Pakistan’s Biggest Threat Isn’t Foreign

PostGlobal – WashingtonPost.com

by Vivian Salama

Ask 10 Pakistanis what the cause of their country’s security breakdown is, and you are likely to hear at least 10 answers. One of the most widespread beliefs is that Pakistan’s problems, much like those of neighboring Afghanistan, were caused by foreign entities – or, more specifically, foreign meddling in domestic affairs.

Regardless of how bad the situation may appear, many I’ve spoken with here in Pakistan are skeptical that any foreign players know how to solve Pakistan’s domestic problems. But after what I’ve seen here, I disagree.

Pakistan is in dire need of the proper financing to get it back on its feet and help it address the economic and social problems that might be causing its downfall. However, if the United States has a genuine desire to see a stable Pakistan, then President Barack Obama and Secretary of State Hillary Clinton must distance themselves from the shortsighted policies of the Bush administration, whether that be military assistance or occasional drone attacks. Recovery can only come in the form of hefty economic development and an overhaul of Pakistan’s outdated infrastructure. We saw one positive step in this direction this week: the trade and transit agreement signed by Pakistan and Afghan leaders in Washington on Wednesday aimed at increasing commerce and foreign investment.

 

President Obama met with Pakistan's President Asif Zardari and Afghanistan's President Hamid Karzai in Washington on Wednesday

 

In recent months, a financial boost from governments including the U.S., Japan and Saudi Arabia has further emphasized the idea that the key to curbing violence in Pakistan is economic and social development. Pakistan, which recently signed a loan package with the International Monetary Fund (IMF) for $7.6 billion, has experienced a significant economic decline in recent years as its inflation rate climbed to 25 percent and its stocks plummeted, falling an average 35 percent last year. All major rating agencies have downgraded Pakistan and the recent surge in terrorist-related attacks has caused most new investments to dry up. What’s worse, economists in Pakistan are predicting significant job losses over the next two years of anywhere from 3 to 4 million people, further exacerbating the crisis faced by Pakistan’s poor and struggling middle class.

Further exacerbating Pakistan’s instability is the growing number of displaced persons in the country. Currently more than 1.7 million Afghan refugees live in Pakistan. 45 percent of those reside in refugee villages and the rest are scattered among host communities, according to UNHCR. However, recent violence in the Swat Valley and neighboring Buner and Dir has forced hundreds of thousands of Pakistanis to flee, leaving the overburdened Pakistani government scrambling for solutions.

Many of the citizens here are scared. Even in Lahore, which is considered relatively safe, a series of recent attacks have left many on edge. Many dual passport holders are now opting to leave for lack of a better option. Many here have little confidence in their government’s ability to cap this growing threat.

Those countries willing to support Pakistan through financial assistance have a responsibility to ensure that the money is properly allocated. Better roads and bridges, more job opportunities through business development, and further development of the country’s energy sector could provide hope to an increasingly disenfranchised population and move this country forward.

Cooperation is a two-way street. In return, Pakistan must be more transparent with donors as the security situation worsens. Pakistani forces have been spread thin by military operations in the Swat Valley and neighboring districts. The Taliban will continue to advance across the country’s North West Frontier Province. The Pakistani government must not allow pride to get the best of it. The country has long been fearful that any foreign intervention could compromise its nuclear program – but domestic entities pose a threat that is far more grim. The time to act is now.

Back in Pakistan

Hey everyone. I’m back in Lahore after several weeks of trotting in the Gulf. For as good as it was to get back to my stompin’ ground in the Arab world, it is equally great to be back in Pakistan with all that is going on. I have a radio report coming out in the next day on the escalating violence in the country. In the meantime, this report was released yesterday by Reuters. I found it very interesting because i am a firm believer that at the core of Pakistan’s militant problem is a growing economic crisis.  So many are pushed into lives of extremism based on a lack of opportunity in the country. While I was in Doha I attended a talk at the Brookings Doha Center where one of the speakers actually described the militants as predominantly mercenaries — hired killers involved in the so-called Jihad NOT for religious motivations, but rather, because their families financially benefit from their participation.  It is a fascinating topic.  While in the Gulf, I met Lahore native Saleem Ali, a Brookings visiting fellow. He recently wrote a book called Islam and Education: Conflict and Conformity in Pakistan’s Madrassas.  In it he argued that the problematic madrassas that tend to foster a climate of militancy are not the hardline religious schools, but rather some of the more secular madrassas where economic hardship and social disenfranchisement are an everyday reality. This report, detailed below, discusses how Pakistan biggest security threat is its economic deterioration.  I wholeheartedly agree. 

By Claudia Parsons
NEW YORK, April 2 (Reuters) – Pakistan must be central to U.S. policy on Afghanistan and needs up to $50 billion over the next five years to avoid an economic meltdown that risks turning the country over to Islamic extremists, said a report released on Thursday.

The report by a think tank with close ties to the Obama administration said Washington must also act to strengthen civilian government in Pakistan and persuade Islamabad to stop using militant groups as an instrument of foreign policy.

The Asia Society, whose chairman was Richard Holbrooke until he was appointed U.S. special envoy on Afghanistan and Pakistan in January, convened a task force to compile the report: “Back from the Brink? A Strategy for Stabilizing Afghanistan-Pakistan.”

The report, made public on Thursday, was provided to President Barack Obama’s administration before he unveiled his strategy on Afghanistan last week. It closely mirrors Obama’s policy, while focusing more on politics than military issues.

The report said the global economic crisis risked further weakening Pakistan’s civilian government, which has little control over tribal areas that have become safe havens for al Qaeda, and which struggles to match the sway of the military.

“Perhaps the most urgent priority is to prevent economic collapse which could undermine state authority even in major urban areas in the next few months,” the report said.

It cited estimates that halting the economic decline in Pakistan might require a five-year package of $40 billion to $50 billion, a sum that dwarfs Pakistan’s existing $7.6 billion International Monetary Fund bailout.

It said 1 million workers joined the ranks of the urban unemployed in the past six months — a volatile source of tension in a country where 40 percent of the population live on an income of under $1.25 a day.

The report urged Washington to work with a “Friends of Pakistan” group at the United Nations to mobilize donors to provide an urgent rescue package that could involve direct budget support and or a World Bank-administered trust fund.

CENTER OF GRAVITY IS PAKISTAN

Task force co-chair Barnett Rubin said the United States and its allies had for too long focused on Afghanistan while allowing problems to fester in Pakistan.

“The regional center of gravity of the problem is not in Afghanistan,” Rubin said. The report argues that there are no al Qaeda bases in Afghanistan, but many in Pakistan, where a variety of other militant groups have long thrived on covert backing from the military and intelligence apparatus.

“Because it faces India, which it sees as an enemy … Pakistan has adopted formally the use of Jihadi groups as instruments of their foreign policy,” Rubin said at a panel discussion in New York on the report.

“One of the aims of our regional diplomacy should be to use all the resources we can to encourage, cajole, force, persuade Pakistan to change its policy away from using those Jihadis.”

Essential to that would be meeting Pakistan’s legitimate security concerns, the report said, and easing tensions with India. Relations between the nuclear-armed rivals were strained further by November’s attacks in Mumbai, which India says were conducted with the involvement of Pakistani state agencies. (The full report can be seen here ) (Editing by Peter Cooney)

Dumping on Dubai: Have Hard Times Hit the Emirates?

Tuesday, Mar. 31, 2009

Time.com

By Vivian Salama / Dubai

 

Over the past few months, Dubai’s glittering skyscrapers have been diminished by the alarms about the emirate’s economic woes. The news has not been easy to take for the showpiece city-state, the most populous among the seven sheikdoms that make up the United Arab Emirates. Indeed, even as the rest of the world spiraled into crisis, the U.A.E. insisted its brand-name city would not be drawn in by the downturn. In fact, the U.A.E. established a “no news is good news” policy of sorts. In January the government announced that fines ranging from $13,600 to $272,500 would be levied against any media outlet that published news considered damaging to the “country’s reputation or its economy.”

But sometimes, the bad news has to be admitted from on high. The U.A.E.’s Minister of Economy, Sultan bin Saeed al-Mansouri, last week acknowledged that the economy of the world’s fifth largest oil exporter is expected to shrink in 2009. He refused to give an indication of the extent of the contraction, saying simply that the U.A.E. would escape recession. The International Monetary Fund had previously said it expected the U.A.E. economy to grow only 3% this year after expanding 7.4% in 2007 and an estimated 6.9% in 2008. (See 10 things to do in Dubai.)

The towers of Dubai have been hardest hit. The large foreign banks that had been financing Dubai’s real estate boom have pulled out, leaving behind a significant burden on local banks, who have turned to the U.A.E. government for help shoring up their liquidity. To date, approximately $15 billion of federal money has been pumped into local banks. Company buyouts financed by Abu Dhabi — the capital of the U.A.E. and the only emirate with petroleum wealth — are believed to be forthcoming, though no officials will discuss details. “Any bailout from Abu Dhabi will come very privately,” says Christopher Davidson, author of Dubai: The Vulnerability of Success. ”Abu Dhabi doesn’t want the Dubai brand to suffer, even if Dubai has disgraced itself with its economic planning.” (See how Dubai placed among the top 10 architectural postponements.)

“The bubble has finally burst,” says one American expat. Some people point to mixed blessings of the financial downturn. Rents, which were at unbearable highs last summer, have now plummeted at least 25%, and property prices are down as much as 50% since August of last year. But while there is some respite from the dawn-to-dusk hammering and drilling that came with Dubai’s construction boom, some $8 billion in projects have now been either scrapped or put on hold. The city’s notoriously brutal traffic jams have eased somewhat in recent weeks since the reported exodus of thousands of expatriates, who make up more than 85% of Dubai’s population. The departures, however, could also be a sign of job losses: foreigners are generally not permitted to live in Dubai without a work visa.

But the city-state has its defenders. “Dubai-bashing is in fashion right now,” says Hassan Jarrar, head of wholesale banking for Standard Chartered Bank in Dubai. “Like most governments, the U.A.E. wants to limit the fears of not just the people inside but also external investors. Are they understating the problem? I don’t think so.” He insists that “the difference between Dubai and Singapore or Shanghai is, in Dubai, when cranes leave site here, they leave when construction is finished.” A trip down Sheikh Zayed Road, Dubai’s main thruway, named after the U.A.E.’s founder and first President, reveals thousands of cranes still operating and the first line of the city’s metro on track to open this summer. (See pictures of Dubai.)

A new billboard has gone up just below Dubai’s World Trade Center. It features images of Dubai’s more recognizable landmarks, like the sail-shaped Burj al-Arab hotel and Burj Dubai, the world’s tallest building. They are all adornments for the subject of the billboard: Dubai’s leader, Sheik Mohammed bin Rashid al-Maktoum. The sheik has been rumored to have suffered significant health problems from the strain brought on by the emirate’s economic woes. The billboard is meant to belie those rumors; it shows the sheik, 59, looking sharp, vibrant and healthier than ever. Behind his picture is a simple caption in Arabic: “We don’t wait for things to happen, we make them happen.” And if you want to say otherwise, Dubai doesn’t want to hear it.

Pakistan and China: A Fraying Friendship?

Thursday, Feb. 19, 2009

TIME.com

By Vivian Salama / Islamabad

 

There is an old Chinese proverb that says to attract good fortune, spend a new penny on an old friend. On Friday, an old friend is due to come calling in China. Pakistan’s President Asif Zardari will make his second visit to China in four months for meetings with senior political and business leaders. A key ally in the U.S.-led “War on Terror,” Pakistan — desperate for money and in need of a good friend — has recently found itself beckoning China for rescue. But is China willing to invest its pennies in Pakistan, much less play superhero for an old but now problematic ally?

Once an “all-weather friend,” China stood with Pakistan during its old confrontations with India. Ties between the two countries date back to 1950 after Pakistan joined a small handful of nations in recognizing the communist People’s Republic of China. In 1962, war broke out between China and India over the disputed Himalayan border region, further aligning China and Pakistan in the name of a common enmity toward India. Since then, Beijing has often offered its support to Islamabad in the way of economic assistance, but also with no-strings-attached military aid and support to Pakistan’s nuclear program.

Although China has not signed an official nuclear agreement similar to the civilian nuclear pact between the U.S. and India, it has invested heavily in the construction of several nuclear power plants in Pakistan. Unlike its relationship with the U.S, Pakistan’s agreements with China seldom came with conditions. “The U.S. hasn’t offered to support nuclear projects with Pakistan, so we go to China where we know we are always very warmly welcomed,” says Muhammad Saleem Mazhar, director of the Center for South Asian Studies at the University of Punjab in Lahore. Various Chinese-funded projects are also currently underway to boost Pakistan’s infrastructure, including the development of a port on the Strait of Hormuz at Gwadar.

However, with Pakistan’s security situation growing increasingly volatile and economic conditions turning dire, there may be a turn in tide between these once intimate friends. “The situation is much different now than once upon a time,” says William Kirby, T. M. Chang Professor of China Studies at Harvard University. “India has emerged as a much more powerful force in the region and Pakistan has not succeeded in the way that hopeful and loyal supporters had once imagined. It is now one of the great security risks in the region.”

Instead of increasing assistance to its old ally, Beijing has apparently been keeping a distance from Islamabad. During Zardari’s visit in October, the Chinese snubbed the Pakistani President’s request for a full-blown economic bailout. While Beijing did grant Islamabad a soft loan last year worth $500 million, it was nowhere near the estimated $14 billion experts say is needed to get Pakistan back on its feet. “The cooperation we saw during the Musharraf era just isn’t there anymore,” says Sayem Ali, an economist with Standard Chartered Bank in Karachi. “China would rather develop better relations with India and the U.S., which is not great news for Pakistan because it has always relied on China’s help.”

The recent instability along Pakistan’s Western border with Afghanistan, as well as a series of abductions of Chinese nationals, could lead China to look elsewhere for more reliable friends in the region — allies who can at least guarantee some sort of stability for China to pursue its strategic and economic interests. “Pakistan today needs China more than China needs Pakistan — that is why there is more enthusiasm in Pakistan about its relations with China than vice-versa,” says Shabbir Cheema, director of the Asia-Pacific Governance and Democracy Initiative.

China, however, cannot afford to turn a blind eye to a nuclear-powered Pakistan that seems to be constantly teetering on chaos. For one, Uighur separatists in China’s Xinjiang province often find inspiration and support in the turmoil in Afghanistan, a conflict entangled in the politics of Pakistan’s tumultuous North-Western Frontier Province. “We are now looking at a situation where China and India are on their way to becoming global powers and Pakistan is really in a position of endemic crisis,” says Kirby. “China can longer afford to make any unconditional guarantees — particularly where Pakistan is concerned.”

Chinese nationals in Pakistan are in as much danger as other foreigners. In the aftermath of a tentative cease-fire between Pakistan and Taliban radicals in the beleaguered Swat Valley, militants there released Long Xiaowei, a Chinese engineer abducted six months ago — an incident that drew unusually forceful language from Beijing.

Pakistan’s troubles, however, are likely to keep China involved in keeping its old ally afloat. Ahmed Ejaz, an expert on Asian security at the University of Punjab, believes that for China, the stakes are far too great for it to turn its back on Pakistan. “An unstable Pakistan will lead to an unstable China,” says Ejaz. “They know this so they will never leave us alone.”

Is Dubai’s Party Over?

I’ve been a while since I’ve written, although there is truly much to report.  I opted to leave Dubai after a little over 10 months of living there.  My time with the Abu Dhabi-based newspaper THE NATIONAL, while interesting, was not quite the right fit for me, so I opted to return to my freelance/vagabond style life and move to Pakistan (following a month-long visit home to the US).  I will be based in Lahore as of mid-January and cannot begin to imagine the adventures that await me, particularly following the recent atrocities in Mumbai which cast yet another light on the internal operations of Pakistan.  In the meantime, I was happy to rejoin me friends at NEWSWEEK during my last week in Dubai and contribute to the following article.  It appears Dubai is not as sheltered from the storm as many once believed.  

Happy Holidays to all — and stay tuned!

Is Dubai’s Party Over?

The glitzy façade shows some cracks.

Christopher Dickey with Vivian Salama in Dubai and Nick Summers in New York

NEWSWEEK

From the magazine issue dated Dec 15, 2008 – click here to link to Newsweek

In her classic account of World War I, Barbara Tuchman sets the scene for the passing of the prewar era with a vision of epochal pomp, the funeral of Britain’s King Edward VII. Nine monarchs rode in the procession and the pageantry evoked “gasps of admiration,” wrote Tuchman. But when it was over, one British peer reflected that “all the old buoys which have marked the channel of our lives seem to have been swept away.”

In Dubai last month, a very different kind of pageant was held, but if Tuchman were still around she’d have been taking notes. This triumph was billed as a world-beating blowout, a $20 million star-smacked extravaganza with the likes of Charlize Theron, Lindsay Lohan, Michael Jordan, and Robert De Niro in attendance. The fireworks display was so enormous it could only truly be appreciated from the heavens (literally—it was visible from space). The occasion was the opening of the $1.5 billion Atlantis resort complex on an enormous artificial archipelago shaped like a palm tree. The point of the party, its promoters explained, was to show the world that Dubai is a land of fantasies come true, an over-the-top destination for good times. But among many of the guests, the mood was funereal. As the fireworks exploded, the global economy was imploding. Many of Dubai’s overleveraged fortunes were crumbling, and no one was sure where to turn. The old buoys seemed to have been swept away.

“It’s a tragedy in the making,” said a senior executive with one of the city’s biggest real-estate-development companies as he peered into his champagne. “A lot of people are going to get hurt. A lot of dreams are going to be shattered,” he said, referring not only to the erstwhile rich and the speculators. Imported workers are already being exported, jobless, back to their homes. Skyscrapers are standing unfinished, baking in the sun. “Have you seen all those ships lined up on the horizon?” he said, gesturing toward the open gulf. “They’re stuck out there full of steel and concrete nobody wants anymore.”

While it may be an exaggeration to say that as goes Dubai, so goes globalization, it has become hard to imagine one without the other. More than any other place on earth, this city-state in the United Arab Emirates is the creation of worldwide commerce, a specialty-built magnet for the kind of hot money that seeks the quickest, highest profits and then moves on when they disappear. A lot of that cash comes from nearby Arab oil powers, most notably the adjacent emirate of Abu Dhabi, which has 90 percent of the UAE’s crude. But many billions more have flowed in from Iran, India, China, Russia, Europe, the United States, and indeed just about every other corner of the world.

For the past decade at least, real-estate speculation has been the national sport. The price of houses and apartments, many not yet built, rose by 43 percent in the first quarter of this year alone. Mortgage money was easy to get and speculators commonly flipped properties for substantial profits in a matter of weeks, sometimes even days, before the first monthly payments came due. Everybody wanted in on the game. “Employees didn’t focus on their work anymore,” complains the chairman of a regional transport company. “They all wanted to go buying property for 10 percent down, if that.” As of June, Dubai had 42 million square feet of office space under construction, more than any other city in the world, even Shanghai. What was a flat desert 20 years ago is today an urban canyon. Such is the frenzy that the Hard Rock Café, built among vacant lots in 1997, is now surrounded by skyscrapers—and plans to tear it down for another high-rise are being debated as if the Hard Rock were a heritage site.

But Dubai wasn’t just a receiver of world capital. It was also an important global investor. In 2006, its DP World acquired the management of six major U.S. container ports—until an explosion of xenophobic protest in Congress made the deal politically untenable. Today, among many other holdings, Dubai owns a 43 percent share in NASDAQ OMX and a 20.6 percent share in the London Stock Exchange. Its wholly owned subsidiaries include Travelodge in Britain, Mauser in Germany, and Barney’s and Loehmann’s in New York. By early 2005 the “liquidity gift,” or windfall profit, created by rapidly rising oil prices started to look like it would last, and Dubai’s boom really picked up steam. Some of the city’s top financial officials started warning privately that a bubble was forming and so sought to keep diversifying their holdings as widely as possible. But as oil prices continued to climb, more and more fresh cash poured into Dubai’s freewheeling economy and the public started to feel protected from global shocks. Nobody was ready for the plunge in prices over the past four months, which has taken oil down to less than a third of its price last summer. Dubai turned out to be “insulated but not isolated,” says Mary Nicola, an economist with Standard Chartered Bank.

As with so much in the interconnected world economy, the ripple effects of the current crisis keep spreading, exposing some of the more unpleasant facets of the Dubai dream. Layoffs, which have already begun, will have an impact not just in Dubai but also in the working-class neighborhoods of Manila and Mombasa and Thiruvananthapuram that sent their workers to the gulf. Thousands are expected to leave when the holiday season is over, with little fanfare. The guest workers’ invitations can be revoked any time, so few complain—but bitterness is widespread. Meanwhile, prices for houses and apartments still on the drawing board have dropped almost 50 percent in some areas, mortgage money is simply frozen, and major projects are stalled or being scaled back. Rumors abound that Dubai may have to sell a substantial stake in Emirates Airlines, the national carrier that’s vital to keeping it connected to the outside world. And in a business culture built on inside dealing, the official denials of such a sale have had little credibility out on the street.

The sense of uncertainty and fear has grown so much that even in Dubai’s famous gold souk, which was a center of trade long before the word “globalization” was invented, there’s now a pall of confusion. “Not only are gold prices dropping,” says Firoz Merchant, the owner of one of the shops. “Everything is uncertain and moving in different directions.” As if to underscore the gloomy mood, last month the Dubai Marina suddenly started filling up with excrement. Apparently many buildings in the city can only dispose of their wastewater by having it trucked to a treatment plant. But the drivers got impatient with long lines and started pumping it into storm drains that led straight to the sea.

In an effort to restore confidence just days after the Atlantis resort blowout, Dubai announced the creation of an “advisory council” headed by Mohamed Alabbar, the chairman of Emaar Properties, which is building, among many other projects, the tallest skyscraper in the world in the heart of the city. Emaar’s stock price, it is worth noting, has plummeted more than 80 percent this year, and the sale price of luxury apartments in the hyper-high-rise has dropped by 40 percent.

“Here in Dubai we are realists, and we are also optimists,” Alabbar told a forum at the Dubai International Financial Center on Nov. 24. To reassure his audience and the world he promised transparency, a rare concept in Dubai, and addressed the question of the emirate’s debt, long rumored to be astronomical. Alabbar said the government and its many affiliated companies had obligations of $80 billion, but assets of $350 billion. “Let me therefore state categorically: the government can and will meet all its obligations going forward.”

Such semi-official figures have never been made public before and their details have still not been divulged. So neither the liquidity of the assets nor the basis for their valuation is clear, and it’s hard for analysts to judge just how realistic Alabbar’s optimism is. “The important thing is not to focus on Dubai’s assets and liabilities, it is about moving forward to rectify the situation,” says Mushtaq Khan, an economist at Citigroup who authored a recent report on the Gulf.

If there is good news, it’s that Dubai’s leaders were quick to take some corrective measures in the earlier stages of the crisis. In September and October, the Central Bank implemented a $32.7 billion plan to support the country’s financial institutions. Alabbar announced last month that the two main home-mortgage lenders, which had run out of money, would in effect be nationalized. And he promised that the three largest developers in Dubai, which control about 70 percent of the supply on the real-estate market, would work together to keep it under control. The crash of the moment is really “a healthy correction,” he said.

Perhaps. Certainly many Dubai residents say they’d like a chance to catch their breath, and there are ample signs the city needs to catch up with itself. Just 50 years ago, the place was a dusty outpost of a few thousand people on a forgotten corner of the Arabian Peninsula. Forty years ago, one of its biggest businesses was smuggling gold to India. After British forces withdrew in the early 1970s from what were called the Trucial States, the seven local sheikhdoms became the United Arab Emirates. Abu Dhabi had the greatest share of wealth because it had by far the greatest share of oil. But Dubai had entrepreneurial spirit.

In the 1980s, under Sheik Rashid bin Saeed Al Maktoum and then his son Sheik Mohammed bin Rashid Al Maktoum, Dubai developed its enormous free port—even as Iran and Iraq fought a war on the horizon. Golf courses that were kept green with millions of gallons of desalinated water started changing the landscape, and by the 1990s, Dubai was building landmark resorts like the sail-shaped Burj Al Arab Hotel. It also started cashing in on new technologies with special Internet and media “cities” built to make it as important a hub for communications as it was for shipping and air traffic. In just five years, from 1995 to 2000, Dubai’s population grew 25 percent, and now stands at about 1.6 million people. The vast majority are expatriates coming to work at every level of society, from menial labor to senior management. In 2007, the Emirates as a whole counted only 864,000 citizens, compared with 3.6 million foreign workers. “While infrastructure development was rapid, the number of expats flocking to the city overwhelmed it,” says Citigroup’s Khan.

But even if Dubai needs an enforced breather, it’s not likely to get through the downturn unscathed. Abu Dhabi, after many years of quietly helping to fund Dubai’s growth and watching Dubai develop a reputation for innovation and excitement, is now looking to take a bigger share of the action. “A formal statement is unlikely,” says Khan, “but strategic assistance from Abu Dhabi is likely.” And so is increasing control. Abu Dhabi dominates the UAE’s federal government and last week the federal constitution was pointedly amended to bar the prime minister (Dubai’s Sheik Mohammed), his deputies and federal ministers from “any professional or commercial job” and to prohibit them from any business transactions with the federal or local governments. How this can be enforced is an open question—to a large extent, Dubai isMohammed Al Maktoum—but the message was clear enough: Abu Dhabi is now in charge.

Meanwhile, the Emirates are literally taking some time off, first for Muslim holidays and then for Christmas. Few big new initiatives are likely to be announced before the beginning of the year, if then. But the cracks continue to show. Take the new Atlantis resort, for example. It is a joint project between South African developer Sol Kerzner’s group and Nakheel, the Dubai development company that built the Palm Jumeirah island and other even more extravagant real-estate follies up and down the coast. Days after the grand opening, Nakheel announced it was laying off 500 people, or roughly 15 percent of its global workforce. “The people with Nakheel spend $20 million on fireworks and don’t have money to pay their own people,” says a Lebanese businessman with extensive interests in Dubai. “It’s a disaster.”

Meanwhile, even the rich are feeling the pinch. Last week the owner of a Mediterranean-style villa on one of the Palm Jumeirah’s beachy fronds facing the Atlantis dropped his asking price from $4.9 million to $3.6 million and then $3.13 million, and offered to throw in his Bentley as well. “Our client has his money stuck in the markets and he desperately needed it to run his business,” says real estate agent Anthony Jerish. “Still, nobody bought it. Maybe we will sell the Bentley separately. I don’t know.” No, this isn’t the old Dubai at all.

…And Now, Time to Fix the Domestic Economy

by Vivian Salama

PostGlobal – WashingtonPost.com

 

The last sip of celebratory champagne is now gone, and so, without a moment’s delay, it is imperative for President-elect Barack Obama to assemble a strong strategic transitional team that can work to heal the wounds of a disillusioned America. A carefully selected team must coordinate with the Bush administration in ensuring a smooth and effective handover. Traditionally the President-elect has stayed out of the spotlight in the two-and-a-half months prior to his inauguration. However, in the words of Senator Hillary Clinton, never have we had as “lame duck” a president as George W. Bush.

President-elect Obama was the clear choice for triggering the shockwave needed at a time when America has few friends abroad and domestic confidence in government is at an all-time low. While people around the world continue to celebrate the clear and momentous significance the victory of Barack Obama signifies in our world’s history, we mustn’t forget that there is a crisis at hand that catchy slogans and smooth-talking rhetoric can not and will not solve. His administration should act quickly in order to capitalize on the momentum of this historic victory.

Where I sit in Dubai, the excitement surrounding a Barack Obama victory is palpable — and the same holds true for the entire region. This election meant so much to so many people around the world for several reasons. People in much of the Middle East have lived the last eight years fearful that one wrong word could bring American warplanes calling.

However, confident markets like Dubai’s and bullish markets like that of Egypt found themselves in a nosedive with news that Wall Street was losing steam. Repairing America’s reputation globally must start with an immediate — and non-partisan — fix to the domestic economy. A distracted and bitterly divided Washington ignored several issues surrounding Congress’s $700 billion bailout package. Financial institutions receiving government support are suspected, in some cases, of having used the capital for other purposes. If the government is going to alter its role by nationalizing banks, then those banks should be susceptible to a stringent checks and balances system. President-elect Obama has not a moment to spare if he and his administration, wish to avoid catastrophe and earn the trust and respect of Americans, their colleagues in Washington, and citizens of the world.

He must also consider certain long-overdue ways of trimming costs, such as closing Guantanamo Bay and cutbacks of any and all unnecessary expenditures in Iraq and Afghanistan (so long as they do not compromise the security of American troops or the inhabitants of both countries).

The elections are over — now it is time to get to work.

It may sound cliché to link this historic event to the American dream — but then, many called the candidacy of the junior senator from Illinois just that; a dream and nothing more. As an American-born child of immigrants, I have seen marginalization, and I have felt cynical that the country to which my parents have given so much would not give back in the same way. The last eight years have been tainted by disappointment, fear and disenfranchisement. It is time for change in the most radical of ways. Many believe that if Obama can win the presidency, then anything is possible. Barack Obama has captured the support and admiration of millions around the world. The hard part now is deciding how to maintain it. The road to financial recovery is one that is long and grueling. However, if he can pave it smoothly and quickly, I reckon that people around the world will readily follow. 

“Retail sales look very healthy”

I’ve been a bit quiet lately watching this financial monster unfold, and this seemingly endless US election campaign wrap up.  It is both an exciting and exhausting time to be a reporter in New York.  I will be back very soon.  In the meantime, I published this article today on the impact of the financial crisis in the retail sector in both the US and the Gulf. Always happy to hear your thoughts.  -vms

Vivian Salama

The National | October 21, 2008

The ups and downs of the markets are enough to make anyone invest in a crash helmet. A day of market euphoria is now often tailgated by one of nail-biting anxiety. 

However, beyond the day-to-day angst witnessed everywhere from New York to Dubai to Tokyo, the ultimate indication that the world’s number one economy may be slipping into recession came last week with news of the latest US retail sales, which offer the best indication of household demand.

Sales at US chain stores rose by a mere one per cent last month, making it the weakest sales growth of any September since 2001, when the industry was in a recession and absorbing the shock of the 9/11 attacks. Also earlier this month, MasterCard SpendingPulse, which measures US retail sales, said a steep drop in consumer spending sent its specialty retail sales index down 7.7 per cent in September compared with one year ago.

Many experts say there are more tough times still ahead for the US.

“We expect October sales to post a sluggish increase of about 1.5 to 2.5 per cent, as there is considerable uncertainty about the economy,” said Michael P Niemira, the chief economist and director of research for the International Council of Shopping Centres (ICSC).

Nearly 10,000km and a world away from Wall Street, the UAE is among the handful of countries bucking the current crisis with its love of high fashion, fast cars and shiny jewellery. Everything from car sales to computer sales and mall revenues is growing in double digits and expected to continue this way for months and possibly years to come.

“Consumption contributes a large part to the GDP and it is essential,” said Mary Nicola, an economist with Standard Chartered Bank. “In the past few years, most of the strength for western companies was driven by their growth in the emerging markets – it is a way to diversify assets.”

Worth about Dh367 billion (US$100bn), the retail sector serves as a major driving force behind the economies of the GCC and has become the second-largest non-oil industry in the region. It is forecast to grow to Dh1.8 trillion by 2010 according to Retail International, a Middle East consultancy firm. Retail spending in the UAE alone is projected to reach Dh37.4bn a year by the end of the decade.

However, a walk through any of the country’s malls reveals that the western business world may not be so far away after all. American and European stores such as Saks Fifth Avenue, Debenhams, Versace and Bloomingdales continue to pop up at shopping centres across the country, sending subtle reminders of the international crisis at hand, despite continued prosperity here in the region.

For instance, US sales at Saks Inc, which owns Saks Fifth Avenue stores, decreased 10.9 per cent for the five weeks ending on Oct 4. All the while, Saks Fifth Avenue has continued its expansion throughout the GCC, with the latest location due to open in the Dubai Marina. Similarly, Bloomingdales will make its debut in the region with the opening of the massive Dubai Mall next week, just as its American counterpart announced it is slashing prices by as much as 60 per cent on various items in an effort to lure buyers back into stores.

In today’s global economy, some experts believe it is foolish to take such news with stride. 

“Nobody likes uncertainty, so obviously it is going to have an impact on any kind of business, including retail businesses,” said Naeem Ghafoor, the chief executive of Skyline Retail Services Consultancy. “Luckily, our whole credit system works differently here in that we are a more cash-oriented part of the world than the US.”

Ajay Dayal, the general manager of retail and marketing for Easa Saleh Al Gurg, the holding company with brand names including United Colors of Benetton and Siemens appliances, said the UAE must now play the “wait and watch game”.

“I think we are over the first hump,” he said. “I get the feeling that sentiments will not get hurt because the government has come in so strongly and supported the banks and made sure liquidity is continued.”

Since the beginning of October, all seven Gulf bourses have fallen sharply. Dubai suffered the most, falling 22 per cent; Abu Dhabi was down 13 per cent and Saudi Arabia, Qatar and Oman were all down by 15 per cent. Still, many believe this is merely in reaction to the global market climate and is in no way an indication of the region’s economic stability. 

Moreover, the strong purchasing power in the region, it is believed, will continue to fuel growth in the retail sector. Figures released this week by the Ministry of Economy revealed that private spending, which includes household expenditure on food, rent, education and other goods and services soared by nearly 18 per cent to an all-time high of Dh290bn last year.

“Retail sales look very healthy in the region at the moment and we haven’t seen any drop-off like you see in the US and Europe,” said Shahram Shamsaee, the senior vice president of retail for MAF Shopping Malls. “Here, access to credit is a lot stricter, there are a lot more restrictions on borrowing and you have to be employed to be able to borrow.”

Others attribute the region’s stability to the franchise business model, which requires international companies to partner up with local holding companies. There are several benefits to franchising a business, say industry leaders. The biggest draw is it generates income, and it fuels business growth with minimal risk and minimal capital investment. It also increases the potential for market penetration while minimising operation costs and expenses.

“It is a way to diversify your assets and minimise exposure essentially,” said Ms Nicola. “US and European assets aren’t doing so well nowadays, so they turn to partner up with businesses here so that they maintain their chances for growth.”

In fact, the Gulf has become an oasis from the global economic downturn that has seen millions of cash-strapped consumers in the West cutting back on spending, with many brands turning to the GCC as a means to survive tougher times.

Figures released by the regional car industry estimate that the combined market for cars and light lorries in the GCC will increase about 10 per cent to 1.2 million vehicles this year. 

General Motors America reported losses of $8.5bn in revenues in the second quarter of this year compared with the same period last year, while in the Middle East, Africa and Latin America, the company increased second quarter sales by $1.7bn.

Luxury brands have done even better. Lexus UAE reported a 50 per cent increase in year-on-year sales for the first half of this year, while Lexus sales in the US were down by 15 per cent for the same period.

Far from feeling the pinch at the pump, drivers in the Gulf enjoy subsidised petrol, making heavy-duty 4×4s a common sight on the UAE’s roads.

Similarly, in the Middle East the PC maker Dell posted 55 per cent growth in unit sales in the second quarter compared to the same period last year, according to company figures based on International Data Corporation information, whereas in the US, Dell sales grew by a mere 5.8 per cent. Acer, the world’s number three PC maker, reported regional sales were up more than 54 per cent in the first quarter, while sales slumped 20 per cent in the US for the same period.

While Emiratis actively contributed to retail sales, the buying power of the country’s expatriate residents – who make up more than 80 per cent of the population – was the major source of success, a study by the Delhi-based RNCOS found. 

Tourism is also a massive factor stimulating growth, with the UAE expecting more than 11 million tourists annually by 2010. However, with dire economic conditions in Europe and North America, many travellers are likely to stay closer to home. Last month, ABTA, a leading UK travel organisation, warned that the UAE must do more to develop its budget hotel sector or risk losing tourists to cheaper destinations.

“There may be a drop in pure tourist traffic because people coming from the West may feel a bit threatened, but we have to wait to see how the winter season is impacted,” said Mr Dayal. “Let’s wait and see – it shouldn’t be too bad.”

Investors flee to gold as world economy is shaken

Amid the hysteria that has unfolded back in the US these last few days, a very very very small light at the end of a very long and dark tunnel….. 

Vivian Salama

The National | September 30. 2008 4:15PM 

DUBAI // Analysts are predicting that the price of gold will once again surge above US$1,000 an ounce as investors turn to the metal as a haven from market turmoil.
Gold’s status as an inflation hedge and an alternative to the US dollar has resulted in a surge of buying in the Middle East, China and Asia. 

“There is very much the possibility before the end of the year that we will see gold prices moving to four figures,” said Philip Newman, the director of GFMS, a London-based precious metals consultancy. 

“People are concerned about the banking environment, particularly as you have many names disappearing and other names rolling in with other banks. In such cases, you have this view of gold as a safe haven.”

Gold futures for December rose yesterday after US congressional leaders rejected the government’s proposed bank rescue plan. December delivery rose $5.90, or 0.7 per cent, to close at $894.40 an ounce on the New York Mercantile Exchange, driven by historic losses in the Dow Jones Industrial Average.

On March 17, the metal reached a record $1,032.70 an ounce as soaring crude oil prices spurred investors to seek protection against inflation.

Analysts say that physical gold buying will also soar.

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Consumers facing a taxing time

Vivian Salama

The National | August 20. 2008 

For many, the adage “a penny saved is a penny earned” is nothing more than wishful thinking. Food prices are up, rents are going through the roof, and salaries are not keeping up with inflation.

Hundreds of thousands of people from around the world who have flocked to the UAE in search of prosperity find themselves cutting costs and struggling to stay afloat. And on top of all that, the one thing the country’s residents have collectively celebrated – a tax-free society – could soon become a thing of the past, as early as 2010.

The issue of whether or not to implement a value-added tax (VAT) in the UAE has sparked its fair share of support and criticism, particularly in the past six months as the inflation rate has risen above 11 per cent and is forecast to keep climbing.

“Now is not the right time to seriously discuss introducing a VAT,” said Robert Ziegler, the vice president of the management consultancy AT Kearney in the Middle East. “A lot of people realise there are a lot of fees that essentially translate into taxes here, but there is also a big psychological factor to the idea of the UAE being ‘tax-free’.”

VAT is an indirect levy and taxes individuals at each stage of production and distribution, from food producers and clothing manufacturers, all the way down the supply chain to the end user – as opposed to a retail sales tax that is collected solely at the point of final purchase.

VAT is a key component in the tax system of about 130 countries, generating a total of more than US$18 trillion (Dh66tn) in global tax revenues, according to a report by the Tax Policy Centre. On average, it accounts for 25 per cent of national governments’ revenues. Like the UAE, the US is one of a handful of non-VAT countries.

Although the standard rate of VAT is 17.5 per cent in the UK, the average rate worldwide is approximately 20 per cent. Some countries such as Denmark, Norway or Sweden have a rate as high as 25 per cent.

The proposal on the table here is not nearly as high – an issue that will delight the 80 per cent of the population made up of expatriates who have come here to live and work on a tax-free basis. According to Ahmad Butti Ahmad, the director general of Dubai Customs, the agency behind the eventual introduction of VAT, proposals submitted to the UAE’s federal authorities suggest anywhere from a three to five per cent tax as a starting point. Ideally, it would serve a number of purposes. Principally, it would compensate for the import tariffs lost to any future free trade agreements, whether with the EU, China, India or the US, although no agreements have been signed with these countries so far. A VAT levy would also boost Government coffers, money that could be spent on welfare.

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