Economy of Iraq

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Iraq's economy is dominated by the petroleum sector, which has traditionally provided about 95% of foreign exchange earnings.(pdf) In the 1980s, financial problems caused by massive expenditures in the eight-year war with Iran and damage to oil export facilities by Iran led the government to implement austerity measures, borrow heavily, and later reschedule foreign debt payments; Iraq suffered economic losses of at least $100 billion from the war.^{[citation needed]} After the end of hostilities in 1988, oil exports gradually increased with the construction of new pipelines and restoration of damaged facilities. Current GDP per capita of Iraq grew 56% in the Sixties reaching a peak growth of 57% in the Seventies. But this proved unsustainable and current GDP per capita consequently shrank by 23% in the eighties

Contents 1 Economic sanctions of the 1990s 1.1 Sanctions 1.2 After the Fall of Saddam Hussein 2 Industry 3 Primary sectors 3.1 Agriculture 3.2 Forestry, fishing, and mining 3.3 Energy 4 Services 4.1 Finance 4.2 Private Security 4.3 Retail 4.4 Tourism 4.5 Telecommunications 5 Labor force 6 External trade 7 Balance of payments and currency 8 Other statistics 9 Notes 10 Miscellaneous topics 11 External links

[edit] Economic sanctions of the 1990s

Iraq's seizure of Kuwait in August 1990, subsequent international economic sanctions, and damage from military action by an international coalition beginning in January 1991 drastically reduced economic activity. The government's policies of supporting large military and internal security forces and of allocating resources to key supporters of the regime have exacerbated shortages. The implementation of the UN's Oil for Food program in December 1996 has helped improve economic conditions. For the first six six-month phases of the program, Iraq was allowed to export limited amounts of oil in exchange for food, medicine, and other humanitarian goods. In December 1999, the UN Security Council authorized Iraq to export as much oil as required to meet humanitarian needs. Oil exports are now about three-quarters their prewar level. Per capita food imports have increased significantly, while medical supplies and health care services are steadily improving. Per capita output and living standards are still well below the prewar level, but any estimates have a wide range of error.

Iraq's economy is characterized by a heavy dependence on oil exports and an emphasis on development through central planning. Prior to the outbreak of the war with Iran in September 1980, Iraq's economic prospects were bright. Oil production had reached a level of 560,000 m³ (3.5 million barrels) per day, and oil revenues were 21 billion in 1979 and 27 G$ in 1980. At the outbreak of the war, Iraq had amassed an estimated 35 billion in foreign exchange reserves.

The Iran-Iraq War depleted Iraq's foreign exchange reserves, devastated its economy, and left the country saddled with a foreign debt of more than $40 billion. After hostilities ceased, oil exports gradually increased with the construction of new pipelines and the restoration of damaged facilities.

Iraq's invasion of Kuwait in August 1990, subsequent international sanctions, and damage from military action by an international coalition beginning in January 1991 drastically reduced economic activity. Government policies of diverting income to key supporters of the regime while sustaining a large military and internal security force further impaired finances, leaving the average Iraqi citizen facing desperate hardships. Implementation of the UN oil-for-food program in December 1996 improved conditions for the average Iraqi citizen. Since 1999, Iraq was authorized to export unlimited quantities of oil to finance humanitarian needs including food, medicine, and infrastructure repair parts. Oil exports fluctuate as the regime alternately starts and stops exports, but, in general, oil exports have now reached three-quarters of their pre-Gulf War levels; per capital output and living standards remain well below pre-Gulf War levels.

The economic sanctions were fully lifted in 24 May 2003, shortly after Saddam Hussein was overthrown. This resulted in economic growth of 53% topping the list of the world's fastest growing economy.

[edit] Sanctions

Iraq's seizure of Kuwait in August 1990, subsequent international economic sanctions, and damage from the ensuing Gulf War of 1991 drastically reduced economic activity. Although government policies supporting large military and internal security forces and allocating resources to key supporters of the Ba'ath Party government hurt the economy, implementation of the United Nations' corruption-plagued oil-for-food program in December 1996 was to have improved conditions for the average Iraqi citizen. In December 1999, the UN Security Council authorised Iraq to export under the program as much oil as required to meet humanitarian needs. Iraq changed its oil reserve currency from the US dollar to the euro in 2000. Oil exports were more than three-quarters of the pre-war level. However, 28% of Iraq's export revenues under the program were deducted to meet UN Compensation Fund and UN administrative expenses. The drop in GDP in 2001 was largely the result of the global economic slowdown and lower oil prices. Following the 2003 invasion of Iraq, the economy to a great extent shut down; attempts are underway to revive it from the damages of war and rampant crime.

[edit] After the Fall of Saddam Hussein

Since the peak of 1980, the nominal GDP of Iraq has steadily shrunk to merely $12,271 million in 2000. However removal of sanctions, after the overthrow of Saddam, had immediate effect. The nominal GDP had almost tripled to $31,140 million by 2005 due to increase in oil output as well as international prices. In 2006, the real GDP growth was estimated at almost 17 percent[1].

Paul Bremer, chief executive of Iraq, planned to restructure Iraq's state owned economy with free market thinking. Order 39 laid out the framework for full privatization in Iraq, except for "primary extraction and initial processing" of oil, and permitted 100% foreign ownership of Iraqi assets. Paul Bremer also ordered a flat tax rate of 15% and allowed foreign corporations to repatriate all profits earned in Iraq. Opposition from senior Iraqi officials, together with the poor security situation, meant that Bremer's privatization plan was not implemented during his tenure, though his orders remain in place. In addition to approximately 200 other state owned businesses, privatization of the oil industry was scheduled to begin sometime in late 2005, though it is opposed by the Federation of Oil Unions in Iraq.

Bremer's transitional government featured figures close to the George W. Bush administration, such as grain-trading industry lobbyist Dan Amstutz, who was put in charge of agricultural policy in Iraq.

One of the key economic challenges was Iraq's immense foreign debt, estimated at $125 billion. Although some of this debt was derived from normal export contracts that Iraq had failed to pay for, some was a result of military and financial support during Iraq's war with Iran.

The Jubilee Iraq campaign argued that much of these debts were odious (illegitimate). However, as the concept of odious debt is not accepted, trying to deal with the debt on those terms would have embroiled Iraq in legal disputes for years. Iraq decided to deal with its debt more pragmatically and approached the Paris Club of official creditors.

In a December 2006 Newsweek International article, a study by Global Insight in London was reported to show "that Civil war or not, Iraq has an economy, and—mother of all surprises—it's doing remarkably well. Real estate is booming. Construction, retail and wholesale trade sectors are healthy, too, according to [the report]. The U.S. Chamber of Commerce reports 34,000 registered companies in Iraq, up from 8,000 three years ago. Sales of secondhand cars, televisions and mobile phones have all risen sharply. Estimates vary, but one from Global Insight puts GDP growth at 17 percent last year and projects 13 percent for 2006. The World Bank has it lower: at 4 percent this year. But, given all the attention paid to deteriorating security, the startling fact is that Iraq is growing at all."^[1]

Between 100,000 barrels per day (16,000 m³/d) and 300,000 barrels per day (48,000 m³/d) of Iraq’s declared oil production over the past four years could have been siphoned off through corruption or smuggling, according to a US Study from May 12, 2007.^[2]

[edit] Industry

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.

[edit] Primary sectors

[edit] 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 Hussein discouraged domestic market production. Despite its abundant land and water resources, Iraq is a net food importer. Under the UN Oil for Food program, Iraq imported large quantities of grains, meat, poultry, and dairy products. The government abolished its farm collectivization program in 1981, allowing a greater role for private enterprise in agriculture.

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 Hussein 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.

The Agricultural Cooperative Bank, capitalized at nearly 1 G$ - by 1984, targets its low-interest, low-collateral loans to private farmers for mechanization, poultry projects, and orchard development. Large modern cattle, dairy, and poultry farms are under construction. Obstacles to agricultural development include labour shortages, inadequate management and maintenance, salinization, urban migration, and dislocations resulting from previous land reform and collectivization programs.

Importation of foreign workers and increased entry of women into traditionally male labour roles have helped compensate for agricultural and industrial labour shortages exacerbated by the war. A disastrous attempt to drain the southern marshes and introduce irrigated farming to this region merely destroyed a natural food producing area, while concentration of salts and minerals in the soil due to the draining left the land unsuitable for agriculture.

[edit] Forestry, fishing, and mining

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.

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.

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 an awesome 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.

[edit] 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, three wars (Iraq-Iran War from 1980-1988, Gulf War 1991 and the Iraqi Invasion of 2003) in addition to the UN sanctions - which lasted for twelve years from 1991 to 2003, 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 petrochemical 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.

In 2007, hydrocarbon industries accounted for well over 70 per cent of the Iraqi economy and 95 per cent of the government's revenues. Diversification of the economy into non-hydrocarbon industries remain a long-term issue.

[edit] Services

[edit] Finance

Iraq’s financial services have been the subject of post-Hussein 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.

[edit] Private Security

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.

[edit] Retail

In the early post-Hussein 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.

[edit] Tourism

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.

[edit] Telecommunications

During 2003-8, mobile phone subscriptions had expanded over hundredfold to 10 million nationwide, reported the Brookings Institute.[2]

[edit] Labor force

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.[3] Under Saddam Hussein Hussein, 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.

[edit] External trade

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.

[edit] Balance of payments and currency

In 2004 the World Bank estimated Iraq’s current account balance at –$3.8 billionUSD after being in surplus for the previous three years. The remaining elements of the balance of payments were not available.

At the time it was deposed, the Hussein 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.

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. From October 2006 to March 2007, the dinar value increased to approximately 1,277 IQD per dollar and to 1,210 IQD by the end of the year as the Central Bank enacted policies to combat inflation and increase purchasing power by raising the official exchange rate.

[edit] Other statistics

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Household income or consumption by percentage share:

• lowest 10%: NA
• highest 10%: NA

with = 20 Agriculture - products: wheat, barley, rice, vegetables, dates, cotton; cattle, sheep & poultry

Industrial production growth rate: NA

Electricity:

• production: 32,600 GWh (2004)
• consumption: 33,700 GWh (2004)
• exports: 0 kWh (2004)
• imports: 1,100 GWh (2004)

Electricity - production by source:

• fossil fuel: 98.4%
• hydro: 1.6%
• other: 0% (2001)
• nuclear: 0%

Oil

• production: 2.25 million barrel/day (2004 est.); note - prewar production (in 2002) was 2.03 million barrel/day (2004 est.)
• consumption: 383,000 barrel/day (2004 est.)
• exports: 1.49 million barrel/day (2004 est.)
• imports: NA
• proved reserves: 112.5 billion barrel (2004 est.) @$70/barrel= U.S.$7.875 trillion

Natural gas:

• production: 2.35 km³ (2002 est.)
• consumption: 2.35 km³ (2002 est.)
• exports: 0 m³ (2004 est.)
• imports: 0 m³ (2004 est.)
• proved reserves: 3,149 km³ (2004)

Current account balance: $-560 million (2003 est.)

Exports - commodities: crude oil (83.9%), crude materials excluding fuels (8.0%), food and live animals (5.0%)

Imports - commodities: food, medicine, manufactures

Exchange rates: New Iraqi dinars per U.S. dollar - 1197 (June 2008)

[edit] Notes

[edit] Miscellaneous topics

• Iraq Stock Exchange

[edit] External links

• europaticker: oils for Food - scandal in the Iraq: Transparency Germany inserts complaint against 57 German enterprises
• IraqiEconomy.org Collection of reports and articles on the Iraqi economy. Also contains archives dating from 2004 to 2006.
• Iraq Revenue Watch A project of the Open Society Institute (George Soros).
• Iraq Analysis Economic Development Page Comprehensive information source listings on the Iraq economy and reconstruction.
• Iraq Reconstruction Timeline at the History Commons
• Jubilee Iraq Campaign to cancel the large debt and reparations.

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