World Bank asked to boost inter-Arab investment

The sharp rise in inter-Arab investments was the main factor in the FDI growth in the region. (EB FILE)

Published Sunday, June 27, 2010

By Nadim Kawach

Arab countries have sought help from the World Bank to increase capital flow among them as part of accelerating post-crisis reforms designed to stimulate their economies, according to their main financial establishment.

The Abu Dhabi-based Arab Monetary Fund (AMF) said it was working with the Washington-based World Bank on a mechanism to promote inter-Arab investment, buoyed by a steady rise in regional capital flow over the past few years despite the 2008 global fiscal distress.

The mechanism involves the preparation of periodical reports on economic data and investment projects in Arab nations with the aim of identifying business opportunities and giving investors better access to regional markets.

"These reports are part of an overall project being carried out by the AMF and the World Bank… it includes the creation of a regional mechanism for the settlement of balance of payments in the Arab countries with the aim of providing comprehensive information on inter-Arab capital and encouraging the movement of capital, goods and other exchanges within the region," AMF Chairman Jassim Al Manai said in a statement published by the AMF website.

The AMF, a regional IMF-style institution run by the Cairo-based Arab League, said the scheme was discussed again at the recent conference on Arab capital inflow held in Abu Dhabi by the AMF and the World Bank. Manai noted that there has been a steady rise in inter-Arab investment but added the flow could accelerate after those arrangements are enforced.

"The remarkable thing in the capital flow into the Arab countries over the past years is that there has been a steady rise in inter-Arab investment," Mana said. "Some Arab countries recorded an increase in capital inflow even after the global crisis and the main reason for this was the big increase in regional investment."

In a recent study, another key Arab League organisation said the pick-up in regional investment was because many Arab investors were forced by the crisis to shun global markets and turn to home countries.

"Another key factor was the improvement in investment laws and a push by most Arab countries to attract capital given their importance in economic growth in the absence of other major financial sources in some regional nations," said the Kuwait-based Inter-Arab Investment Guarantee Corporation (IAIGC).

It said the investment climate and infrastructure in most Arab countries had largely improved over the past few years, but added more work needs to be done.

The report showed the bulk of the increase in foreign direct investment (FDI) flow into the region in 2008 was in inter-Arab investments, which leaped by nearly 64 per cent.

The growth in capital inflow boosted the share of Arab states in global FDI to 5.3 per cent in 2008 from 3.9 per cent in 2007 and only 0.4 per cent in 2000.

The sharp rise in inter-Arab investments was the main factor in the FDI growth in the region, as they jumped to $34 billion (Dh125bn) in 2008 from about $21bn in 2007.

"Gulf countries have remained the main source of inter-Arab investments, while new players emerged on the arena in 2008, including Egypt and Lebanon," IAIGC said.

"Between 1995 and 2008, Saudi Arabia, Sudan and Lebanon were the largest beneficiaries of inter-Arab investments as they attracted $95bn, nearly 70 per cent of the total inter-Arab FDI of $135bn." A breakdown showed Saudi Arabia, the world's largest oil exporter, topped the list of Arab FDI recipients in 2008, with about $29.6bn. The UAE was the second largest beneficiary, receiving nearly $13.7bn.

Arab states have often been urged to reform their financial and investment laws to attract capital needed to stimulate their economies and reverse a steady capital flight from the region. The calls gained momentum after the global crisis, which has inflicted heavy losses on many Arab investors.

Despite the relative improvement in the investment environment in the region, inter-Arab capital flow has remained a fraction of the total Arab investments abroad. Between 1995 and 2008, the cumulative inter-Arab investment totalled just over $100bn, less than five per cent of the overseas Arab assets IAIGC's figures showed the crisis depressed FDI into the Arab region in 2009 for the first time in many years despite a surge of more than 26 per cent in 2008.

It showed FDI pumped into 17 Arab nations that have provided data soared by 26.9 per cent to around $89.2bn in 2008 from nearly $70.3bn in 2007.

FDI flow was much higher in 2008 despite a sharp slowdown in the second half of the year and it followed several years of steady growth in capital flow into many Arab countries because of high oil prices, a surge in regional projects and improvement in investment laws.

"As for 2009, FDI flow into the Arab region was expected to have declined due to several factors, including the slowdown or contraction in the economies of industrial nations, which have constituted a major source of foreign direct investment for Arab states over the past few years," IAIGC said.

"Another factor was the continuation of turbulence in most Arab and global markets as such instability contributed to increasing uncertainty regarding investment decisions in the medium and long terms and to shelving of more projects in the region in infrastructure, hydrocarbon, and real estate sectors."

Addressing the conference in Abu Dhabi, a World Bank official urged Arab governments to push ahead with reforms to encourage regional capital flow.

Mansoor Dailami, Finance Director at the World Bank, said regional nations should take advantage of a recovery in their economies, referring to recent forecasts by the IMF and the World Bank that real GDP in the Middle East and North Africa could be around four per cent this year and 4.1 per cent in 2011.

"Increasing economic co-operation and investment flow among the Arab countries will support their economies and enable them to withstand the repercussions of fresh turmoil in the global markets," he said.

In recent comments, IAIGC Director Fahd bin Rashid Al Ibrahim urged Arab nations to pursue economic reforms to lure in investments, saying existing laws are still not attractive enough to foreign capital.

"There are too many obstacles for foreign investment and inter-Arab investment in the region… they include the absence of a unified law to regulate investment in member states and failure of some governments to comply with the agreements they sign with the investors," he said.

"The obstacles also involve the disparity and deficiencies in legislations governing business, mainly the labour law and investment protection rules, as well as the absence of an effective judicial system to settle any trade or business issue… of course, these obstacles vary from one country to another but their presence is largely obstructing capital flow into the Arab World."

FDI recipients

2007 2008

KSA 24.31 29.62

UAE 13.25 13.70

Algeria 2.038 12.55

Egypt 11.57 9.49

Sudan 3.64 6.35

Morocco 4.63 3.48

Lebanon 3.48 3.19

Tunisia 2.07 3.12

Libya 0.72 2.76

Syria 0.89 1.18