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Iraq - Economy (Notes)

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, and oil revenues were $21 billion in 1979 and $27 billion 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, 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 while sustaining a large military and internal security force further impaired finances, leaving the average Iraqi citizen facing desperate hardships.

Implementation of a UN Oil-For-Food (OFF) program in December 1996 improved conditions for the average Iraqi citizen. In December 1999, Iraq was authorized to export unlimited quantities of oil through OFF to finance essential civilian needs including, among other things, food, medicine, and infrastructure repair parts. The drop in GDP in 2001-02 was largely the result of the global economic slowdown and lower oil prices. Per capita food imports increased significantly, while medical supplies and health care services steadily improved. The occupation of the U.S.-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 2.0 million bbl/day,

One key issue that currently confronts economic policymakers in Iraq is inflation. The year-on-year inflation rate for 2006 was 64.8%, a significant increase over the 2005 rate of 31.6% and well above the IMF target rate of 30% annual inflation. In an effort to infuse some stability in prices in Iraq, the Central Bank of Iraq (CBI) began to appreciate the Iraqi Dinar (ID) relative to the U.S. Dollar (USD) in November 2006. As of June 7, the CBI had appreciated the ID by 17%. It has also accelerated interest rate increases; the deposit rate is currently 20%. Inflation in Iraq, however, is only partly a monetary problem, and is more strongly related to real sector effects, particularly bottlenecks resulting from the security situation.

The Iraqi Government is seeking to pass and implement laws to strengthen the economy, including a hydrocarbon law to encourage development of this sector, a revenue sharing law to equitably divide oil revenues within the nation in line with the Iraqi constitution, and writing regulations to implement a new foreign investment law. Controlling inflation, reducing corruption, and implementing structural reforms such as bank restructuring and private sector development will be key to Iraq's economic growth.

Foreign assistance has been an integral component of Iraq's reconstruction efforts over the past three years. At a Donors Conference in Madrid in October 2003, more than $33 billion was pledged to assist in the reconstruction of Iraq. Out of that conference, the United Nations (UN) and the World Bank launched the International Reconstruction Fund Facility for Iraq (IRFFI) to administer and disburse about $1.4 billion of those funds. The rest of the assistance is being disbursed bilaterally. To date $13.5 billion has been pledged in foreign aid for 2004-2007 from outside of the U.S.

The Government of Iraq has also made an agreement with the Paris Club to reduce some of its debt service obligations. This three-stage agreement will allow for the reduction of over $34 billion in Iraqi debt. Also, in December 2005, the International Monetary Fund (IMF) agreed to extend a stand-by agreement (SBA) to the Government of Iraq in the amount of SDR 475.4 million (about U.S. $685 million).

In July 2006, the Government of Iraq and the UN began work to formulate the International Compact with Iraq (ICI), a five-year framework for Iraq to achieve economic self-sufficiency within its region and the world. On May 3, 2007 in Sharm el-Sheikh the ICI was formally launched by more than 70 countries and international organizations, many represented at the ministerial level.

The Compact aims to create a mutually reinforcing dynamic of national consensus and international support. Domestically the aim is to build a national Compact around the government's political and economic program and to restore the Iraqi people's trust in the state and its ability to protect them and meet their basic needs. Internationally, the Compact establishes a framework of mutual commitments to provide financial and technical assistance and debt relief needed to support Iraq and strengthen its resolve to address critical reforms and policies.

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. Obstacles to agricultural development during the previous regime included labor shortages, inadequate management and maintenance, salinization, urban migration, and dislocations resulting from previous land reform and collectivization programs. A Ba'ath regime policy to destroy the 'Marsh Arab' culture by draining the southern marshes and introducing irrigated farming to this region 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. Through assistance from USAID and USDA, targeted efforts have begun to overcome the damage done by the Ba'ath regime in ways that will rehabilitate the agricultural sector and confront environmental degradation. These efforts include infrastructure development, private sector development, veterinary clinic restoration, increased wheat production, and training and technical assistance in developing policies on sustainable water resources management and building Iraqi natural resources management.

The United Nations imposed economic sanctions on Iraq after it invaded Kuwait in 1990. Under the Oil-For-Food program Iraq was allowed to export oil and use the proceeds to purchase goods to address essential civilian needs, including food, medicine, and infrastructure spare parts. With the lifting of UN sanctions after the Ba'ath regime was removed in 2003, Iraq is gradually resuming trade relations with the international community, including with the U.S. The U.S. designated Iraq as a beneficiary developing country under the Generalized System of Preferences (GSP) program in September 2004. Iraq was granted observer status at the World Trade Organization (WTO) in February 2004, and began its WTO accession process in December 2004. On May 25, 2007, Iraq participated in its first Working Party meeting in Geneva. The meeting, in which Trade Minister al-Sudani participated, was characterized as a successful start to the WTO accession process, one that is crucial to Iraq's integration into the international economy. Dependent upon Iraqi progress on relevant issues, the next Working Party meeting could take place as early as spring 2008.

Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Current Time - Ranking Positions
Notes and Commentary: People - Economy - Government and Political Conditions - Historical Highlights - Foreign Relations - Relations with U.S.

Facts at a Glance
Current Time
Ranking Positions

Notes and Commentary
Government and Political Conditions
Historical Highlights
Foreign Relations
Relations with U.S.

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