September 13, 2003	Saturday	Rajab 15, 1424

DUBAI: The coffers of Gulf Arab states brim with petrodollars, but policymakers seem unable to take the political risk of bold reform to shake up their ailing economies.

Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Oman and Bahrain, which straddle nearly half the world’s oil reserves, have been talking for years about overhauling their crude-dependent economies and boosting private sector growth.

Reforms often discussed include offloading state stakes in firms to boost the private sector, diversifying sources of income by levying income tax — now limited to a small religious tax — and slashing subsidies. Cutting red tape and legal reforms are also needed to encourage investment.

Yet analysts said what little progress made was inadequate as officials shy away from tough choices on the economy and attempt to shore up support in the political arena.

Half-hearted reform measures make it hard for conservative governments to deliver on promises of attracting foreign funds and creating jobs for increasingly frustrated young populations.

“If people in the Arab world don’t develop expectations of improving their lot in life and of better chances in the future, it can lead to anything from lack of incentive to work to corruption to terrorism,” said a Gulf-based economist.

The social and political pressure is strongest in regional US allies Saudi Arabia and Kuwait, whose citizens are used to cradle-to-grave welfare systems and cushy government jobs.

But the bloated public sector can no longer absorb them.

“Job creation is their biggest challenge and to achieve this they need economic reform,” said Chief Economist Randa Azar-Khoury of National Bank of Kuwait.

“The reform process is inadequate. It has to be integrated and well thought out, or there will be gaps and will not achieve the desired measures.”

The World Bank says public sector-driven and protected economies supported by oil can no longer generate sufficient growth or jobs and has called for trade and investment reform.

POLITICAL PRESSURE: Unemployment rates average 15 per cent in the Arab world, a World Bank report said. In the Gulf, most private sector jobs are taken by foreigners who make up over 30 per cent of the region’s 30 million population, economists say.

Some frustrated youth with no jobs and angry that oil wealth was in the hands of the elite join the ranks of religious zealots. Analysts say social, political and economic reforms are needed to address their grievances.

The International Monetary Fund has repeatedly urged oil-rich Gulf Arab states to levy income taxes and cut subsidies to diversify income revenues but governments have been hesitant to act on such measures, fearing domestic backlash.

In Kuwait where state spending on salaries and pensions swallow most of Kuwait’s oil income, parliament has blocked privatization and tax laws and efforts to reduce government jobs and subsidized living.

Sagging oil prices hit Gulf states hard in 1997 and 1998, prodding them to act on reform. But they have made almost no progress in reducing reliance on oil, their economic backbone.

Saudi Arabia, the region’s largest market and the world’s biggest oil exporter, is on track for a 2003 oil income of $85 billion — the highest in 20 years — to turn a projected $10.40 billion budget deficit into a $6.3 billion surplus.

Riyadh has allowed foreign ownership in some sectors, partly privatized its telecoms firm and passed a capital markets law.—Reuters