Iraqi Fair for Reconstruction of Infrastructure Opens
A fair, offering equipment and material for the reconstruction of Iraq, opened in Baghdad last week. Two hundred twenty companies and 600 businessmen from 26 countries are taking part. Despite last minute cancellations, countries participating in the fair include France, Italy, Germany, Austria and Cyprus. Absent from the fair are the U.K., Japan (surprised the Iraqis) and, of course, the U.S. [23]

Syrian Oil Exports
The Syrian offer of oil for delivery in April suggests a larger illegal flow of Iraqi oil to Syria than either Syria or Iraq was willing to admit. The Syrian Minister of Oil, Ibrahim Haddad, said the Iraqi-Syrian pipeline is "tested periodically" and, given its poor state of repair, it is not capable of carrying more than 100,000 b/d. Still, Syrian exports have risen from 300,000 b/d to 450,000 b/d. The minister said Syria produces 550,000 b/d and that it consumes 250,000-300,000 b/d, leaving a surplus for exports of 250,000 to 300,000 b/d. [24]
[The minister was somewhat disingenuous because previous records show that Syria consumes approximately 400,000 b/d. This figure suggest a daily flow of Iraqi oil of at least 150,000 b/d. But even a periodical flow is a violation of the Security Council resolution which is particularly embarrassing to Syria because of its membership on the Council.]

Syria: Reform of the Banking Sector
In a lecture delivered at the "Tuesday Evening Forum" in Damascus, Syrian economist Nabil Sukkar [formerly with the World Bank] called for reforms in the banking sector. The reform is necessary to improve the financial intermediation role of the banks between savers and investors and to strengthen the performance of the national economy which must grow by 7.8% annually if it is to solve the unemployment problem. [Real economic growth in Syria in recent years was close to zero or worse.]

Dr. Sukkar highlighted the current shortcomings of the banking sector in Syria:

  • Expansion of money supply in the market but little savings [people keep their surplus cash at hand rather than save it in a bank]
  • Absence of monetary policy
  • Interest rates are fixed administratively and often frozen for a long time
  • Focus of commercial banks on lending to the public sector
  • Loans to trade sector are short-term
  • Shortage in bank capitals and the proliferation of non-performing loans

The advantages of reform will be to increase the banks' ability to attract domestic savings as well as capital from abroad, increase their capacity to use and distribute capital throughout the national economy and increase the share of the banking sector in the GDP.[25]

In the meantime, President Assad issued last week a new law which will expedite the opening of private banks in Syria. It is estimated that at least 50 Arab and foreign banks are waiting to be licensed. [26][This is one of the conditions for a future membership in the World Trade Organization.]

Syria Seeks to Raise Tourism Revenues
The Syrian Minister of Tourism, Sa'ad Allah Agha Al-Qal'a, said tourism has become a major economic component like agricultural, industry and trade. Efforts are under way to raise the contribution rate of tourism to the GDP from the current 7% to 20%. In a press conference in Paris, the minister detected a big improvement in Syria's image "in view of the effectiveness of Syrian policy performance."[The minister did not say whether he was referring to domestic or foreign policy performance, or both.] Following a 60% decline in tourism after 9/11, bookings are now 85% of the pre-9/11 events. [27]

European Investment Bank (EIB) Offers to Finance Expansion of Oil Refineries in Syria
The Syrian Ministry of Oil and Mineral Wealth has been discussing with the European Investment Bank (EIB) a financial package to develop and expand the two refineries in Hums and Banias.The bank has tentatively offered a loan of $100 million. [28]

IMF Supports Reduction of Jordanian Debt
A senior official of the International Monetary Fund (IMF) said that the performance of the Jordanian economy in recent years would justify reducing its foreign debt of $7 billion.[29] [It should be noted that the IMF's endorsement carries considerable weight with the Paris Club whose members could decide on forgiving or rescheduling debts on concessionary terms of debtor countries.]

Israel: Unemployment at 10.1%
The Israeli Central Bureau of Statistics issued figures showing unemployment in Israel has reached 10.1% in January. This is the highest rate of unemployment since 1993 when Israel was in the process of absorbing 1 million new Russian immigrants. The tourism and High Tech sectors have suffered the most. [30]

In the meantime, Dr. David Klein, the Government of Bank of Israel (central bank) accused the government for its failure to deal with unemployment and economic growth. He said the "the deficit in 2001 caused the long-term interest rate to rise which has continued in 2002. This policy impacts negatively on unemployment." Klein also said that the government has not done enough to reduce the rate of unemployment and increase employment in the private sector."[31]

Israel will Buy Turkish Water
Israel will commence buying 50-100 million cu. meters of Turkish water because of water shortage in the country due to insufficient seasonal rains. Israel has also decided to double the amount of desalinated water from 200 to 400 million cu. meters annually. [32]

$700 Million Arab Contributions to the Intifada and Al-Aqsa Funds
According to the final report of a follow-up committee appointed by the heads of Arab states following their summit meeting in Cairo in 2000, total Arab actual contributions to the Intifada and Al-Aqsa funds have reached $693 million which fell short of the $1 billion target. Total transfer to the Palestinian Authority through the end of 2001 was $405 million. Another $125 million was transferred to the Authority in the first 3 months of 2002.

In a completely non-squitor part of the report, Arab countries were called upon to put pressure on Israel to sign the convention against the proliferation of nuclear weapons.[33]

Palestinian Authority Accuses Israel of Disrupting Testing of New Turbine
D. Abd Al-Rahman Hamad, head of the Palestinian power authority, accused the occupation forces of obstructing the work of Swedish engineers who were in Gaza to test the first of two new turbines in Gaza's power plant. As a result, the engineers returned to their country and the brown outs in Gaza will continue. [34]

[1] Al-Quds Al-Arabi, March 19, 2002.

[2] Al-Quds Al-Arabi, March 17, 2002.

[3] (March 14, 2002.)

[4] Al-Hayat, March 14, 2002.

[5] Al-Quds Al-Arabi, March 13, 2002.

[6] Al-Qabas, March 15, 2002.

[7] Al-Bayan, March 21, 2002.

[8] Al-Hayat, March 20, 2002.

[9] Al-Hayat Al-Jadeeda, March 18, 2002.

[10] March 17, 2002.

[11] Al-Quds Al-Arabi, March 22, 2002.

[12] Al-Sharq Al-Awsat, March 20, 2002.

[13] Akhbar Al-Yom, March 18, 2002.

[14] Al-Quds Al-Arabi, March 19, 2002.

[15] Al-Ahram, March 21, 2002.

[16] Al-Ahram, March 21, 2002.

[17] Akhbar Al-Yom, March 18, 2002.

[18] Al-Hayat, March 18, 2002.

[19] Al-Sharq Al-Awsat, March 20, 2002.

[20] Babil, and Al-Sharq Al-Awsat, March 17, 2002.

[21] Babil, March 20, 2002.

[22] Babil, March 17, 2002.

[23] Al-Quds Al-Arabi, March 21, 2002.

[24] Al-Quds Al-Arabi, March 22, 2002.

[25] Teshreen, March 17, 2002.

[26] Al-Sharq Al-Awsat, march 20, 2002.

[27] Al-Hayat, March 16, 2002.

[28] Al-Thawra (Damascus), March 12, 2002.

[29] March 17, 2002.

[30] Al-Sharq Al-Awsat, March 18, 2002.

[31] Ma’ariv, March 19, 2002.

[32] March 20, 2002.

[33] Al-Hayat, March 15, 2002.

[34] Al-Hayat Al-Jadeeda, March 20, 2002.

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

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