INTERVIEW-World Bank says Iraq overshadows mideast prospects

www.forbes.com Reuters, 01.10.03, 7:57 AM ET By Suleiman al-Khalidi

AMMAN, Jan 10 (Reuters) - A senior World Bank official said on Friday that the possibility of war in Iraq was hanging like a "sword of Damocles" over the prospects for reforms and economic recovery right across the Middle East.

Jean-Louis Sarbib, the World Bank's Vice President for the Middle East and North Africa, said the region would be hit dramatically by the consequences of a U.S.-led war on mainstay sources of income such as oil, remittances and tourism.

"The region has had two major impacts. The first has been the overall slowdown of the world economy. The second has been essentially September 11 and its immediate impact on the countries that rely on tourism as an export," Sarbib said.

"Combined with the concerns about the situation that may or may not develop in Iraq, that is making the Middle East a place where the economic environment and the investment climate on a technical side are not the most attractive and where the risks are perceived to be very high," he told Reuters in an interview.

Egypt, Morocco and Jordan in particular have suffered from holidaymakers' reluctance to visit the region. Other states reliant on oil imports have also been hit hard.

Oil prices have soared by 25 percent in the last two months to touch two-year highs because of an export halt in Venezuela and fears of more shortages if U.S. forces massing in the Gulf launch military action to disarm Iraq.

"If you are an oil exporting country it's good. If you are an oil importing country that's not so good. So that's where the balance is going to be," he added.

The World Bank's latest 2003 growth prospects for the region hinge on whether conflict in Iraq occurred. If conflict is averted and confidence in the region is gradually restored, the region's growth is forecast to increase to 3.7 percent by 2004.

Despite high oil prices that propped up Gulf oil producers, a global economic slowdown has sapped oil exports and the region's overall estimated GDP growth declined to 2.5 percent in 2002, down from 3.2 percent in 2001.

INVESTMENT WANES, SOCIAL TENSION BREWS In 2002 foreign direct investment (FDI) in the region suffered from a sagging global economy, which has reduced private flows by at least 25 percent to developing countries since 1997.

"FDI in the region is even lower than in sub-Saharan Africa, and that says something about the attractiveness of the investment climate in the region," Sarbib said.

"You are not going to see a rush of private investment in the region and I am not talking simply about foreign direct investment. A lot of the money from the region is invested outside the region," he added.

A conflict in Iraq would also hit confidence in fragile capital markets and possibly trigger cross-border capital flows particularly from countries near war zones, he said.

Sarbib said "the sword of Damocles over the region as to whether or not the United States is going to have a war with Iraq" was prompting already nervous governments to drag their feet over International Monetary Fund-guided structural reforms.

"There are social tensions exacerbated by the very understandable fear of governments to create any more social unrest at a time when populations are very edgy," Sarbib said.

Serious reforms are needed to create jobs and cut poverty across the middle east and north Africa region, in which 80 million people or some 30 percent of the population live on less than $2 a day.

But Iraq worries are adding to worsening living conditions and ongoing Israeli-Palestinian violence to make governments even more hesitant to embark on politically difficult reforms.

"So all of these things create a very fragile and very tense environment in which decision makers are understandably not ready to jump ahead into reforms," Sarbib said.

"Right now it's such a volatile, such a difficult environment...but if you have a world economy that is not particularly growing or healthy in a region that is on edge right now then you are not going to do (reforms)," he added.