IRAQ: The Iraqi Economy

February 16, 2005

Backgrounder
Current political and economic issues succinctly explained.

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What’s the state of Iraq’s economy?

Iraq’s economy, which suffered badly as a result of years of sanctions and the immediate devastation caused by U.S.-led invasion, has begun to rebound. Experts say improvements in oil and electricity production are getting the country back on track. However, ongoing security problems leading up to the handover of sovereignty June 30--including suicide bombings, attacks on foreign workers, and sabotage of oil infrastructure--are deterring foreign investment and derailing many reconstruction projects.

How big is the economy?

Much of Iraq’s economy is still informal, with significant economic activity done by unregistered businesses, says Thomas Foley, who served as director of private sector development for the Coalition Provisional Authority (CPA) and is the founder and chairman of the investment firm NTC Group. This makes it difficult to know exactly how big the economy is. Foley estimates that its gross domestic product (GDP) is some $10 billion dollars per year, excluding the oil sector. Iraq’s oil revenues roughly double GDP to about $20 billion annually, about that of Latvia or Bolivia.

What’s the unemployment rate?

Last summer, the World Bank and IMF estimated Iraq’s unemployment at nearly 60 percent. By January 2004, Foley says, the rate had fallen to about 28 percent, with a margin of error of some 5 percentage points, according to Iraq’s Ministry of Planning. The current rate is roughly 25 percent, says Richard Greco, Jr., who served as an economic advisor to the CPA in Iraq and is the CPA’s acting director of private sector development in New York.

Has oil production reached prewar levels?

Iraq produced 2.04 million barrels per day in 2002, according to the Energy Information Administration (EIA), which collects official energy statistics for the U.S.government. Iraq’s oil production dropped to an average of 1.3 million barrels per day in 2003, but had recovered to prewar levels in January and February of 2004. Recent sabotage on the northern and southern pipelines, however, has curtailed production, and massive pipeline explosions June 14 and June 15 stopped all exports. Iraqi oil officials say they hope to resume exports at 700,000 barrels per day within 10 days. Export revenues from oil in 2004 so far total some $6.4 billion, according to the CPA. Assuming uninterrupted production, Iraqi oil revenues are expected to rise to $20 billion in 2005, according to The Economist. Iraq holds some 11 percent of the world’s proven oil reserves, and the eleventh largest natural gas reserves.

Where do Iraq’s oil revenues go?

Into a special fund called the Development Fund for Iraq (DFI). The DFI was created by U.N. Security Council Resolution 1483 in May 2003 to hold Iraq’s oil revenues, seized Saddam-era assets, and leftover funds from the U.N. Oil for Food Program. The DFI is administered by the CPA and overseen by an International Advisory and Monitoring Board (IAMB), made up of representatives of the United Nations, the World Bank, the International Monetary Fund (IMF), and the Arab Fund for Economic and Social Development. After June 30, the Iraqi Interim Government will control the DFI.

How much money is currently in the DFI?

About $10.1 billion, according to a June 9 CPA budget report.

How much money has passed through the DFI?

The DFI has had a total cash inflow of more than $19.9 billion to date, according to the CPA, and has spent nearly $9.8 billion on reconstruction projects, security, and Iraqi ministry budgets. It has committed some $4.4 billion to other projects, leaving some $5.7 billion remaining in the 2004 budget. Iraq Revenue Watch, a project of the Open Society Institute, criticized the CPA in a recent report for delaying IAMB audits of its DFI spending.

Are some parts of the country doing better than others?

Experts say Kurdistan, which has seen little anti-coalition violence, has benefited economically--particularly from cross-border trade--more than other regions of the country. In the so-called Sunni Triangle in central Iraq, where most of the attacks against coalition soldiers and civilians occur, reconstruction efforts have been consistently set back by attacks. That area has been particularly bloody leading up to the handover of sovereignty June 30. More than 80 people throughout Iraq--many of them civilians in Baghdad and its surrounding neighborhoods--have been killed in the first two weeks of June in more than 16 car bombings, according to news reports. Many attacks are targeting Iraq’s economic infrastructure, including a June 14 bombing that killed 13. Among the victims were three employees of a General Electric subsidiary who were working on Iraq’s power system.

What’s the status of electricity production?

Electricity production has reached 4,100 megawatts per day, Greco says, which is significantly less than the CPA goal of 6,000 megawatts per day. The United Nations estimated before the war that Iraq could produce 4,500 megawatts per day. Iraqi energy ministers predict that demand could soar to as much as 7,000-8,000 megawatts per day this summer, The New York Times reported June 14.

What’s the status of Iraq’s debt?

Iraq owes some $120 billion in debt and interest payments to international lenders and creditor nations, according to the IMF. This figure includes $42 billion--$21 billion in debt and $21 billion in interest--owed to the Paris Club, a group of 19 creditor nations. Iraq owes some $60-65 billion to non-Paris Club creditors, and about $15 billion to commercial creditors. President Bush has actively campaigned for nearly all Iraq’s debt to be forgiven; other nations have been cool to the idea of offering financial amnesty to an oil-rich country. President Jacques Chirac of France is willing to forgive half of Iraq’s debt but no more, according to news reports. James A. Baker III, who was appointed by President Bush in December 2003 as a personal envoy on Iraq debt, has been meeting with creditor governments around the world to secure debt forgiveness commitments.

How is reconstruction progressing?

Slowly. Only $1.6 billion of the $18.4 billion approved for Iraqi reconstruction by Congress last year had been spent by the end of April 2004, according to the Congressional Budget Office. As of May 18, the CPA had committed $7.7 billion more to relief and reconstruction efforts, and plans to commit a total of $10.4 billion to such contracts by the handover of sovereignty June 30. Bureaucratic delays have slowed the reconstruction process, and the ongoing security problems have severely hampered rebuilding. Contractors working in Iraq have to spend 10 percent to 25 percent of their budgets on security, according to the CPA. "It’s difficult to attract investment to an environment where security challenges are not contained," says Jonathan Berman, director of global business solutions for the DAI Group, an international development consulting firm. "International investors are 100 percent turned off by the violence they’re seeing," he says.

Are any international corporations investing in Iraq right now?

Yes, says Berman, but they’re mostly regional concerns from the Arab world or firms run by Iraqi expatriates. "[Expatriates] are always the last out and the first back in," he says. He and Greco say international firms are for the most part making small-scale investments in Iraq right now, and waiting for security to improve before making big commitments. The election of a new government may also make a difference to both international investors and Iraqis. Experts say the new permanent government, expected to be elected by the end of 2005, will have to show that it can contain the violence and sustain a legal system that supports private sector enterprise to reassure the international business community.

What are the economic forecasts for next year?

Very promising, experts say--if the security situation is brought under control. Iraq’s economy had been declining for years as a result of international sanctions against Saddam Hussein’s regime. In 2003, the war and subsequent looting caused the economy to shrink by 22 percent. But the economy is projected to grow by 45 percent in 2005 and 25 percent in 2006, according to the Economist Intelligence Unit, a financial research division of The Economist. "I think the economy is very positive," Greco says. "There continues to be a steady stream of interest from international investors, not just in oil, but also the agriculture, petrochemical, glass and cement industries. There’s so much potential."

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