Middle East & Africa | Arab economies
Wallowing in cash
A high oil price will delay reforms
Aug 12th 2004 | Cairo
IF YOU are wondering where your bigger petrol bills are going, look no further than Bahrain. It has just been sold for a reported $6.6m. Not the real Persian Gulf kingdom of Bahrain, but rather the five-acre replica off the coast of Dubai. "Bahrain" is one of 260 artificial islands that make up "The World", a $1.8 billion man-made archipelago shaped like a world map—the latest giant property gimmick in an emirate with cash to fritter.
Dubai is not the only Arab state wallowing in an oily windfall. The real Bahrain has a $500m offshore resort under construction. Oman has "The Wave", an exclusive seaside residential complex, and even dowdy Saudi Arabia plans a luxury marina at Al Khobar, a town better known for a recent and bloody terrorist attack on expatriate workers.
With oil prices at their highest level in two decades, revenues of some $600m a day are gushing into the Gulf, double the volume during the 1990s. The monarchies of the Gulf Co-operation Council are alone likely to earn $35 billion more from oil exports this year than last, according to Standard Chartered bank, and that excludes big producers such as Algeria, Libya and Iraq. With Arabs warier of investing in the West than during previous booms, more of the cash is staying at home.
Aside from a region-wide property boom, this has fuelled a surge in Arab stock indices. The combined market capitalisation of the 14 official Arab stock exchanges, from Casablanca to Muscat, has risen from $360 billion at the end of last year to $470 billion now. Saudi Arabia's alone has climbed by $60 billion, with its index up 37% this year, following a 79% climb in 2003. Operating profits for its largest listed firm, the partially privatised Saudi Telecom, have more than doubled, from $1.3 billion in 2002 to a projected $2.8 billion this year.
Even oil-poor countries are winning. Investment and tourism from the Gulf have restored some confidence in battered Lebanon, pushing Beirut's long-stagnant stock index up by 38% since December. Jordan's exports are up by a third from last year. Egypt's sickly economy is showing renewed signs of vigour, not least because of tolls from warships heading for Iraq through the Suez canal.
Government finances have also improved markedly, especially among Arab oil producers. Saudi Arabia, which based its budget on a forecast oil price of $19 a barrel (the 2004 average has been more like $35), is heading for a surplus estimated at $15 billion-30 billion. Algeria, a basket case in the 1990s, now hoards foreign-exchange reserves of $30 billion.
The bad news is that the Arabs' recent good fortune is poorly shared. Economists predict regional economic growth of some 5% this year. But this follows nearly two decades of relative slack that have left 80m out of 290m Arabs below the poverty line. And 5% is not fast enough to provide the 2.5m new jobs a year needed to contain Arab unemployment, let alone reduce it from its current level of perhaps 18%.
Jassem Saadoun, a Kuwaiti economist, observes that in the past, higher oil revenues have reduced pressure on governments to push through badly-needed reforms. Full coffers give governments little incentive to privatise, deregulate or make public accounts transparent, all long-standing demands of both foreign and local investors. Flush governments can carry on paying surplus bureaucrats to drink coffee, and subsidising inefficient firms owned by their cronies.
The other bad news for Arab states is that oil shocks aren't what they used to be. In 1981, oil prices spiked to the equivalent of $80 a barrel in today's money, pushing exports per capita among OPEC producers to triple their current level. Then, crude oil sales made up nearly 8% of the world's GDP. Now they are closer to 2%.
This article appeared in the Middle East & Africa section of the print edition under the headline "Wallowing in cash"
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