September 1989, Page 19

Trade and Finance

By John T. Haldane

Arab Development Aid Drops

The Organization for Economic Cooperation and Development reports that development assistance aid from Arab countries dropped by 29 percent last year. Total Arab aid reached $2.3 billion in 1988, compared to $4.5 billion the previous year. Saudi Arabia continued to account for the largest part of Arab aid, providing almost $2.1 billion to developing countries in 1988. Kuwait, which used to be a major donor, ranked second with $108 million. In real terms, bilateral and multilateral Arab aid has declined for the eighth straight year. In 1988, aid was the lowest since 1971.

Mideast Military Offset Agreements

The US Office of Management and Budget's report entitled Offsets in Military Exports provides information on a number of offset arrangements with Middle East nations. Offsets are described as a range of industrial and commercial compensation practices required as a condition for the purchase of military exports. The various types of offsets are defined as coproduction, licensed production, subcontractor production, overseas investment, technology transfer and countertrade.

Egypt, Israel and Turkey received commitments from US weapons suppliers to provide benefits equal to approximately 35 percent of the value of their weapons contracts during the period 1980-87. General Dynamics Corp., for example, agreed to make $480 million worth of offset investment in Turkey as part of a $4.2 billion project to build 160 of its F-16 fighter aircraft in that nation.

In the seven-year period covered by the OMB report, Turkey's offsets represented 58.6 percent recovery of the $2.7 billion value of its purchases of US military exports. Egypt's offsets were worth 22.9 percent, while Israel had the lowest percentage of offsets, 22.8 percent.

In the area of subcontractor production (overseas production of a part or component of a US origin defense article), the most business went to Israel, worth $89 million, followed by Turkey with $16.3 million, Egypt with $1.2 million and Saudi Arabia with $300,000.

Saudi Arabia will become more deeply involved in offset investment as the Peace Shield program-a $5 billion agreement to create a sophisticated ground-based command, control and communications system for the country's air force-proceeds. Boeing won the contract to build the system and in return has agreed to invest a large part of its program revenues in joint ventures. Currently about $3.4 billion are tied to offsets.

Iraq-Lebanon Trade Agreement

Brigadier Issam Abou-Jamra, the minister of economy and commerce in General Michel Aoun's Lebanese Christian transition government, confirmed recently that a $100 million trade agreement had been signed with Baghdad. The understanding involves 35 categories of agricultural and industrial products, but no military equipment. Each party is to export $50 million worth of goods, with Iraq's largest category to be $10 million worth of veterinary medicine and $5 million of rice. Lebanese exports will include $10 million of construction materials, $4 million of electrical supplies and $4 million worth of shoes and handbags. The trade pact offers Iraqi importers an 18-month delay in payment, and in return, reduces Iraqi import duties on Lebanese products.

Until the Gulf War, Iraq was the second largest importer of Lebanese goods, after Saudi Arabia; Lebanese industrialists are eager to reenter the Iraqi market.

Suez Canal To Be Widened

Suez Canal Authority (SCA) Chairman Ezzat Adel announced that a number of international consultants have submitted bids to conduct new studies on widening and deepening the Suez Canal. Costs of these studies will be covered by a $2 million grant from the Kuwait-based Arab Fund for Economic and Social Development.

The proposed expansion of the waterway will involve deepening the north-bound channel to accept ships with a draft of up to 68 feet, as compared to the present 53 feet. Adel stated that when the work is finished, fully laden oil tankers of 370,000 deadweight could be handled.

Tolls from the canal amounted to more than $1.3 billion in 1988. The waterway ranks as the country's third most lucrative foreign exchange earner after tourism and the remittances of Egyptian workers abroad.

IMF Predicts Rising Demand for OPEC Oil

The International Monetary Fund's annual World Economic Outlook states that oil consumption in the industrialized countries is expected to continue to rise in 1989 and 1990, although at a slower pace than in 1988. The supply of oil from OPEC members is expected to increase slightly in 1989 before rising again by about 4 percent in 1990.

Since OPEC crude oil production in 1988 was higher than the combined crude oil production ceiling of 18.5 million barrels per day in effect for the first half of 1989, the report concludes that "these estimates imply that there would be some room for an increase in production quotas in the second half of the year or in 1990."

Non-OPEC production is expected to show a slightly larger increase in 1989 than in 1988, with a considerable part of the increase to be accounted for by Norway. However, the rise in non-OPEC supplies is expected to slow during the course of 1989 and in 1990, with a continuing decline in output of the United States and only limited prospects for further sizeable production increases in other countries.

Israel Devalues Shekel Again

Tel Aviv devalued the shekel for the second time in six months in late June in an effort to breathe new life into a stagnant economy suffering from the adverse financial effects of the Palestinian uprising. The last devaluation was a 13 percent drop made late last year, following a two-year exchange rate freeze. Since that devaluation did not have the desired effect of boosting exports, the government came under mounting pressure from industry to act again.

Minister of Finance Shimon Peres stated that the new devaluation should stimulate export-led growth without spurring inflation. He admitted to the cabinet that the intifada in the West Bank and Gaza strip had caused a greater economic slowdown than previously forecast.

Qatar Initiates Huge Gas Project

The Qatar General Petroleum Corporation has begun offshore installation work on the development of the giant North field, which will make the area the largest gas project in the Middle East. The North field is the biggest offshore gas deposit in the world and should provide Qatar with revenues into the 21st century. Production well drilling began last summer and the rest of the offshore production complex will be installed toward the end of 1990 or early 1991.

This first phase will cost $1.3 billion and produce 800 million cubic feet per day of gas available for the domestic market. An additional 40,000-50,000 barrels per day of LPG and condensates will be produced for export. The overall project, worth an estimated $7.8 billion, will include civil, mechanical and electrical construction and installation at the Fahaheel gas plant.

The most promising export market for Qatari gas at present is Dubai, which has established itself as an attractive site for light industrial development in the Gulf area. Japan also is seen as a likely long-term buyer.

John T. Haldane is a Middle East specialist who has served in the foreign service and in the departments of commerce and treasury.