The last few days of 2001 were characterized by intensified efforts between Egypt and Iraq to increase their economic collaboration. For Egypt, these efforts stem from a desire to halt the deterioration in its macroeconomic position wrought by declining tourism, exports and revenues from the Suez Canal. All of these factors have caused a sharp decline in foreign exchange affecting the value of the Egyptian pound vis-à-vis the dollar.
Not satisfied with the performance of recent ministers of economy, President Mubarak has unexpectedly abolished the ministry of economy and transferred most of its responsibilities to the ministry of foreign trade. The new Minister of Foreign Trade, Dr. Yusuf Butrus-Ghali, has coined the phrase: "export or die" which he has repeated often since taking office a month ago. Iraq, which has been receptive to Egyptian products, offered the new minister a good starting point. In this respect, Egypt's motivation for stronger ties with Iraq is driven by economic realties. On the other hand, Iraq’s primary motivation in seeking collaboration with Egypt is primarily political. It is part of a coordinated offensive to offer economic incentives to those countries that have expressed their opposition both to the UN sanctions regime and to a potential threat of U.S. military action against Iraq, and Egypt, is one of these countries, and an important one at that. Otherwise, Iraq's only export, oil, is of no interest to Egypt being an oil producing country itself.
The following news items provide a flavor of what has been agreed between the two countries on bilateral economic measures.
Baghdad: Meeting of the Joint Iraqi-Egyptian Committee
The Joint Iraqi-Egyptian Committee on Economic Collaboration met in Baghdad on December 29. The Egyptian delegation, which arrived in Baghdad on board a direct flight from Cairo, was headed by the Minister of Foreign Trade, Dr. Yusuf Boutrus- Ghali, and included the Minister of Public Works, Mukhtar Khattab, the Minister of Industry, Fahmi Al-Sa’idi, and the Minister of Electricity and Power, Hassan Yunis, in addition to 100 businessmen. The Iraqi delegation was headed by the Minister of Trade, Muhammad Mahdi Saleh.
In his opening statement, the Iraqi minister affirmed his country’s determination to develop its trade and economic relations with the Arab countries and, in particular, with Egypt which ranks first among Iraqi trading partners in the Middle East but third overall (Russia and France are first and second, respectively), Egypt’s exports to Iraq have reached $1.7 billion in 2001 and Egypt’s objective is to raise them to $5 billion in a few years. In this connection, Iraq’s Minister of Foreign Affairs, Naji Sabri, expressed his country’s desire to see Egypt occupy the first place among Iraq’s trading partners.
Iraq had severed its diplomatic relations with Egypt in December 1991 because of Egypt’s participation in the coalition that expelled Iraq from Kuwait. The diplomatic relations were restored on October 2000, with the two countries exchanging diplomats at the rank of Charge d’Affaires (suggesting less than full diplomatic relations).
Egypt and Iraq Sign a Memorandum of Understanding (MOU) on Economic Cooperation
After three days of negotiations in Baghdad, the Egyptian and Iraqi delegations signed an MOU [referred to in the newspaper as a protocol] on economic cooperation. The main features of the MOU are the following undertakings:
- Creating a maritime company to connect Egypt and Iraq directly and facilitate the shipment of cargoes and the voyage of passengers.
- Creating an overland transport company for the same purpose.
- Permitting the Egyptian private sector to participate in the rehabilitation of factories, electric power stations and hospitals in Iraq.
- Signing a separate agreement between the fair authorities of the two countries to allow prominent exhibitions of products in each other's country.
- Creating an import company for rolling stock for the railways of both countries.
- Providing training and technical assistance by Egypt in the power, agricultural and industrial sectors
- Making available to Iraq studies made by Egypt in connection with the creation of free trade areas.
Egypt: Minister of Electric Power Visits Baghdad
The minister of electric power, accompanied by 50 businessmen, is visiting Baghdad. This is the 27th visit exchanged by ministers of the two countries since 1997, the most important of which was that of Iraq’s Vice-President, Taha Yaseen Ramadan in late 2001 which culminated in the signing of the free trade agreement between the two countries.
Among the pressing issues on the agenda is expediting the interconnection of the electric grids of 6 Middle Eastern countries to deny Israel any benefits through its relations with some Arab countries [no mention was made about the nature of these benefits or which Arab countries.] The first stage of the interconnection will include Egypt, Jordan and Syria, which is already underway. The second stage of the interconnection will include Lebanon and Turkey with Iraq getting connected at a later, unspecified, date. The proposed electric interconnection project will meet Iraq’s need for electricity because of the UN Sanctions Commission's refusal to approve the purchase by Iraq of new electric generators.
Iraq Calls on Egypt to Transcend the Memorandum of Understanding
Iraq’s Vice President, Ramdan, said that his country’s aspirations for cooperation with Egypt transcend the MOU between the United Nations and Iraq which limits the trade between the two countries to the framework of "Oil for Food" program. He said the MOU was "finished" [in fact, it was recently renewed for another 6 months] and that Iraq would submit to Egypt proposals for a long-term agreement covering a range of activities for joint collaboration.
Egypt: A New Phase in Collaboration between Egypt and Iraq
The official Egyptian newspaper, Al Ahram, reviews in some detail the just concluded economic and trade negotiations between Egypt and Iraq. The paper says the relations have been transformed from the exchange of goods to that of establishing joint investment projects. The paper quotes the Iraqi vice president as stating that during his meeting with the Egyptian delegation, in Baghdad, it was necessary to agree on a new10-year strategy that transcends economic relations into technical, educational and scientific collaboration.
Dr. Boutrus-Ghali said that the trade and economic relations between the two countries are based on a trade agreement signed in 1985, which was suspended in 1990 after the U.N. had imposed sanctions on Iraq. The Joint Egyptian-Iraqi Trade Committee renewed its meetings after Iraq had signed the memorandum of understanding with the United Nations on "Oil for Food Program" in 1996. However, due to the sanctions, the trade between the two countries was one-way since Iraq was required by the Security Council's resolution on sanctions to limit its exports to oil only.
The article repeats the main features of the new agreement between the two countries which were listed above.
A Brief Assessment of the New Trade Agreement between Egypt and Iraq
As pointed out in the introduction, the newly signed trade and economic cooperation agreement between Egypt and Iraq is asymmetrical. It could bring genuine economic benefits to Egypt but very little to Iraq apart from the political manifestation of support. With hardly anything to export to Egypt, Iraq's main reward will be a statement of political support and brotherly fidelity from Egypt. It is significant that despite the presence of 5 or 6 Egyptian ministers in Iraq during the trade negotiations, Saddam Hussain could not spare time to meet with them [On January 2, the Iraqi newspaper Babil, owned by Saddam;s son Udai Saddam Hussain, published the Iraqi president's schedule of meetings for the entire 2001, which includes meetings with far less important dignitaries than those representing Egypt at the trade negotiations.] In the special circumstances of the Iraqi political reality Saddam's inability or lack of interest in conferring with the Egyptian delegation speaks loud.
It is also significant that the free-trade agreement between the two countries, negotiated almost two years ago and signed by the two countries at the latter part of 2001, is still languishing at the Egyptian parliament which has failed to ratify it. With its overwhelming majority in Parliament, the Egyptian Government’s failure to press for early ratification must have to do with its reluctance to annoy its biggest external donor. One suspects that the prominence given to the agreement in the Egyptian press has to do more with Egypt’s economic predicaments than with a realistic expectation of a quantum growth in exports of Egyptian goods to Iraq. One must also conclude, therefore, that the memorandum of understanding on trade and economic collaboration is first and foremost a political document serving the disparate political objective of the two countries. Its economic underpinnings are yet to be demonstrated.
Sources: Al-Jumhuriya (Baghdad), December 29, 2001; Al-Thawra (Baghdad), December 29, 2001; Al-Ahram, December 31, 2001; Al-Hayat, December 28, 2001; Al-Sharq Al-Awsat, December 31, 2001; Al-Ahram, January 2, 2002.
REGIONAL ECONOMIC NEWS
Recommendations to Arab Central Banks to Allocate Reserves in Euro
A report issued by the Arab Agency for Investment Guarantees, headquartered in Kuwait, called on Arab central banks to retain a portion of their foreign currency reserves in euro instead of the dollar and to establish foreign currency exchange regimes compatible with that of the European Union.
The report also called on Arab countries, with close relations with the EU, to intensify their social and economic structural reforms to make their countries more competitive with the EU, more attractive for European investments and more able to benefit from the Union in the advisory, technical and institutional fields.
The EU is considered the most important trade partners with countries situated on the southern banks of the Mediterranean but this partnership, the report said, is not balanced. For while the EU provides these Arab countries with more than half of their imports, their exports, in return, constitute less than 3% of the Union’s imports. Besides, most of the Arab exports are raw material, including oil and gas from Algeria and Libya.
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Finally, the report pointed out that while the technical and financial aid from the EU to some Arab counties is designed to encourage the exports of the EU to them, the financial aid is provided on loan terms which increases the indebtedness of these countries. At the same time, these countries are not receiving a commensurate compensation from the Union for the loss of revenues resulting from reduced tariffs as dictated by the various partnership agreements between the EU and individual Arab countries.
Source: Al-Sharq Al-Awsat, December 28, 2001.
Program to Finance Arab Trade –Unsuccessful
A regional Arab program designed to encourage Arab trade by providing letter of credit guarantees has not been successful, according to the program’s spokesman at Dubai. Throughout its existence, for more than a decade, the program provided letter of credit guarantees for a total of $3.2 billion, a small amount given the volume of the Arab annual external trade of more than $300 billion. The spokesman attributed the limited accomplishment of the program to various bureaucratic restrictions which make alternative programs in the market place more attractive to the merchants.
Source: Al-Sharq Al-Awsat, December 24, 2001.
OIL
AOPEC: Substantial Increase in Oil Revenues in 2000
The Secretary General of A[Arab] OPEC states that the exports of the 10 Arab members of OPEC (organized into a sub-group, known as AOPEC] have reached $167 billion in 2000, an increase of 53% over the previous year.
The production of AOPEC reached 19.5 million b/d of crude oil, or 29% of global production. The production of natural gas reached 352.5 billion cubic meters, or 12% of global production.
During 2000, Egypt made 24 new discoveries of crude oil, equal to 80% of all new discoveries by the Arab countries. Egypt’s natural gas discoveries for the same year amounted to 50% of the total Arab discoveries
Source: Al-Ahram, December 30, 2001.
OPEC Suspends Pricing Mechanism
In addition to its decision, reached in its Cairo meeting on December 29, to reduce production by 1.5 million b/d OPEC has also decided to suspend, at least temporarily, the pricing mechanism under which the production of oil was increased by 500,000 b/d when the oil price has reached the ceiling of $28 per barrel and decreased by a similar amount if the price of oil has declined below the floor of $22 per barrel. According to the Qatari minister of oil, the pricing mechanism is "on leave."
The stability of oil prices after the recent reduction depends largely on the willingness of both OPEC- and non-OPEC members [who have also agreed to reduce their production by about 500,000 b/d] to adhere to their quotas and avoid "cheating." [The decline of oil prices on the day OPEC announced the reduction in production may suggest that the market is not sanguine about OPEC’s ability to police its members on the quota issue.]
In a separate article titled "'OPEC Cairo'" and the Choices for Committing Suicide in the Spring" the same newspaper, quoted above, suggests that the agreement reached in Cairo between members and non-members of OPEC has only postponed the inevitable conflict between the two groups because the interests of Russia, the largest oil exporter outside OPEC and the regular members of OPEC are not compatible. The paper casts doubt on Russia’s commitment to reduce production beyond the winter season. OPEC’s concerns about Russia are heightened by the opening a new Russian port in the Gulf of Finland on December 26. The port will reduce Russia’s dependence on Baltic ports and will enable it to start immediately to export 240,000 b/d, scheduled to increase to 600,000 b/d in 2003.
Sources: Al-Sharq Al-Awsat, December 29, 2001; Al-Sharq Al-Awsat, December 29, 2001; Al-Sharq Al-Awsat, December 27, 2001
OPEC Excludes Iraq from Production Quotas
Iraq, one of the most militant members of OPEC, was not required to reduce its oil production under the agreement reached in Cairo on December 29 because of the ministers’ appreciation of the unique situation of Iraq which remains under U.N. sanctions.
When asked about the smuggling of Iraqi oil to Syria, Iraq’s Minister of Oil, ‘Amer Rashid, answered that Iraq seeks to strengthen its relations with all its neighbors and that the development of economic relations between Iraq and its neighbors is a right exercised by Iraq as an independent and sovereign country, "regardless of American hegemony." In short, the minister did not deny the smuggling. [The question is: Should Syria, as a member of the Security Council, benefit from a smuggling operation which is a clear infringement of a resolution taken by the Council in which Syria sits as a member?]
Iraq has also announced that effective January 7, Turkish tankers will be able to cross the Iraqi border again to carry Iraqi diesel to Turkey. The newspaper Babil, issued by Saddam Hussein's son Udai, commented, rather cynically, that "while the trade in diesel is a technical violation of the embargo imposed by the United Nations, the Western countries will turn a blind eye to this lucrative trade which is essential for Turkey whose economy is in a serious crisis."
Source: Al-Sharq Al-Awsat, December 29, 2001; Babil, January 5, 2002.
COUNTRY NEWS
Egypt: US Aid to Egypt
Responding to an urgent request from Egypt for aid, the U.S. has approved an extraordinary "economic and political assistance" amounting to $960 million that will be delivered to Egypt through March 2002 in support of its national currency which was devalued by more than 34% in 2001. The official Egyptian newspaper Al-Ahram reports that the value of the dollar in the black market has reached a new high and speculators expect further devaluation of the Egypt pound.
Sources: Al-Hayat, January 3, 2002; Al-Ahram, January 5, 2002.
Egypt: Restrictions on Purchase of Foreign Exchange
Faced with insatiable demand for dollars in the exchange market, the Central Bank of Egypt pumped another $250 million (in addition to the $500 million sold to the foreign currency traders in early December. At the same time, the central bank has restricted the sale of dollars to travelers with travel tickers, and the amount authorized for sale was reduced from $1000 to $500 per traveler. Shortly thereafter, the prime minister of Egypt decided to suspend the operations of 18 companies which deal with foreign exchange for violations of laws and regulations governing foreign currency transactions. The suspension will last between 2 weeks to 2 months.
Sooner or later Egypt may have to examine its commitment to the International Monetary Fund under which it has agreed to retain "a continuing exchange rate flexibility which would allow Egypt to ride out periods of market turbulence while avoiding further significant declines in official reserves…"
Sources: Al-Sharq Al-Awsat, December 28, 2001; Al-Ahram, January 2, 2001; International Monetary Fund, "IMF Concludes 2001 Article IV Consultation with the Arab Republic of Egypt," November 5, 2001.
Egyptian Economy Enters New Year Burdened with Problems
The Egyptian economy has entered the new year burdened by problems resulting from unexpected events as well the of failures of previous government. This the main thesis of an analysis of the Egyptian economy published by the Kuwaiti newspaper, Al-Qabas.
Besides the liquidity problem which has been highlighted in this Digest in recent weeks the government has to deal with a number of chronic problems. These include unemployment, which the paper characterizes as a time bomb, the population crisis (most recent population census stands at 67 million), vast and ineffective bureaucracy and the failure to create employment in the private sector. Observers were surprised, the paper says, at the government decision to create 500,000 job opportunities in the public sector that is already bloated with similar job opportunities created in the past.
Source: Al-Qabas, January 3, 2002.
Lebanon: Political Conflicts Drain Central Bank Reserves
The frequent political conflicts in Lebanon force the Central Bank of Lebanon to interfere in the foreign exchange market to protect the Lebanese lira from precipitance fall because of the natural inclination of investors to seek safety. In 2001, the central bank used $4 billion of its reserves to support the lira, which is twice the amount of support in 2000. Political conflicts also exacerbate the economic slowdown and forces more people out of work. In 2001, 14000 workers lost their jobs in the service sector alone.
Source: Al-Safir, December 28, 2001.
Algeria: After Disastrous Floods – Water Shortage
The Ministry of Water Resource is considering raising water prices to the consumers because of a sharp decline in water in the three dams which supply water to capital and to the eastern part of the country. Should there be no rainfalls this season the country will suffer from thirst. Stringent measures will have to be introduced to save water. The problem is that Algerian dams collect no more than 2-3% of rainwater, which is one reason why the country had suffered from severe floods a few weeks earlier, followed by severe shortages.
Iraq Accuses the UN of Garnishing the Largest Pat of Oil Revenues
Algeria: After Disastrous Floods – Water Shortage
Iraq’s Minister of Oil says that the UN has retained $18.5 billion of oil revenues while the Iraqi people received only $15 billion in the framework of “Oil for Food” introduce in 1996. Saddam Hussein accused the UN of stealing Iraqi money to make alleged compensations.
Source: Babil (Baghdad), January 2, 2001.
Iraq Arrests Camel Smugglers
Customs authorities have arrested a number of individuals accused of attempts to smuggle 135 camels. [It was not known whether the camels were being smuggled in or smuggled out.]
Source: Al-Iqtisadi (Baghdad), December 27, 2001.
Israel: Decline in Economic Growth
Israel's economy in 2001 contracted for the first time in 48 years, hurt by a global economic slowdown and more than one-year of the Palestinian Intifada.
The Gross Domestic Product (GDP) per capita fell 2.9 in 2001, with an overall fall of 0.5% in GDP, to approximately $17,000.By contrast, GDP in 2000 rose by 6.4%. These are the worst results for the Israeli economy since 1953 when Israel experienced a negative growth of 1.4%.
The sliding GDP reflects the general fall in output in most sectors during 2001. Technology (including start-ups) and the construction industry were hit hardest, while tourism industry declined by 47%. The year also concludes with the lowest exchange rate of the Israeli shekel vis-à-vis the US dollar, recording a rate of 4.47 shekel per one U.S. dollar, a decline of 9% in 2001.
In the meantime, the country enters 2002 without a state budget because of disagreements among the government's coalition partners regarding a proposed reduction of 6 billion shekel ($1.35 million.) in social services.
Sources: Ha'aretz, and Ma'ariv, December 31, 2001; Al-Sharq Al-Awsat, January 2, 2002.
Israel: Introduction of Euro will Help Exports
The Israeli Minister of Finance, Silvan Shalom, welcomed the introduction of the euro. He said the euro will help Israeli exporters by reducing the cost of transactions in multiple currencies.
In 2000, total Israeli exports to EU was $8.5 billion, while 22% of its foreign trade was denominated in euro.
Source: Al-Sharq Al-Awsat, December 31, 2001.
PA: Islamic Bank Expands Financing in PA Projects
The Islamic Bank for Development (headquartered in Jeddah) proposed the inclusion of government and international bodies in the execution of projects estimated to cost $200 million funded by the Al-Aqsa and the Intifada funds, an administered by the Islamic Bank. The implementation of these projects has been hampered by frequent closures of the area by the Israeli authorities. The Islamic Bank proposed that non-government organizations, the United Nations and the World Bank should also be involved in the implementation of these projects.
Among the projects to be financed by the Al-Aqsa Fund are the "rehabilitation and rebuilding of homes and real estate affected by the Israeli aggression" during the Intifada and refurbishing and re-supplying of hospitals and clinics to expand their capacity to provide medical care. Other projects include small-scale domestic industries and support to agriculture to ensure food security.
Source: Lailatalqadr.com, December 31, 2001.
World Bank: New Sources Needed to Finance PA
According to a report issued by the World Bank's office in Gaza, the PA budget has a monthly deficit of $68 million because of a decline of 80% in direct and indirect taxes collected by the Authority. The report says that the Authority will continue to suffer big deficits because Israel has suspended the reimbursement to the Palestinian Authority the latter's share in tariffs and taxes, including value added tax, collected by Israel on goods imported by, or sold to, the Palestinian Authority. The suspended payment was estimated by the World Bank at $178 million through June of last year. The budget deficit would have become even larger were it not for the monthly direct budgetary support of $48 million from the European Union and Arab countries.
The World Bank report stressed that the Palestinian Authority seek alternative sources of funding while simultaneously reducing its expenditures. These measures will reduce internal borrowing which is placing the Authority in a financial bind in terms of meeting its obligations toward suppliers of services in the health, education and sanitation areas.
In the meantime, the Labor Department in Gaza revealed that 78828 workers, including 1153 females, are registered for work. The situation was aggravated by Israeli policy of closures.
Source: Al-Sharq Al-Awsat, January 1, 2002.
PA Wants to Join Arab Free Trade Agreement
Iraqi Minister of Trade, Dr. Muhammad Mahdi Saleh, said that the Palestinian Authority has asked to join the free trade agreement between Iraq, Egypt, Syria, and Libya as the fifth member.
This agreement was due to be signed in December but the signing was postponed at Egypt's request pending a review of the Palestinian application for membership. As was pointed out earlier, Egypt seems reluctant to sign the free trade agreement with Iraq.
Source: Al-Sharq Al-Awsat, December 31, 2001.
*Dr. Nimrod Raphaeli is Senior Analyst of MEMRI's Middle East Economic Studies Program.
