According to official figures released by the Inter-Arab investment Guarantee Corporation (IAIGC), the global financial distress decreased capital flow into the Arab countries by nearly $10 billion in 2008 to reverse a steady growth over the past few years mainly due to high oil prices.
"From a record $72 billion in 2007, foreign direct investment (FDI) into the region plunged to nearly $62 billion in 2008, showed the figures by the IAIGC. Indeed, the global financial crisis has affected FDI movement worldwide," said a report published by Bank Audi's MENA Weekly Monitor.
FDI flow into the Arab states hit a record high in 2007 because of strong oil prices and reforms carried out by some regional countries. The level in 2007 was nearly $10 billion above the FDI of $62 billion recorded in 2006. IAIGC said several factors contributed to the surge in FDI in 2007, along with strong oil prices and moves by some members to improve investment laws.
This increase in the Arab countries' share of FDI is attributable to both internal and external factors. Internal factors include the fact that regulatory frameworks are becoming more relaxed in several countries of the region, particularly in the area of financial, construction, communication and tourism services. In addition, privatization of the state-owned enterprises and liberalization of most service sectors have also attracted more FDI by trans-national corporations, IAIGC said in its quarterly bulletin.
Another factor is the improved investment climate in several Arab countries, which include eased or improved registration and fiscal procedures for various business start-ups, an increase in the number of one-stop shop for new business, the establishment of new public credit registries and/or private credit bureaus as credit information providers, the reduction of tax and customs duties, implementation of e-government programs, simplification of procedures for the technical inspection of imports and exports and improvement of the quality and the accuracy of economic statistics.
As for 2008, the report attributed the decline to the collapse of oil prices as a result of the oil demand contraction, a sharp slowdown in the economies of industrial nations, the upheaval in most Arab stock markets and lower capital export by Gulf oil producers into other Arab countries.
The turbulence in Arab stock markets has aggravated the state of uncertainty in the region's investment climate, mainly in medium- and long-term investment decisions. This has led to the postponement of a number of projects in the region, especially in the oil, real estate and infrastructure sectors, the bulletin said.
Slackening oil demand has also played a key part in this decline, as it depressed crude oil prices and consequently stifled Gulf exports into other Arab countries. It has also affected the flow of capital into oil and gas projects in the region, since some of them have been shelved.
IAIGC urged the Arab nations to push ahead with reforms to lure investments, saying the existing laws are still not attractive enough to foreign capital.
There are too many obstacles for foreign investment and inter-Arab investment in the region. They include the absence of a unified law to regulate investment in member states and failure of some governments to comply with the agreements they sign with the investors.
The obstacles also involve the disparity and deficiencies in legislation governing business, mainly the labor law and investment protection rules, as well as the absence of an effective judicial system to settle any trade or business issue.