Arab Domestic Investment

By Joseph C. Story

New figures have been published showing just how sharply Arab oil producers cut back last year on spending for domestic economic development.

The figures, contained in the 1983 annual report by the secretary general of OAPEC—Organization of Arab Petroleum Exporting Countries—reveal that the total amount spent by the 11 member nations on economic development projects declined from $45 billion in 1982, to $29.3 billion in 1983—a drop of 34.9 percent. The 1983 figure is even more significant when compared to the 1981 spending total of $65 billion.

Of the OAPEC member states, seven reduced public development spending by 30 percent or more, with smaller reductions recorded by Bahrain, Egypt and Kuwait. The only country bucking this trend was Libya, which actually increased spending by a whopping 411 percent—the result of heavy spending on a single water project.

A breakdown of spending by sector shows that the largest dip, in dollar terms, occurred in the housing and construction field, which still attracts the largest share of spending by the combined OAPEC countries. Total expenditures in that sector dropped from $12.7 billion in 1982 to $6.5 billion in 1983. This 49 percent decline was accelerated by the sharp cuts made last year by Saudi Arabia, where project spending fell from $8 billion in 1982 to $2.4 billion in 1983. The Saudis accomplished this impressive cutback mainly by stretching out existing major projects and delaying the start of new ones. Iraqi commitments in this category dropped from $108 million two years ago to $5 million in 1983. The only significant increases in newly contracted housing and construction projects in 1983 were logged by Kuwait ($861 million) and Libya (1 billion).

On a percentage basis, the most pronounced drop in new project spending occurred in the oil sector, with total expenditures of $2.5 billion, compared to $7.1 billion in 1982. Again, Saudi Arabia accounted for the largest cuts, going from $2.5 billion in 1982 to $316 million last year. This dramatic slowdown in oil sector spending by the Saudis conceivably could lower the Kingdom's maximum oil production capacity sometime in the future.

New projects in the transportation and communications sector held up relatively well in 1983, declining by only $200 million from total spending of $6.6 billion one year earlier. An increase in spending of 1.1 billion by Saudi Arabia was offset by decreases by Bahrain, Egypt, Iraq, Qatar, Syria, Tunisia, and the U.A.E.

Other economic sectors which experienced spending reductions by OAPEC in 1983 were water and electricity (down 51.1 percent), health, education, and social services (down 34.5 percent), and the non-oil industrial sector (down 36.3 percent).

The only sector to show a spending increase was in agriculture and irrigation, which rose from $1.8 billion in 1982 to $4.2 billion in 1983. This gain was accounted for entirely by Libyan contract commitments of $3.3 billion for the water project mentioned above.

For 1984, spending on domestic development projects in the Arab world has increased slightly, but remains quite low by recent standards. However, as OAPEC oil production continues to rise from the 1983 low, and new industrial goods such as petro-chemicals and refined petroleum products come on the international market, local development expenditures are expected to increase. Although the Arab construction boom of the 1970s will not be repeated, a growing requirement for U.S. goods and services for Arab agriculture, industry, power, transport, communications, and health and education services is projected for the future.

Joseph C. Story is a specialist in Middle East economics and international oil affairs.