July 1, 2002 No. 32

Regional Economic News

July 1, 2002 | By Dr. Nimrod Raphaeli*
No. 32

I. Regional Economic News

Decline in Trade between the U.S. and Arab Countries in First Quarters of 2002
According to data published by the U.S. Department of Commerce, total trade between the U.S. and 14 Arab countries declined by $2.5 billion, or 20.7%, in the first quarter of 2002 compared with the same period a year earlier. Imports from the U.S. have declined from $5.5 b. to $3.9 b., or by 16%. The biggest decline of $760 million was recorded by Saudi Arabia. A large decline in imports from the U.S. was also recorded by the U.A.E., Algeria, and Lebanon. This reduced level of trade is attributed to the events of September 11 and the subsequent fall in the price of oil which impacted the revenues of the oil-exporting countries.

During the same quarter, Arab exports to the U.S reached $5.5 b., much of it in oil and gas. The biggest exporters to the U.S. were Saudi Arabia ($2.4 b.), Iraq ($1.3 b.), Algeria ($484 million) and Kuwait ($407 million).[1] In short, these four countries accounted for 84.3% of all Arab exports to the United States.

Arab Countries Fall Behind in the New Economy
Under the title "Arab countries fall behind in their dealings with the instruments of the 'new economy,'" Al-Sharq Al-Awsat quotes a senior official from the World Bank as stating that the use and application of the Internet and information network in the Middle East is considered the lowest in the world. It is even lower than in poor countries in Africa.

A recent report, "Network readiness index," issued by Harvard University, covers the network readiness of 75 countries, including only two Arab countries. The report ranks Jordan and Egypt 45 and 51 on the index, respectively; Israel is ranked 21.

The newspaper points out that the absence of other Arab countries from the report, despite their "concerted effort" "reflects the nature of their dealings with information, the secrecy [with which] information is dealt with and [the failure] to reveal information in the age of knowledge and globalized economy." The Harvard report points out that many countries show considerable interest in the technological aspects of the transactions in the knowledge economy but fail to take legislative action to ground these transactions onto legal principles. The paper stresses the need for new rules to bridge over the "legislative gap" and the "numerical gap."[2]

Economic Research Forum Predicts Sharp Decline in Growth in 2002
The annual report of the Economic Research Forum, issued in Cairo, predicts that economic growth in 2002 in the Arab countries, as well as in Turkey and Iran, will be in the range of 0.5-0.75%. This will be on top of two disappointing decades in the 1980s and 1990s when the real gross domestic product per capita had declined by about 1% in the 1980s and ceased to grow in the 1990s. The report, produced by Dr. Hiba 'Handoosa, highlights some of the factors which have affected economic performance: domestic and external shocks, instability in exchange rates, low savings and investments compared with other developing countries, and weak managerial and administrative capacities.

While privatization is encouraged in some countries there is still a need for freer trade and for the liberalization development of the customs regimes. However, most private companies, the report asserted, have operated under government protection and with limited competitiveness. In order for these companies to be competitive, the private sector will have to begin to consider itself independently of the government.[3]

In a related article, Dr. Henry Azzam, the Executive Director of Jordanvest, points out that the total GDP of Arab countries has grown from $440 billion in 1980 to about $730 billion in 2001, or about 2% on average annually. Considering that the rate of inflation during that period has averaged 3%, the GDP had registered a negative growth. At the same time, population has also increased from 140 million in 1980 to 285 million in 2001 causing further reduction in the GDP per capital. As an example, in Saudi Arabia, GDP per capita was $25,000 in 1978 which was equal to that in the United States but has declined to $8,500 in 2001, a year in which GDP per capita in the U.S. reached $40,000.[4]

Arab Water Security
Under the auspices of the World Bank, journalists from a number of Arab countries were invited to a water conference in Caan, France, June 1-7, 2002 to address the water crisis in the region.

The water situation in the Middle East is considered the worst in the world. Per capita water sources, on an annualized basis, are 3550 cu. meters in Africa, 3,350 cu. meters in Asia, and 7180 cu. meters in the world at large. After averaging 1744 cu. meters annually in 1990 and 1027 cu. meters in 1996, water sources per capita in the Arab world are 1000 cu. meters which would decline to 464 cu. meters in 2125

The Syrian government's newspaper Teshreen summarizes the impediments to water security in the Arab countries:

  1. Limited water resources due to geographical reasons (90% of the region is arid or semi-arid);
  2. More than 50% of water resources are shared with countries outside the region (Turkey, Ethiopia). The situation is further complicated by the absence of agreements between upstream and downstream countries governing water use;
  3. The highest rate of population growth in the world which adds pressure on the demands for drinking water and agriculture;
  4. Low efficiency in water usage, in addition to waste (50% of water is lost due to leakage in pipelines and poor maintenance).
  5. Inadequate pricing of water use and reluctance of governments to seek full cost recovery of water for agriculture.[5]

II. Oil and Gas News

Impact of Arab-Israeli Conflict on Investments in Oil and Gas
U.A.E.'s Minister of Oil, Obeid bin Yusuf Al-Nasiri, in a speech to a conference which addressed "Oil and Gas in International Policy," held in Abu Dhabi, (June 2-3, 2202), warned that the Arab-Israeli conflict is driving consumer countries to invest in areas which are economically less viable but politically more stable.[6]

Many speakers warned against the use of oil as a political weapon. The conference recommended that OPEC should continue its dialogue with the non-OPEC oil producing countries to "protect and respect the rules of the world oil markets."[7]

The Gulf region, including Iran and Iraq, had confirmed reserves of 650 b. barrels in 1999, expected to reach 800 billion in the next century. Confirmed reserves in 1940 for the region were a mere 20 billion.[8]

In Egypt alone, recent findings in the Gulf of Suez and the western desert bring total confirmed reserves to 3.7 billion barrels of oil and 56.5 trillion feet of natural gas.[9]

U.S. Looks to Africa for Oil Supply
In its efforts to reduce its dependency on Arab oil, the United States is diverting its attention and resources to Sub-Saharan Africa as a major future source of oil. U.S. oil imports from Nigeria and Angola are already equivalent to 16% of its imports from Saudi Arabia and it would increase to 25% by 2015. Other oil producing countries in the region will soon include Gabon and Chad. The two largest American oil companies, Exxon Mobil and Chevron-Texaco are already active in the area.[10]

OPEC Production Exceeds Approved Ceilings
OPEC production of oil in May reached 23.1 million b/d, which is 1.4 million b/d over the approved ceiling of 21.7 million b/d.[11] The cheating within OPEC is endemic and no amount of exhortation to the contrary has been effective.

American Report on Egypt Gas Export to Israel
The most recent Economic Trend Report, issued by the American Embassy in Cairo, indicates that the Eastern Mediterranean Company of Egypt, which is a producer of natural gas, has negotiated with the Israeli Electricity Company an agreement to supply the latter 1.7 billion cu. meters of natural gas which represents 56% of the company's needs.

The Egyptian Ministry of Petroleum maintains its silence with regard to the report, neither confirming nor denying it. Following the recent Israeli incursion into the West Bank opposition parties in Egypt have been seeking firm denials from the Minister of Petroleum that Egypt was not exporting natural gas to the "Zionist entity."[12]

A New Gas Project
Egypt, Jordan, Syria and Lebanon have decided to go ahead with the construction of a pipeline that would carry Egyptian natural gas to Turkey first, and later to Cyprus and Eastern Europe. The pipeline will also meet the natural gas requirements of Egypt's three Arab partners. The project is estimated to cost $1 billion. The first phase of the project will connect El-Arish in the Sinai Desert with the port of Aqaba in the Red Sea. The four countries have ignored Israel's request to participate in the project.[13]

Iraqi Oil Exports Decline Sharply
Iraqi oil exports in June are estimated to reach 600,000 b/d which is one third of Iraq's exports in the period prior to the oil export suspension imposed by Saddam Hussein the month before. Iraq attributes the decline to the ex-post pricing mechanism which fixes the oil price two weeks after its export. Iraq argues that this pricing mechanism discourages buyers who prefer certainty over uncertainty. The United Nations which introduced the ex-post pricing mechanism maintains that it prevents Iraq from seeking a special levy from buyers on oil exported in the framework of "Oil for Food Program." To revitalize its oil exports, Iraq has announced that it would seek only $0.15 as a special levy on each barrel of oil. Iraq has not explained why such a levy was necessary although it is obvious that it is meant to provide the regime with cash not subject to UN supervision. Oil dealers are said to be reluctant to pay even this reduced levy for two reasons: first, there is currently no shortage of oil on the international markets; and second, Iraq's constant threat to use oil as a political weapon has impelled many customers to seek more reliable sources of supply.[14]

Besides Iraq, Russia is the only other country which has publicly criticized the ex-post pricing mechanism of Iraqi oil. Russian companies collect handsome commissions by buying as much as $5 billion dollar of Iraqi oil for re-sale to the United States.[15] Russia is therefore not interested in any interruption in the supply mechanism of Iraqi oil.

Meanwhile, the Iraqi Minister of Oil, 'Amer Rashid, declared that Iraq has no intention of suspending oil exports in solidarity with the Palestinian people as it had done about two months ago.[16] He did not give a reason but clearly the last suspension was a large failure with long-term negative implications for Iraqi credibility as a reliable supplier.

American Air Strike Damages Iraqi Oil Pipeline
Iraq admitted that an American air strike on June 22 damaged the oil pipeline in southern Iraq. Iraq did not say how extensive the damage was or whether there was a fire.[17]

U.S. and Allies Intercept Iraqi Sailboats Smuggling Oil
General Richard Myers, the Chairman of the Joint Chiefs of Staff, said that the U.S. Fifth Fleet and warships from allied countries intercepted 21 Iraqi sailboats in the Gulf last week carrying smuggled oil. He said that most of these ships were not designed to carry oil, nor do they have large storage facilities.[18]

III. Country Economic News

Saudi Arabia: Popular Boycott Reduces American Imports
Saudi Arabian youth wearing Palestinian kafiyya (headgear) have been distributing leaflets outside mosques, schools, and commercial centers, urging Saudis to boycott American products such as household goods, cars, food, fast food restaurants, soft drinks and cigarettes because of the U.S. siding with Israel. During the first quarter of the current year, American exports to Saudi Arabia have declined by 43%, from $1.74 billion to $986 million. During the same period, Saudi exports to the U.S. have declined by 36% from $3.83 billion to $2.44 billion. The commercial attaché at the American embassy in Riyadh, Charlie Katzenbaum, said the embassy feels the impact of the boycott and it is concerned. [19]

Some analysts attribute the decline of American exports to Saudi Arabia to the lack of new military sales by the U.S. and the absence of new big ticket items such as commercial airlines. For example, the value of American civilian and commercial airplanes exported to Saudi Arabia was $777 million in 2000 compared with $5 billion in 1998.

U.S. figures show a contrary trend. U.S. exports to Saudi Arabia in the first 3 months of 2002 reached $281 million in January, $328.5 million in February and $376.4 million in March. These figures indicate that exports have been rising although they are still below 2001 levels.[20]

The decline of Saudi exports to the U.S. is attributed to a smaller tonnage of oil at lower prices.[21]

No Easy Solutions for Domestic Debt in Saudi Arabia
Economists maintain that Saudi plans to use proceeds from privatization to reduce domestic debt, currently estimated at $168 billion, may provide only temporary relief. The primary problem is structural and it has to do with a growing population which has reached 22 million with a median age of 16 and for which jobs and services have to be provided.[22]

Saudi Aid to Palestinians Exceeded $2 billion
According to a statement issued by the Saudi embassy in Amman, Jordan, official and non-official Saudi aid to the Palestinians has reached $2.4 billion. This amount includes $250 million which represents the last installment of Saudi Arabia's share to the Al-Aqsa and Intifada Funds. It also includes a monthly subsidy of $15 million to the Palestinian Authority. The Saudi aid also includes medical and relief assistance.[23] The statement does not indicate over what period of time the total aid amount was provided.

Egypt: Financial Assistance Not Forthcoming
At the aid meeting held in Sharm Al-Sheikh, Egypt, donor countries and international institutions, such as the World Bank, have pledged $10.3 b. of aid to Egypt over a four year period. These pledges included $2.1 b. in support of Egypt's balance of payment in the current year and another $8.2 b. for development programs in the remaining 3 years. Many of the pledges have not materialized largely because Egypt has failed to live up to its own commitments which called for the introduction of policies concerning privatization, structural and financial reforms, encouragement of foreign investment, protection of intellectual rights, and reform of the banking and financial markets.

By highlighting these issues, the government newspaper Al-Ahram admits that there is much work ahead to be done to translate donors' commitments into hard cash.[24]

U.S. Will Advance $200 million to Private Sector in Egypt
The United States will advance $200 million to meet the requirements of the private sector in Egypt for American-imported goods and raw material in 2002.[25]

Iraq: Saddam Introduces Religious Tests for Merchants
Saddam Hussein has decreed that Iraqi merchants must pass a test of fiqh (Islamic jurisprudence) if they want to stay in business. Those who fail the test for the first time, will have their businesses closed for 6 months; those who fail the second time will have their businesses closed permanently.[26]

Syrian Ports Given First Priority to Receive Iraqi Imports
Iraq's Minister of Trade, Muhammad Mahdi Saleh, said that Iraq will accord Syrian ports first priority for receiving Iraqi imports. This is another blow to the Jordanian port of Aqaba.

Free Trade Agreement between Syria and Lebanon Criticized by Syrian Industrialists
The recently-signed free trade agreement between Syria and Lebanon which eliminated tariffs on trade was criticized by Syrian industrialists. They are concerned that Lebanon has fewer restrictions and lower tariffs on its imported raw material and, secondly, they are suspicious of the authenticity of the certificates of origin issued by Lebanese chambers of commerce for Lebanese exports to Syria. But there is another reason as well. Syrian industrialists have made considerable profits through their government's protectionist policies and any liberalization in that regard is seen as a threat to their prosperity.[27]

Syria: No Privatization of Public Companies
The Syrian Minister of Economy and Foreign Trade Ghassan Al-Rifa'i told the press that Syria was not considering the privatization of its public sector at this time. Rather, the Syrian government will seek to make public companies more efficient and remove barriers that impede private investments.[28] The minister did not say how Syria will succeed in increasing the efficiency of bureaucratic public entities where others have tried and failed.

Morocco: Social Security Fund Squandered $4.3 billion
According to a report submitted to the Moroccan parliament, the National Social Security Fund has lost $4.3 billion over a period of 30 years due to mismanagement and embezzlement. This is the fourth major financial scandal in Morocco in recent years which has cost the country $15 billion, an amount equal to the country's foreign debt.[29]

Iran Welcomes American Business
Muhammad Qadha'i, Iran's deputy minister of economy, declared that American investors were welcome in Iran. In a statement to Iran Daily, he said that "[Iran's] laws do not prohibit economic cooperation with the United States, and that the Iranian nation has nothing against the American people or American business."

The U.S. has maintained an embargo on Iran for 22 years.[30]

Israeli Losses from Intifada
Dr. Karnit Flug, the Director of the Research Department in the Bank of Israel (central bank) has estimated Israeli losses from the Intifada through the end of 2002 at 32 billion shekel ($6.5 b).[31]

World Bank Provides a Credit to WB/Gaza
The World Bank/International Development Association has extended a credit of $10 million to West Bank-Gaza. The credit aims at improving the quality and availability of basic social and economic services in poor and marginal communities. The credit is interest free for 40 years, with a 10 year grace period.[32]

Too Many Donkeys in Gaza
The London-based daily Al-Sharq Al-Awsat carries a long interview with Abd Al-Rahim Abu Al-Qambaz, Director of Health and Environment in the Municipality of Gaza, on the problem of donkeys in the city. Al-Qambaz complained there were too many donkeys in the city–3,000 in all for a population of 1.2 million-the highest ratio of donkeys to people in the world.

While the donkey is used to transport people and goods it is also a source of traffic and environmental hazards because of braying, animal waste, and the habits of locals to shampoo and wash donkeys on the beaches of Gaza.

The donkeys are also the source of conflict among neighbors concerning braying and food. When Al-Qambaz was asked whether there was a special station to deal with donkey-related conflicts he replied: "Man! Sharon has not left us a space to even think of ourselves…"[33]

[1] Al-Hayat, May 22, 2002.

[2] Al-Sharq Al-Awsat, June 20, 2002.

[3] Al-Hayat, June 2, 2202.

[4] Al-Hayat, June 22, 2002.

[5] Teshreen, June 16, 2002, and Al-Jazirah (Saudi Arabia), June 21, 2002.

[6] Al-Hayat, June 3, 2002.

[7] Al-Hayat, June 3 and June 4, 2002.

[8] Al-Hayat, June 4, 2002.

[9] Al-Hayat, May 18, 2002.

[10] Al-Quds Al-Arabi, May 24, 2002.

[11] Al-Iraq, June 16, 2002.

[12] Al-Sharq Al-Awsat, June 15, 2002.

[13] Al-Hayat, June 18, 2002.

[14] Al-Sharq Al-Awsat, May 28, 2002; Al-Quds Al-Arabi, May 28 and June 18; Al-Iraq, June 17; Babil, June 18; Al-Hayat, June 14; and Al-Sharq Al-Awsat, June 15, 2002.

[15] Al-Quds Al-Arabi, June 19, 2002.

[16] Babil, June 26, 2002.

[17] Babil, June 23, 2002.

[18] Al-Sharq Al-Awsat, June 28, 2002.

[19] Al-Quds Al-Arabi, June 21, 2002.

[20] Al-Sharq Al-Awsat, June 21, 2001. Figures on U.S. exports are drawn from

[21] Al-Sharq Al-Awsat, June 21, 2002.

[22] Al-Iraq, June 17, 2002.

[23] Al-Sharq Al-Awsat, June 21, 2002.

[24] Al-Ahram, May 25, 2002.

[25] Al-Ahram, June 17, 2002.

[26] Al-Iqtisadi (Iraq), May 12, 2002.

[27] Al-Hayat, June 20, 2002.

[28] Al-Quds Al-Arabi, May 27, 2002.

[29] Al-Hayat, June 6, 2002.

[30] Al-Hayat, June 16, 2002.

[31] Ma'ariv, May 9, 2002.

[32] Al-Hayat, May 26, 2002.

[33] Al-Sharq Al-Awsat, May 27, 2002.

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

Share this Report: