AMMAN, 13 October 2003 — The recent plans announced by the interim Iraqi Governing Council to fully liberalize the economy and open all sectors except oil to 100 percent foreign ownership have raised alarm among different Iraqi groups. Many rejected the reforms as being premature and may end up with foreigners controlling and/or owning the country’s economic infrastructure sold at low prices. The reforms were announced ahead of a donors’ conference for Iraq scheduled for Oct. 23-24 in Madrid with the hope of raising some $70 billion to finance reconstruction over four to five years.
The package of economic reforms was made public by the interim finance minister at this year’s annual World Bank/IMF meeting held in Dubai last month. Investors in any field, except for oil production and refining, would be allowed 100 percent ownership of Iraqi assets, full repatriation of profits, and equal legal standing with local firms. Foreign banks would be welcome to set up shop immediately, or buy into Iraq ventures. Income and corporate taxes would be capped at 15 percent. Under new bank rules, six foreign banks will be allowed “fast-track” entry into the country and will be permitted full ownership of the local banks within five years. Tariffs would be slashed to a universal 5 percent rate, with none imposed on such imports as food, medicine, books, and other humanitarian goods.
Other initiatives have already created an independent central bank, as well as, a trade bank backed by a consortium of 13 foreign banks and a $500 million credit from America’s Export-Import Bank. Together, the moves hold the promise of placing Iraq back into the global economy in record time. The new rules are subject to “adoption or replacement” by a future, elected Iraqi government. Given the shock expressed by many Iraqi businessmen at the speed and scale of the reforms, one should not rule out the possibility that a future regime may choose to reverse these changes.
Discarding of 40 years of national-socialist culture and replacing it with a liberalized private economy cannot happen overnight. The country needs to invest in education, health, infrastructure, public administration, police and army, a new legal system, a new currency, and a new constitution, besides putting in place an effective court system and a functioning democracy. However, the situation is not hopeless. The Iraqis remain relatively well educated and the status of Iraqi women is better than in many Arab countries. Huge oil reserves and sufficient water resources are not the only assets that the country has, there are 4 million Iraqis living abroad who can contribute experience and money.
However, despite this wealth, Iraq has witnessed continuous deterioration since 1980 and its economy shattered by three wars, thirteen years of UN sanctions, mismanagement and massive corruption has become one of the least developed in the region. Iraq’s oil sector remains in very bad shape. After averaging 2 mbpd in 2002, oil production dropped from 2.4 mbpd in February this year, (i.e. before the US invasion of Iraq in March 2003), to 300,000 bpd in May, 500,000 bpd in June, 700,000 bpd in July and 1 mbpd in August and September. Domestic oil consumption is estimated at 0.5 mbpd.
The most serious constraints on Iraq’s oil production and export capacity are sabotage, frequent power cuts and the looting of oil facilities, particularly in the southern fields. Furthermore, Iraq’s main export pipeline, which carries oil from the northern fields around Kirkuk to the port of Ceyhan in Turkey, has been blown up on several occasions and there have been numerous attacks on the country’s internal pipelines.
Iraq’s oil production level so far this year has averaged 1.088 mbpd, while Brent crude has been trading at an average of $28.5 a barrel during the first three quarters of the year. Assuming oil production cost of around $2 a barrel and another $3 a barrel discount of Iraqi crude to Brent crude, this leaves an average price so far this year for Iraqi crude of $23.5 a barrel. Iraq’s total oil GDP would then come to around $9.3 billion at present levels of oil production and prices.
A series of GDP estimates in current US dollars for all the Arab countries including Iraq are published in the authoritative annual Arab Unified Economic Report prepared and edited by the Arab League, Arab Fund for Economic and Social Development and the Arab Monetary Fund. This report shows Iraq’s GDP for 2001 at $81 billion, the third highest after Saudi Arabia and Egypt. These figures are based on official foreign exchange rate when converting GDP value of non-oil sectors from Iraqi dinars to US dollars. If the market rate of 2,500 dinars to the dollar were used, Iraq’s GDP figure would not exceed $15 billion, and the country’s total GDP this year would be in the range of $25 billion.
Iraq is heavily indebted country. In mid-July, the Paris Club of creditor countries estimated that Iraq owed a total of $42 billion to its member governments ($21 billion in principal and $21 billion in late interest payments). The largest Paris Club creditors to Iraq are Japan ($4.1 billion), Russia ($3.5 billion), France ($3 billion) and the US ($2.2 billion). Non-Paris Club public creditors and private creditors have yet to publish their own estimates for debt owed to them by Iraq. However, various independent studies have put this debt at around $63 billion (including late interest payments), with the bulk owed to governments of the Gulf countries. Iraq’s total external debt is therefore likely to be close to $105 billion. In addition to its massive external debt, Iraq is also obliged to pay compensation awarded by the UN Compensation Commission to victims of its 1990 invasion of Kuwait. As of end-July 2003, awarded compensation remaining to be paid by Iraq amounted to $28 billion bringing the country’s total external obligations to $133 billion.
No detailed estimates of the likely costs of reconstructing Iraq’s economy have yet been released by any international institutions. In regards to the oil sector, independent estimates indicate that it could cost up to $10 billion to restore Iraq’s oil production to its pre-1991 level of 3.5 mbpd. In terms of the non-oil sector, the sums are far larger. The Coalition Provisional Authority estimates that it would cost $13 billion to rebuild Iraq’s electricity infrastructure alone, and it would take $16 billion to restore the country’s water supplies.
However, these are just two elements of a vast reconstruction program that could be as high as $100 billion. Iraq’s private sector is still in its infancy and given the country’s underdeveloped financial and capital markets, economic growth will be mainly driven in the coming few years by government expenditures financed by oil revenues.
It may be premature to transform Iraq now into a virtual free-trade zone. As had happened elsewhere in the world, opening up the country is normally a gradual process and should be supported with political reform and stability. It is therefore essential that the Coalition Provisional Authority restore security and basic services, push reconstruction forward, and expedite the transition to an internationally recognized, sovereign Iraqi government. Joining the WTO and implementing the much needed liberalization reforms would then follow in due course.
(Henry T. Azzam is chief executive officer at Jordinvest.)
