Washington Report, November 1988, Page 21

Trade and Finance

By John T. Haldane

Kuwaiti Economic Prospects Brighten

The late 1980s have proven to be one of the most difficult periods in Kuwait's history. The country is just beginning to climb out of a five-year recession caused by a decline in oil prices, the collapse of the Souq Al-Manakh stock market, and a serious decrease in stock and real estate values. In addition, Kuwait's export trade has been badly hurt by the Iran-Iraq war.

Traditionally a main supply base for Basra and Baghdad in Iraq and the northern Iranian port of Bushire, Kuwait is presently in an ideal position to begin supplying goods and services, as well as financing, for the expected post-war reconstruction booms in both Iran and Iraq. A number of Kuwaiti companies are sitting on huge inventories of machinery, building materials, trucks, and spare parts, while Kuwaiti banks stand ready to participate in financing the expected upsurge in re-exports.

Kuwait's minister in charge of services, Issa Al-Mazidi, has told the managers of Kuwait's two main ports, Shuaiba and Shuwaikh, to "get ready for a surge in shipping." There are already signs of increased activity, after years of both ports operating at less than 25 percent of capacity.

North and South Yemen to Cooperate in Oil Exploration

The oil ministers of North and South Yemen have signed a joint oil exploration and development agreement granting the Yemen Oil Company for Investments and Mineral Resources, which is jointly owned and financed by the two governments, exclusive rights in a hitherto disputed border area. Soviet contractors recently discovered oil in the area, between Yemen Hunt Oil Company's Marib-Jawf concession and the Shabwa area in South Yemen.

The site under agreement is a 970-mile zone between North and South Yemen on the southern edge of an area known as the Empty Quarter. It has been of interest ever since Yemen Hunt Oil Company found and developed oil in the nearby Marib-Jawf basin, where production is expected to reach 200,000 barrels per day by the end of this year.

The two countries hope to secure funding for the area's development from the Kuwait-based Arab Fund for Economic and Social Development.

World Bank Continues Mideast Support

The World Bank is continuing its policy of providing substantial financial support to countries throughout the Middle East. Algeria has been granted a $160 million loan to strengthen its power system and a further $211 million to rebuild its railway network, prepare an extensive irrigation program, and upgrade vocational education programs. Egypt is to receive $36 million to improve the Alexandria water distribution network, while Jordan recently received a $36 million loan to improve the country's telecommunications network. Morocco was granted a $90 million loan to expand its electrical network and $23 million to improve its agricultural irrigation system. Tunisia plans to use a $150 million loan to support the government's medium-term program of economic adjustment and stabilization. Turkey will be able to pursue its medium-term program of reforms in the financial sector with the support of a $400 million loan. South Yemen is to use a $12 million loan to improve the water supply system of Al Mukalla, the country's second largest city.

Iran and Turkey Sign Power Agreement

Iran and Turkey have signed an agreement for the construction of several joint-venture power plants, all to be fed imported Iranian gas. The agreement covers construction of two plants in Turkey, one in eastern Anatolia and the other in the Mediterranean port of Iskenderun. The first plant will be supplied with piped gas, while the second will use liquid natural gas shipped from Iran. The two countries have agreed to share the power from the Anatolian plant, while the second plant will generate electricity for steel, fertilizer, and chemical plants near Iskenderun.

China Enters Algerian Market

The China International Water and Electric Corp. will build a $250 million dam in the eastern Algerian province of Mila. The Chinese firm won out over British, Indian, and Spanish bids to be awarded the largest contract ever given to a Chinese company in Algeria. The Chinese are believed to have offered concessionary terms with regard to financing in order to break into the Algerian market.

Iran and Iraq Face Huge War Debts

As the eight-year gulf war comes to a close, Iran and Iraq are facing severe financial problems due both to actual war-related costs as well as lost oil revenues.

One expert has estimated that the war cost Iraq at least $90 billion in lost oil and non-oil revenues, while Iran suffered a loss of earnings of over $30 billion. If the total costs of military expenditures are added, Iraq has lost almost $150 billion, while Iran has lost about $70 billion.

Iraq went into the war as one of the gulf's richest oil producers, with estimated foreign currency reserves of about $20 billion. It has since moved to a position of being a major debtor nation, owing foreign governments, banks, and firms over $65 billion. However, because $30 billion of this total is owed to fellow Arab states Saudi Arabia and Kuwait, it is unlikely Iraq will be pressured into repaying at least this portion of its debt.

Iran started from a stronger economic base and has been carefully financing imports on letters of credit which were paid more or less as they have fallen due. But Tehran still has short-term debts totaling dose to $8 billion.

Both countries are trying to boost oil production back to pre-war levels in order to return quickly to financial stability. Iraq's current export capacity is estimated at 2.3 million barrels per day, compared to a 1979 peak of 3.5 million barrels per day. Iran's present capacity is believed to be only 3 million barrels daily, compared to a 1977 peak of 5.7 million.

Big International Turnout at Tehran Trade Fair

Britain, West Germany, Japan, and other exporting nations flocked to this year's 14th annual Tehran International Trade Fair September 12 to 23. More than 30 nations booked space at the fair, which the Iranian Ministry of Commerce has staged annually despite the Iran-Iraq war.

However, international interest in the fair jumped sharply after Iran agreed to a cease-fire and interest gained further momentum as exporters competed for potentially lucrative contracts in the oil, petrochemical, energy, telecommunications, transport, and construction sectors.

US and Israel Sign Missile R&D Agreement

The United States and Israel have signed a new anti-tactical missile research and development agreement which, according to Israeli Minister of Defense Yitzhak Rabin, could lead to the deployment of a weapon capable of "countering the growing Arab missile threat."

The pact covers two joint research and development projects related to the Strategic Defense Initiative: the Israel Aircraft Industries' anti-tactical missile known as the Arrow, and a battle management concept design study.

The Pentagon initially proposed that responsibility for the estimated $400 million needed to finance the projects be equally divided between the two countries. Israel countered with a demand that the US fund up to 90 percent of the project. The signed agreement states that the United States will fund 80 percent of the project and Israel 20 percent.

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.