Jordan Times
Thursday, December 9, 1999
Foreign direct investment inflow to Arab countries
on the decline
Henry T. Azzam
Chief Economist and Managing Director,
Middle East Capital Group
THE UNPRECEDENTED growth of foreign direct investment (FDI) in 1998, up 39% to $643.9 billion, largely bypassed the Arab World. According to the UNCTAD World Investment Report 1999 (WIR), FDI flows to Arab countries fell by 6.5%, from $6.3 billion in 1997 to $5.9 billion last year, ending a steady growth trend since 1995. Arab countries' share in world FDI in 1998 was less than 1%, down from approximately 1.4% in 1997.
The cornerstone of the 1998 surge of FDI was the marked growth of flows into the U.S. (up 77%) and Western Europe (up 76%), reflecting their solid fundamentals. Developing regions present a different picture; their share in total FDI inflows rose from 26% in 1980 to 37% in 1997, but subsequently declined to 28% in 1998 reflecting reduced inflows to a number of Asian economies that year. Flows to Asia and the Pacific were down by 11% to $85 billion, a better-than-expected performance due to currency devaluations, FDI liberalisation and the still solid long-term prospects of the region. Flows to Central/ East Europe also declined by almost 5.5%. Despite the turbulence of financial markets, FDI flows to Latin America and the Caribbean increased by 5%, accounting for 11% the total flows.
Among Arab countries, eight drew in higher FDI in 1998 compared to 1997; six attracted lower flows; two maintained 1997 levels while Kuwait was the only one to record a net outflow of $10 million. FDI as a percentage of GDP remains particularly low for almost all countries in the region, averaging 1.2% for Arab countries as a whole and ranging from 0.1% (Sudan) and 0.2% (UAE, Bahrain), to more decent levels of 3.0% (Jordan) and 3.1% (Tunisia). Morocco witnessed the largest decline in FDI in 1998, down 76% to $258 million after being the North Africa's largest recipient in 1997. The massive drop was mainly due to a decrease in privatisation-led FDI in 1998 to levels of previous years. FDI inflows to Algeria and Sudan also recorded substantial declines.
Egypt, now the second largest Arab recipient of FDI after Saudi Arabia, received $1.08 billion in FDI in 1998, an increase of over 20% on the year before. Investments were concentrated in the chemicals, construction, engineering, food, metal, and textile industries, in addition to the tourism sector. Tunisia, which was one of the six African countries singled out by UNCTAD earlier this year as “African FDI front runners,” has demonstrated a particular dynamism in attracting FDI throughout the 1990s. FDI flows to Tunisia almost doubled in 1998 to $650 billion and the country was ranked as one of the five most attractive destinations in Africa for FDI in the period 2000-2003.
Foreign direct investment in Middle Eastern Arab countries declined marginally in 1998 to $3.27 billion, in contrast to a sharp increase in 1997. The WIR report ascribes this slowdown last year's fall in oil prices. Saudi Arabia witnessed a drop in FDI from $2.58 billion in 1997 to $2.4 billion, but remains the largest beneficiary of foreign direct investment in the region. FDI inflows to Qatar increased to $70 million in 1998, from $55 million in 1997, flows into Bahrain — already at low levels of $26 million in 1997 — dropped to $10 million, while Oman and the UAE maintained 1997 levels. In the Levant, FDI flows to Lebanon increased by over 50% to reach $230 million in 1998, while Syria recorded a more modest improvement, from $80 million in 1997 to $100 million in 1998.
In Jordan, FDI inflows dropped considerably from $361 million in 1997 to $223 million in 1998. However, significantly larger flows are anticipated for 1999 in light of several joint venture agreements with foreign partners in the mining sector this year and significant foreign participation in the tourism sector. Foreign investor interest in Jordan is growing as the country makes progress in its privatisation and economic reform programmes. If concluded this year, the privatisation of JTC will bring in $508 million. Foreign companies are also bidding for Jordan's first independent power project. The EU Association Agreement and the extension of QIZ privileges to additional industrial estates in Jordan will hopefully encourage more foreign direct investment in Jordanian manufacturing activities over the next few years.
Total FDI this year is expected to exceed $700 billion and Arab countries should account for a larger share than in 1998. Several Gulf countries are opening up their oil and gas sectors to foreign participation, while others have been introducing reform and liberalisation policies safeguarding intellectual property rights, institutionalising new business laws and making their countries more hospitable to foreign investment. A stronger privatisation drive among some Arab countries that started in 1999 but is expected to pick up momentum next year will also increase the Arab World's share of global foreign direct investment. FDI has become an important source of private external finance for developing countries. Governments in the Arab World need to address corruption, reduce bureaucratic tape, establish a clear legal infrastructure and provide incentives to attract investors. Capital always goes to where the rules of the game are clearest.