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Political & Economic Overview Growth Prospects
Sector Analyses

Political & Economic Overview


The Iraqi reconstruction process promises great business opportunities alongside a quagmire of security, logistical and administrative traps. In 2003, Iraq's GDP barely reached $30 billion. When Sadaam Hussein came to power in 1980, however, GDP stood at almost $130 billion and Iraq profited from one of the most advanced economies in the Middle East.  Average income fell from $3,600 per person in 1980 to between $770 and $1,020 by 2001 and will be just $450-610 by the end of 2003, according to World Bank figures


The Iraqi economy has suffered successive blows. First, wealth and power was solely concentrated in the hands of Sadaam's Ba'ath Party in a centrally-controlled and corrupt state. The country lacked a national budget for 25 years. Second, the sanctions regime following the 1990 Iraqi invasion of Kuwait severely limited the flow of goods in and out of the country and infrastructural development development was severely neglected. Thirdly, the April 2003 invasion not only ousted the regime but also overhauled the existing bureaucratic and commercial order. 


Since May 2003, Iraq continues to suffer irrendtism, constant waves of terror attacks against strategic economic targets such as pipelines and refineries, a mounting death toll and controversies over the awarding of contracts. This has had a detrimental impact on the reconstruction effort.

Population: 25.5 million
Religions: Muslim, Christian
Government: Coalition Provisional Government (CPA)
Languages: Arabic, English widely spoken, Kurdish, Turkish and  Farsi spoken in northern regions
Work Week:
Monetary Unit: Iraqi dinar (ID) and US dollar
Exchange Rate: 1 Iraqi Dinar = US$3.3

On the other hand, the international community has already pledged several billion dollars in loans (2.5 billion from the US Congress, 1 billion from the oil-for-food program, and 2 billion pledged by other international donors) until oil facilities can come back on line on a significant scale. In addition, $1.7 billion in Ba'ath regime assets in international banks, over $1 billion in Saddam's personal wealth and gold stockpiles have been allocated to reconstruction.


UN Security Resolution 1483 places revenue from oil production in a development fund held at the Iraqi Central Bank to finance reconstruction activities. The fund is supervised by a panel of international auditors. An international advisory and monitoring board composed of experts from the IMF, the World Bank, the UN, and the Arab Fund for Social and Economic Development will approve individual auditors for the panel and provide accountability. The UN resolution also grants concessions on Iraq's foreign debt which is estimated at between $60-130 billion. International financial institutions such as the Paris Club and Iraq's creditor countries are conducting heated and strained negotiations over a delayed repayment structure.


The Coalition Provisional Government (CPA) and the American army have yet to establish internal stability but nevertheless, international firms have shown a healthy interest in bidding for reconstruction work. Unfortunately, the international squabbles, charges of corruption and threat to personal security that have characterized this process are not likely to end in the near future


Growth Prospects


At the beginning of 2004, growth is dependent on internal stability, institutional capacity and a clean and transparent business environment. On the one hand, Iraq has the natural resources, manpower and access to international capital to create a flourishing business environment and to leverage its former wealth. Steps are being taken to create a workable tax system, an organized legal and regulatory framework, a reformed, transparent banking sector and adequately paid bureaucracy - all lacking in the final years of Sadaam's regime.


On the other hand, Iraq is unable to invest the billions of dollars pledged for the reconstruction effort due to the lack of institutional and infrastructure capability. The first half of 2004 is vital for the CPA to break this vicious circle by creating the necessary regulatory, security and financial environment. Moreover, the CPA and the Americans need to address the compaints of several countries and businesses that claim discrimination in the awarding of contracts in the reconstruction process, claiming that British and American companies are winning all the contracts. There are also charges of corruption against Arab companies in the allocation of contracts.


The most immediate growth sectors are the hydrocarbons industry, construction, transportation and telecom. The oil sector makes up more than half of the total economy and is the main source of government revenue. The Iraqi oil minister has promised that oil production will double from 1.3m barrels per day to 2.7m barrels per day by March 2004, producing an export income of $12bn. Yet nearly all that income will go to paying salaries, subsidies and security and only $1.4bn for reconstruction investment. However, too much attention on oil sector could leave the economy vulnerable to economic hazards with a non-diversified tax base.


Sector Analyses



Iraq traditionally had a very strong agricultural sector and was totally self sufficent in food until the 1950s. Since then the industry has been neglected and is extremely outdated despite the fact that some 30% of the population is involved in farming. USAID has already appointed a special advisor to see the rehabilitation of this sector, particularly highly profitable date exports and have made it a priority focus.



Iraq's proven oil reserves - at least 112 billion barrels - are only rivalled by Saudi Arabia. The majority of reserves lie in the north, at Kirkuk, with sizeable quantaties at Rumalia in the south. Oil accounts for approximately three quarters of Iraq's GDP. There are major problems in repairing Iraq's war-torn oil infrastructure because of security problems.


Besides repairing existing infrastructure, there is also great potential for further exploration. Out of Iraq's 73 discovered fields, only 15 have been developed. Oil wells are sparsely scattered over the fields; there are only two thousand wells drilled in Iraq, as compared to one million in Texas.


There is also great potential in downstream industries but so far little progress has been made in making these operational again. Iraq is producing only about a third of its pre-war levels.


Iraq also has reserve of approximately 110 trillion cubic feet (tcf) of natural gas, the world's tenth largest reserves. The main sources of natural gas are at Kirkuk, Ain Zalah, Butma, and Bai Hassan fields in the north, and the Rumailia complex and Zubair fields in the south.


Acute fuel shortages testify to the acute problems faced by the Iraqi energy industry. Repairs to plants that make gasoline and cooking fuels are officially given priority but they are still badly underserviced.


The country's electricity has been primarily supplied from two thermal plants located in Baiji and Mosul and the Saddam Hydroelectric Dam on the Tigris River. Supply falls a full two gigawatts short of demand. Bechtel is engaged in repair work of electrical infrastructure under the USAID Capital Construction contract, but there is potentially a lot of opportunity for companies to further upgrade and build new generation and distribution facilities.


Finance & Banking

A financial coordinator has been appointed for Iraq and charged with selecting and stabilizing a national currency, writing a government budget, and repairing the banking sector. Peter McPherson will head up a group of experts in the summer of 2003 responsible for, among other tasks, straightening out and reactivating the Ministry of Finance, Central Bank, commercial banks and other financial institutions. It is understood that talks are underway between the CPA and a consortium of US and British banks regarding the banking sector's rehabilitation. The banks involved are US groups J.P. Morgan Chase, Citigroup and Bank of America, the UK's HSBC and Barclays. A third UK bank, Standard Chartered, may also be brought in for its expertise in rebuilding damaged financial systems.



A combination of neglect and war have left Iraq's infrastructure badly lacking. This includes transport, drinking water, and electricity. The Americans succeeded in reopening the Umm Qasr port. Bechtel has been leading the rejuvenation of the transport industry and some subcontraction has gone to Iraqi companies.


Baghdad's three railways are relatively functional; Baghdad-Kirkuk-Irbil, Baghdad-Maaqal-Umm Qasr, and the Baghdad-Mosul-Yurubiyah line that extends to Turkey.


Major contracts are being awarded for potable drinking water provisions, water distribution systems, sewage systems, and wastewater treatment systems. Half of the country's sewage facilities are non-functioning.

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