December 1989, Page 46

Trade and Finance

By John T. Haldane

US-Mideast Trade Increasing

Department of Commerce trade statistics for the first seven months of 1989 indicate that US trade with the Near East and North African Arab countries continues to rise. US exports totalled almost $7 billion, compared to $6.4 billion for January through July 1988. US imports were valued at $7.9 billion, compared to $6.2 billion at the same time last year.

Primary American export markets for the seven-month period were: Saudi Arabia ($2.1 billion); Egypt ($1.5 billion); Iraq ($730 million); and the United Arab Emirates ($547 million). US imports, mainly oil, came from Saudi Arabia ($4.1 billion); Iraq ($1.4 billion); Algeria ($1.1 billion); and Kuwait ($432 million).

Kuwaiti Economy Recovering

Kuwait now is in its third year of renewed expansion. Its economy grew an estimated 5 percent last year, with increased output in both the oil and non-oil sectors. Expansionary monetary and fiscal policies are stimulating growth, although recent fluctuations in oil prices have caused some uncertainty about the contribution of the oil sector to future economic expansion.

The Kuwaiti government budget has remained stable at an expenditure level of about $10.5 billion for the past several years, despite the economic retrenchment of the mid-1980s. The government's program of financing the budget deficit through the sale of bonds has continued to be successful. Monetary policy has tightened, after the previous policy of encouraging low interest rates led to a drain on foreign currency holdings of the Central Bank.

Government spending remains the major engine of domestic business activity. 1989-90 budget figures indicate that development spending will continue at current levels and focus on social welfare projects, targeting essential services in the areas of housing, road construction, public utilities, education, telecommunications and medical care.

Iraq Expanding Oil Facilities

Iraqi Minister of Oil Issam al-Chalabi states that his country's oil export capacity will reach an estimated 6 million barrels per day (b/d) by the end of 1990, when the Gulf ports of Umm Qasrm Khor al-Zubair and Fao and the offshore terminals of Mina al-Bakr and Khor al-Amaya have been rebuilt.

Significant progress has been made over the last few years in pushing the development of new oil fields, constructing oil pipelines across Saudi Arabia and, since the Iran-Iraq war cease-fire, in rebuilding Gulf ports and offshore terminals damaged during the conflict. For example, a second pipeline across Saudi Arabia, the Iraq Pipeline Trans Saudi Arabia (IPSA-2) will begin operation soon. The 56-inch, 600-mile pipeline will raise Iraq's crude oil capacity through Saudi Red Sea ports to 1.65 million b/d, a significant increase over the present 500,000 b/d flow.

The minister said Iraq has a current production capacity of 4.5 million b/d but will keep its exports in line with its new OPEC quota of 2.78 million b/d.

Saudis Propose Leasing Oil to US

American and Saudi Arabian officials are discussing a Saudi proposal to lease crude oil to the United States. These talks are a follow-up to Saudi Minister of Oil Hisham Nazer's meeting with Secretary of Energy James D. Watkins. The leasing idea is of interest to the Energy Department, which is under orders from Congress to develop alternative ways of financing the acquisition of oil for the Strategic Defense Reserve (SDR).

The SDR, created in response to the Arab oil embargo of 1973, contains approximately 575 million barrels of crude oil stored in salt caverns in Louisiana and Texas, an amount equal to about 80 days' imports at current import rates. It is targeted to grow to 759 million barrels, but Congress is considering an increase to 1 billion barrels.

The leasing concept would involve Washington paying an annual fee lower than production costs and holding the crude in its reserves. The oil would be under US control but owned by the producer, who would be paid if it is later sold.

GCC Calls for Free Trade with EC

Bahraini Minister of Development and Industry, Yousef Ahmad al-Shirawi, recently issued a new call for the European Community (EC) to negotiate a free trade agreement with the Gulf Cooperation Council (GCC). In a Reuter's interview he said "We want the EC to. . . allow our products to enter without customs duties and we want to embark on joint ventures with them so we can manufacture new products which can freely enter Western Europe."

The EC's Executive Commission adopted a mandate to begin talks concerning a free trade agreement on September 20, but no action can be taken until the EC foreign ministers make a decision to adopt the mandate. The draft mandate does not provide for completely open trade, since it calls for protections of the EC's petrochemical industry and of infant GCC industries.

Iran Pushing New Five-Year Plan

Newly elected President Ali Akbar Hashemi Rafsanjani has ordered an urgent review of Iran's new five-year plan since the 1979 revolution. An earlier one, prepared in 1983 during the Iran-Iraq war, was never really viable, both because of the hostilities with Iraq and its assumption that oil prices would remain at about $32 a barrel.

The new plan, according to Morteza Al-viri, the parliamentary planning and budget committee chairman, will concentrate foreign exchange spending on oil and gas, agriculture, water and mining projects. The Rafsanjani regime hopes to generate $90 billion in foreign currency by the end of the plan, including $2 billion from gas exports, and $12 billion from non-oil exports, with the balance to come from oil exports.

While parts of the new plan, such as the non-oil export figure, seem overly optimistic, the Iranian government now appears to appreciate the seriousness of Iran's financial difficulties and is moving to revitalize the stagnant economy. Some members of the new regime in Tehran acknowledge that not all national goals can be met at the same time, given present foreign currency shortages. Emphasis is being given to rehabilitation of the oil sector, which normally produces more than 90 percent of the country's foreign exchange revenue, but which operates at less than 40 percent capacity.

OPEC Production To Jump

At a speech to the Oxford Energy Seminar in September, the OPEC Secretary General, Dr. Subroto of Indonesia, stated, "Our projections show that if the world economic growth rate maintains its 1980's average of just over 2.5 percent, then the global energy market will expand steadily up to the end of the century by an annual average of 1.7 percent. Oil demand will rise by about 7 million b/d to around 57 million b/d in the year 2000. And OPEC's share of the international oil market is expected to rise from the present 43 percent to 54 percent, so that, by the end of the century, our organization will be producing more than 30 million b/d."

Meanwhile according to a new Conoco Inc. energy supply/demand forecast to the year 2000, US oil production will fall more than 2 million b/d, while imports will increase to about 11 million b/d in 2000, from only 6 million b/d in 1987.

John T. Haldane is a Middle East specialist who has served as a foreign service officer in Baghdad, Cairo and Beirut, and is an international economist in the departments of Commerce and Treasury.