Negotiations are under way to forge lucrative partnership agreements

By Mark Huband in Cairo

Financial Times, 19 September 1997

Slow progress towards the removal of trade barriers between the European Union and the Mediterranean states has not discouraged the Middle East and North African (Mena) countries in their efforts to secure access to the European market.

Nine different agreements between the EU and the Mena states are now at various stages of negotiation. Tunisia, Israel, Morocco and the Palestinian Authority, have signed partnership agreements, though all are awaiting ratification by the parliaments of the EU member states. Jordan, Egypt, Lebanon and Algeria are also conducting negotiations, while Syria is engaged in exploratory discussions. Middle East and North African states are expected to benefit from the exchange rate security of European economic and monetary union as their increasingly export-driven economies seek to compensate for tariff reductions by exploiting the opportunities offered by partnership agreements with the EU.

Extensive liberalisation of economic and fiscal policies throughout the region has in part been spearheaded by the absolute necessity for reform.

But this has been coupled more recently with the need to attract foreign investment, reform companies and privatise state enterprises in preparation for increasing competition from EU states as the Euro-Mediterranean market is opened.

“The main agenda is our own agenda,” said Hassan Abouayoub, formerly Morocco’s minister of agriculture and a senior negotiator of the country’s partnership agreement signed with the EU in 1996. “But the major impact of liberalisation is not known now, except that we know liberalising is helpful to existing industries.”

A study of the benefits to Morocco and Tunisia of trade liberalisation with the EU by two World Bank economists and published by the Egyptian Centre for Economic Studies (ECES), concluded that per capita income in the two countries would increase over 10 years by $ 25 per annum and $40 per annum respectively. The gains would be 25 per cent greater if this liberalisation were globalised.

Both countries have 12 years from the signing of the agreements to reduce tariffs and harmonise standards with the EU. The ECES study estimated that quality improvements will allow both countries to increase export prices by a further two per cent.

“We have lost 3,000 jobs each year through privatisation, but more than that number have been created through foreign investment,” says Mohammed Ghannouchi, Tunisia’s minister for international co-operation and foreign investment, outlining the balancing act the countries of the region are forced to perform.

“We are losing $600m-$700m a year in lost customs revenues, which have to be compensated for by economies,” Mr Ghannouchi said.

Even so, Tunisia, which signed a partnership agreement with the EU in July 1995, is way ahead of its rivals on the southern shore of the Mediterranean in raising standards of production and instituting the first tranche of tariff reductions two years ahead of the date required by the EU agreement.

Now it is seeking to ensure that a tight fiscal policy, control of inflation and tracking of the Ecu as the barometer for its currency, the dinar, prepares the economy for the demands of Ecu. As part of the discipline of retaining this exchange rate stability, the government aims to reduce the budget deficit from 3.7 per cent of GDP in 1996 to 3 per cent this year.

“Seventy-five per cent of our trade is with Europe, and 80 per cent of our foreign investment comes from Europe, as well as 80 per cent of our tourists. The dinar follows closely the value of the Ecu, and we are continuing to try to control the currency, to respect the criteria for convergence in order to retain parity,” says Mr Ghannouchi.

Morocco has enjoyed a currency stability similar to that of Tunisia, though has refrained from tracking either the US dollar or the Ecu in such a deliberate manner. But this pre-occupation stems from concern over the impact of monetary uncertainty on the European side.

“When the peseta and escudo were devalued, it had a tremendous impact on us, and can have a great impact on our trade flows,” says Mr Abouayoub, suggesting that the tighter exchange rate parameters of the Ecu will provide a degree of security for southern Mediterranean states whose main trading partners are southern rather than northern European countries.

“It’s a key question, and it’s a pity that so little attention is paid to it,” he said.

The subject of Emu has not entered into Egypt’s lengthy and as yet unresolved negotiations over its partnership agreement with the EU, according to Gamal Bayoumi, Egypt’s negotiator. Mr Bayoumi says the question did not arise because the US dollar remains Egypt’s main benchmark, despite nearly 35 per cent of Egypt’s $ 3.2bn export proceeds deriving from EU states in 1995-96. Egypt now aims to act as a link between extra-regional investors and the EU.

“I see people coming from the Far East – from Japan and Korea – to establish themselves in Egypt. They are optimistic about exporting from Egypt to Europe,” says Mr Bayoumi. The government has introduced broad measures to attract foreign direct investment, as well as reforming labour laws, allowing full convertibility of the highly stable Egyptian pound, and slowly acknowledging the need for cumbersome customs and port procedures to be radically reformed.

Such a role is not expected to be open to neighbouring Jordan, which has pushed through liberalisation measures which it intends will qualify it for WTO membership as well as tailoring the economy to the requirements of the partnership agreement it has signed with the EU.

“For future admission to the WTO, Jordan must come to terms with the end of tariffs. This has already meant a JD30m reduction in government income, but there has been some compensatory increase in sales tax,” says Mr Jawad Anani, Jordan’s deputy prime minister.

“Complaints have come from the non-export sectors, such as building materials and food processing, which are confined to the local market,” Mr Anani said.

Despite the downside, felt most acutely by small producers, Jordan’s government believes it is in a good bargaining position with the EU, owing to its trade deficit, on which basis it has successfully argued that it should be allowed to increase its export quota to EU states.

The government expects the impact of Emu to be largely positive, as it will provide a simple alternative to the dollar while also allowing it to make substantial Ecu deposits in European banks from which larger returns will be demanded than currently secured on the variety of currencies being held.

“We think that two currencies will give a safety cushioning factor to the internal currency regime, because of the value of our foreign currency holdings,” says Mr Anani. “We have been following [the Emu discussions] rather keenly.”

© Financial Times