Iraq: ECONOMY

ECONOMY



Overview: Iraq’s economy was badly damaged during the Iran-Iraq War (1980–88), and the international sanctions imposed following the Persian Gulf War of 1991 were another major blow. Aside from those events, reconstruction of a viable economy in the early 2000s encountered a severely distorted system. Under Saddam Husayn, the levers of economic power were solely in the hands of a corrupt elite in the ruling Baath Party; for the 25 years prior to 2003, no national budget was prepared. Under those circumstances, the private sector engaged mainly in illegal economic activity. Because Iraq’s economy depends heavily on the oil industry, progress from the post-Husayn low point of 2004 depends on the rates at which that industry is reconstructed and re-integrated into the world oil market. In 2005 economic development in Iraq depends first on improvement of the security situation, which greatly hindered economic progress in 2004. Most major enterprises are expected to remain in state hands until a permanent government is in place. Near-term government planning goals include budget deficit reduction, diversification of the economy through privatization, and reduction of unemployment. International grants and investments are an important source of funding for such goals.



Gross Domestic Product (GDP): According to the World Bank, in the crisis year of 2003 Iraq’s GDP shrank by 34.2 percent compared with 2002, but the 2003 figure, US$12.1 billion, was a drop of about 60 percent from the 2000 figure of US$31.8 billion. Because such a low point was reached in 2003, the projected figure for 2004, US$21.1 billion, amounted to an increase of 74.4 percent. (According to the Economist Intelligence Unit, however, between 2002 and 2004 Iraq’s GDP varied by not more than 25 percent.) To reflect the dominant role of the oil industry, contributions to Iraq’s GDP are divided into four parts rather than the conventional three. In 2004 the World Bank projected that the oil industry share of GDP would be 80 percent, with agriculture contributing 9.8 percent, services 8.7 percent, and manufacturing 1.5 percent.



GOVERNMENT Budget: The World Bank estimated that in 2003 government revenue was US$4.7 billion and government expenditures totaled US$8.6 billion, incurring a deficit of US$3.9 billion. The official 2004 budget of the interim government called for expenditures of US$33.5 billion and revenues of US$19 billion, incurring a deficit of US$14.5 billion.



Inflation: In 2003 and the first half of 2004, estimates of inflation in Iraq ranged from 25 percent to 28 percent. However, by the end of 2004 inflation was under substantially tighter control.



Agriculture: Historically, only 50 to 60 percent of Iraq’s arable land has been under cultivation. Because of ethnic politics, valuable farmland in Kurdish territory has not contributed to the national economy, and inconsistent agricultural policies under Saddam Husayn discouraged domestic market production. The international Oil-for-Food program (1997–2003) further reduced farm production by supplying artificially priced foreign foodstuffs. The military action of 2003 did little damage to Iraqi agriculture; because of favorable weather conditions, in that year grain production was 22 percent higher than in 2002. Although growth continued in 2004, experts predicted that Iraq will be an importer of agricultural products for the foreseeable future. Long-term plans call for investment in agricultural machinery and materials and more prolific crop varieties—improvements that did not reach Iraq’s farmers under the Husayn regime. In 2004 the main agricultural crops were wheat, barley, corn, rice, vegetables, dates, and cotton, and the main livestock outputs were cattle and sheep.



Forestry: Throughout the twentieth century, human exploitation, shifting agriculture, forest fires, and uncontrolled grazing denuded large areas of Iraq’s natural forests, which in 2005 are almost exclusively confined to the northeastern highlands. Most of the trees found in that region are not suitable for lumbering. In 2002 a total of 112,000 cubic meters of wood were harvested, nearly half of which was used as fuel.



Fishing: Despite its many rivers, Iraq’s fishing industry has remained relatively small and based largely on marine species in the Persian Gulf. In 2001 the catch was 22,800 tons.



Mining and Minerals: Aside from hydrocarbons, Iraq’s mining industry has been confined to extraction of relatively small amounts of phosphates (at Akashat), salt, and sulfur (near Mosul). Since a relatively productive period in the 1970s, the mining industry has been hampered by the Iran-Iraq War (1980–88), the sanctions of the 1990s, and the economic collapse of 2003.



Industry and Manufacturing: Traditionally, Iraq’s manufacturing activity has been closely connected to the oil industry. The major industries in that category have been petroleum refining and the manufacture of chemicals and fertilizers. Before 2003, diversification was hindered by limitations on privatization and the effects of the international sanctions of the 1990s. Since 2003, security problems have blocked efforts to establish new enterprises. The construction industry is an exception; in 2000 cement was the only major industrial product not based on hydrocarbons. The construction industry has profited from the need to rebuild after Iraq’s several wars. In the 1990s, the industry benefited from government funding of extensive infrastructure and housing projects and elaborate palace complexes.



Energy: As one of the three most oil-rich countries in the world, Iraq has the resources for complete energy independence. By world standards, production costs for Iraqi oil are relatively low. However, long-term neglect and mismanagement of the petroleum industry by the Baathist regimes left the industry’s infrastructure in poor condition. The lifting of sanctions in 2003 allowed repairs to begin. However, since 2003 oil pipelines and installations have been sabotaged persistently.



In 2004 Iraq had eight oil refineries, the largest of which were at Baiji, Basra, and Daura. Sabotage and technical problems at the refineries forced Iraq to import fuels, liquid petroleum gas, and other refined products from nearby countries. In October 2004, for example, Iraq spent US$60 million for imported gasoline. In late 2004 and early 2005, regular sabotage of plants and pipelines reduced export and domestic distribution of oil, particularly to Baghdad. Nationwide fuel shortages and power outages resulted. In 2004 plans called for increased domestic utilization of natural gas to replace oil and for use in the petrochemicals industry. However, because most of Iraq’s gas output is associated with oil, output growth depends on developments in the oil industry.



As much as 90 percent of Iraq’s power generating and distribution systems were destroyed in the Persian Gulf War of 1991, and full recovery never occurred. In mid-2004, Iraq had an estimated 5,000 megawatts of power-generating capacity, compared with 7,500 megawatts of demand. At that time, the transmission system included 17,700 kilometers of line. In 2004 plans called for construction of two new power plants and restoration of existing plants and transmission lines to ease the blackouts and economic hardship caused by this shortfall, but sabotage and looting held capacity below 6,000 megawatts. In 2004 the World Bank estimated that US$12 billion would be needed for near-term restoration, and the Ministry of Electricity estimated that US$35 billion would be necessary to rebuild the system fully.



Services: Iraq’s financial services have been the subject of post-Husayn reforms. The 17 private banks established during the 1990s were limited to domestic transactions and attracted few private depositors. Those banks and two main state banks were badly damaged by the international embargo of the 1990s. To further privatize and expand the system, in 2003 the Coalition Provisional Authority removed restrictions on international bank transactions and freed the Central Bank of Iraq (CBI) from government control. In its first year of independent operation, the CBI received credit for limiting Iraq’s inflation. In 2004 three foreign banks received licenses to do business in Iraq.



Because of the danger posed by Iraq’s ongoing insurgency, the security industry has been a uniquely prosperous part of the services sector. Often run by former U.S. military personnel, in 2005 at least 26 companies offered personal and institutional protection, surveillance, and other forms of security. In the early post-Husayn period, a freewheeling retail trade in all types of commodities straddled the line between legitimate and illegitimate commerce, taking advantage of the lack of income tax and import controls. The Iraqi tourism industry, which in peaceful times has profited from Iraq’s many places of cultural interest (earning US$14 million in 2001), has been completely dormant since 2003. Despite conditions, in 2005 the Iraqi Tourism Board maintained a staff of 2,500 and 14 regional offices.



Labor: In 2002 Iraq’s labor force was estimated at 6.8 million people. Recent figures on labor participation by sector are not available. In 1996 some 66.4 percent of the labor force worked in services, 17.5 percent in industry, and 16.1 percent in agriculture. In 2004 estimates of Iraq’s unemployment ranged from 30 percent to 60 percent. The actual figure is problematic because of high participation in black-market activities and poor security conditions in many populous areas. In central Iraq, security concerns discouraged the hiring of new workers and the resumption of regular work schedules. At the same time, the return of Iraqis from other countries increased the number of job seekers. In late 2004, most legitimate jobs were in the government, the army, the oil industry, and security-related enterprises. Under Saddam Husayn, many of the highest-paid workers were employed by the greatly overstaffed government, whose overthrow disrupted the input of these people to the economy. In 2004 the U.S. Agency for International Development committed US$1 billion for a worker-training program. In early 2004, the minimum wage was US$70 per month.



Foreign Economic Relations: From the 1990s until 2003, the international trade embargo restricted Iraq’s export activity almost exclusively to oil. In 2003 oil accounted for about US$7.4 billion of Iraq’s total US$7.6 billion of export value, and statistics for earlier years showed similar proportions. After the end of the trade embargo in 2003 expanded the range of exports, oil continued to occupy the dominant position: in 2004 Iraq’s export income doubled (to US$16.5 billion), but oil accounted for all but US$340 million (2 percent) of the total. In late 2004, sabotage significantly reduced oil output, and experts forecast that output, hence exports, would be below capacity in 2005 as well. In 2004 the chief export markets were the United States (which accounted for nearly half), Italy, France, Jordan, Canada, and the Netherlands. In 2004 the value of Iraq’s imports was US$21.7 billion, incurring a trade deficit of about US$5.2 billion. In 2003 the main sources of Iraq’s imports were Turkey, Jordan, Vietnam, the United States, Germany, and Britain. Because of Iraq’s inactive manufacturing sector, the range of imports was quite large, including food, fuels, medicines, and manufactured goods.



Balance of Payments: In 2004 the World Bank estimated Iraq’s current account balance at

–US$3.8 billion after being in surplus for the previous three years. The remaining elements of the balance of payments were not available.

External Debt: At the time it was deposed, the Husayn regime had an estimated US$120 billion of external debt. In late 2004, the Paris Club of international creditors agreed to cancel 80 percent of the debt owed by Iraq to member nations, an amount estimated in 2004 at US$42 billion. As of early 2005, the restructuring of Iraq’s remaining debt and war compensation obligations, which the United Nations was to carry out, had not begun.



Foreign Investment: Generally, in 2005 foreign investors awaited a quieting of insurgent activities before making large commitments. Although foreign banks received permission to do business in Iraq, security conditions limited their activity. The Standard Chartered Bank of Great Britain, the multinational Hong Kong and Shanghai Banking Corporation (HSBC), and the National Bank of Kuwait received licenses to conduct banking transactions in Iraq, but a limit of six such banks was set until 2008. Iraq’s Foreign Investment Law allows foreign banks to hold a 50 percent interest in Iraqi private banks. In 2005 the World Bank’s International Finance Corporation joined the National Bank of Kuwait in buying a share of the Credit Bank of Iraq, a major infusion of money into the Iraqi financial system. In early 2005, there was much discussion of U.S. and European firms gradually privatizing Iraq’s state-owned oil industry, despite Iraqi resistance to such a foreign presence. Shell, BP, and Exxon Mobil have signed agreements to study Iraq’s reserves, and in December 2004 an international consortium signed a small-scale oilfield development agreement with the Ministry of Oil.

Foreign Aid: In 2004 the U.S. Agency for International Development was responsible for awarding contracts totaling US$900 million for capital construction, seaport renovation, personnel support, public education, public health, government administration, and airport management. The World Bank committed US$3 billion to US$5 billion for reconstruction over a five-year period, and smaller commitments came from Japan, the European Union, Britain, and Spain. Russia canceled 65 percent of Iraq’s debt of US$8 billion, and Saudi Arabia offered an aid package totaling US$1 billion. Some US$20 billion of U.S. 2004 appropriations for Iraq were earmarked for reconstruction. Effective application of such funds, however, depends on substantial improvement in infrastructural and institutional resources. Because Iraq’s international debt situation had not been elaborated in 2005, for the foreseeable future U.S. funds are expected to pay for capital investments in rebuilding.



Currency and Exchange Rate: In October 2003, the new Iraqi dinar replaced the old Iraqi dinar as the official currency. In March 2005, its value, originally 1,950 to the U.S. dollar, had appreciated to 1,460 to the U.S. dollar.



Fiscal Year: Iraq’s fiscal year is the calendar year.