Away from the headlines of
sectarian violence and turmoil, the post-Saddam Hussein Iraqi governments -- first
the Coalition Provisional Authority, then the elected Interim Government -- have
waged a difficult campaign to move the once dictatorially controlled economy to
one based on a free market. The core of the financial and economic struggle
can be found in Iraq's critically important oil reserves. Oil is Iraq's lifeline,
comprising two thirds of the country's gross domestic product and about 10 percent
of the world's proven reserves. The resource is expected to continue to be the
primary industry in Iraq's new economy but also its Achilles heel given that the
country's economic ups and downs are tied to volatile oil prices and to the ability
of the country to produce and export oil. F ollowing
the Persian Gulf War oil export sanctions crippled the country's social programs.
Even after the United Nations negotiated the 1996 oil-for-food program to allow
limited exports in exchange for food and medicine -- and after the export caps
were ultimately removed in 1999 -- the country was unable to achieve pre-1990
oil production levels. That blow has been felt throughout the economy. Per
capita income also has yet to recover. The International Monetary Fund estimated
a 2006 GDP per capita of $1,687, less than half its early 80s $3,600 peak. The
IMF blames slow economic progress on continuing insurgent violence and on an oil
infrastructure left dilapidated since 1990s sanctions. "Even if there
were no violence going on in the country, Iraq would face very large bills for
rebuilding its electricity grid, and rebuilding roads, and rebuilding airports
and water systems and irrigation canals and all the stuff Iraq needs to have a
functioning economy," said Chris Foote, a former adviser to the Coalition
Provisional Authority's economic office. To help combat the problem, the
CPA cut taxes and allowed privatization of Iraq's non-oil businesses, but ongoing
violence has limited investment and has continued to plague the elected government
now running a sovereign Iraq. "[The Iraqi government] can't really
control events very well; they can't control economic life very well because of
the security crisis," said Bassam Yousif, an Iraq-born assistant professor
of economics at Indiana State University. In 2003, the World Bank reported
that crime, economic instability and poor access to capital were top obstacles
to private sector investment. But to many, it's a chicken-and-egg argument: "Without
turning the Iraqi economy around, we can't expect the decline in political violence
nor can we expect to move towards political stability in Iraq," Eric Davis,
a professor of Middle East politics at Rutgers University, told the NewsHour in
October. Davis and others argue, Iraq can't have economic reform, a central
precept of the CPA's rebuilding plan, until insurgent violence is controlled,
and insurgent violence can't be controlled until there is economic progress. The
U.S. Department of Energy has said hundreds of insurgent attacks on oil infrastructure
have cost Iraq billions of dollars in lost revenue. Colin Rowat, an economics
researcher at the University of Birmingham, made a more specific estimate using
sparsely available economic data, putting the cost of the Iraq war on Iraq's economy
between $24 and $30 billion in 2005, or about 40 to 50 percent of the country's
GDP. In December 2006, the U.S. Iraq Study Group estimated that much of
Iraq's oil is stolen: 150,000 to 200,000 -- and perhaps as much as 500,000 --
of the 2.3 million barrels of oil produced each day. Corruption, which is
anecdotally rife in the new Iraq, has also hobbled foreign investment. A recent
U.S. Senate report said that corruption "has not abated" and that U.S.
policymakers should expect that it will continue to be a problem for Iraq's economic
prospects for some time.
Like so much of the nation's financial life, corruption centers
on oil. Oil smuggling combined with costs attributed to insurgent
violence and the removal of subsidies has lead to a doubling of
year-over-year fuel prices in mid-2006. The IMF reports insurgent
violence is responsible for much of the markup on consumer products
as well, and predicts Iraq's year-end inflation will sit near
the same rate it's been since 2004, 30 percent.
"Thirty to
40 percent given that we've had an invasion and a rampant insurgency is an accomplishment,
given the conditions," said Yousif, but he added that there is still a danger
that inflation could spiral out of control.
The Central Bank of Iraq has taken steps to ease inflation by
raising its key interest rate, from 10 percent earlier in 2006
to 16 percent in November, and has also appreciated its currency,
the free-floating Iraqi Dinar.
Regardless of the CBI's actions, inflation
remains troublesome because costs continue to rise as consumption and wages remain
low for Iraqis who have jobs.  Iraqi
employment has been difficult to estimate, but the U.S. government, the Iraqi
government and the Heritage Foundation have reported recent unemployment rates
between 25 and 50 percent. A plurality of employed Iraqis work in the public sector
and about 1 percent work in the oil industry, leaving questions as to the future
of Iraq's workforce.
Rutgers professor Davis told the NewsHour the key problem
in Iraq is unemployment. "If you also realize that 61 percent of the
Iraqi population is under 25 and there's been almost no new job creation since
2003, it doesn't take very much arithmetic to realize who are the most susceptible
to recruitment to insurgent groups and sectarian death squads," he said. Iraq
also has significant financial hurdles to overcome. According to ISX Data Services,
though some 112 companies, banks for the most part, are listed on the relaunched
Iraq Stock Exchange, one-third of the companies are not traded and no company
has gone public since 2005. Iraq's bond, trading at a 9.5 percent yield, is one
of the riskiest issued by a sovereign country. And what was once a $40 billion
surplus in the 1980s had turned into a $120 billion deficit by the 2003 ouster
of Hussein's regime. Despite these hardships, the international community
has maintained its optimistism. In addition to support from the Bush administration,
Iraq is also participating in a debt cancellation agreement -- to be completed
in 2008 -- with the Paris Club, a consortium of developed country creditors, to
which Iraq had owed $40 billion. And after the IMF provided $436 million
in emergency relief in 2004, deputy director Takatoshi Kato said Iraqi authorities
had been "successful in promoting macroeconomic stability in 2005."
In late 2005, the IMF established a Stand-by Agreement, a precautionary,
short-term $685 million loan. A $100-million-dollar loan from the World Bank --
its first to Iraq since 1973 -- followed in late 2006. The combined debt
relief would bring Iraq's deficit to about $40 billion, about the same as the
country's expected 2006 GDP. The IMF predicts Iraq's GDP will increase 14.4
percent in 2007, with oil and non-oil revenues growing at roughly 10 percent over
the next five years, though their predictions assume a stabilization of attacks. Even
with ongoing violence, however, Iraqi ministers are pressing ahead. In May, Iraq's
new oil minister al-Ghadban took steps to quell corruption, announcing a plan
to make the oil industry more transparent to the international community. And
in Iraq's 2007 budget, finance minister al-Zubaidi announced government revenue
would include taxes and, for the first time, would not be completely dependent
on oil.
-- By
Adnaan Wasey, Online NewsHour
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