Soft landing for military spending

25 June 2004
It is often said that history repeats itself. But, while the recent war in Iraq bears many hallmarks of the previous conflict, the huge spike in defence spending which followed the resolution of the 1990-91 war has been conspicuously absent in the aftermath of that in 2003.

Unlike 1992, when, according to figures from the Stockholm International Peace Research Institute (SIPRI), defence spending in the region increased by 34 per cent, 2003 has seen an upturn of only 10 per cent. In Saudi Arabia, the region's largest military spender, the contrast is even starker. In 1992, military expenditure in the kingdom jumped by 91 per cent; in 2003 it increased by just 2 per cent to $19,102 million.

The numbers cannot always be taken at face value. Figures for defence spending, when they are released, are often bundled with those for internal security, and sometimes even with the Justice Ministry's budget. Much military expenditure is also off-balance-sheet, with defence purchases offset against oil deals.

Whatever their shortcomings, the figures do show that recent defence spending has been far more conservative than in 1992. A great deal has already been invested in Middle East defence capabilities over the past 10 years and, at least in terms of major procurement deals, the region is coming to the end of its current spending cycle. Compared with an increase in world defence spending for 1994-2003 of 18 per cent, SIPRI figures indicate that military expenditure in the Middle East increased by 48 per cent and in North Africa by 35 per cent.

In contrast to the second Gulf war, where several Arab states sent troops, most Middle East countries had little or no involvement in the most recent Iraq conflict. Those that did take part - notably Bahrain, Qatar and Kuwait - played supporting roles to the US-led coalition. Qatar is home to the US' central military command, which oversaw the Iraq campaign, the US navy's fifth fleet is based in Bahrain, and Kuwait once again provided a base for coalition forces during the conflict. Protected by the US umbrella, there is little incentive for these countries to invest heavily in arms procurement. Although, according to SIPRI, Bahrain's military expenditure increased by 38 per cent in 2003, this was offset by a corresponding decrease in US funding - from $200 million in 2002 to $90 million in 2003.

Arms procurement in the Middle East has always had a strong political element, and sensitivities to the military domination of an Arab country by a Western power has led the other GCC countries to adopt what Wuyi Omitoogun, a defence expenditure researcher at SIPRI, calls a 'wait and see' policy. What plans there may be for a renewed round of defence spending in the region are likely to be put on hold until the US presence in Iraq, and the instability that currently dominates the country, begin to wane. 'There could well be a shift in spending as relations with the US change over the course of the post-conflict period in Iraq, but as yet there is no evidence of this,' says Mark Stoker, defence economist at the Institute of International Strategic Studies (IISS).

Moreover, many of the Gulf states are increasingly having to focus spending on other areas. For most countries in the Middle East and North Africa, the primary challenge in the coming years will be the reduction of unemployment and the absorption of a burgeoning domestic workforce. 'With the social and demographic problems facing the region, I don't see huge amounts of money being diverted into defence,' says Stoker. 'It may creep up from the current 7 per cent of GDP [gross domestic product], but won't go ballooning up as it did in 1992, particularly given that the countries are so much better equipped.'

Between 2001-03, Saudi Arabia's budget allocations for health and social development increased by 28 per cent to $6,219 million, whereas budgeted expenditure on defence and security fell by 12.5 per cent to $18,392 million. Unemployment was already running at 8.4 per cent in December 2003, and with 40 per cent of the population below the age of 15 and population growth of 3 per cent a year, the need for such reprioritisation is becoming more pressing.

In many cases, changing defence and security priorities have also meant a reallocation of expenditure. Recent events in Saudi Arabia have given internal security a particularly high profile. Suicide attacks on a Riyadh compound in November 2003 left 18 people dead and more than 120 injured. On 29 May, 22 people were killed in attacks in Al-Khobar. The increasing frequency and heightened fear of such attacks are threatening to impact Saudi Arabia's economic performance, as Westerners in particular are increasingly tempted to look for safer homes for their businesses.

In the face of these escalating problems, the government has understandably ramped up its efforts to improve security in the kingdom. There is a renewed emphasis on surveillance, and military acquisitions are increasingly adaptable to both external and internal security. 'The security situation in Saudi Arabia is not going to be resolved by buying state-of-the-art military equipment,' says Stoker. 'That is not the threat they are facing. What Middle East countries are most likely spending money on is their installation security and surveillance-gathering assets. Unmanned aerial vehicles are being bought to patrol borders, and they could also be used for oil installation security.'

Part of the Saudi response to the security threat includes a proposed high-tech border fence for the kingdom - the Saudi Border Guard Development Programme, or Miksa. In a demonstration of the political dimension of procurement deals, Riyadh is in talks with civil engineering firm Vinci and Thales. Both are from France, whose refusal to join the Iraq war makes it a less contentious partner in these sensitive times. There is talk that a Eur 7,000 million ($8,439 million) deal could be within weeks of completion.

Despite the absence of a spending spike, the Middle East is still a crucial market for the weapons industry. The region's expenditure in this area stands at about $70,000 million, and it is by far the world's largest importer of arms. For the past decade, military spending in the Middle East as a proportion of GDP has remained consistently around the 7-8 per cent mark, with a similar level forecast for 2004. High as this is, the fiscal ramifications are for the time being largely offset by high oil prices. Saudi Arabia remains the world's biggest market for military equipment, and last year it generated a budget surplus of $12,000 million. With oil prices recently breaching the $40 mark and set to remain strong, the kingdom and its oil producing neighbours can still be assured of a healthy revenue stream.

As a result, despite the recent downward trend in large procurement contracts, deals are still being made. Only last year the UAE cemented a deal for a $1,500 million package to upgrade 30 Apache attack helicopters to a new configuration, and it is also under contract to buy 80 Lockheed Martin F16s from the US over five years, at a cost of $6,500 million. Originally due at the beginning of last year, delivery is expected to begin imminently. There is also talk of Saudi Arabia investing in a new fleet of fighter aircraft in the medium term. The Eurofighter, the F15 and the Rafale, made by France's Dassault, are the main candidates for the contract.

Other, smaller, deals are also being considered. 'One trend emerging in Kuwait, Oman and the UAE is towards buying smaller, first-attack craft: highly well-equipped and manoeuvrable ships that are good at working in close waters,' explains Stoker. 'Possibly at the persuasion of the US, they may wish to increase their capability in this area to ensure a nimble fleet which can be used to counter any possible threat from Iran, or just to keep an eye on things.'

The GCC is also making some progress towards a joint military structure, under the name Peninsula Shield. Following its first Joint Defence Council meeting in October 2002, the GCC expressed satisfaction at the progress being made towards improving military co-operation between its six members. A shared optical fibre command and control link has now been operational for about two years. And in December 2003 a project was launched to develop accommodation and training facilities for 6,000 Peninsula Shield personnel in Hafr al-Batin in northern Saudi Arabia.

With big procurement deals on the backburner, and internal security considerations increasingly taking centre stage, the focus of defence expenditure has shifted for the time being. But substantial spending levels persist, and it is purely a matter of time before major deals begin to resurface. n

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