Created: 3/9/1990

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Near East and South Asia Review |

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The dramatic developments in chc Soviet Union and Easiern Europe liave raised new concerns and cipectllions io (be Arab world. Stales with close (iea to the lju are facing reduced political, ecanomie,iiar. support, while slates with cioac lies to the West tear icsourees will be drvctied lO^Easiem Europe and thc US commttmeni to the Arab world will%






Syrian armed forces have achieved defensive strategic par ily with Israel, bui ihe Syrian miliiary slit!many wcahneu ihai wojIu* make stislaiwaag protonged defensive opcratrw eWacaJLaJpjpjw^^

Lth.tnon: Who Murdered Proldrnl Muawad?.

Prctidcnl Moawad was killed byground-level explosion o( hundreds ofLebanese Carisiian suongman Michel Am was most likely icipoasibfc for MuawacTs death, and he may have been aided by lhe Palestine Liberal tan Oiganiraiioa or thc

Iraqii ' (WC* j

on tri lulling lo Domestic Unrest?

Libyan kader Qadhafi has abandoned the economic reform program hc launched8 and appear, lo be setting ihc stageew round of economic austerity measures. Thc country's foreign payments situation is dc terwrat ing. inTlaiioA is on the rise, and the banking sector has been hit bard by capital flight. JPJJJ

Bilateral T*

Egyptian lies

Kuwait's intcresl is securing Egyptian stability and ils apparent belief that Cairo will once againtrongforce in the

rid provide the foundation for increasingly closeies, am E. y>


Near East and Soulh Asia Review.


Arab World: Impact of Changes In lhe Soviet Union and Easternr

The dramatic developments in (he Sovietand Eastern Kuropc have raised newmncemv and expeetaiion* in the Arab world. Authoiii.itijn rulers, particularly Syria's Prcudcnl AtaadIraq'* President Saddamcatressure for change may spread in theirtatu with close ticshe USSR aad Eastern Europe web as Syria, Libya, and Algeria arc facing reduced political, economic, and militaryoderate Arab slate*.with close ties to lhc West, such as Egypt and Saudi Arabia, archat Wcaiern economic rcsourcci will he diverted in Eaiiern Europe and ihai lhc relaxation in Eavt'West tensions "ill reduce thc US commit mem tolhcm aadhe Arab-Israeli peace process. There are several potentially IlvoraMc iir plica! ioaa for the United State* if current trend* are sustained, particulaily the declining diingcr of confrontation wkh lac Soviet Union and lie increasing prospect of cooperaiion withon regional issuer ol impof la

So. Irl-Uit Earopean New Thinking aad tbe Arab World

Since coming io poweroviet President Gorbachev hu made clear that restructuring within Ihe Soviet Union is his primary goal and lhat heore re laud international envii onmentccomplish this. His new approach lo the Arab world ts evident in such policy changes asiih respect lo virtually all aspects of lhe Arab-Israeli peace process, expanded contact*srael, increased identification wkh the ohycctrvc*

and interests of moderate Arabs, warnings to radical Arab client* that military solution* to

regional dispute* are not feasible,illingness

to cooperate wiih ihe Untied Slates lo resolve

regional tensions'**)

The new pmcrssmcMi ol Eaucrn Europe have not had much limeevaluate their policies toward ihc Aran world, hut ihey arc accelerating the paceraslicv fCsSHSSB he gun by theiru- capanuitn ol FaM European relations withnified in recent months a*oland hasc euehliihcd diplomatic nlatu

ontes In S'"let and laslky Change*

rVtHin A'lhs. Arabali who have had (lose lies in the CommumU Uafci arc almost certainty concerned lhal ibe USSR and Eastern Europe arc becoming Icsa committed io the Arab cause. Tbc Syrian perceptioneclining Soviet commiimcnt already has led lo mcaJJicaiions in policy such as Syria's decision to strengthen ni regional position hy tceslahlithioajatuilomaiic relations wiih Egypt Olher Arab Uaies wuh close lie* lo Moscow aho have taken steps to bobier their regional positioni Libya ha* improved il* tics to Egypt and sought closer relation* wiih ill Maghreb neighbors, and South Yemen has moved toward unification with North YcmcnfflMB

Th* Online* ot Economic Chang*irrn* So-tcl Union

Rapid economic (turnft in Eastern Europe andrt Unton will challenge Middle Eollem gmemmentspeed upeconomic reform effort, oetause they fate increasedfor /icfifi eiJ ciiftrmrni. tooil. TV burden of change fill fall turgriy on resource-poorhai depend on external assistance We expect them to push fitrrgumoteconomic cooperation agreements and to seek increased trade, aid, and tnvttfmeni tie* lo Japan, so-tailed newiy indmitnehunt eauntnel. and ihe United Statesr* tigyirous reform pettgrunts in lilt Middle East ait kkeh/ to spread econtutUe opportunities "toer broadlytuhtr rmrrt Arab itatet tirword prate' politicalhberati.'

Dunng the IVAOs mnit cnururies in iht region bttrrtw-ed heattfyui meet dcelrtpmeni needt and compensate for detlirting otl revenues and aid flows. The growing debt burden forced severol countries, including Iraq. Israel, Egypt. Morocco, ondAlgrna. lo embark on programs lo streamline public-sector enterprises, diversify ond promote tsp->ni. and wtcreatt economic efficiency The sutcess of these refnrm programs depends. In pan. on the availability of external financing andeased access to Western-*mm

Moderate Arabs. TbeneArabstateiwiihcJMelitShe Uiuied Sines and Western Europe are concerned (bat Western poliiical and economic resources will be diverted

The rrtassneftnarKirtgreouutmrnO of economic restructuring in Eastern Europe and Ihe Soviet Union threaten to sourete Middle Eastern countries ihat are banking on external funds io help underwrite their economic reform rffons. Israel and Egypt, majorof US security and economic assistance, have begun lobbying hard lo maintain and even increase current aid levels. International Monetary Fund and World Bank borrowers such as lo'dan. Egypt, and Algeria fear that proposed lending to Eastern Europe or the Soviet Union will limit Ihe availability of concessional credit Many Middle Eastern countnts art also major commercial horrowen ond art likely to face harderigher babtvetl rotes ond shorter npayme-.tthey compete wiih Eastern Europe end possibly the Soviet Union for loans.

Rtstnclivt policies have bmisedfontign investment in many Middle Eastern examines, end changes in Eastern Europe and the Soviet Union wilt make the task of attracting investors more difficult. Foreign inrtstors have been denied access lo lucrative petroleum industry operations, and bureaucratic impediments in several countries severely limit pri-our-sectoractivity Unless current investment

Possible Outbreak of Revolution In the Arab World Companion of Arab and East European Regimes. The strength and effectiveness of popular unrest In Eastern Europecaused considerable Arab inucly that prodrmociacy sentiments will spread to ihe Middle East. There are several similarities bclween Ihe former regimes in Eastern Europe and some Arab regimes;

Thc legiiimacy of some Arab regimes Ls as questionable as the legitimacy of Eastern Europe's Communist governmenls. Minority faction slackingi or popular credibility

policies are liberalised, lhe region willbe hard prisied lo compete wiih Eastern Europe'sskilled work font, peotuniry to the expanding WetS European ma-ket. and lemptanding cultural net to

Trade prospetli for Middle Eastern countnet are likely to be muedesult of economic lefonns in Foxier* Europe nnd the Sower Uruan Intheihon run. oil exporten ruch as Iraq and Iran thai ere willing to negotiate countertrade arrangements -probably linked lo arm salesarc likelyxpand trade with foreign exchange constrainedurope and the Sowet Union. Htghieehncdogy exporters such as Israel may well find new markets for their products, and leehncdogy importers Such as Iraq are likely lo benefitoosening of Westernastern Europe and We Sonet (Jn on.

Over time, the Middle East will face increased competition from East European and Sonet goods in world markets Lon-cost East European products am likely us compete dimity with Middle Eastern textile and lighl engineering exports throughout Europe-the largest market for moil Middle Eastern The mtejration of the European

community2 has already fueled fears among Middle Eastern producer! that iheir products mil fori greeted trade^

Economic reform in Eastern Europe and Ihe Soviet Union will also upset longstanding trade and aid relationships with several Middle Eastern countries IruSications that Moscow is tcmsidenng mewingon veeiibSe currencyl ploejng Hi economic relation,ommercial basil threaten to weaken lies to major partners such as Syria. The countries of Eastern Europe have already started ntducing aid progeams and are considering StiUng their Middle Eastern loans to finance their economic reftsrm effort. Itl^

To strengthen their bargaining position in Ihe changxiggioealmvironrneni. wt expect die Middle Eassem countries will try to prmpnan stalled eectnomic cooperation agreements under the aegis of regional organisations such as the Gulf Cooperation Council, the Arab Cooperation Council, and the Arab Maghreb Union. With Western Europe pnroccupied with Us eastern nriehho-s. lhe Middle Eastern statei ere Ftkelylo iryto expatid economic tits to Washington and I

in power in Syria. Iraq, and South Yemen, (or example.

Totalitariano tomepatterned on the Soviet and Eaal European model, areched in tuch Arab uatei as Iraq and Syria, and they are sustained by hated aecurity force*,

idespread in most Arabi is popular awareness of corruption.

Arab stales have seriousroblems, and thererowing disparity

between the wealthy and the poor.

istory of mas* demoosiratwm ia iheeveral Arab cooniiies. rncluding Egypt. Algeria. Syria, and Iraq.

There are importowever,situation in Eastern Europe and in lhe

e Arab regimes have depended on their ownmilitary and security services. The Communist regimes imposed on Eastern Europe after World War II were sustained by lhe demonstrated power of the Soviet military.

The armed force* in Eastern Europe were reluctant to fire on iheir own people, facilitating lhe collapse of thelthough many Arab leaders may be unsure of the ultimate reliability of Iheir military forces, ihey have not been faced wuh military refusal lo carry out order*.

Strong religious, tribal, clan, and extended family lie* characicriuically underpin political

structure* io lhe Arab wirld. contrihulinj;e liability ut Irate vxHtK<4gBJjV 'jp'^5

Arab Content About thereaJfcvoiuticn TV dramatic event!Uvkf. Europe have had resonance throughnul (he Arab world, bul the violent overthrow of lhc Ccauscscu regime in Romania in December IW wat parlicslatly in (he autocratic regime* in Syria and

_.President.'ccmpl nnnular pressure again*!

Saddam Huiaynhonconungs in hi* regime and ha* promised corrective

indicaics he has rrJa,ed for^r, .raveland increased hut puMic conlactsresent lhewho cares for hu people.

Moderate Arab leaders also may face popular pressure lor change The (iovcramcnt of Kuwail Iu* been under pressure lo reconvene its parliantcot, and in0 (heredemons! rations inHahiainisarc urging ihc ruling family to liberalize, arguing lhal there arc lessons lobe learned from Eastern Europe. Jordan icccoilyarliamentary election and hasew lorum for criticism of government actions,lYI't. became of it* cennnmic problems and rclaiivc poliitcal openness, must also be considered vulnerable in popular unrest , Prospects

Thc rcvohrtsoasin Eastern Europe couldatalytic affect on the Arab world, encouraging disillusioned and disaffected nopulalions and feeding popular dcmonMrjt ioets and prolCSIS This may seem mosi Dkcly in countries with regime* Similarhose (Opplcd in Eastern Europe, bul it could occur ia any Arab slateissatisfied population taannnfe

Those Arab leaders whoTciTl particularly vulnerable such as Asaad and Saddam Husayn willangck>ns to preempt challenges toule. They may introduce limited reforms lo prevent popular pressures, bul ihey are unlikelyn.'i genuine liberalisation lhat mighi threaten llteir regimes Thcy^all noiajor lesson being provided by the Soviet Union and Eastcin Europepolilical concession* stimulate demands for greater concessions and lhal those governments lhat have initiated change become increasingly vulnerable. Thus, should real popular challenges develop in Syria or Iraq. Assad and Saddam Husayn almost certainly would reject liberalization and lurn to repression to control popular

Thr more moderate Arab leaders may pursue new policies to preempt or limit popularresident Mubarak of Egypt. King Hussein of Jordan,recedent Ben Ali of Tunisia arc among

Jap* flu 7

Economic Assistance Flows*


the more likely leadenmphasize reform Ii is unclear how change would develop or whai in naiure would be Few Aiab leaden are likely toeir programs on Western models They are lar more likely lo look lo ihcir own hutory and culture and to see* accommodation wiih ihc prevalent ideology ofheilamic fundamenlahsrB. An Islamic model could contain elccaenli of democ/aty (as id Iran's Consultativeui it could also contain elements of religiousystem based oa rundamcolalism is likely to be both ami-Westera and anti Communist in orient at ion

Implications for Ihc United States

Continuation of cm rent Soviet aad Eau European policies in the Arab world will have several implication! for slates in thc region as well as for tbc United Stares:

The danger of direct tlS-SovKl cooftonUlKW ia tbe Arab world will continue lo decline. Moscow and Washington may be more able lo

cooperate on regional issues of importancehem, such as pievenling missile proliferation.

Those Arab states Ihat relied oc the Soviet Union may reorient their policies aad may even adopl more conciliatory positions toward thc United Slates.

ib world wtflw the Soviet Uruonegitimate member of tbe world community. Soviet credibilityediator will be eoJianced, and the preeminent role of the United States may decline. Autocratic regime* seeking to loosen political and economicd urea are likely to seek help from and improved relations wiih the international community, including ibe Uaked Slates Should tkeylura to repression, they would face international censure and could become more inward looking and less conciliatory. They could even become more aggressive cBernaHy as they seek to dsstrad doeocatic attention and justify repression-



Syria: Achieving Defensive

luting Ihc pastears.TJamascus hastrong conventional forceeterrent capability based on its chemical warfare program that wouldeoftoruaooo with Israel costly for Tel Aviv. Tbe Syrian military still has many weaknesses that would make sustaining prolonged defensive OpcfationsdilTiCull. Syria will be hard pressed in tbc neat few years to develop the capability to launch an offensive strike agaiosi Israel or to sustain the military gains made over the last decade,

DtflaUioos of Strategic Parity Syrian President Assad defuses strategic parity in broad terms encompassing social and economic factors, such as technical and educational capabilities, in addition to the military bajaajts]

military terms, Assad defines parity as the "achievementarallel level with the force* of tbe enemy to detere furlher states that "this does not mean forces should be matched, nun for man, rifle for rifle, plane for plane. Rather defense forces should be sufficient lo convince Ihc opposite side that efforts at ei|sansion wouldc believe the principal motivating factor behind Assad's quest for military parity is his view that Syria has to be able to negotiate with Israelosition of strength, not weakness, if it hopes to regain lhe Golan

Syrians achieved defensive parity largely became of massive Soviet support. Tie Soviets soughtodernize tbe Syrian eai&tary with massive infusions of sophisticated equipment intended to lessen key Syrian vulnerabilities. The Soviets concentrated on developing Syrian air defenses, electroaic warfare, and command, control, and communications capabilities. Under Gorbachev, Moscow hat dearly indicated it opposes Assays concept of offensive strategic



deploymenlew a! usrface-toaii missile systems- the tactical SA-fS,na Ibetrengthened Syrian air defer

Modemliinj Conventional Forte*

Gnjond Fcxct. Modernizaoon ol Syrian ground iVeei hai propaddy,at mat iigoifseaBiry clened ibe topological and (ualitatrve gap with the Israeli

_ loreover. Syriani have deployed iheiranks to icxond-cchclon and regime protectioneaving thebe bolk of Syria) tank force facing Dae Israelis, cm Ihc GoUabete older taak* are bile match for the Israelii' upgradedor advanced Merkavatanka In addition, enany of the Syrians'

lank* Uek reinforced inner md are vulnerableracB asl::ua raruulea. aBnMnW

TV Syrian* alto lag behind lhe Israelii in artillery capability deapile the dramatico the number of artillery pieces acquired" by Syria during tbe put decade, Wkh ihe except ion of multiple tockil launchers, the Syiiaa* have few icl!

Tbc Syrians adhere to ie and rely heavily noirepower instead of sliessing accuracy. Thii strategy wai during the six mwllss of shelling of Eail Beiruiost of ihc targets hit by tbe Syrians appeared to be Ihe result of tuck and massive shelling rather than skill

Ah*amascus reltea primarily on its surface-to-air missile network rather lhan its Air Forte for protect ioc of its airspace and has concentrated on building up these defenses since

To supplement their surfacclc-atr missiles, the Syrians have deployed an air surveillance radar network I

Air Font. Modernization in (he Syrian Air Force has proceededteady pace. I

I The olderighter makes up aboutercent of Syria's Interceptor force. The more modern and sophisticated MiG-OGs, MtG-ZSs, andcomprise onlyercent of this


Syrian aircraft and pilots are not as caps ir. our judgmenl Most o( Syria's aircraft lack Ihc sophisticaied avionics afc^sssaaassnsjkajsjj^^ Uetil (beperationalwe beljeve will beyrians win lack (be all weather, dayaiaal, low-aliitudc strikeMeat (raining activity ia rigorously scripted and controlled by ground conttollers, denying Syrian pilots an-

ft'ovy. The Syrian Navy's primary reiportsibilily bio defend the Syrian coast, but the Navy demonstrated its abilityeploy outside Syrian coastal waters last year when i( blockaded Lebanese Christian pots. Missilelsand Komais-gre

Deterring Tct Aviv Syria's surface-to-surface missiles aad cbemical warfare capability are the primary reasons Syria has achieved defensive parity with Israel. Syria has one brigade each of FROGs. Scuds, and SS-lls, totalicgaunchers. The FROG rockc( and Scud missile ire inaccurate systems aad pose thc biggest threat to targets covering large areas such as airfields and population centers Theissile provides Syriaore accurate short-range lystcnajfBaV


The Scud missile armedhemical warhead is Damascus's main strategic opiloo.iloBseter range,cud missiles canfj


would male Damascus carefully weigh (he costs of

^USmj|llijSI: r



When (height bomber is fully integrated into Ihe Air Force in about three years, it could giveore survivable air-dropped chemical weapon delivery platform, magnifying (he threat to Israel. TbeCO-kilometer range, depending on the mission's altitude, will allow (he to base the aircraft deeper inside SyriaI



In addition, thc aircraft's avionics package will provide the Syrians with limited adverse wealhcr and day-oight bombing capabilities allow loeecdntnt

In our judgment, the Syrians prefer sonnies io aircraft for delivery of chemical weapons because of the higher probability of reaching the target. To this end, the Mn.un have attempted lo acquire^





The Syrians will continue loUiivc lot overall military parity over tbe long term, but ibe pur suit will be increasingly difficult. We believe ihey -ill be able to maintain pariry prod

Syrian effort* to reach parity will be further hindered by increased Soviet reluctance to sponsor Syria's strategic goals. The Soviets will stndoisbtcdr, continue lo stress support forut theybe reluctant to folly

support ils offensive gceJs. Soviet equipment supply decisions wifl almost certainly be made with these goals ia scuod. further frustrating the Syrians. Moreover. Soviet demands for payment of al least some ol Damaseus's military debt to Moscow wiUyria's strained economy ajgkW Q


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Ubanon: Who Murdered President Muawad?

Pieijdmt Rene Muawad wu killed onebanese Independence Day.f hundreds of kilograms ol plastic We judgeChristian strongman Mich-el Awn wai responsible for Muawad'i dealb on Ihe basis of motive, possible gain, and largely drcumslaotiaJ evidence, Palesiinc Liberation Organiiaiion (PLO) elements or the Iraqi Government may have encouraged or even i ided Awn loebanon. 0MtM

Kareaalc Considerations

The instrument of Muawad's deathemotely detonated caplosive chargeilogram* ia site. It waa hiddenuildingoute Mwawad waa likely to travel after all ending Independence Day celebrations Reports of the assassination bgtray no indications of hastytliecevice was cocutuuetcd and cm placed accordingell coftce.-ved andfgjgjft


! unconventional tactics had become part of Awn's repertoire before Muawad'i death.erovocative campaign of ami-US dc moral rat ions. Skins at tke US Lmbasiv ia East Beaut, and threatened toew Americansc strongly inspect Awn was responsible for the wave

of bombings that swept last Beirut and thc Christian enclave just before the assassination Some of (be bombs eipsoded outside thc homes of Christian dekgatensvbo bad supported the national reconciliation accord reached ia Al Tn'if, Saudi Arabia. Since the Lebanese Forces militia supported the Al Ta'if accord, il seems unlikely (bey would have been behind tlxHMkV


We believe Muawad'i death was engineered primarilyorpedo Lebanese national reconciliation, lo addition, the removal of thc Syrian-backed President was intended toajor blow to Syrian prestige and politically weaken Christians who advocated compromise and acicanmodatioa with Lebanon's Muslims We do not rule oat the possibility thai Muawad'i assassination was also designed to prevent tbc rccoost'iutiooentral Lebanese national authority. In sum. we believe Awn stood the most

Wi m


gain fiom's removal. In addition, his death eliminated Awn's main rival for political legitimacy and muted opposition lo Awn within tbc Christian commururyassjajpiss*. ther SaspeeU

Although Awn is the prime suspect ineath, other faetkms in Ixbanon cocld have been respCK^MclJlflfr ^

Tbe Lebanese Forces sniliiia's opposition io Syria's intrusion inio Christian aifairs and expertise in carbomliing make il suspect. At lhe lime of Muawad'sdealh, however, Ihe Lebanese Forces was supporting Ihe Al Ta'if process through ks political arm. Even (hough one should not underestimate Ihe potential of any Lebanese group for ry. ihc militiaou'lical setback within (he Christian enclave following Muawad'i death.

Iraqnly became of Bagdad* persistence in attempting to deliver FROG artillery rockets lo (be Lebanese Christians last year and lhe pleasure the Iraqi leadership takes in thwarting Syrian designs ia Lebanon.

The PLO would have an easier lime preserving Its locbold in soul hern Lebanon if ibe central government could oot eitcnd its authority there.

Similarly, the Iranians and radical Shia Hizballah seekromote disorder in Ubanoneans of establishingIda.nfc repssbiic. Hizballah usually takes credit for iu bombings, however, and there has been no claim of icscsocsibiliry for Ibe Muawad bocabmg Aahough the Iranians may calculate thai Muawads death will promote their interests in Ubanon. revelation of Iranian complicity would jeopardize Tehran's strategically important relationship with Dantaseus-someihing Tehran has been unwilling to do. Moreover, there isoodirect evidence suggesting an Iranian or Hizballah role.

We doubt that Syria killed Muawad because someyrian security personnel also died in thcblastdjff


On the basis ofpossible we bcJieve Michel Awn is the perpetrator.

The lebaoesc National RctnocllUKou Process

The meeting of members of thepartuimenl in Ai To if. Saudi Arabia, produced new bui fragile hope for lhe future of Lebanon. Affa several weeks of wrangling, meeferred lota the At Ta'if accord- that murremrd earl

tornpromaet ihathniUoru had rejected The itnportanet of the At Ta'if accord wai not ia eevum/aitfrtepreeexroy^Mnifcawta^our. The foci ihat representatives ofLebanon, normally fratricidal iteti were willing and obit toower-sharing agreement unhealed that the civil war is not ntctstarily interminable. If Iht first step toward poliiical reformsychological conversion, then iht comrmtmtnl of Christian legillolori to thant power

Maurdfiedt. befynrur^ofan^poliisxale^ 7hu process nrpntsents aformidabU challenge to thoieebanese politics who benefit from the continuation of Use status quo and lhe miliiia system

Libya's Deteriorating Economy:

serious hard currency shortage, fueling inflation aa* raising especial ions among the Libyan populaliop aJgaJI

Ubya's foreign payments situation deterioratedor lhe first time the trade account moved into deficit because oilaccount for virtually all of Libya's exportellercent and imports increasedatent. Compounding this shortfall. Qadhafi's open border policy ledharp iocrcasc in ibe services account deficil in


ribuling lo Domestic Unresl?

Libyan leader Col. Mu'ammar Oadhali has abandoned lhc ecooomic reform program be Uuocheclnd appears to be setting <bc stageew round of economic austeriiy measures. The country's foreign payments situation is dc( evidencedrawdown in foreign exchange reserves. Inflation is on ihc rise, and thc banking sector has been hit particularly

Although little data are available for iw, we believe Libya is stilligh current account deficit. Most import ant, we believe there was little improvement in (he services accoun( deficil because Libyan tourists flush with hard currency and hungry for Egyptian goods flocked to Alexandria after ihe border wiih Egypt was

erviccspending by Libyan tourists io Tunisia and Turkey, which recorded tbc greatest influx of Libyanillion. The poor performances in the trade andeo un Isurrem account deficit of Si2 billionore than double7 short fall.


Renewed austerity measures are likely togenerale at least some civil unrest, but this probably will not threaten (he regime. Qadhafi has weathered oihcr economic crises im his two decades in power and probably knows how far be can squeeze his people

;conient icaches threatening proportions.

Despite to increase in oil revenues from SS2 billion8 to S6 billion last year dueigher inicrnatiooal prices, Qadhafi probably could not slash importley goalin pan because international food prices were higher. Libya imports about two-thirds of its food needs. In addition:


The governmeni must pay premium prices for oil-related technology since Washington jrnposed economic sanctions

LJbya'a Economic Doldrums Libya has not recovered from ihe plunge in oil6 (hat halved its export revenues. Inonfromrxlbyapublic weary of ecooomic austerity and humiliated by Libya's miliiary defeai in Chad, Qadhafi removed most restrictions on travel abroad, filled staie-run stores wiih food and consumer goods, and promised prtvaieuch larger role io the produciioo and distribution of spods. These ecooomic stepsore market-oriented economy were not fully implemented and did not focus on the serious Structural problems plaguing Ibe economy. The poorly planned reforms appear only to have made thc situation worse by creating a

[Libya's Deteriorating" Financial Position j

crop in Fioctao increase in iimons* ano service paynentn..

ive ousneo tne current account into tne rea

Service_Payaents Eoorts

'l-ekdes revenuesgooes ond

Current Account Surplus Current Account Deficit


Tbe drop ia foreign eaeaange reserves buttresses speculation lhal Libya's current account deteriorated further'nsnHBI^lsMl

Tripoli, for political reasons, does not borrow

aioney lo finance Uscarrent account deficits. Instead, Qadhafi finances tbe country's foreign payments shortfalls bydsawag down foreign

teserveierve fell7 billion inJJ4 billion ir0

CirmW/ltgaU Ccmtributing to Libya's fmaeoal woesourishing black market thai has sipbooed off large sums of bard currency from the official bartking sector.

several ploys lo obtain hud cuttcocy (or imports and (bat Libyan officials choosegnore the infractions. For example. Libyans bribe medical officials to obtain certificates indicating -expensive medical treatment is requiredhitd

Z)omesnc 5Acwjrej. The outflow a( scarcetond Earrpt is equally

We believe Gaddafi's capricious dealings with foreign trading partners have contributed to

flourished In Tunisia9 as enterprising Libyans purchased heavily subsidized basic commodities at home, trucked them across (he border, and sold (hem to Tunisians for substantial profits.esult, shortages of these goods on the Libyan dornettic market have increased theft and fueled inflation. Rural areas appear particularly hard bit. Tbe disparity in living standards hasajor bone of contention bctygm Tripoli and the hiol

I Urvan.lullaa rcUlou have been mOve-ced by lackasiey of coto-Ul Soeslattbnve IbeturolQMhaficr-erThe Libreabatrttieued Rom* tor aimeiiies eowiitedtheHe hu tbo referred to Rome atult* Meditcotmin luty has cosenlly eaoWred QadBiti'i iporsdH Undo in panrateri iuoasmcrciil lintsm.


i" i. i

bya: International Liquidity B"olli'ii









Remedialill Qadhafi Make th. High, Oadhafi Kas taken or is eonslderi

options- unoer review are similarioT recornoseods to (roubled countries.

believe QadhaliwajublceTwTcot lo import, during bia ipecehhe lime People's Confesses in January, when be laid consumer goods are not useful and not necessary."


tbe Stage for an rkonotnie CracVdown

ptech lo the Basle People's Congresses onanuary. Qadhafi indicated heeruns to lighteron the economy was needed The Libyan leader said 'everything is Deo* to ml revenues. ana* shit isow eon everything be free, he asked, nhen the price of ml hasadhafi urged lhe eortgresses to reconsider Libya's economic system and said they should consider whether Libya should return lo "the marketadhafi reminded the congresses that "economic freedom meant rxplcniation, inflation,. addition Qadhafi:

m Ttlamed the private sector for shortages and


a, Claimed free trade would increase the country's debt He said free fade ensures the availability of goods, but 'at the expense of all the assets and budget erf the state'

Said the people had the authority to determine whether the stale should pay for health cart and education, but told them "you should tee first whether your stale has money or not.'

look forn<irriY Qadhafi probably will have more money at hii disposal ibis year il oil price* rcmaio fun. and he sncccufully coti imports. Regardless of wbal he saves from thc proposed budget cuts, wc believe he will choose to invest his resources in joint ventures, grandiose dcrncslic projects, or support for revolutionary or terrorist groups abroad. Is Our view, QadhalTs moves to crack down on private-Secior activity will worsen lhe already serious structural pioblems within tbe economy and impedeId addition, we erpect littic improvement in the precarious position of the banking sector and believe European banks doing business sviih Libya will become more hesitant about providing trade financing or underwriting LibyaoprojcctsaafMRat Implications for Domestic Stability Ecocvoosic liberalisation raised expectation* among Libyans lhat they might once again enjoy the high Irving standards experienced during the years of high oil prices, ye believe Gaddafi's derision to

open the borderseft political move, bul it also exposed bis countrymen to the range of consumer goods available abroad and enabled them to experience the personal freedom* accorded ci'tiens in neighboring countries. Strict enforcement of lhc foreign exchange rcgulal ions probably will anger lhe public, which ha* been forced to cross ihe*Ader* to find the most basic consume. goods9M 'yy^ Still, sve believennomic crackdown will notegime- threatening popular uprising. Qadhafi has weathered olher economic crises during hi*ears in power. Heanny polilical operator who knows how far he can scpaccie his people. Oejy if Qadhafi misjudged the mood of the pcpu land failed to rescind ocw aisslcrsty measures al thc outset of violent unrest would he risk violent and potentially troublesome

Qadhafi may believe that cuts in subsidies could improve (he-domestic economy. Such cuts svould


Kuwall-liRypI: Maturing; Bilateral Ties


Kuwait's interest in securing Egyptian liability and iu apparentt Cairo will oocc againtrong moderating force in ibe Arab wensc? provide tbc foundation lor iricreasmglyCWaJti-Eavptian lies. Kuwail recognise* Egypt's uadttiooalh/ important role in ibe Arab weld and since iisdepeodeoce has worked to expand its political, ecoocenic, and security tics to Cairo The Kuwaitis stepped up security reoperation wiih Cairo after Ibe Iran-Iraq war tkrcalencd to spill over into other Gulf stales, and, since the cease-fire, they apparenlly have looked to Egyptian President Mubarak to discourage Iraqi adventurism in the Gulf. aflfllnV^lose Relallooshlp Both Kuwak and Egypt historically have benefited from Ibeir dose rrJalions. 7hia relationship originaied in Egyptian Pies idem Gamal Abd al-Nasirs decision to send Egyptian troopsuwail1 as part of an Arab League force to counter Iraqi threats to Kuwaiti sovereignty. After Ihe Arab-Israeli waruwail supported Egypt and (be other Arab belligerents by participating in an OPEC oil embargo against Western commies. Oktnaff Kuwait severed formal lies lo Egypt8 touching Cairo's signing of the Camp David accords1

Increased concern over the possible spillover of the Iran-Iraq war led Kuwait lo capand military aad financial ties to Egypt beginning6 and lo

Since Iran and Iraqease-rue inuwait has continued lo cuilrvalc close relations with fcgypt. Tbe Kuwaitis view hie odly tics to Cairoounterbalance lo lhc iafliiencc of their larger Dt^bors, Iran. Iraq, aad SaudiA/absa We believe the ruling AI Sabab family has been seeking Egyptian support since last year in the dispute with Iraq over possession of Bubiyan and Warbah Islands, currently under Kuwail! control. AmirJabir probably hope* Presidcni Mubuak can use Egyptian support to Iraq during the warIrao and Cairo's aJTilialion with Baghdad in lhe Arab Cooperaiion Council lo temper Saddam', pressure oc Kuwart1 Tbe Al Sabah also be seelang Ea^ptiano.respond to rising docaestic demand for political reform in Kuwait. Crown Prince Sa'd al-Abdallah Al Sabab duties his visit to Cairo in earl. January publach/ announced thai tbe ruling familyew formula to rccoovcoc the National*

Far-Reacblng Cooperaiion Oa lhe financial front. Kuwait is lobbying lhe International Monetary Fund (IMF) to delay its demands for ecooomic reforms in Egypt long enough for Cairo toeasure of financial Uabilaty. Kuwait believes IMF-supported reformshelp Fgypt era lhc long term but lean their immediate effectbe to incite ]


has been asking Western countries to persuade the IMF lo accept slower implementation of reforms raibcr than insist on Strict adherence to measures that Cairo is resisting Moreover. Kuwaiteader io securing Gulf state economic assistance for Jordan lasl summer, and wc believe Kuwait would consider similar measure* lo help boost

9 Malh I'm

Cano'a foreign exchange position if Egypt* economy dccli"C5 abruptly. MiM ^j.

Kuwait and Cairo do not alv-a

tbe political 'eUttooship, even (hough (he talki produced Utile erfw-

Kuwait is hoping to altei the nature of economic supportgypt by replacing direer financial grants wrta private mvrsimeaf, Kuwaiti aid has

Irnedeak of0 million6ess thanillioo last year and7 has shifted primarily (torn direct aid to project aid. Kuwait haa tuned businessmen to consider private investment in Egypt and has worked with Cairo to reduce Egyptian legal constrain is to foreign investment. Although some Kuwaiti businessmen may quest ion (be low rate of return available in several Egyptian projects, Kuwaili ptrvatejoveaior* have channeled aa estimatedillion2ypt'ian agricultural, urban rail titaic. aad tourism projects.

Original document.

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