Saturday, July 16, 2011

The Deep Economic Woes Of Non-Oil Exporting Arab Countries

Caroline Glick offers some interesting insights to the economic woes of large Arab countries with popular uprisings and no significant oil exports, primarily Egypt and Syria (Both Egypt and Syria has some oil production, but far from enough to lift the countries out of poverty). Some excerpts:

The most important, strategically consequential story is that Egypt is rapidly going broke. By the end of the year, the military dictatorship will likely not only default on Egypt’s loans. Field Marshal Tantawi and his deputies will almost certainly be unable to feed the Egyptian people.

Some raw statistics are in order here.

Among Egypt’s population of 80 million, some 32 million are illiterate. They engage in subsistence farming that is too inefficient to support them. Egypt needs to import half of its food.

As David Goldman, (aka Spengler), reported in Asia Times Online, in May the International Monetary Fund warned of the impending economic collapse of non-oil exporting Arab countries saying, “In the current baseline scenario the external financing needs of the region’s oil importers is projected to exceed $160 billion during 2011-13.” Goldman noted, “That’s almost three years’ worth of Egypt’s total annual imports as of 2010.”

Since Mubarak was overthrown in February, Egypt’s foreign currency reserves have plummeted from $36b. to $25b.-28b. Last month, Tantawi rejected an IMF loan offer of $3b., claiming he would not accept any conditions on the loans. Instead he accepted $4b. in loans from Saudi Arabia and another $2.34b. from the Gulf states.

And still, Egypt’s foreign currency reserves are being washed away. As Goldman explained, the problem is capital flight. Due in no small part to the protesters in Tahrir Square calling for the arrest of all those who did business with the former regime, Egypt’s wealthy and foreign investors are taking their money out of the country.

At the Arab Banking Summit in Rome last month, Jordan’s Finance Minister Mohammed Abu Hammour warned, “There is capital flight and $500 million a week is leaving the Arab world.”

According to Goldman, “Although Hammour did not mention countries in his talk... most of the capital flight is coming from Egypt, and at an annual rate roughly equal to Egypt’s remaining reserves.”

Last month, Syrian President Bashar Assad gave a speech warning of “weakness or collapse of the Syrian economy.” As a report last month by Reuters explained, the immediate impact of Assad’s speech was capital flight and the devaluation of the Syrian pound by 8 percent.

For the past decade, Assad has been trying to liberalize the Syrian economy. He enacted some free market reforms, opened a stock exchange and attempted to draw foreign investment to the country. While largely unsuccessful in alleviating Syria’s massive poverty, these reforms did enable the country a modest growth rate of around 2.5% per year.

In response to the mass protests threatening his regime, Assad has effectively ended his experiment with the free market. He fired his government minister in charge of the economic reforms and put all the projects on hold. Instead, according to a report this week in Syria Today, the government has steeply increased public sector wages and offered 100,000 temporary workers full-time contracts. The Syrian government also announced a 25% cut in the price of diesel fuel, at a cost to the government of $527m. per year.

Boasting foreign currency reserves of $18b., the Syrian regime announced it would be using these reserves to pay for the increased governmental outlays. But as Reuters reported, the government has been forced to spend $70m.- $80m. a week to buck up the local currency. So between protecting the Syrian pound and paying for political loyalty, the Assad regime is quickly drying up Syria’s treasury.


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