Mon, Oct 24, 2005 page12

• Insurance key to Saudis' WTO membership effort

  RELIGION There are three elements of `Shariah' law blocking insurance firms from the kingdom -- the rules against uncertainty, gambling and interest

  • THE OBSERVER
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  Saudi Arabia is much less famous for its liberal economy than for the rule of Shariah law and its lack of many human rights. But this week, after 12 years in waiting, the birthplace of Islam may finally be allowed to enter the WTO.

  On Friday, a working party of the WTO will announce whether the kingdom can join the group of 148 nations in time for December's meeting of trade ministers in Hong Kong -- a deadline the Saudis are desperate to reach.

  However, it is this week's fraught negotiations with one of its trading partners, the EU, that could prevent it from doing so. In order to join the WTO, Saudi Arabia must reach a bilateral agreement with the EU.

  Europe is attempting to tackle the Saudi insurance industry -- a sensitive area for an Islamic state as it is based upon a financial gamble.

  EMPLOYMENT NEEDS

  There is much at stake for the Saudis. Despite the fact that oil revenues this year are up 40 percent and GDP is projected to grow by 8 percent, 30 percent of Saudi nationals are unemployed.

  The oil boom of the 1970s saw an enormous rise in birth rate: 60 percent of the population is under the age of 20.

  Officials in the Saudi administration believe that getting the country's youth into gainful employment is crucial in the fight against terrorism.

  The government hopes to create a diversified economy. In order to do so it needs more foreign investment. This has never been a popular idea with the Wahhabis, the hard-line religious leaders of the kingdom. But it is happening, slowly.

  In the many shopping malls of Riyadh, Western businesses such as Marks & Spencer and Pizza Hut run franchises. Deutsche Bank has set up shop and the Toyota dealership in Saudi is the largest in the world.

  Steffen Hertog, an Oxford University expert in Saudi Arabia's accession to the WTO, said that it would be an important psychological jump for the many businesses that have held out.

  "It's a comfort for business. The government is signifying it wants to play by the rules," he said.

  LATE JOINER

  Saudi Arabia had failed to participate in the General Agreement on Trade and Tariffs (GATT).

  According to Rodney Wilson at Durham University in the UK, it was confident that oil exports would remain its only concern. This meant that the kingdom did not become a WTO member when it was created in 1995.

  Joining late meant liberalizing to a much greater extent and having to sign bilateral agreements with all its major trading partners.

  The political situation surrounding Sept. 11 made the Saudi accession impossible in 2001 but the cogs began to move last April when US President George W. Bush held hands with Crown Prince (now King) Abdullah and pledged to help push through Saudi accession before Hong Kong.

  US DEMANDS

  The US managed to force a number of crucial reforms that went well beyond the WTO's rule book.

  US businesses will be able to take up to a 75 percent stake in Saudi companies in the services sector, 100 percent in information technology and 51 percent in retail rising to 75 in three years.

  Saudi also promised to reduce almost all agricultural tariffs to 15 percent or less and remove export subsidies.

  US agricultural exports to Saudi account for nearly US$500 million annually.

  EU'S CONCERNS

  So far, the EU has gained significant concessions for member countries but there are two sticking points in the negotiations, which must be resolved this week.

  The first is the dual pricing of natural gas.

  Saudi companies can buy gas cheaper than foreign competitors.

  The Saudis argue that this is not a subsidy, and in any case, the issue could be resolved at the WTO if it were a member.

  But EU states such as Poland are concerned that backing down on Saudi dual-pricing now would set a dangerous precedent for when Russia, another gas-rich economy, eventually joins the WTO.

  While early intelligence suggests the EU has won on this issue, the second -- insurance -- has deadlocked negotiations.

  `SHARIAH'

  According to Sabbir Patel, of the International Co-operative and Mutual Assurance Federation, there are three elements of Shariah law that prevent insurance companies from operating.

  Gharar (uncertainty) is illegal and it is uncertain whether a payment will be made and how much it will be.

  Maisir (gambling) is illegal. A small amount of premium is paid in the hope of gaining a large sum.

  And riba (interest), also illegal, is paid in order to raise capital for insurance funds.

  As a result, however, there are co-operative insurance models that comply with Shariah law, but also Saudi insurance funds based abroad but with branches in the country.

  FRAMEWORK

  Foreign insurers want to open branches in Saudi Arabia and to invest up to 60 percent in a local co-operative. However, the EU is pushing Saudi to allow European companies to do so with 100 percent equity and hopes to lay the framework for a traditional insurance industry in the country.
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