UAE Economic Future Brightens

By John T. Haldane

The US Embassy in Abu Dhabi reports brightening economic prospects for the United Arab Emirates. The seven-emirate federation has weathered the relative recession of the mid-1980s, and the increase in oil prices in 1987 began a new phase of economic growth. The balance of payments remains positive and the overall balance of trade continues to be in the black.

The UAE government has been emphasizing its dual efforts to decrease dependence on petroleum and to increase the size and productivity of the private sector. In 1988, the contribution of the non-oil sector to the GDP rose 3.2 percent to a total of 66.6 percent, with the oil sector percentage falling to 33.4 percent.

The future commercial outlook for the UAE is encouraging for several reasons. The government philosophy toward business is one of a strong commitment to free enterprise. Also, the UAE is gaining recognition as a regional entrepot and center for Gulf trade promotion. The free-trade zone at Jebel Ali in Dubai continues to show large growth in the value and weight of the imports and exports it handles, chiefly because of the generous incentives it offers users.

UAE exporters enjoy a larger market than the small size of the federation would suggest. As a member of the Gulf Cooperation Council, the UAE is beginning to share markets in Bahrain, Kuwait, Oman, Qatar an Saudi Arabia (the other GCC member states). Also, markets in Iran, Iraq, Africa and the Indian subcontinent are becoming profitable for UAE businessmen.

Foreign businesses are showing renewed interest in Dubai, the second-largest member of the federation, as a foothold in the Gulf, in order to cash in on eventual reconstruction business in Iran and Iraq and increased postwar investment in other Gulf countries. More than a dozen Japanese, European and US multinationals set up regional headquarters there in 1989.

Algeria Pushing Economic Reforms

Algeria's new prime minister, Mouloud Hamrouche, has announced sweeping measures to liberalize the economy and attract foreign investment. The reform program covers practically all areas of economic activity. Banks are being granted autonomy in project financing in both the public and private sectors; regulations granting state enterprises monopoly over trade and production are being abolished in most industries; foreign firms now may set up local offices; tourism has been opened to fully private sector joint ventures; consumer subsidies have been reduced; and the dinar is being allowed to devalue slightly against major foreign currencies. In addition, private firms now will receive a portion of the government-controlled import budget, to be disbursed by the National Chamber of Commerce.

The government also intends to reduce Algeria's financial dependence on hydrocarbons (98 percent of foreign exchange income) through economic diversification, with the private sector encouraged to play a more active role in the domestic economy.

Algeria's recent poor economic performance can be directly attributed to the collapse of its long-term economic development planning when oil revenues fell drastically in 1986. Foreign income was halved in two years, creating both a balance of payments crisis and a budget deficit. At the same time, Algeria has been facing a population explosion, with an annual growth of 3.3 percent, one of the world's highest. This has led, along with the economic crisis, to unemployment levels of at least 20 percent, with about half of the unemployed being under 25.

The international banking community appears to have faith in Algiers' economic reform efforts. The government has successfully negotiated good-sized loans with the International Monetary Fund and the World Bank. The latter is making available more than $400 million to enable Algiers to liberalize the economy, modernize ports and improve irrigation systems. At the same time, the IMF is lending Algeria an initial $200 million and a follow-up of $400 million. In addition, the nation's leading creditors—France, Italy, Japan and Spain by extending new lines of credit have effectively refinanced its $21 billion in debts.

The steady world price of oil also suggests that the country's oil and gas monopoly, Sonatrach, may be able to improve its foreign currency income to almost $9 billion, up at least $1 billion from last year.

Kuwait To Expand Tanker Fleet

Chairman Abdul Fattah al-Badr has announced that the Kuwait Oil Tanker Company (KOTC) will purchase 11 new oil tankers worth $500 million. In an interview with the Kuwait daily Al-Qabas, al-Badr said that the cost of transporting petrochemicals is expected to increase significantly over the next few years. KOTC, which presently operates 20 vessels, transports about 60 percent of Kuwait's petroleum product exports and approximately 30 percent of its crude oil exports.

The first purchases will be four large liquefied petroleum gas (LPG) carriers, followed by super-size crude carriers and large product carriers.

Last June, al-Badr predicted that "the world will face a tanker shortage within the next two years similar to the one that occurred in the 1970s, " followed by a four-fold increase in freight rates.

Egypt-IMF Talks Stalled

Talks between Egyptian and International Monetary Fund (IMF) officials in Washington recently still have not resulted in any progress toward a final agreement on a standby credit. This is particularly bad news for Cairo, since the planned meeting with the Club of Paris to discuss the rescheduling of approximately $10 billion of debt repayments falling due July 1988-December 1990 must now be delayed.

The IMF insists that new economic measures be adopted by Cairo before a standby credit is considered. While commending Egyptian steps taken to reduce the budget deficit for fiscal 1989-90, the IMF is pressing Cairo to raise real interest rates to encourage Egyptian pound savings and to rationalize exchange rates.

The delay in reaching an agreement is jeopardizing Egyptian relations with the World Bank, which in September had expressed a willingness to consider a round of fresh lending to support the government's economic reform program.

Adding to the pressures on the Egyptian government to reach an IMF agreement is the need to make payments on its $5.5 billion military debt to the United States. Nations who have incurred debts under the foreign military sales program have almost all US aid cut off if they fall more than 12 months behind in payments.

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