Agreement on tariffs could open Gulf states' markets to the world

By Tarek al-Issawi

RIYADH, Saudi Arabia (AP): An agreement to unify customs tariffs underlines the Gulf states' -- and particularly Saudi Arabia's -- commitment to opening their markets to the world.

The Gulf is usually slow off the mark when it comes to matters relating to national economies. But a recent drastic slump in oil prices, coupled with the trend of globalization and competition from international economic blocs, forced states in the region to reach a last-minute agreement on the tariffs during a November Gulf summit.

The agreement was considered a major victory for Saudi Arabia, which currently has the highest tariffs among the Gulf states at 20 percent, leaving it at a clear trading disadvantage with its neighbors. The Emirates has the lowest tariffs, with a maximum of 4 percent.

Once the agreement is implemented in 2005, the Gulf states are expected to benefit from additional trade with each other and thereby increased revenues.

The tariffs agreement also will help the Gulf states, and especially Saudi Arabia, formulate a basis to deal with other international economic blocs, including the European Union and NAFTA, the trade agreement between the United States, Mexico and Canada. It will also help Saudi Arabia gain entry into the World Trade Organization.

The year 2005 deadline was agreed upon to allow the Gulf states to prepare their bureaucratic economies for the change.

The agreement exempts some food and basic items and sets tariffs on essential goods such as those needed for industry and agricultural development at 5.5 percent. The duty on other goods, including cars and luxury items will be 7.5 percent.

The tariffs agreement "will open more oil and petrochemicals markets for Saudi Arabia and will give it equal footing in dealing with the European Union," said Abdul Aziz Dagestani, head of the economic committee in the Saudi Consultative Council.

Saudi Arabia's exports are currently limited to oil and its byproducts. With customs tariffs lowered, the kingdom will be able to launch a re-export industry and push other products into international markets.

"The agreement has been a long time coming and we all sacrificed to make it happen, but we will reap its fruits," said Saudi Finance Minister Ibrahim Al Assaf.

Saudi Arabia, the traditional leader of the Gulf Cooperation Council states, has made it clear over the past few months that it was adamant about pursuing economic reforms and opening its huge market for foreign investments. Its petrochemical market as well as metals and basic foods industries are among the main markets foreign investors have been trying to cash in on.

The Saudi economy has been hard-hit by unstable international oil prices, unemployment and a huge budget deficit. The customs tariffs agreement, along with domestic reforms announced in October by Saudi Crown Prince Abdullah, will help jump-start it, analysts say.

"We have to work aggressively to take measures to modernize our economic regulations," Abdullah said.

Abdullah heads the Higher Economic Council, a powerful 11- member council charged with formulating economic policy, proposing where the country's budget should be spent, and creating jobs.

Over the past two years, and under the crunch of falling oil prices, the Saudis have been discussing privatizing major companies in the public sector, specifically the electricity and telecommunications ministries, and the national carrier Saudi Arabian Airlines.

Abdullah has called for reviewing labor market regulations, allowing foreigners to invest in non-oil sectors and removing other obstacles that keep foreign investors away.

He acknowledged that the kingdom needs foreign investments "which contribute in financing projects and introduce the needed technology, marketing strategies and management skills."

The kingdom also has recently raised electricity and gasoline prices and imposed an airport tax. In addition, a transportation ministry official said the government was considering imposing tolls to counter the high costs of maintaining roads.

For the current five-year plan which ends in 2000, the government is expected to spend a total of 132 billion riyals (US$35.2 billion) on road maintenance, said Abdullah bin Abdul Rahman, transportation ministry undersecretary for road works.

Dagestani said stability in the oil market, increased control on government spending and an expansion in private sector investments will help the kingdom slash its budget deficit.

A recent study by the Saudi British Bank said that the Saudi budget deficit is expected to drop to between eight billion riyals ($2.13 billion) and 12 billion riyals ($3.2 billion) from a deficit of 44 billion riyals ($11.8 billion).