January 1991, Page 66

Trade and Finance

OPEC Production Back to Pre-Crisis Levels

By John T. Haldane

The International Energy Agency (IEA), the Paris-based group which acts as watchdog for 21 major oil-consuming nations, reports that the loss of 4.3 million barrels per day (b/d) of oil from the market resulting from the UN embargo of Iraq and Kuwait has been made up. Sharp production rises by Saudi Arabia, Nigeria, the United Arab Emirates and Venezuela mean that world output now has reached the 23 million b/d produced just prior to the Kuwaiti crisis.

Some oil experts now are concerned that once the Gulf crisis is over the world will find itself flooded with oil, as OPEC nations argue over how much each should pump. Those states that have stepped up production to offset the loss of Iraqi and Kuwaiti crude oil will be caught in a dilemma if prices crash as the previously boycotted oil pushes back into the market. The producers will have a difficult time trying to agree on who should cut back and by how much, analysts say. Saudi Arabia, the world's largest exporter, already has said that it plans to keep pumping more oil far into the future.

Meanwhile, the Middle East crisis doesn't appear to be cutting the volume of US oil imports. The American Petroleum Institute says the embargo on Kuwaiti and Iraqi oil exports has had little effect on US oil imports since the August invasion. For example, US imports in September averaged almost 08 billion b/d, up 0.2 percent from a year ago.

Military Debt Cancellation a Boon to Egypt

Egypt's fragile economy, badly shaken by the Gulf crisis, received a welcome shot in the arm when Congress agreed to an administration-backed plan to forgive Egypt's $6.7 billion military debt. President Bush had pressed for debt forgiveness to reward Cairo for its crucial role in support of the American-led effort to counter Iraq's invasion of Kuwait. As one congressman put it: "Egypt is the glue that holds the Arabs together in Operation Desert Shield. "

In addition to the debt relief, Egypt will remain the second largest US aid recipient, with $2.1 billion scheduled for next year.

According to World Bank estimates, the Gulf crisis will result in a gross loss of about $3.6 billion in Egyptian annual foreign exchange earnings. The bank estimates for the losses included: remittances down by $2.4 billion; tourism down by $500 million; Suez Canal fees down by $200 million; and exports of goods and services to Iraq and Kuwait down $500 million.

Egypt would have been required to make $100 million in overdue payments on its military debt to the United States in September 1990, as well as additional substantial payments for the remainder of the year. US law would have forced Washington to cut off annual aid allowances to Egypt if the military debt payments had not been made.

According to international financial experts, Egypt had been facing a budget deficit of approximately $4.5 billion for the fiscal year which began July 1, 1990. But it had hoped to eliminate about $3.5 billion of that total by rescheduling payments on its $50 billion foreign debt, leaving a shortage of about $1 billion. Unfortunately, the Kuwait crisis dashed all hopes for any amelioration of Egypt's financial problems.

The heavy losses in foreign exchange earnings follow a year in which total current account receipts reached a record high of $15.8 billion, according to International Monetary Fund (IMF) figures. This was 30 percent higher than in 1988, and well ahead of the previous record of just over $13 billion in 1984.

The 1990/91 budget had been seen as one of the most realistic published by Cairo in recent years, and was clearly designed to appeal to the IMF, with which the Mubarak regime has been negotiating a standby credit agreement for more than two years. The Egyptian government has made clear to the IMF its commitment to continue its economic reform program, despite the problems caused by the Gulf crisis. A senior official in Egypt's Ministry of Economy and Foreign Trade states that a key element in the program, the unification of the central bank and commercial bank exchange rates, will be carried out in the near future.

New Soviet-Saudi Ties to Boost Trade

The announcement in Moscow recently that full diplomatic relations will be reestablished between Saudi Arabia and the Soviet Union should lead to a sharp rise in trade between the two nations. Soviet Foreign Trade Relations Minister Konstantin Katushev told Saudi Chamber of Commerce officials in Jeddah in October that petroleum related industries are the most promising areas of cooperation. The minister mentioned that Soviet importers would be interested in petroleum and petrochemical-related goods. Saudi Aramco is said to already have held talks on a possible agreement to export oil technology to the Soviet Union.

Riyadh's agreement to resume diplomatic ties comes after a gradual improvement in relations in recent years and undoubtedly was accelerated by Moscow's withdrawal from Afghanistan and its anti-Iraq position in the Kuwait crisis.

World Bank to Assist Victims of Gulf Crisis

World Bank President Barber Conable says his institution is reviewing its lending programs to determine which nations might need more funds to cope with the economic fallout from Iraq's invasion of Kuwait.

Conable said that the economic sanctions against Iraq would hit other nations, such as Egypt and Jordan, which have lost remittances from workers in Iraq and Kuwait, as well as Turkey, which is suffering from cutting off the pipeline for Iraqi oil running through that country.

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