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Volume 30, Number 6November/December 1979

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Arab Aid

Who Gives It

Written by John Lawton

Arab aid has become so large, so widespread and so complicated that the Arab governments - which supply the funds - have had to set up specialized agencies to handle it all. In some cases the Arab governments themselves provide direct budgetary support for other governments and contribute to such international and regional aid bodies as the World Bank and the OPEC Special Fund. Increasingly, however, Arab funds for development of the rest of the Third World are being handled by highly specialized, closely coordinated Arab organizations. The most prominent of these organizations are the Kuwait Fund for Arab Economic Development, the Saudi Fund for Development, the Abu Dhabi Fund for Arab Economic Development, the Arab Fund for Economic and Social Development, the Islamic Development Bank, the Arab Bank for Economic Development in Africa, and the OPEC Special Fund. Together, these seven organizations, which have a combined authorized capital of about $12 billion, have committed a total of more than $7.5 billion in "soft" loans to developing nations - that is, loans at low interest rates, long periods of grace before repayments start and long repayment periods. This is how they operate.

THE KUWAIT FUND FOR ARAB ECONOMIC DEVELOPMENT. The first, and for many years the only, Arab aid agency, the Kuwait Fund for Arab Economic Development was set up in December 1961, on the last day of Kuwait’s first year of independence, and rapidly became a vital force for progress in the Third World. Through the Fund, and other channels, Kuwait, a country barely the size of Maine, has alone provided $1.6 billion in aid to other countries.

In the history of the Kuwait Fund there are two phases. The first covers the first 12 years of its existence, when its concern was with the Arab world. The second runs from July 1974, when, with the increased flow of oil revenues, its capital was quintupled to $3.5 billion and its responsibilities were extended in a new charter to helping all developing states, i.e. non-Arab and non-Muslim states as well as Muslim and Arab ones.

During the first phase the Fund advanced $561 million in easy repayment loans to 47 projects in 13 Arab states, a generous but not remarkable start. But then, after 1974, its lending increased sharply. In 1976 alone the Fund committed more than $322 million, and by 1978 it had approved 124 loans totaling $1.6 billion to 45 countries. The Kuwait Fund functions with a minimum staff: rarely more than 35 professionals. But if small, that staff is also excellent; indeed its experience and judgment in evaluating development projects has become an international gauge. As a result, when the Kuwait Fund puts money into a project, other donors, more often than not, promptly follow suit.

In virtually all cases the Kuwait Fund gives priority to schemes with direct developmental impact on the country and its loans are invariably "soft" - repayable over 10 to 50 years at from a half percent to no more than five percent interest. In addition, the Fund, in recent years, has given an increasing number of direct grants for economic surveys and technical assistance programs, often as vital as specific projects in national development programs.

THE SAUDI FUND FOR DEVELOPMENT. A symbol of Saudi Arabia's concern for countries in urgent need of assistance, the Saudi Fund was set up by royal decree in October 1974, to stimulate economic growth in developing nations. In little more than four years the Fund signed "soft" loan agreements totaling $3.1 billion with 51 countries, many of them falling within the lowest per-capita income bracket in the world - i.e. less than $250 per year.

In all countries aided by the Saudi Fund, the emphasis - as in Saudi Arabia's own development plan - is on basic infrastructure, with almost 60 percent of approved loans earmarked for transport, power and water projects. A major channel of Saudi aid, the Fund accounts for about 30 percent of the kingdom's foreign economic aid. The Saudi Fund, an autonomous organization, is administered by a board of directors chaired by the country's Minister of Finance and National Economy, and its initial capital totaled an impressive $3 billion. Even that, however, is not the ceiling. Under its charter, the kingdom's Council of Ministers can increase the capital.

Generally Saudi Fund loans run for 20 years at four percent a year, with a five-year grace period before repayments must start. The Fund, furthermore, has a follow-up department which monitors the progress of projects and sees them through to completion.

THE ABU DHABI FUND FOR ARAB ECONOMIC DEVELOPMENT. The principal aid-giving agency in the United Arab Emirates, the Abu Dhabi Fund was established in July 1971 to finance development of needy Arab states. Not long after, however, those limits were abandoned to allow the Fund to extend economic assistance to all developing countries of the Third World. In 1975 it undertook its first project in Africa and in 1977 its first in Asia.

As the Fund's scope was widened, Abu Dhabi also increased its capital; in June 1974, the Fund's initial $120 million capital was quadrupled to $500 million. With that support assured, the Fund, in 1974, stepped up its lending too: from $50 million in 1975 to $176 million in 1976. In the first four hectic years of operations - 1974 to 1978 - the Fund committed itself to loans totaling $587 million to 50 different projects: 31 in the Arab world, 9 in Asia and 10 in Africa.

Like loans made by other Arab funds, most of the Abu Dhabi Fund's loans are made on easy terms: interest at from three to six percent, repayable over 10 to 20 years, with a three to five year grace period before repayment begins.

After a review of its policies in mid-1978, the Fund decided that it might, in the coming years, concentrate more heavily on African and Asian projects. But that, in turn, will depend on the continuing stability of UAE revenues and in mid-1979 that stability could not be assured. Because of unexpected fluctuations in petroleum revenues and unforeseen budget problems, Abu Dhabi, like the other United Arab Emirates, might be forced to restrict many of its internal and external expenditures.

THE ARAB FUND FOR ECONOMIC AND SOCIAL DEVELOPMENT. Much more than a loan agency, the Arab Fund for Economic and Social Development, says its director Saeb Jaroudi, is "a regional development bank for the Arab world." Unlike some funds, the Arab Fund does not simply wait for governments to propose projects that require finance. Instead, it takes the initiative by identifying projects that need to be implemented or bottlenecks that need to be removed and then making its own proposals. "Thus," says The Economist, "it is to some extent steering Arab economic development."

The Arab Fund's main goal, in fact, is to further the economic integration of the Arab world, and in pursuit of it, the Fund has come up with some unusually imaginative ideas. These include plans for turning The Sudan into the "breadbasket" of the Middle East (See Aramco World, May-June 1978), studies of the Arab "brain drain" and Middle East manpower, establishment of a pan-Arab computerized airline reservation system, and a system to share information, supplied by satellite, on Arab natural resources. Altogether the Fund's research and technical assistance plans have cost $14 million.

Set up in 1973, the Kuwait-based Fund has 20 Arab member states plus the Palestine Liberation Organization, with most of its $1.5 billion pledged capital supplied by the oil-producing Arab countries. In its first five years of operation the Fund itself backed 46 development projects to the tune of $1.1 billion and also served as an executive agency for regional projects funded by the United Nations Development Program.

THE ARAB BANK FOR ECONOMIC DEVELOPMENT IN AFRICA. The newest of the Arab aid agencies, the Arab Bank for Africa, like the Arab Fund, is a specialized operation. Set up in 1975 to aid economic development of the African continent, the Bank reflects the growing Arab commitment to economic expansion in Africa.

Based in Khartoum, the Bank - often known by its French abbreviation, BADEA - has an authorized capital of $886.5 million - subscribed mainly by Saudi Arabia, Libya, Kuwait, Iraq and the United Arab Emirates - and in its first three years of operation it lent just under $283 million to 32 African countries.

Besides aid to individual nations, the Bank also backs regional projects such as the pan-African telecommunications system. "We believe that one of the most important elements in African unity is economic integration," says Bank president Chedley Ayari. "If we can help them integrate economically, we can help them achieve economic unity."

BADEA differs too from many other banks in that, in lending, priority is given to the smallest and poorest countries - rather than to the largest and richest. The reason, of course, is that the Bank exists to provide money, not to earn more.

THE ISLAMIC DEVELOPMENT BANK. Because it operates on strict Muslim principles, the Islamic Development Bank differs from other banks. It does not, for example, charge interest. Instead it finances itself by direct and indirect equity participation-owning shares - in projects, by profit sharing, by accepting the proceeds of transitional finance leasing and by levying a small administrative charge on some loans. Established in 1975 specifically to aid Muslim nations, the Jiddah-based Bank has 32 Islamic member states. Its subscribed capital is just over $1 billion, of which almost 90 percent is contributed by Arab countries. The key donors are Saudi Arabia, Libya, the United Arab Emirates and Kuwait.

By the spring of 1978, the Islamic Development Bank had approved long-term loans totaling $19.7 million to 13 countries, financed two leasing operations, and bought a cargo ship for Bangladesh and a tractor plant for Turkey. Together those projects added up to $4.4 billion. In addition, the Bank backed foreign trade deals with eight different countries totaling $26.8 million and agreed to participate in a Jordan refinery and a housing project in Dubai - a commitment of about $300 million. By mid-1979 the Bank was financing 103 such projects worth $810 million.

THE OPEC SPECIAL FUND. The seventh of the key agencies, the OPEC Fund made 111 loans totalling $440 million to 64 countries in its first two years of lending operations. Set up in 1976 by the 13 member countries of the Organization of Petroleum Exporting Countries, the Vienna-based Fund has a fixed capital of $1.6 billion, more than half of which is subscribed by the Organization's seven Arab members. Like the Arab Bank for Economic Development in Africa, the OPEC Fund extends loans to the world's poorest nations, either directly, or indirectly through the United Nations Development Program. All loans are interest-free with an average maturity of 20-25 years. The OPEC Special Fund, says it's director general Ibrahim Shihata, acts mainly as a "gap financier," making up the shortfall between funds already allocated to projects by other lending institutions and total necessary financing. In this way it eliminates possible delays in implementation.

The OPEC Fund is also a self-starter. "In many cases we offer assistance rather than waiting for an application," says Shihata. "It takes two to make a loan and if we just waited for applications, by now we would have made perhaps only 15 to 20 loans, instead of more than 100."

Arab aid funds, then, cover the entire spectrum of foreign aid. Although the key sources of money are the same countries, and although the organizations seem to overlap, they are, in fact, an organized network that assures funding for virtually all contingencies.

Such aid, moreover, is increasingly important as, in recent years, many of the industrialized countries, long the leaders in giving to the poorer countries, had begun to find it difficult to expand or even maintain previous levels of aid.

Arab aid, consequently, is no longer just a welcome addition to foreign aid, but a vital - and large - percentage of aid totals. Saudi Arabia, for example, supplied funds corresponding to 20 percent of total World Bank borrowings between 1973 and 1976 and in 1977 pledged a quarter of the total funds in the International Monetary Fund's Special Facility, a $10-billion account set up to provide loans to poor countries. The kingdom also contributed one-third of the total funds in the nearly $9-billion IMF Oil Facility and a quarter of the $200-million IMF Interest Subsidy Account, which was established to reduce the interest-payment burden on some heavily indebted countries. Saudi Arabia's contributions to international aid are so large, in fact, that the kingdom recently accepted the IMF's offer of a seat on its governing body.

This article appeared on pages 26-27 of the November/December 1979 print edition of Saudi Aramco World.


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