For years economists have lambasted the lack of FDI heading to the Arab world. Government officials have promised reforms to pave the way for hesitant foreign investors. But with little change in the investment climate, the calls have grown louder in parallel with the rapid rise in oil prices.

‘The Middle East attracts less than 1 per cent of the estimated world pool of FDI funds,’ Omar bin Sulaiman, director-general of Dubai International Financial Centre, told the World Economic Forum, held in Jordan last May. ‘We as a group of nations are investing significantly more in other countries outside the region than we are receiving. It is now time we made the Middle East a lure for FDI.’

The 2005 World Investment Report released by the UN Conference on Trade & Development (UNCTAD) at the end of September backs up Sulaiman’s view. The FDI inflow index across the region makes for embarrassing reading. The Middle East & North Africa (MENA) region attracted just over $15,000 million in 2004. In comparison, Singapore alone had inflows of $14,000 million for the same period. ‘If you compare the inflow with other regions, it is very small,’ says Mastaka Fujita, chief of the investment trends division at UNCTAD.

Over the last two years there have been signs that the situation is changing. In 2004, the West Asia region, taking in the Gulf, Levant, Iran and Turkey, increased FDI inflow by just under a third, rising from $6,500 million to almost $10,000 million. However, more than half was concentrated in Saudi Arabia, Turkey and Syria. According to Fujita, 2005 is likely to see FDI inflow double in many nations, particularly the Gulf.

On a country-by-country basis, Bahrain outperformed the rest of the region. The UNCTAD FDI performance index, which measures the levels of investment actually achieved in relation to resources available, placed the kingdom in 27th position (see Bahrain Special Report, pages 36-38). Smaller economies such as Syria (39) and Jordan (48) also fared well, as did gas-rich Qatar (63). However, the region’s economic heavyweights ranked well down the table. UAE (104), Egypt (108) and Saudi Arabia (121) all failed to make the top 100.

Certain discrepancies were also highlighted by the report. Syria’s FDI inflows of about $1,200 million were substantially higher than the UAE’s, often considered the shining light in the region. ‘For Syria and Saudi Arabia, it was the first time in the survey,’ says Fujita. ‘The statistics were directly attained from the government, whereas with the UAE the FDI inflows do not necessarily cover all the emirates. With statistics difficult to attain in the UAE, we have had to collect investment figures from balance of payments.’

Familiar explanations have been put forward for the lack of FDI. Ongoing political instability, lack of transparency, regulatory frameworks and restriction on foreign ownership have hindered the process. ‘Certain countries in the Middle East such as Jordan are beginning the deregulation and privatisation process and are showing good results. It is also benefiting from its free trade agreement (FTA) [with the US], and as a result FDI is coming from the US,’ says Fujita.

With Oman, Bahrain and Morocco already signed up for FTAs and the UAE in advanced negotiations, the likelihood is that more FDI will also be heading in those directions first.

However, strict foreign ownership laws restricting access to the hydrocarbons sector are harming FDI inflows. ‘This is not