The Arab World in 2002

FES-Analyse

Riad al Khouri, BLitt (Oxon)

January 2002

n The most important new event with a major impact on the Arab World in 2001 was the attack on the United States on 11 September. With the exception of Afghanistan and the US, the impact of the consequences of the 11 September attack was and remains greater on the Arab World than on any other part of the globe.

n The main short term influence on the Arab World in 2001 continued to be the Aqsa Intifada, which began in September 2000, and the consequent implications of the conflict with Israel; this was especially the case in the Fertile Crescent, and to some extent in the Nile Valley and the Arabian Peninsula, but less so in the Maghreb and the Indian Ocean States.

n Major medium-term trends with an impact on the Arab World as a whole that continued in 2001 included the relatively firm price of oil and the relative weakness of the EU vis-à-vis the US, both of which factors had become more important since March 1999.

n Longer term trends that continued to have an impact on the Arab World in 2001 included globalization, in its economic and social aspects, and its antitheses, including fundamentalism (and to a lesser extent autarky) both of which have become increasingly important since the early to mid-1990s.

n The interaction of all of the above has resulted in a situation that may quickly lead to greater change in the region as a whole than at any other time since 1991 in the aftermath of the second Gulf war. However, outward change in 2001 has not been great or dramatic, whether before or after 11 Sep- tember, and the general situation throughout the region apparently resembles what it was before that date.

Herausgeber und Redaktion: Albrecht Koschützke, Stabsabteilung der Friedrich-Ebert-Stiftung 53170 Bonn, Tel.: 0228-883376, Fax: 883432, eMail: [email protected] 2 FES-Analyse: The Arab World in 2002

This paper describes the main trends in and in- Sudan; the Arabian Peninsula, including the six fluences on the Arab World (defined to include Gulf Co-operation Council member states, plus all countries that are members of the Arab League) Yemen; the Fertile Crescent, including Pales- in 2001. Beginning with an Overview of the whole tine, Lebanon, Syria, Jordan, and Iraq; and the Arab World during the year 2001, proceeds to a Indian Ocean Arab States (IOAS), including Political and Economic Analysis by Subregion. Djibouti, the Comoro Islands, and Somalia. As For the purposes of the paper, the Arab coun- developments in the latter remained relatively tries are divided into five subregions: the unimportant during the past year, both in them- Maghreb, including Libya and all Arab states to selves as well as in the larger Arab context, they the west; the Nile Valley, comprising Egypt and will only be dealt with briefly in the Overview.

Overview

Before 11 September, the Arab World was recorded in 2000. Despite the drop in oil prices enjoying moderate political and social sta- and lower export revenues. The kingdom is still bility in 2001 – despite pockets of more or less expecting a balanced budget in 2001 despite significant unrest, which however had mostly the declining oil price, as well as a surplus in been of the level of previous years or lower. At the balance of payments this year. the same time, a modest economic expansion The UAE economy is still riding high on the and socio-economic development was taking back of the high oil prices of the last 18 months, place across the region. Globalization was and is expected to grow at around 4% in 2001. making inroads in most countries, and struc- The economies of Kuwait and Qatar should tural adjustment including trade liberaliza- grow more modestly this year, but they are sup- tion and privatization, was having a more ported by sustainable policies based on pru- important impact across the Arab World. dently low oil prices that can absorb a signifi- The most important single influence on the cant decline from current levels and still be economies of the Arab countries as a whole broadly balanced. In addition, government re- remained the hydrocarbon sector, in particu- serves are abundant, which results in negligible lar the export of crude oil. The engine of growth domestic or external borrowing needs. Con- of the Arab World, except for the Maghreb, versely, if the price of oil increases, these two remained the four GCC states that are mem- economies stand to make large budget and ex- bers of the Organization of Petroleum Ex- ternal current account surpluses that would porting Countries, especially Saudi Arabia, boost their reserves. still the largest Arab economy, with Kuwait and In the Maghreb, the relationship with the the United Arab Emirates in a secondary role, European Union was still the single most followed in importance by Qatar. important influence on individual countries, Saudi Arabia’s GDP is expected to grow in though with stronger competition from the US. 2001, though at a level lower than the 4.5% Until 11 September, the continuing relative FES -Analyse: The Arab World in 2002 3 weakness of the EU vis-à-vis the US was ap- the region could become more significant in parent in the Maghreb’s improving relations the next few months. The events of 11 Sep- with American firms and contacts with US or- tember are a short-term setback for Arab ganizations. On the whole, however, the Maghreb globalization efforts. Cross-border flows of states remained strongly tied to the EU. This people, goods, ideas and capital into and out of was especially the case of Morocco and Tunisia, the Arab World have been hampered by the so far the only Maghreb countries that have consequences of the 11 September events; at signed Euro-Med Association Agreements. While the same time, there has also been an impact on growth in several EU economies was not as intra-regional activity. On the other hand, the strong as in 2000, the impact of this slowdown successful convening of the World Trade Or- on the Maghreb was not severe, and modest ganization ministerial meeting in Doha provided progress was registered by most economies some high-profile reassurance of the region’s in the subregion until the later part of 2001. stability. In this context of relative stability, always ex- The crisis has increased the risk profile of cepting outbreaks of violence in Algeria, illegal several key Arab countries. As a result, the emigration from various Maghreb countries Arab World is likely to receive less capital flows into EU states remained an issue, but did not in the wake of 11 September attacks. Foreign flare up. direct investment into the Arab World, which rose to $ 4.6 billion in 2000, may drop to $ 3.5 The situation in the three IOAS remained billion this year and go even lower in 2002 if much as it was in 2000, with the continued present rends continue. influence of France in Djibouti and the Comoros underpinning stability amidst slow growth, while Another impact of the 11 September attacks has gradual state-building took place in Somalia as been a surge of anti-Arab sentiment abroad, a prelude to addressing poverty and other ma- which prompted investors from the region jor socio-economic problems. However, even in to consider trimming their sizeable financial this distant backwater of the Arab region, the ties to the US, as some Arab investors are events of 11 September caused many changes worried that their US assets may be frozen in and set the stage for possibly even more im- the global crusade against terrorism. As much portant developments. (A small example of as two-thirds of the estimated $ 1,000 billion this was even evident in the Horn of Africa, with that Arabs hold abroad is thought to be invested the disruption of normal money transfer mecha- in the US or deposited in American banks. Up nisms from the GCC countries as an indirect till now, there has been no dramatic shift to part of the US campaign against terrorism cau- move out of the American market or US sing disruption in the lives of thousands of poor banks. However, things could take a sharp Somalis who rely on remittances from abroad.) turn for the worse if the US decides to strike The economic impact on the Arab countries against one or more Arab countries or to of the attacks on the US has so far been freeze assets and accounts of alleged terrorist modest, but the adverse consequences for organizations. 4 FES-Analyse: The Arab World in 2002

The region’s bourses were also affected by the that some of the resonance of Osama bin events of 11 September. Following the attacks, Laden’s appeal to the Arab masses lies in all Arab stock markets moved significantly their having had little alternative means of lower and some lost most of the gains re- political expression. Before 11 September, corded since the beginning of the year. some political and cultural openness had begun to penetrate conservative or other au- Local interest rates in the various Arab coun- thoritarian Arab systems, but the situation tries have been moving down in line with after the attacks on the US became less clear. US rates; and the trend is likely to continue, On the one hand, a continued relaxation in the bringing lower borrowing cost to businesses in political atmosphere would help to ease tensions the months ahead. Markets are now discounting arising in various Arab countries as a result of weaker demand for oil associated with a much rapid change in the context of globalization; at slower global economy. the same time, fear of anti-Western activities and The energy markets were hit by post-11 Sep- a desire by the US to clamp down on what it tember turmoil, even though underlying trends perceives a extremist tendencies would cause a in oil production throughout 2001 meant that move towards less openness. Arab oil output had already fallen. Saudi Ara- The consequences of the 11 September at- bia’s daily production was cut from more than tacks have complicated the stance of various 8.3 million barrels at the beginning of 2001 to forces in the Arab World’s vis-à-vis Israel. less than 7.5 million barrels from September, Though the attacks on the US mean that there but after the attacks on the US in particular, is a chance for American policy to evolve in a attempts to raise the oil price became more direction more favorable towards the Palestini- difficult, with the West seeing a lower fuel im- ans, Israel in the short-run emerges as an even port bill as helpful in pulling Western econo- more valuable ally of the West in the region. mies out of recession. Although the attacks on American attitudes towards the Palestinian issue the US did prompt a rise to around $ 30/b, this seemed to have shifted slightly after Secretary quickly subsided to $ 20, below the OPEC-set of State Colin Powell’s speech in November on minimum target of $ 22. However, with the taking steps to resolve the Israeli-Palestinian world sinking into recession and civilian conflict, but other events have since complicated aviation brought to its knees, there is little matters and resulted in a more dangerous situa- chance of demand improving. A further chal- tion in Palestine. lenge for Arab oil producers is that, as more However, on the whole across the region, with Russian, Central Asian, and West African oil the exception of Palestine, outward change comes on stream, the world will become less in 2001 has so far not been great or drama- dependent on Arab supplies in the short run. tic, whether before or after 11 September; and The political and cultural impact of the con- the general situation throughout the Arab World sequences of the 11 September attack was apparently resembles what it was before that and remains great. Throughout most of the date. Nevertheless, this by no means implies Arab World, tension between Islam and mod- that no change is in the offing, and the present ernity remains. Since 11 September it is clear relative calm – outside of Palestine – is partly FES -Analyse: The Arab World in 2002 5 the result of a wait-and-see attitude by regimes cupancy of 30-70%. International tourists arri- and businesses alike, whether Arab or foreign. vals in the Arab world were in excess of 30 million in 2000, with their spending estimated at Exceptions to this on a practical level and in around $ 21 billion. However, their numbers the short-term are the airline and tourism dropped drastically in the period following 11 sectors. Air travel to and from the region has September and they are not expected to recover dropped by around 35% since 11 September. soon. Barring catastrophic upheaval, whether Many of the major local and international carri- the rest of the Arab economy also suffers or ers have cancelled certain destinations and re- recovers in 2002 depends for most of the re- duced the number of flights operated. Hotels in gion on oil and the GCC economies, with EU Egypt, Jordan, Lebanon and the UAE among relations as an added important factor in other parts of the region reported drops in oc- the Maghreb.

The Arabian Peninsula

The past year has seen the Arabian Peninsula religious laws, including barring banks from states continuing to cope with Islamist move- charging interest. ments, often through liberalization. Qatar has promised to establish an elected par- Bahrain has made a strategic shift to open- liament within two years; Saudi Arabia, a firm ness, welcoming back thousands, including opponent of elections, has expanded the au- some former Marxists, from exile in an an- thority of an advisory council to the king; and nouncement in February that grants them am- Oman and the UAE have also indicated that nesty. The year has also seen freedom for po- they would be working to make their systems litical prisoners, a scrapping of emergency laws, more consultative and broad-based. and a promise to revive elections open to all Whether these liberal trends will continue re- Bahrainis, men and women alike, with munici- mains to be seen. In Yemen however, the reac- pal polls set for next year and parliamentary tion to the events of 11 September has been for elections in 2003. the state to tighten its security grip in an at- Kuwait is further along in legislative life, but tempt to appease the West. US officials and the democracy has brought Islamists into the Yemeni authorities have begun to work more Parliament, which legislates against public closely. Yemeni security police have begun to freedom. The Kuwaiti Parliament and cabinet pick up suspects for interrogation. The Yemeni are embroiled in a dispute over whether to government adopted strict new visa require- adopt Shari’a as the legal system. The governments. It will no longer be possible to get a visa ment has blocked the change, but Kuwaiti at the airport or border. At the same time, the Islamists are continuing to press for adjustment Yemenis have been providing the US with phone of existing codes to make them consistent with records and dossiers on suspects. 6 FES-Analyse: The Arab World in 2002

US-Yemeni relations have been rocky since the Economically, the GCC has this year pushed Gulf war, when Yemen did not support the anti- forward several important topics aimed at boost- Iraq coalition, but now the Yemeni government ing regional co-operation. Foremost among these appears to be moving closer to the West. US are measures to implement unifying customs economic aid was terminated after the 1991 tariffs (in 2003) and a monetary union (by 2010), Gulf war, except for recent food aid. Whether while talks between the EU and the GCC re- more Western help will be forthcoming to help garding a possible free trade agreement resumed. Yemen out of its economic mess in return for GCC countries have also said they will join serious security co-operation remains to be seen. forces with the others to cut oil production in January to stem the falling price of crude. The Security co-operation continues to be strong Dolphin scheme, which plans to supply Qatari within the subregion, and the GCC joint air de- gas to the UAE and possibly further to Oman fense system, which was officially launched in and Pakistan, is the first such international pro- February, has successfully started operations. ject in the region, including a 24.5% French In other moves to tighten security control, the stake in the operating firm. UAE has come under pressure to introduce However, the general trend in the subregion stricter regulations to control funds deposited after 11 September has been of caution and in banks and financial transfers. The UAE has contraction. Stock markets in most of the responded to the challenge, stating in early No- GCC states were negatively impacted by the vember that it is prepared to play its part in the recent attacks on the US, though the value of international effort to protect the world econ- shares on the UAE bourses in Abu Dhabi and omy from money laundering, and announcing Dubai rose after the attacks. The rise was major changes to its financial system. These in- spurred by initial expectations that Gulf inves- clude new anti-money laundering legislation due tors in the US would repatriate much of their to be introduced soon. There will also be a ceil- money. Such an injection of funds would have ing on the amount of money that can be brought helped the Dubai Financial Market and the Abu into the country undeclared, although that limit Dhabi Stock Market continue their moderate has yet to be announced. Having gained a repu- gains of 2001. This, however, did not take place tation for financial laxity the UAE is keen to re- and shares fell again. Unlike the pattern in the dress the balance. In the meantime its officials UAE, the larger Gulf markets did drop imme- have been working closely with US officials to diately after the attack. Saudi Arabia’s bourse, target suspect organizations. the largest in the Arab world, fell after the attack as did that of Kuwait (the second However, it should be remembered that this largest). These and other GCC bourses re- process began before 11 September. In an ear- main in the doldrums, and the short-term lier indication of moves by the UAE to conform outlook is still bleak. to Western standards, the chairman of the Cen- tral Bank said on 8 September that the govern- In a long-term approach to ensure sustainability, ment would soon issue legislation penalizing GCC economies have attempted diversification money laundering. and globalization. Bahrain is an old hand at this FES -Analyse: The Arab World in 2002 7 strategy, Saudi Arabia and Kuwait have under- expand into wider markets. It has already has taken more non-oil based manufacturing in 2001, signed service provider agreements with 45 and Qatar and Oman have been involved in me- countries and aims to cover 100 countries by dia activity and transport projects respectively. the end of the year. Thuraya has major foreign shareholders, largely telecommunications com- However, in 2001 the UAE has taken the panies. lead among the GCC economies in innova- tive cross-border business. Dubai in particular Like their counterparts regionally and world- has looked more and more towards foreign in- wide, GCC airlines have suffered. On Septem- volvement in its economy, and the emirate is ber 24, Dubai-owned Emirates airlines, one of increasingly turning to tourism, which now ac- the world’s fastest growing carriers, announced count for 20% of GDP. After 11 September that it would cancel 26 of its flights per week however, this major source of income will un- to 11 destinations in Europe, the Gulf and the doubtedly decline. Less than two weeks after Indian subcontinent. In addition to a drop in the attack, luxury hotels in Dubai had already bookings, Emirates airlines has suffered losses reported a 30% fall in bookings and tourists may on another front. It owns 42.6% of Sri Lankan well take their time before returning. Visitors Airlines, a carrier only recently itself struck by from neighboring Saudi Arabia are still coming terrorism. On 24 July, Tamil Tiger rebels at- to Dubai, but speculators have oversupplied the tacked Colombo airport and destroyed one third emirate with luxury hotels, and European and of the airline’s fleet. US travel agents have long been offering rooms at prices substantially below the rack rates. Gulf Air, jointly owned the governments of Abu Dhabi, Bahrain, Oman and Qatar, announced, A more successful recent example of diversifi- on September 26, that it would cut back opera- cation is the establishment of the Dubai Internet tions by 15% in order to reduce costs. It is also City and the adjacent Media City. Microsoft urging employees to take up its offer of early and Cisco Systems are prominent players in the retirement. former, which seeks to bring information and communication technology companies together The 11 September effect seems to have been be- in one location, and the recent relocation of hind the announcement by Sharjah that it would Middle East Broadcasting Corporation, with its be postponing the launch of its own interna- vast pan-Arab coverage, from London to Me- tional airline, Sharjah Airlines, until next year. dia City was a major victory for the emirate. Sharjah claimed is in talks with another emirate to finance expansion once the airline is launched Also moving to globalize, some UAE compa- and it has already leased three aircraft from nies have made efforts to expand into the inter- three foreign firms. national arena. The real estate company Emaar has set its sights on India, where it is to build a Despite the gloom, Emirates airlines stated that group of luxury villas, complete with golf course it would still take delivery of 11 new, wide-- and all amenities. Emaar is 20% owned by for- bodied aircraft by September 2002. Emirates eigners. The Abu Dhabi-based telecommunica- airlines was the first airline to commit to the tions company Thuraya is similarly trying to planned Superjumbo A380 earlier this year. The 8 FES-Analyse: The Arab World in 2002 company made profits for the six months to the statements the company also announced that end of September of $ 46 m a 2.4% rise over from next year it would add five new routes to the same period last year. Although the effects its network while continuing to operate all cur- of 11 September have yet to appear in profit rent services.

The Fertile Crescent

The co-incidence of the events of 11 Sep- Other infrastructure sectors have not progressed tember with the continuation of the Aqsa as far as mobile telecommunications or the postal Intifada, the blockade of Iraq, and the pres- service. The projected sales of the electricity and sures of globalization meant that the Fertile water companies have not moved significantly and Crescent area had a problematic year. With so they continue to face a general lack of funds in growth economic rates in all five countries a country saddled with huge debt. There has been of the subregion low, poverty expanded and no progress on the management of Beirut port living standards fell as governments restruc- either since Dubai Ports Authority announced tured economies. In Palestine and Iraq, that it would withdraw from that contract. emergency conditions deteriorated, while in Lebanon needs to integrate into the international Syria and Lebanon, deterioration was mixed community in order to economically survive. with some positive change. Confidence was not helped by the impact of the The Lebanese economy has come under in- 11 September attacks, although it did tempo- creasing pressure in the last year. rarily relieve pressure on the Lebanese pound. On a more positive note, for the first time, the The Lebanese government has taken some sig- Lebanese cabinet passed a lower draft budget nificant steps to reorganize the country’s ailing than the previous year, a positive response to infrastructure, most notably in the telecommu- market pressures. nications sector and the postal service. Both of As the country’s debt rises, foreign exchange these have seen their foreign elements removed reserves fallen. Foreign currency reserves are in recent months, as the Lebanese government down over $ 1.5 billion from $ 5.9 bn at the unilaterally cancelled the two existing mobile start of the year. Much of the foreign exchange telephone contracts with LibanCell and Cellis, has been spent shoring up the Lebanese pound, and SNC-Lavalin from Canada pulled out of the which had come under increasing pressure as postal service. The two current operating com- worries grow about financing the debt and po- panies have not ruled out bidding for the li- litical instability followed the arrest of dissidents censes, but they will face tough competition in August who are opposed to Syria’s presence from Gulf telecommunications companies such in Lebanon. as Q-Tel of Qatar and Etisalat of the UAE. Clearly the global downturn, especially in the Lebanon and the US have entered a tense stand- telecommunications sector, will not help. off following disagreement as to whether the FES -Analyse: The Arab World in 2002 9

Lebanese based Hizbullah, was a terrorist or- state. Lebanon already has to import power from ganization. Lebanese Prime Minister Hariri re- Syria to meet its current demands. jected the claim, the first time in the current anti- Attempts at a fiscal correction could be ham- terror campaign that any country has directly pered by the repercussions of the attacks in the defied US demands. The US formally asked US. Moreover, the uncertain geopolitical envi- Lebanon to freeze Hizbullah assets, accusing ronment now jeopardizes privatization and eco- Lebanon of neutrality, which was not an ac- nomic growth, both of which are key to stabi- ceptable position and implied double standards. lizing the debt burden. Lebanon remains very Lebanon is saddled with debt and can ill afford vulnerable to regional developments, which to become a pariah state. However, the US has could rupture the fragile domestic consensus repeatedly said that it will take action against and compromise the government’s reform countries that do not freeze the assets of terror program and consequently, postpone any fis- organizations, by blocking those country’s as- cal correction. sets held in US banks. If such threats become reality, Lebanon could find itself in serious trou- Like Lebanon, Syria continues to implement ble. One third of Lebanon’s $ 2.7 bn in gold re- economic reform. Prominent has been a draft serves is housed in the US. However, Lebanon banking law, which allows private banks to has complied with other US requests. The Leba- establish offices in Syria, with Lebanese banks nese central bank had worked hard to check the likely to be the first to move in. Despite the records of Lebanese commercial banks to see if legislative activity, more legal changes will be they had any links with previously published required in order to overhaul the state banking terrorist organizations. New anti-money-laun- system before foreign banks are permitted to dering laws passed last April bring the country enter. Syria has stuck to its policy of autarky into line with international standards. and has not yet approached any foreign institutions for help to establish a banking control Privatization of loss-making state companies is commission, but without such a body no for- also an important priority, but inevitably the eign banks would trust the system enough to political fallout inherent in the process is causing invest in Syria. Banks and financial institutions problems. The government faced strikes and are themselves seen as vital to Syria’s rap- protests when it imposed staff cuts of almost a prochement with the outside world, as they are quarter on the over-staffed, losing national car- essential for credit and financial transactions, rier, Middle East Airlines with the intention of which would help rebuild the Syrian economy. readying it for privatization. However, there are no potential buyers for the airline on the hori- A positive step was the announcement on 15 Sep- zon, given the meltdown in the global aviation tember by the state Commercial Bank of Syria sector post-11 September. Despite this lack of that it had joined the Visa International network success, the government seems intent on push- and would issue credit cards. Earlier this year ing ahead with similar restructuring of the elec- the government altered the official exchange rate tricity and water utilities, as neither of them is to match the market rate, a step that was vital expected to appeal to investors in their current to the establishment of a credit card system. 10 FES-Analyse: The Arab World in 2002

Syria also has entered a rapprochement with for the US. The Austrian president, also came subregional neighbors. The free trade agreement in October, as well as a series of ministers from with Jordan in October will take into account Arab countries and UK Prime Minister Blair. changes in Jordanian trade laws following the Absent thus far has been Palestinian President kingdom’s joining the World Trade Organiza- Yasser Arafat, who was to arrive on a state visit tion. Syrian-Iraqi trade has grown. The visit by to Damascus on 25 September. That was called Syrian Prime Minister Miro to Baghdad in Au- off at the last minute, with the Palestinians and gust resulted in a number of contracts for joint the Syrians exchanging blame for the cancella- companies and Iraqi imports from Syria are ex- tion. It was expected to have been a watershed pected to reach $ 1.5 bn by the end of this year, event that would have signaled the end of an all within UN trade limits. Both countries have eight-year freeze in Syrian-Palestinian relations also said that they are close to naming the con- following Arafat’s conclusion of an interim tractor for a new oil pipeline that will transport peace accord with Israel. Palestinian President Iraqi oil to the Syrian Mediterranean coast. This Yasser Arafat had originally been scheduled to is especially beneficial to the Iraqis in the current visit Damascus on 12 September, but that was situation, which has deteriorated since last year. postponed after the attacks on the US the day before. The Palestinian National Authority and Te course of events since September 11th has Syria have seen a warming of relations under not helped boost Syria’s economy. Losses for Bashar al-Assad. The Syrian president has sup- Syrian Arab Airlines have mounted. The com- ported the principle of exchanging land for peace pany had been growing by 15% per year before in Arafat’s stalled negotiations with Israel. The the attacks and would now only grow by 5%. collapse of peace talks since the Palestinian re- Syrians traveling had fallen by 11% since Sep- volt against Israeli occupation erupted has made tember and the number of visitors to Syria had it easier for Arafat to smooth his relations with fallen by 12%, harming the country’s fledgling Damascus. President al-Assad met Arafat on the tourism industry. sidelines of an Arab summit held in Amman in However, after the 11 September attacks on the March. Syria has made several goodwill ges- US, Damascus has found itself increasingly a tures towards the Palestinian Authority, includ- center of international attention. While Syria ing recognizing its passports, allowing Palestin- is still on Washington’s list of states that spon- ian students to study at Syrian universities and sor terrorism, Syria was elected in Novem- allowing Israeli Arabs to visit Syria. Syrian ber 2001 to the UN Security Council with- Prime Minister Miro held talks in August with out objection from Washington. As Syria Palestinian Finance Minister Nashashibi and In- prepares to take its seat now in January dustry Minister Krunz on ways of promoting bi- 2002, Syrian President Bashar al-Assad con- lateral economic cooperation. This is especially tinues his attempts to liberalize Syrian poli- beneficial to the Palestinians in the current situa- tical and economic life. tion on the West Bank and Gaza.

No less than five foreign ministers from EU At the start of the year 2001, the Syrian govern- countries have trooped to Damascus since mid- ment quietly announced a Damascus Spring as September to discuss Arab opinion and support part of President Bashar al-Assad’s promises FES -Analyse: The Arab World in 2002 11 for economic and political reform. Following a imports will come down almost immediately, crackdown in February, opposition leaders have while Jordanian tariffs will be eliminated over again been arrested or re-imprisoned. The dis- ten years. The US-Jordan FTA, signed into law sidents – who include journalists, academics, on 28 September is an expression of America’s intellectuals and some parliamentarians – claim commitment to Jordan. QIZ will continue to that they are fighting against the rise of corrup- exist under the FTA. Though the new pact will tion and the need for more freedom and the eventually make QIZ irrelevant over the long existence of a peaceful public opposition. The term, there will still be room for the latter for authorities see these figures as overstepping the some time. This is because the FTA calls for mark by trying to portray Syria’s past in a bad the imposition of a relatively high 35% minimum light. Furthermore, the country sees itself as on the Jordanian content of value-added in order one of the last defenders against an expan- for a product to enter the US duty-free. QIZ sionist Israel. This was the reasoning behind mitigates this by allowing Israeli and Palestinian keeping such tight state control on the econ- inputs to contribute cumulatively to the required omy and political processes, and continues to Jordanian value added. Insofar as a 35% level be of concern, especially as regional tension will not be easy to achieve, the easier terms of has increased. However, times are changing QIZ will prove more advantageous for Jordani- rapidly in the subregion, and it is clear that ans wishing to sell their products in the US. al-Assad’s reforms will ultimately have to be Many potential investors are attracted by implemented. Syria also took a significant step the privileges of investing in QIZ Jordan when it attended the 27-state EU and Mediter- but are reluctant to invest due to the politi- ranean conference in Brussels in November. cal unrest across the border. The increase in Talks between Syria and the EU for an as- the number of QIZ companies will be a func- sociation agreement – much like that already tion of the political stability in the region as signed with Jordan – have progressed. many potential investors are deterred by the Through the EU-Jordan Association Agree- instability In the West Bank and Gaza. In- ment, which may enter into force early this vestors seeking to tap Jordan’s QIZs have sett- year, the kingdom sought to deregulate its led into await-and-see approach against a back- trade with the EU countries, amounting to drop of spiraling violence in the region. But al- some $ 1.3 billion a year. By joining the WTO ready established QIZs have been under fire from early last year, Jordan reached another im- an Anti-Normalization Committee and investors portant milestone in its efforts to boost trade were blacklisted as „normalizers: with the Je- and free its economy. The situation regarding wish state. Jordan’s Qualifying Industrial Zones (QIZs) is Jordan became the only Arab country to encouraging. QIZ projects have been multiply- have a free trade agreement with the US and ing in Jordan. At the heart of QIZ lies a US the fourth country worldwide after Canada, attempt to bring Israel closer to her neighbors, Mexico and Israel. The US-Jordan FTA is ex- including Jordan. Under the Jordan-US Free pected to boost Jordanian exports to the US and Trade Agreement (FTA) US tariffs on Jordanian to attract foreign direct investments to Jordan. 12 FES-Analyse: The Arab World in 2002

Jordanian exports to US markets are showing King Abdullah officially launched the ASEZ, great potential. From $ 64 million in 2000, they which is expected to attract substantial and quali- are expected to reach $ 212 million by the end tative investments in light industry among other of this year. sectors.

Jordan is vulnerable to geopolitical developments Jordanian GDP in 2001 will rise by about 4%, because of its reliance on international grants a performance better than any of its subregional and subsidized petroleum. However, Jordan has neighbors, but nevertheless one that is buoyed left no doubt that it is supporting the interna- by massive foreign aid. While trade liberaliza- tional coalition against terrorism. Therefore, it tion measures such as Jordan’s accession to the is likely to continue to receive substantial sup- WTO, the initiation of QIZs, and the Jordan- port. US FTA are valuable, other critical variables Implementation of the FTA is expected to facili- also have a substantial impact on the timing and tate a substantial expansion of Jordanian exports magnitude of Jordan’s stability. A sudden or un- to the US, which have historically been mea- expected change in these factors can disrupt the ger. However, Jordan’s exports to the US are momentum. By the same token, improvement stronger due in part to the growth of QIZs. in these areas (such as resolution of the Israeli- Coupled with job-creation in the Aqaba Special Palestinian dispute or the lifting of the trade em- Economic Zone (ASEZ), the dent made in un- bargo on Iraq) could further enhance the over- employment could be considerable. In May, all economic situation of Jordan.

The Maghreb

In 2001, the relationship with the EU remained On the whole, however, the Maghreb states re- the single most important influence on individ- mained strongly tied to the EU, which had a ual Maghreb countries, though with stronger mixed economic performance for the first eight competition from the US. Until 11 September, months of the last year and poorer prospects the continuing relative weakness of the EU vis- after that. The Maghreb states are net food im- à-vis the US was apparent in the Maghreb’s importers, mainly of cereals but also meat, while proving relations with American firms and con- the EU in many agricultural market segments tacts with US organizations, but after that the produces more than it needs, exporting some situation has become less clear. The Maghreb of these surpluses to the Maghreb. The latter in states are net food importers, mainly of cereals turn exports extensively to the EU, especially but also meat, while the EU in many agricul- the Tunisians, with three-quarters of their trade tural market segments produces more than it being with the EU countries. At the same time, needs. The prosperity gap between the Maghreb the prosperity gap between the Maghreb and and the EU, its closest non-Arab neighbor and the EU, its closest non-Arab neighbor and larg- largest trade partner, has widened rather than est trade partner, has widened rather than di- diminished. minished, despite very close links. FES -Analyse: The Arab World in 2002 13

While growth in several EU economies was not solved Western Sahara issue remained at as strong as in 2000, the impact of this slow- the heart of the Algeria-Morocco dispute. In down on the Maghreb was not severe, and mo- June, the humanitarian aspects of the issue re- dest progress was registered by most economies emerged, as it was reported that Sahrawi refu- in the subregion until the last part of 2001. gee camps in the Algerian Sahara desert faced a food crisis. Stop Hunger Now, an international The subregion enjoyed relative stability in hunger relief organization based in the US, took 2001, except for some outbreaks of violence the lead in mobilizing an international response in Algeria. During the second half of the year, to an impending hunger crisis in the Western the Algerian internal situation heated up some- Sahara desert; while United Nations agencies what. The government reinforced warnings con- called for an emergency assistance to the Sahrawi cerning the illegality of demonstrations, while in populations sequestered in southwestern Algeria. July US President George W Bush urged Alge- ria’s president to pursue economic and political By contrast, in Morocco and Tunisia, domes- reforms, as protesters deplored repression of tic stability was maintained. Against a back- youth and ethnic protests. Meanwhile, efforts drop of lower EU growth, Moroccan and Tuni- to restructure the Algerian economy continued, sian export growth has slowed. Combined with with the World Bank in the same month ap- the probable negative shock to their respective proving a $ 16.5 million loan to fund a project tourism industries by the 11 September events, to modernize Algeria’s financial system infra- this will lead to lower growth. structure. The EU is discussing a Euro-Med As- Tunisia benefited from improved competitive- sociation agreement with Algeria, but the Euro- ness of its industries and the prudent macro- peans are calling for more meaningful economic economic policies of the government, although and political reforms. the fiscal deficit is still high. These strengths Illegal emigration from various Maghreb coun- should allow Tunisia’s attraction to foreign in- tries into EU states remained an issue, but did vestors to remain unscathed. However, on the not flare up alarmingly. The most serious inci- political and cultural levels, Tunisia has been dent of the year took place in late June when progressively turned into a sort of police Spanish police captured more than 200 North state; basic human rights (free speech, pri- Africans trying to enter Spain illegally by cross- vacy of homes, assembly) are not respected; ing the Strait of Gibraltar from Morocco. Other- people live in fear of repression; the courts wise, before 11 September, the prospects of a have lost their independence; and democ- falling population in Europe began to impinge racy has been replaced by a one-party re- on the immigration issue and soften the attitude gime controlled by a president whose family of some EU countries. After the attacks in the exploits presidential privileges in order to US, things changed but the picture remains un- enrich itself. clear. By contrast, Morocco witnessed improve- In 2001, the confrontation between Algeria ment in the political outlook with an in- and Morocco did not escalate, and bilateral creasingly problematic economy. The govern- relations remained stable. However, the un- ment is dependent on privatization revenues to 14 FES-Analyse: The Arab World in 2002 finance part of the higher fiscal deficits, and re- Mauritania remained out of the news for ceipts from these sales may be delayed or lower most of the year, maintaining its tradition- than planned. Morocco’s total public debt ally strong ties with the EU. This was con- reached $ 29 billion in 2001, which represents firmed in August with the renewal of the Mau- 81% of GDP, and is expected to increase in ritania-EU Fishing Protocol providing increased 2002 to finance the budget deficit. External debt fishing opportunities for EU vessels and more amounted to $ 15 billion while domestic debt money for Mauritania. increased to $ 14 billion. The 2002 budget has In conditions that still prevail in the Maghreb, allocated $ 4.2 billion to service the debt of which economic benefits – e.g. of increased intra- $ 2.8 billion is to cover domestic debt payments regional trade – remain secondary to con- and $ 1.4 billion external debt. Morocco’s ex- siderations of national security, the regional ternal debt has been declining in the past year power balance, and the patterns of political mainly through transforming part of the debt to alliances. The political and structural fea- investments in the country. External debt drop- tures of the region are the major determi- ped from $ 16 billion in 2000. Domestic debt, nant of economic policymaking rather than on the other hand, has been increasing and it vice versa. The crucial issue of regional power approached, for the first time, external debt balancing is reflected by the predominant bilat- levels. The rise in domestic debt is exhausting eral pattern of trade and other forms of eco- an increasing segment of domestic liquidity nomic co-operation that are used in order to needed for private sector’s investments. The exploit or change regional alliances. In this Moroccan government has resorted to the do- context, attempts by the Arab Maghreb Union mestic financial market and to privatization pro- (AMU) countries to develop multilateral co- ceeds to cover its budget deficit. Morocco has operation among them continued to progress not fully allocated privatization proceeds to in- slowly. The 4th session of the consultative coun- vestments; it has rather used partly them to cil of the AMU was held in Morocco in the first financing the budget deficit. The 2002 budget week of September with the participation of the plans to use revenues from privatization to re- five Maghreb states and in presence of the Mo- duce its projected deficit from 5.9% to 3%. roccan Prime Minister, Abderrahman Youssoufi. Libya moved closer to the rest of the Maghreb, The infrastructure commission of the AMU as well as to the West in the wake of the end consultative council was also active during the of the Lockerbie trial in the winter of 2001. year in discussions of major projects. The 8th Libya and Algeria signed a series of co-opera- meeting of the ministerial sector-based council tion agreements after the Algerian-Libyan joint for training, employment and social affairs of commission held two days of meetings in Sirte the AMU recommended in July the creation of in August. The accords covered investment, a Maghreb database network on employment economy, trade, finance, education and security. and professional training, while Morocco called Libya has benefited from these links, as well as on Maghreb countries to adopt a joint strategy from the better oil prices that had prevailed to take up the challenge of new information earlier in the year. technologies. FES -Analyse: The Arab World in 2002 15

Though there was no substantial increase in the Euro-Med agreements impose complicated trade or other forms of interaction among the rules of origin on imports from third countries, Maghreb countries themselves in 2001. How- the harmonization of legislation is still needed ever, the prospects for stronger inter- and in- among Arab states. This will put Arab countries traregional economic integration among the in a better position to benefit under their agree- Arab states as a whole and the EU, as well as ment. The harmonization of rules of origin among with the Maghreb countries seem to have im- the Arab partners would be a first step towards proved slightly. Arab member states party to the achieving the trade area. (While Morocco’s and Euro-Mediterranean Association Agreements are Tunisia’s trade agreements with the EU have set to establish a Mediterranean Arab Free Trade already entered into force, Jordan and Egypt are Area (MAFTA) according to a declaration by signatories to the agreements and their trade Morocco and Tunisia, in partnership with Egypt pacts are waiting for all EU Parliaments to en- and Jordan, in June 2001. The initiative is pro- dorse them.) The initiative was proposed in the posed in the belief that such an alliance would belief that such an alliance would bolster each bolster each country’s economic position and country’s economic position and increase in- increase investments between them as well as vestments between them as well as strengthen strengthen their ties with the EU. While noting their ties with the EU.

The Nile Valley

Politically, Egypt in 2001 was little changed on currency, such as the 6% devaluation in Au- the previous year, with the exception of the gust. emergence of Amr Mousa as a potential suc- cessor to President Hosni Mubarak. Mousa’s However, as recently as November, the dollar move to the head of the Arab League in Cairo continued to record strength against the Egyp- from his previous post as foreign minister of tian pound reflecting Egypt’s difficult econo- Egypt has given him a springboard to the coun- mic conditions. After the 11 September attacks try’s highest office. In this way, a potentially on the US, Egypt’s tourism industry, the coun- destabilizing factor on the Egyptian scene has try’s largest source of foreign currency revenue, diminished, to the longer-term benefit of the has been hit hard. The tourism sector is under- country. going a major decline while transport revenues, including those from the Suez Canal, are pro- However, while political and social stability jected to fall by $ 433 million. were maintained in Egypt in 2001, the performance of the Egyptian economy in 2001 Along with Suez Canal earnings, remittances up till September was mixed. The Egyptian by Egyptian expatriates and petroleum exports, pound came under pressure from regional ten- tourism is one of Egypt’s largest foreign-reve- sion, and the Central Bank took steps in recent nue earners. Fear of flying, a global recession, months to release the pressure on the national and caution about holidaying in the Middle East 16 FES-Analyse: The Arab World in 2002 at such a politically turbulent period have quickly increase in entrance fees to archaeological sites left their mark on Egypt’s prospective earnings until November 2002. Egyptians, who pay sub- from tourism. This fall comes at a time when the stantially less than foreigners, had their domes- Egyptian tourist industry was expanding rap- tic airfares fares cut by 15%. These measures idly, especially along the Red Sea coast and the were boosted by a further statement from the Sinai Peninsula, in spite of the tension in the government on 1 November in which it said that West Bank and Gaza. Now, hotels that were to state banks would provide interest-free loans open in the autumn have postponed their for five months to tourist facilities. In Novem- launches, awaiting reassurance that tourists will ber the Egyptian government also approved a $ return to the region. 30 m fund that would provide incentives for to international charter companies to continue fly- The vast majority of tourists to Egypt come not ing to Egypt. The government will cover the from the US, but from Europe and Arab coun- costs of empty seats up to a maximum of 30% tries, and the drop in hotel occupancy tends to of all international flights arriving at Egyptian suggest that the latter groups are just as nervous airports other than Cairo and Alexandria. as the Americans are about traveling to Egypt. While a total of 5.5 m people came to visit The tourist drop will also harm the national Egypt in the year to October 2001, only 2.75 m flag carrier, EgyptAir, as well as smaller airlines. – 3.85 m are expected in the following twelve EgyptAir announced in September that it would months. The government estimated that tourism indefinitely suspend all flights to Pakistan and receipts could drop by 30-50% in the year fol- Yemen, cut global operations by 15%, and not lowing 11 September, and would total only go ahead with the planned purchase of two $ 3.2 bn for the calendar year 2001. Boeing 777s, which had been scheduled for delivery in September. However, it is expected The year 2001 was already a tough one for that Egyptian carriers will be able to pick up Egyptian tourism, with numbers for each of the additional passengers from those airlines that first nine months of the year falling on the pre- have cancelled flights to the Middle East. (Sin- vious year. This problem is largely explained by gapore Airlines and Delta are among the com- anxiety over the violence in Israel and Palestine panies that have stopped flying to Cairo since and the devaluation of the Turkish lira in Feb- the attacks.) Furthermore, Egyptian airline op- ruary 2001, which made Turkish tourist desti- erating costs are lower since staff salaries are nations more competitive. Although no official more modest, and the country’s carriers also figures are available for the number of tourists enjoy full government support. This close rela- that have come to Egypt since 11 September – tionship has been shown in recent weeks, as or those that have cancelled their trips – esti- Egypt’s airlines were offered $ 5 bn in insurance mates are that arrivals had fallen by 40-45% in guarantees. EgyptAir, whose assets are esti- October and were likely to fall further. mated to be around $ 13 bn, received liability To counter these trends, Egypt has been taking guarantees of $ 1.2 bn; the other Egyptian reg- steps to encourage visitors. As of November it istered airlines shared the remainder of the made a 40% cut on tourist fares on EgyptAir guarantee. Despite setbacks, development of domestic flights for six months and delayed the Egypt’s transport infrastructure has continued: FES -Analyse: The Arab World in 2002 17 in November, Egypt’s first Build-Operate-Trans- Dutch/Shell targeted. The Spanish firm has con- fer airport was inaugurated with the arrival of tracted to buy 4 bn cu. m of gas per year from German tourists. The Kuwaiti Kharafi Group the Egyptian General Petroleum Corporation, built the airport, near the Red Sea. and its envisaged plant would have two trains handling 4 bn cu. m per year each. Egypt is Nor was the news from other sectors better, in- planning to cooperate with Syria and Cyprus to cluding hydrocarbons, a mainstay of the econ- develop oil and gas reserves in the eastern Medi- omy. Egyptian oil production continued its slide terranean. Before exploration can begin, how- in October to 633,000 barrels per day (bpd), ever, the continental shelf and the exclusive down from September. Natural gas production economic zones of Cyprus and Egypt must be and sales remained flat, but petroleum revenues agreed, in an area where Israel and Lebanon – although unpublished – would have been hit would also have an interest. (Egypt is also in- by the 25% drop in oil prices since shortly after volved in a gas pipeline to supply Jordan, Leba- 11 September. Along with tourism and revenues non and Syria from Sinai.) from the Suez Canal, oil exports are one of the most important sources of Egyptian hard cur- In addition to developing its reserves of hydro- rency revenues. However, the sector has been carbons, Egypt is trying to exploit other natural given small boosts. The US firm Ocean said in resources. Tantalum, a rare metal, has been dis- October that production had begun on its newly- covered in industrial quantities in the eastern discovered offshore wells, while France and desert. In a $ 40 m deal with the Egyptian gov- Egypt signed a gas production and transport ernment, Gippsland, an Australian firm, has se- agreement on 12 November. Gaz de France and cured 50% ownership of the 48m-ton deposit state-owned Egyptian General Petroleum Cor- and it will be responsible for development of poration, and the Egyptian Natural Gas Hold- the find. Another Australian firm, Centamin, is ing Company have agreed on joint development optimistic about being able to extract large quan- of gas reserves for export to France and other tities of gold from a site in the eastern desert. destinations in Europe. Development of facili- The firm believes that there are sufficient quan- ties for exporting Egypt’s gas also continues. tities of gold that can be extracted relatively The US firm Bechtel announced that it had won easily and cheaply to make it one of the more a contract for engineering and design of a liq- important mines in the world. This would rank uefied natural gas (LNG) terminal in the West Egypt as the world’s fourth largest gold pro- Delta Deep Marine area, a large gas field off- ducer, but the firm is having trouble raising the shore from Alexandria. The facility, 50 km east capital needed to bring the project to fruition. of Alexandria, will include a marine terminal, storage facilities, and a liquefaction plant. British However, it will take some time for output from Petroleum (BP) is planning to build an LNG these and other projects to make a difference in plant at Damietta, in the Nile Delta, and Royal Egypt’s foreign sector; meanwhile, the coun- Dutch/Shell is said to be looking to build an- try’s trade deficit for the first half of 2001 rose other. Union Fenosa, Spain’s third largest power by about 7% as traditional exports suffered. Al- utility, has been seeking partners to participate though Egypt has long been an exporter of raw in its LNG terminal project, with BP and Royal materials, especially cotton, its exports in that 18 FES-Analyse: The Arab World in 2002 category are declining. While total exports for able sectors of tourism and airlines play such the first half of 2001 have risen, cotton and raw a small role in Sudan. However, even before material exports were down about 10% over 11 September, expectations in Sudan were so the same period last year. much lower than Egypt: Sudan did not offer any short-term prospects for rapid growth or Although cotton has traditionally been a major development. On the other hand, the coun- source of foreign revenue, exports and produc- try enjoyed an increasing measure of stabil- tion have been dwindling. Since early October, ity during the year, offering the possibility cotton shippers have indicated that war premi- that it would strengthen its position in the ums on shipments from the Middle East would global community and mend toes with the rise- due to fear that further conflict due to the West. By end-summer, the US government had events of 11 September may have repercussions appointed John Danforth as a special envoy to in the region. Egypt is to be hit for premiums Khartoum, with the task of helping to reconcile as high as $ 800 per 40 ft box, potentially harm- the country’s belligerent factions. Prior to that, ing the cotton export industry further. Libyan leader Mu’ammar Qaddafi had arrived Egypt’s trade deficit is exacerbated by large im- in Khartoum in July for talks with Sudan’s ports of wheat. According to figures released president Omar Hassan al-Bashir in connection in November, Egypt imported 2.9 m tons of with peace proposals for the country, sponsored wheat from the start of the fiscal year on July jointly by Libya and Egypt. The Sudanese gov- 1. Although the majority came from US suppli- ernment then announced in August that an Afro- ers, French imports have been making steady Arab peace summit would be held in an attempt gains in recent months. to end the country’s 18-year civil war. Previ- ously, it was announced in late June that the Under these circumstances, it is not surprising ten African countries that use the waters of the that share values in the country have fallen. The Nile River, most of which passes through Su- Cairo stock exchange fell in the wake of the 11 dan, have agreed to cooperate to optimize the September attacks on the US. It recovered a river’s resources and combat environmental certain amount since then, but closed on No- degradation. vember 21 at a seven-year low. Several Egyptian companies have published disappointing news: These and other moves gave greater promise for example, Egypt’s dominant beverages pro- that Sudan’s endemic civil war and development ducer, Al Ahram Beverages, said that it ex- dilemmas would be ameliorated. However, the pected its sales to be hit by the fall in tourists 11 September attacks once again served to visiting Egypt. The company estimates that 19% confuse the issue. Washington sources includ- of beer and 85% of wine is sold to tourists, and ing the State Department repeated their asser- expects that sales will drop by 9% and 50% re- tion that in recent times Sudan was linked to spectively. terrorism, sometimes providing safe haven and even a place of recruitment for Islamic mili- The Sudanese economy has not been as bad- tants. So far, Sudan has not suffered directly ly hit as its northern neighbor by the 11 Sep- from these assertions in the wake of the 11 tember events, particularly since the vulner- September attacks, but a source of anxiety has FES -Analyse: The Arab World in 2002 19 been re-introduced into the Sudanese development process, which may retard it once again.

Riad al Khouri BLitt (Oxon), Director, Middle East Business Associates (MEBA) wll [email protected]