Economy and Trade
Formerly part of the Ottoman Empire, Iraq was occupied by Britain during the course of World War I. In 1920 it was declared a League of Nations mandate under United Kingdom administration. Iraq attained its independence as a kingdom in 1932. It was proclaimed a republic in 1958, but in actuality a series of strongmen ruled the country until 2003. The last was Saddam Hussein, who was deposed following the Gulf War. In October 2005, Iraqis approved a constitution in a national referendum and, pursuant to this document, elected a 275-member Council of Representatives in December 2005. Decreasing insurgent attacks and an improving security environment in many parts of the country are helping to spur economic activity. Iraq’s economy is dominated by the oil sector, which has traditionally provided more than 90% of foreign exchange earnings. Oil exports are around levels seen before the United States and its allies launched Operation Iraqi Freedom.
Economic Policy over 12 Months
Historically, Iraq’s economy was 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 3.5 million barrels per day (bpd), and oil revenues were US$21 billion in 1979 and US$27 billion in 1980. At the outbreak of the war, Iraq had amassed an estimated US$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 debt of more than US$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, damage from military action by an international coalition beginning in January 1991, and neglect of infrastructure drastically reduced economic activity. Government policies of diverting income to key supporters of the regime and sustaining a large military and internal security force further impaired finances, leaving the average Iraqi citizen facing desperate hardship.
The occupation of the US-led coalition in March–April 2003 resulted in the shutdown of much of the central economic administrative structure. The rebuilding of oil infrastructure, utilities infrastructure, and other production capacities has proceeded steadily since 2004, despite attacks on key economic facilities and continuing internal security incidents. Despite uncertainty, Iraq is making progress toward establishing the laws and institutions needed to make and implement economic policy.
Iraq’s economy is dominated by the oil sector, which has traditionally provided about 95% of foreign exchange earnings. Current estimates show that oil production averages 2.1 million bpd.
In its March 2010 report on the country, the International Monetary Fund (IMF) commended the Iraqi authorities for the progress in rebuilding its economy under extremely difficult security and political conditions. The report said that “substantial progress has been made since 2003, despite the difficult security situation,” and that “inflation has been reduced to single digits, the international reserves position has improved markedly, and direct fuel subsidies were eliminated, while the pension system was put on a sustainable footing, which created room for priority spending on investment and the social sectors.” The IMF also said that several steps had been taken “to strengthen public financial management, improve transparency in the oil sector, and rebuild capacity at the central bank,” and that “the authorities have initiated the restructuring of the two largest state-owned banks.”
Economic Performance over 12 Months
The Iraq economy grew by 4.2% in 2009, according to IMF estimates, down from 9.5% in the previous year. The decline reflects the drop in oil prices from their peak levels in mid-2008, as well as the fact that oil production and export volumes have not risen as much as planned, due to insufficient investment. However, the IMF believes that Iraq’s longer-term economic outlook is strong, as oil prices and production are projected to increase markedly in the coming years.
The decline in oil prices and lower than expected production inevitably had an adverse impact on the country’s external accounts. Iraq’s external position weakened in 2009, with oil export proceeds falling to US$39 billion, and both the external current account and the overall balance of payments moved into large deficits.
Oil export receipts account for around 85% of government revenues, and thus the lower oil prices also undermined the government’s budget. Indeed, the IMF believes that the government recorded a fiscal deficit of more than 20% of GDP in 2009. The country’s international reserves also fell, declining by almost US$7 billion in 2009, to about US$44 billion by the year end, reflecting the use of government deposits at the Central Bank of Iraq to finance the budget deficit.
Inconclusive parliamentary elections, held in March 2010, resulted in a stalemate that remained unresolved by August 2010. The lack of a government means that foreign investors eager to win contracts to rehabilitate Iraq’s idle factories and infrastructure are delaying decisions. The economy also remains hampered by the lack of a reliable electricity supply. Regular insurgent attacks and steady increases in demand have led to shortages, with much of the country receiving just a few hours per day. The government imposed a 100% hike in tariffs in early June in a bid to reduce demand, but this does not address the issue of the shortage of supply, which is unlikely to be resolved for a number of years.
On a brighter note, Iraq’s inflation rate remained subdued in 2010, reaching its lowest point in three decades for the second straight month in May (at 3%), due to lower prices for food, nonalcoholic beverages, communications, and energy. However, announcing the figures in July, the central bank said that it had no plans to cut interest rates. Iraq’s central bank last cut its base interest rate by 100 basis points to 6% in April 2010. The central bank also said that it has no intention to change the exchange rate of the Iraqi dinar, which has been at 1,170 to the US dollar for more than a year, in the foreseeable future.
Support for Inward Investment and Imports
Inward investment is handled by the Iraq Economic Development Group (IEDG) via its website. It aims to develop high-quality, commercially feasible projects to encourage investments into Iraq, mainly targeting critical Iraqi infrastructure to fuel economic growth, create jobs, and provide the basis for continued employment growth. Investors should have projects in mind that address these interests. The IEDG advertises projects internationally, and claims that no project advertised has an annual return on investment of less than 30%, though this can be a five-year average on larger projects. It can arrange direct investment, or take a general investment that leverages all ongoing projects. It will also help investors to promote products, and will assist in getting products to market.
Further information can be obtained from IEDG.
GDP growth: 4.2% (IMF, 2009)
GDP per capita: US$3,600 (2009 est.)
CPI: −4.4% (IMF, end 2009)
Key interest rate: 7% (December 31, 2009)
Exchange rate versus US dollar: ID1,170 (2009)*
Unemployment: 15.2% (2008 est.)
Current account deficit/surplus: −US$19.9 billion (2009 est.)
Population: 29,671,605 (July 2010 est.)
* Iraqi dinar
Source: CIA World Factbook except where stated