Defending the budget

02 November 2002

Towards the end of the year, a second batch of UAE Air Force pilots will make their way to the US to receive training on how to fly F-16 fighter jets. With the first deliveries of 80 aircraft scheduled for the beginning of next year, one of the largest regional arms deals of recent years - it is estimated to be worth up to $7,000 million - is close to reaching fruition.

In the context of UN Security Council debates over a new resolution on Iraq and the US military build-up in the Gulf, such transactions provide an important backdrop to the intensifying debate on regional stability.

The Middle East has, for some time, been a focal point of the global arms trade. However, regional defence expenditure has not been solely about the construction and maintenance of domestic military capability. For Clausewitz, war was the extension of foreign policy by other means. For many Middle East governments, defence contracts have served the role of extended foreign policy. Arms procurement from the US, the UK and France has, in the past, been used as a means by which political ties have been strengthened and security enhanced.

While this continues to be the case, the emphasis is changing and Middle Eastern defence expenditure is adopting a new configuration. 'In the GCC, for example, attempts to build a regional defence capability are pushing foreign policy purchases into the past,' says Christopher Langton, head of the defence analysis department at the London-based International Institute for Strategic Studies (IISS). 'Increasingly, equipment purchase decisions are based on internal security concerns - much of the equipment is dual-use in this regard. In addition, greater emphasis on collective defence creates a competitive environment: none of the armed forces wish to be found wanting in joint exercises.'

The emphasis on developing the capabilities of the GCC defence force, Peninsula Shield, was restated at the last GCC annual summit, held in Muscat at the beginning of the year. The commitment was made in 2000 to expand the force's strength from 5,000 troops to 22,000 by 2003, though the likelihood is that only 6,500 troops will be stationed at the Hafr al-Batin military base in northern Saudi Arabia and the remainder will be on alert as reserve units. The challenges to the establishment of a capable regional force have centred on equipment standardisation and improved unity of command. Growing volumes of money are being spent on overcoming them.

To date, the move to share responsibility has not led to any lessening of the financial burden. 'The GCC may have moved to a position where it perceives a common threat - Iran and Iraq are still the public focus - and it is working to develop a unified defence capability, but all the member states are continuing to build 3D [land, air & sea] forces. There is no movement towards the development of niche capabilities, as is the case in Europe, for example,' says Langton.

Whether such strategic thinking - and investment in broad capabilities - is sustainable will become as much a macroeconomic question as it is a political and foreign policy consideration.

Regional defence spending - both current and capital related - is very high: in 11 of the 18 countries surveyed it exceeded 5 per cent of gross domestic product (GDP) in 2001; and in seven it exceeded 8 per cent. To put these figures in context, the global average is about 2.7 per cent. Equally important, is the fact that defence spending has grown faster than GDP in all but three countries (see chart).

However, the economies - and the budgets - of the region are not comparable. For example, Kuwait might have the highest levels of defence spending per capita in the Middle East, and among the highest as a proportion of GDP, but there is no reason to doubt that this is sustainable. Kuwaiti oil revenues continue to be robust, its current account and budget remain in surplus and its portfolio of international investments is extensive. In addition, a decade ago it was amply demonstrated that defence programmes should not be an area for cost-cutting.

From a financial perspective, the situation in the UAE is similar. Abu Dhabi has shouldered sole responsibility for paying the defence bill - it is handled off-balance sheet and is not part of the federal budget - and has ample resources to do so. Neither Kuwait nor the UAE are saddled with meaningful government debt.

The situation is not so clear-cut elsewhere. Saudi Arabia may have the largest economy in the Arab world, but with defence spending equivalent to about 13 per cent of GDP, a domestic debt pile equivalent to about 100 per cent of GDP, budget surpluses a rarity and a young and fast-growing population requiring extensive infrastructure investment, the trend of increasing military spending is not sustainable indefinitely. Political judgement and the weighing of geopolitical factors will become increasingly acute as the macroeconomic pressures grow.

In the Eastern Mediterranean, budgetary constraints have been more pronounced. 'Syria would love to increase defence expenditure, but it simply lacks the funds,' says a London-based defence analyst. 'It needs to replace old Soviet equipment, but it still owes Russia more than $10 billion.' Syria's defence spending stands at 9.5 per cent of GDP and, with the Russian liability included, government debt is equivalent to about 110 per cent of GDP. Elsewhere, Jordan's defence spending may have already overshot comfortable levels: although still high at 8.7 per cent of GDP, Amman's was one of the few military budgets to contract last year.

One of the most stretched economies in the region is Israel's. Defence spending rose to 9.6 per cent of GDP last year, and with GDP contracting and Israel's debt pile growing a financial squeeze is threatened. However, direct financial support from the US will prevent any dramatic collapse in capability (see box).

For many of the strained economies, comfort can be found in the fact that most regional capital investment cycles are coming to an end. In Egypt, the programme to replace Soviet-supplied equipment with Western arms is well advanced. In the Gulf, the surge in equipment purchases that followed the 1990/91 Gulf War bucked the global trend of the post-Cold War 'peace dividend', but it too is now nearing completion. The tail has been seen this year in Kuwait's $850 million order for 16 AH-64D Apache Longbow attack helicopters, Saudi Arabia's receipt of the first of three Lafayette frigates and Oman's order for 16 Super Lynx 300 naval helicopters.

The focus has turned to ongoing operations and training, systems integration and the development of military infrastructure. Some governments have shown innovation: for example, Oman's joint service military academy is to be a private sector-financed project. 'It's not just about the bulk supply of equipment anymore,' says a spokesman from the UK's Defence Export Services Organisation. 'The rationale of the defence industry is no longer about the supply of systems, but about sub-systems.'

The shift in focus is significant as big-ticket procurement programmes have accounted for sizeable proportions of total defence expenditure over the last decade. If respite comes in this area, the upward movement in defence spending will probably be reversed. It may not be a peace dividend, or the end of an arms race, but it could ease the pressure on some regional budgets.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications