December 27, 2001 No. 16

Special Focus: Regional Economic Issues

December 27, 2001 | By Dr. N. Raphaeli*
No. 16

Arab External Debt is $160 Billion
An economic report issued by the Arab Economic Unity Council estimates Arab external debt at $160 billion and the annual debt service at $12 billion that restricts the ability of the non-oil economies to achieve their growth targets. According to the report, the annual debt service is equivalent to 17% of total export of goods and services. The report estimates foreign exchange reserves of the Arab countries at $84 billion, or 5.61% of total annual imports. In 2000, total Arab exports of goods and services reached $165, or 3% of global exports while imports reached $154 billion or 7.2 of global imports. Inter-Arab trade remains weak. It totaled $14 billion or 4.8% of total Arab external trade of $319 billion in 2000.

With regard to oil reserves, the report says that confirmed reserves of oil represent 62% of world total but the gas confirmed reserves is only 22.5% of world total. Arab oil export is 20 million b/d which is 27.2% of total world oil export.

The report estimates foreign direct investment (FDI) in Arab countries at $7.4 billion, or less than 1% of total annual FDI of $865.5 million and only 2.4% of FDI in developing countries. On the other hand, Arab FDI was 1.1% of total world FDI.

[Expatriate Arab capital, both public and private, primarily from the Gulf countries, is estimated somewhere between $600-800 billion. With so little of it in FDI one must conclude that most of the expatriate Arab capital is invested primarily in financial instruments, e.g., bonds, stocks and saving accounts. Historically, this pattern of investment reflects more a trader's than entrepreneurial mentality.]

In a separate, but related news item, Lebanon's external debt is estimated at $26.1 billion, or the equivalent of 165% of its gross domestic product, one of the highest in the world.
Sources: Al-Sharq Al-Awsat, December 19, 2001; Al-Hayat, December 15, 2001.

Rise in Unemployment in the Arab World
A report issued by the Arab Labor Organization has warned that unemployment will rise following the consequences of September 11, particularly among Arab workers in European countries and the United States which will reduce foreign remittances from expatriate workers. The report estimates the Arab emigrant workers at 5 million. The report further estimates that the total number of unemployed workers in the Arab markets at 16.4 million in 2000 but emphasized that the problem has become more serious in the last 3 years. The countries most hard hit are Algeria, Iraq, Jordan, Yemen, Somalia, Sudan and the Palestinian Authority. The Gulf countries, with Saudi Arabia at the top, says the report, have been able to follow a strategy of reducing unemployment.

The report pointed to rising unemployment among the 15-24 age groups, reaching 38% in Algeria and Morocco, 34% in Egypt and representing 60% of the unemployed in Syria and Bahrain. These percentages are rising in Egypt, Syria and Tunisia because of new entrants into the labor market. [Most countries involved have no social safety nets. Also, in the absence of realistic economic solutions to the unemployment problems, political oppression is utilized to curb potential social disquiet.]
Source: Al-Sharq Al-Awsat, December 17, 2001.

OPEC Oil Revenues to Decline 19%
American energy sources estimate a decline of 19% in OPEC revenues in 2001 and another 14% in the following year due to a decline in both price of, and demand for, oil. The decline would cause budget hardships to OPEC members whose oil revenues constitute a major share of their revenues. In absolute numbers, oil revenues will decline from $241 billion in 2000 to $197 billion in 2001 and $169 billion in 2002.

These figures do not include Iraqi oil revenues that are subject to control by the UN Sanctions Committee and are not included in OPEC's figures on production and revenues.
Source: Al-Jazeera, December 12, 2001.

OPEC to Meet if No Agreement Reached with Non-Members
OPEC members have agreed to hold an extraordinary meeting in Cairo on December 28 if no agreement is reached with non-OPEC members on the reduction of oil production by 500,000 b/d effective January 1.
Source: Al-Sharq Al-Awsat, December 14, 2001.

Egypt's Liquidity Problem and Other Economic News

Egypt Devalues its Currency
Following September 11, Egypt has faced a liquidity problem as a result of a sharp decline in tourism, emigrant workers' remittances and substantial declines in exports as well as in fees collected by the Suez Canal Authority. The Egyptian pound that was unofficially pegged to the U.S. dollar in the early 1990s has come under increasing pressures because of the un-balance between supply and demand.

During 2000, seeking to strengthen its external position, Egypt departed from the de facto peg to the U.S. dollar. Following an initial depreciation, an adjustable currency band was adopted against the dollar in January 2001. This band was subsequently further depreciated and widened in mid-2001, resulting in a cumulative depreciation of about 25% relative to the dollar. On December 12, the Central Bank of Egypt announced another devaluation of 8.4% relative to the dollar, bringing the total devaluation in 2001 to 22%. Not being confident that the devaluation of the Egyptian pound has reached bottom money changers in Cairo believe that people holding dollars will continue to hold on to them, fearing further devaluations. In fact, Al-Ahram quotes a study by Credit Suisse, issued on December 5, that projects a further devaluation of the pound early next year.

To address its liquidity problem, Egypt is making serious efforts to close the gap between the demand and supply in the foreign exchange market by seeking urgent help from various external sources. This Digest had reported last week that the US had already agreed to transfer to Egypt $500 million in cash from the American aid program to Egypt. Other measures are listed below.
Sources: International Monetary Fund, "IMF Concludes 2001 Article IV Consultation with the Arab Republic of Egypt," November 5, 2001; Al-Ahram, December 14, 2001; Al-Qabas (Kuwait), December 14, 2001; Al-Ahram, December 15, 2001.

Egypt: Urgent Economic Aid from Arab/Moslem Financial Institutions
The Arab Monetary Fund will advance Egypt $200 million this month and another $100 million next month. The Islamic Bank for Development will advance Egypt $100 million within a fortnight to pay for the import of consumer goods.

The Egyptian Government estimates the immediate gap between supply and demand in the foreign exchange market at $500 million and another $1500 million will be required by June. That means the government will have to pump $250 million a month into the exchange market through June 2002 to maintain its stability, in addition to the $500 million that it has already committed for December, 2001.

Egypt has foreign currency reserves of $14 billion equivalent which, The Prime Minister, Atef Ubaid, declared that the government "will not touch."
Source: Al-Hayat, December 14, 2001.

Egypt: Urgent Aid Request to the European Development Bank
Egypt is asking the European Development Bank for urgent assistance to contain the losses the country has suffered since September 11. The bank is considering providing $100 million in aid to finance the metro tunnels in Cairo and Alexandria in addition to tourist projects.

The European Development Bank has earmarked 6.5 billion euro to finance projects outside the European Union in 2000-2007. Egypt has so far received 17% of the bank's investments in developing countries in 2001 and the percentage is bound to increase to 20% next year.

Egypt is also negotiating with the World Bank and the International Monetary Fund for immediate relief.
Source: Al-Hayat, December 18, 2001.

Egypt: Efforts to Attract Arab Tourists
Assistant Minister of Tourism, Dr. Adel Abd Al-Aziz, underscores the flow of investments in the Egyptian tourism sector from Arab countries, estimated at 10 billion Egyptian pounds (approximately $2.2 billion.) [He did not indicate over what period of time these investments were made.]

After the events of September 11, which have "subjected Arab tourists to Europe and the United States to harassment", it was necessary to put together an "Arab tourism bloc" to divert Arab tourists to Egypt which has always been in the country's interest. In 2000, Arab tourists to Egypt represented 20% of the total foreign tourists of 5.5 million.

Egypt's plan is for an increase of 12% annually in the number of tourists to Egypt. In this regard, Egypt is initiating new programs to attract tourists, including "educational tourism" which focuses on the Pharaonic civilization in Aswan and the "diving industry tourism"[snorkeling] in the Red Sea.
Source: Al-Hayat, December 10, 2001.

Egypt: Plans to Establish a New Bank for Tourism
After the recent major decline of tourism, a new plan has been launched by the Central Bank of Egypt, the Federation of Banks and the insurance industry, to establish a new bank to finance tourism projects and provide financial concessions such as lower interests rates on loans to tourist enterprises and rescheduling of existing loans.

No information was provided on the size of the capital of the proposed bank or its structure and mode of operation.
Source: Al-Sharq Al-Awsat, December 17, 2001.

Egypt: Ambitious Plan for Suez Canal
The Head of the Suez Canal Authority, General Ahmad Ali Fadhel, said the Authority has started the penultimate stage of dredging the canal and deepening it to 66 feet instead of the current depth of 62 feet. When the work is completed in 5 years, the Canal will enable the passage of oil tankers carrying 230,000 tons instead of the current limit of 220,000. The final stage of development will be completed in 2010 when the Canal will have been dredged to a depth of 72 feet.
Source: Al-Sharq Al-Awsat, December 17, 2001.

Egypt: New Cities Contradict Objectives of 5-Year Plans
A recent urban study highlights the failure of the government plans to build new cities, and spread the population and, subsequently economic activities, over wide areas outside the greater Cairo metropolitan zone. The big projects in Suez, the Northern Shore and Sinai have failed to reduce the urban pressures on Cairo. As an example, the author, Engineer Ahmad Salah Othman, says that the size of the inhabited urban area of greater Cairo has remained steady at 120 sq. km between 641-1952, but has increased more than fourfold in the second half of the last century, reaching 530 sq. km. As a result of what he describes as a random growth, about 40,000 acres of Egypt's best agricultural land have become urbanized.

The study concludes that the urban policies for Cairo--past, present, and future--are implemented in conflict with the national goals that call for dispersing the population across the entire country.

[Cairo's population is currently estimated at 13 million. Given a natural growth of 2% and even a small internal migration of another 2%, the population of Cairo could double by 2020. Traffic, water supply and sanitation problems in addition to poor medical services and environmental decay, which are already enormous, could be completely out of control.]
Source: Al-Ahram, December 19, 2001.

Other Economic News

Iran: International Tender to Build 12 Power Plans
The Iranian minister of energy said his country would soon issue an international tender inviting bids from foreign companies for the construction of 12 steam - or oil-fired power plants at a cost of $12 billion. Each plant will produce 320 megawatts. In addition, Busher nuclear power plant, being built by Russian engineers, and which is due for completion in 2005, will add another 1000 megawatts.
Source: Al-Sharq Al-Awsat, December 19, 2001. Babil (Baghdad) also reported on December 19 on the Busher nuclear power plant.

Iran: Demands in U.S. to Lift Economic Sanctions
American oil executives maintain that the time has come to lift economic sanctions on Iran, imposed following the occupation of the American Embassy in Tehran in 1979 by Iranian students. In 1996, US Congress legislated sanctions on foreign companies investing in Iran and Libya. Some commentators say that a rapprochement between the US and Iran is possible in view of President Khatemi's expression of sympathy for the victims of the terrorist activities in September 11.

Senator Arlen Specter is quoted saying: "They [Iranians] are opposed to Taliban, and their willingness to assist in our war against terrorism is a positive factor." On the other hand, some leading members of Congress point to Iran's support of Hizbullah and its inclusion on the list of countries that support terrorism may delay such a rapprochement.
Source: Al-Shark Al-Awsat, December 19, 2001.

Libya: A New Oil Field Discovered by Austrian Company
Austrian oil group OMV AG has made a substantial oil discovery in the Murzuk Basin in Libya. It said that preliminary evaluations indicated that over 250 million barrels of reserves have been found but that the company seeks to increase the reserves to 400,000 barrels within the next two years.
Source: Al-Sharq Al-Awsat, December 14, 2001.

Syria: Assad Replaces Entire Economic Team
In the second cabinet, led by Dr. Mustafa Miro, as Prime Minister, there has been a complete overhaul of the economic team. The outgoing ministers of finance, economy, transportation, tourism, and agriculture, have been replaced by new ministers.

[It is not clear whether the changes in the economic team could signal a shift in the economic policy. The fact that the new Minister of Finance, Dr, Muhammad Al-Atrash is a strong supporter of the public sector, which is most in need of reform, may indicate that the pace of economic reform in Syria will proceed cautiously which is the hallmark of Syrian political and economic policies.]
Source: Al-Hayat, December 14, 2001.

Syria Will Reduce Air Fares And Hotel Rates by 40%
In an interview with Al-Hayat, the Minister of Tourism, Dr. Qassem Miqdad, declared that the Syrian Government plans to take a number of measures to overcome the negative consequences of the "terrorist explosions" on September 11. Among these measures is a reduction of 40% in air fares and in room rates in 5-, 4- and 3-Star hotels. He said the government's program for tourism from abroad suffered from "a big negligence" by failing to change the picture of Syria as "a terrorist country." He said Syria condemns terrorism in all its forms but it distinguishes between terrorism and "the legitimate national right which calls for defending land and dignity." It should be noted that Dr. Miqdad was not included in the new Syrian Government announced on December 13.
Source: Al-Hayat, December 10, 2001. Iraq and Syria Will Not Sue Turkey Over Water Disagreement
The Iraqi Minister of Irrigation, Rasool Sawadi, discounted the idea of suing Turkey at the International Court of Justice in the Hague in the event Turkey will persist in ignoring Iraq's and Syria's invitation to reactive the tripartite commission on water which had stopped meeting in 1992.

The Iraqi minister said that Iraq would rather use "Arab influence, including the Arab League", in all international fora to grant Iraq and Syria their legitimate rights within the framework of international agreements on the use of the Euphrates and Tigris waters.
Source: Al-Iqtisadi (Baghdad), December 12, 2001, Al-Shark Al-Awsat, December 13, 2001.

Iraq Denies Turkey Will Explore for Oil in the North
Iraq has vehemently denied a statement by the General Manager of the Turkish National Oil Company that his company will be exploring for oil "in ten cites in Northern Iraq" which are controlled by the Kurdish Democratic Party led by Mas'ood Barazani.

In Baghdad, the Director of Information in the Ministry of Oil denied any plan to cooperate with the Turkish company in oil exploration in "the Kurdish Province." He said the ministry's plan "relies for exploration and development on local skills in cooperation with some foreign expertise, particularly Russian." He added that the exploration in the Kurdish areas is not part of a national plan.

Even if oil were to be found, the minister doubted that it could be marketed because of UN sanctions and because the Kurdish Province is already receiving its share of revenues in the "Oil for Food" program.
Source: Al-Sharq Al-Awsat, December 12, 2001.

Iraq: Jordanian Airlines Renews Flights to Baghdad
The Royal Jordanian Airlines has renewed its flights to Baghdad on December 13 after a 3-month interruption caused by demands for higher premiums by the insurance companies. There will be 4 regular flights weekly between the two countries.

The director of the Jordanian Airlines said the resumption of regular flights "will restore the vitality of trade to its natural course and will facilitate the travel of businessmen, students and tourists between the two brotherly countries."
Source: Babil, December 14, 2001.

Jordan: Banks Free from Connections with Terrorist Activities
The Governor of the Central Bank of Jordan, A. Tuqan, announced that a close examination has revealed the absence of any connection between Jordanian banks and terrorist funding activities. He said Jordan is one the countries which is very strict in the implementation of banking rules and regulations.

In answer to a question about "certain financial institutions that operate in accordance with the Islamic Shari'a" he said that Islamic financial banks and companies in Jordan "operate in conformity with the law and are subject to supervision and auditing like other banks which operate in Jordan." When asked about the "Palestinian Aqsa Bank's" alleged financing of extremist groups the Governor said the bank was not on any list submitted by the UN Security Council (see item below).

A spokesman for the Palestinian Aqsa Bank attributed the accusations to "the American and Zionist campaign against the Palestinian people and its institutions."
Source: Al-Sharq Al-Awsat, December 13, 2001.

Afghanistan: Preparations for Reconstruction Underway
A conference on preparing for Afghanistan's reconstruction was held in Islamabad (Pakistan) on November 27-29. The conference was co-sponsored by the World Bank, the Asia Development Bank and the United Nations Development Programme. The conference identified the priorities for the country and the mechanism for coordinating and managing external aid. The size of the aid will be determined by a donors' meeting to be held in Tokyo in January. In Tokyo, multilateral and bilateral donors will make known their levels of contribution to the reconstruction efforts in Afghanistan.

In a subsequent meeting at the World Bank, the Afghan Minister of Finance, designate, Mr. Amin-Arsalan said: "We should not think in terms of taking Afghanistan back to where it was in 1978 (pre-conflict). We Afghans must envision our future more boldly."
Sources: The World Bank, Concluding Comments by the Co-Chair November 29, 2001; Tehran Times, December 18, 2001.

Saudi Arabia Faces a Strategic Choice on Deficits
Saudi Arabia is facing a budget deficit of $6.7 billion in 2001 and another $12 billion in the following year. The government faces a strategic choice of drawing upon its savings in overseas banks, estimated at $80 billion, or issuing treasury bonds to local banks to cover the deficits. Budget deficits had risen to $200 billion between 1983 and 1999.

Some economists suggest that since debt is rising faster than the GDP the time has come for the government to embark upon fundamental economic reforms to reduce dependency on oil revenues and to begin liquidating external debt which would require 40 years to complete.
Source: Al-Sharq Al-Awsat, December 13, 2001.

PA: Aqsa Bank Questions Justification for Freezing its Assets
Sheikh Saleh Abduallah Kamel, Chairman of the Board of Islamic Banks and Financial Institutions, and head of the "Dallat al-Baraka" which owns Islamic Dallat al-Barakah banks, expressed his regret at the Arab media's rush "to disseminate information on Islamic banks in a manner inconsistent with the facts and without the least consideration of the damage inflicted on the Islamic banks and financial institutions." He said the Aqsa Bank, in which the Islamic Bank of Jordan owns a share [did not say how big or small] helps to develop areas under the Palestinian self-rule and serve the Palestinian economic development activities "under the hearing and sight of the governments of the United States and Israel."

The Aqsa Bank was on a list of institutions suspected of financial terrorism submitted by the US Government.
Source: Al-Hayat, December 15, 2001.

UN Compensation Commission Extends Deadline to Palestinians
The UN Compensation Commission for the 1991 Gulf war has extended the deadline for Palestinians to submit their claims for compensations from Iraq until July 2002. The decision was in response to a request by a Jordanian legal counsel who represents 1318 Palestinians, most of them living in Gaza, but have experienced difficulties traveling. The Commission has authorized the Palestinian Authority to submit the claims on behalf of the Gaza residents.

The Commission has so far approved compensation amounting to $35.9 billion of which $13.7 billion has been disbursed. The Commission is reviewing requests for compensation totaling $300 billion, including $80 billion from companies and $60 billion for compensation for damages in kind. It retains 25% of revenues from the sell of Iraqi oil in the "Oil for Food" program. [The lifting of economic sanctions on Iraq would mean the end of the UN Sanctions Committee as well as the end to compensating those who suffered from the consequences of the Iraqi occupation of Kuwait.]
Source: Babil (Baghdad), December 14, 2001.

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

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