Business

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 Hussein, 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-Hussein low point in 2004 depends on the rates at which that industry can be reconstructed and reintegrated into the world oil market. In 2006 economic development in Iraq depends first on improvement of the security situation, which greatly hindered economic progress in the first post-Hussein years. Most major enterprises remained in state hands when a permanent government took office in early 2006. 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. Privatization, which met strong resistance in the post-Hussein years, is to be accomplished in gradual stages. Government corruption is a serious obstacle to economic progress because it centers on agencies administering the oil industry. Iraq applied for membership in the World Trade Organization in 2004, but it had not been accepted as of mid-2006.

Gross Domestic Product (GDP)

According to the World Bank, Iraq’s GDP in the crisis year of 2003, US$12.1 billion, represented 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 figure for 2004, US$25.6 billion, amounted to an increase of 112 percent. The economy experienced a 3 percent decrease in productivity in 2005, yielding a GDP of US$24.3 billion, or US$907 per capita. In 2006 forecasts of future GDP growth varied widely because of the unpredictable revival pace of the oil industry. In 2004 industry contributed 66.6 percent of GDP, services 26.1 percent, and agriculture 7.3 percent.

Government Budget

The World Bank estimated that in 2003 government revenue was US$4.7 billion and government expenditures US$8.6 billion, resulting in 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. The 2005 budget included expenditures of US$24 billion and revenues of US$19.3 billion, a deficit of US$4.7 billion. TheMinistry of Finance’s Budget Directorate was scheduled for reorganization and streamlining in 2006.

Inflation

In 2003 and the first half of 2004, estimates of inflation in Iraq ranged from 25 percent to 28 percent. Although inflation was under substantially tighter control by the end of 2004, in 2005 it again rose sharply to an estimated 40 percent.

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. The United Nations 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. The chief recipient of such imports is the Public Distribution System, which rations food to the population. Long-term plans call for investment in agricultural machinery and materials and more prolific crop varieties—improvements that the Hussein regime failed to make. In 2005 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 2003, 113,000 cubic meters of wood were harvested, nearly half 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 2002 the catch was 14,500 tons.

Mining and Minerals

Aside from hydrocarbons, Iraq’s mining industry has been confined to the 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 international 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 oil-related industries have been petroleum refining and the manufacture of chemicals and fertilizers. Before 2003, limitations on privatization and the effects of the international sanctions of the 1990s hindered the diversification of manufacturing. Since 2003, security problems have blocked efforts to establish new enterprises. An exception is the construction industry, which has profited from the need to rebuild after Iraq’s several wars. In 2004–5 growth in construction was spurred by a government program to ease Iraq’s serious housing shortage. In 2005 about 150,000 Iraqis were employed in short-term construction projects. That industry’s main material requirement, cement, was the only major industrial product not based on hydrocarbons.

Energy

Possessing the third-greatest oil reserves 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 international sanctions in 2003 allowed repairs to begin. However, since 2003 oil pipelines and installations have been sabotaged persistently, and in mid-2006 output had not regained pre-2003 levels.

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 2005 and 2006, 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 natural gas output is extracted together with oil, growth in gas output depends on developments in the oil industry. An expansion program in that industry for 2006 called for an expenditure of US$2 billion on new oil pipelines, storage facilities, export terminals, refineries, and wells, together with repair of damaged infrastructure, improved security, and streamlining of the delivery system. The plan would increase oil exports for 2006 to 568 million barrels, compared with the 2005 total of 508 million barrels. However, in 2006 the Ministry of Oil estimated that some US$25 billion was needed to repair damage and replace equipment.

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 2006 Iraq had an estimated 5,000 megawatts of usable power-generating capacity, compared with 8,000 megawatts of demand. This discrepancy led to regular power outages, particularly in Baghdad, and to the importation of power from Iran and Syria. Although 98 percent of houses were connected to the power grid in 2005, for most customers electricity supply was extremely unreliable, and in 2006 factories received only 20 percent of the power needed to operate at full capacity. In 2005 plans called for the construction of several 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 slowed expansion. In 2005 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 reforms since the fall of Saddam Hussein. 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 conduct 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, in2005 at least 60 companies offered personal and institutional protection, surveillance, and other forms of security. The companies employed an estimated 5,000 to 10,000 Iraqis and 8,000 to 15,000 foreign operatives and workers. 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.

The Iraqi tourism industry, which in peaceful times profited from Iraq’s many places of cultural interest (earning US$14 million in 2001), has been completely dormant since 2003. Despite these conditions, in 2005 the Iraqi Tourism Board maintained a staff of 2,500 and 14 regional offices.

Labor

In 2004 Iraq’s labor force was estimated at 7.4 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 2005 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, in the early 2000s the return of Iraqis from other countries increased the number of job seekers. In 2005 most legitimate jobs were in the government, the army, the oil industry, and security-related enterprises. The overthrow of Saddam Hussein’s greatly overstaffed government disrupted the input of large numbers of Iraqis to the economy. However, in 2005 the government of Ibrahim al Jafari made another cut in the public sector (which nonetheless still accounted for as many as half of Iraq’s jobs), further reducing employment. In 2005 U.S. and Iraqi government authorities opened new training centers to alleviate unemployment, which threatened to augment the membership of insurgent groups. In early 2004, the official 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$17.8 billion), but oil still accounted for all but US$340 million (2 percent) of the total. In 2004 and 2005, sabotage significantly reduced oil output, limiting total export values. In 2004 the chief export markets (in order of value) were the United States (which accounted for 52 percent), Spain, Japan, Italy, and Canada. In 2004 the value of Iraq’s imports was US$19.6 billion, incurring a trade deficit of about US$1.8 billion. In 2004 the main sources of Iraq’s imports (in order of value) were Syria, Turkey, the United States, Jordan, and Germany. Because of Iraq’s inactive manufacturing sector, the range of imports was quite large, including food, fuels, medicines, and manufactured goods.

Balance of Payments

The financial management and reporting system remained incomplete in 2005, making full evaluation of Iraq’s financial situation problematic. 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. Information on the remaining elements of the balance of payments was not available.

External Debt

At the time it was deposed, the regime of Saddam Hussein 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 its 19 member nations, an amount estimated at US$42 billion. In 2005 a three-phase process was devised for this restructuring, which was to be conducted by the United Nations. The United States applied heavy pressure on creditor countries outside the Paris Club to take similar steps. The International Monetary Fund estimated Iraq’s external debt for 2005 as US$68 billion (2.8 times gross domestic product—GDP) and forecast that the 2006 debt would be 2.2 times GDP.

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 risks 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 2004 Shell, BP, and Exxon Mobil signed agreements to study Iraq’s oil reserves, and an international consortium signed a small-scale oilfield development agreement with the Ministry of Oil. In 2006 Iraq set a goal of US$20 billion of foreign investment in its oil industry. In an effort to regularize procedures, in mid-2006 the Council of Ministers approved a new foreign investment law that met strong resistance in the Council of Representatives (lower house of parliament) because of its provisions for foreign ownership.

Foreign Aid

In the post-Saddam Hussein period, Iraq has received foreign aid from a number of national and international sources, but the United States has been by far the largest donor. For the period 2004–7, Iraq received pledges of US$33 billion in aid. In 2005 U.S. government aid to Iraq totaled US$10.2 billion, an increase from US$3 billion in 2004. For 2003–6 all forms of U.S. assistance totaled US$28.9 billion, 38 percent of which was designated for upgrading security and 40 percent for repairing critical infrastructure. In 2004 the U.S. Agency for International Development awarded contracts totaling US$900 million for capital construction, seaport renovation, personnel support, public education, public health, government administration, and airport management.

Among international contributors, 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. Effective application of reconstruction funds depends on substantial improvement in infrastructural and institutional resources. Pending full resolution of Iraq’s international debt situation, for the foreseeable future U.S. funds are expected to pay for capital investments in rebuilding. However, in 2004–6 security costs consumed an unexpectedly high percentage of aid allotments, to the detriment of reconstruction activity.

Currency and Exchange Rate

In October 2003, the new Iraqi dinar replaced the old Iraqi dinar as the official currency. In August 2006, its value, originally 1,950 to the U.S. dollar, had stabilized at 1,476 to the U.S. dollar.

Fiscal Year

Iraq’s fiscal year is the calendar year.

Source: Library of Congress – Federal Research Division Country Profile