Wednesday, July 17, 2013

IMF Report On Iraq’s Economy Sees Short-Term Growth, But Long-Term Structural Problems


In May 2013, the International Monetary Fund (IMF) released a short report on Iraq’s economy. It predicted continued growth in the short to medium-term, but warned of structural problems as well. Iraq is obviously famous for its oil industry, which still has huge potential to expand. The issue with the country’s economy is that there is little else to build upon. The government also plays a dominant role with all its inefficiencies, and that has a negative effective upon the business environment. That represents the dichotomy of Iraq. Oil presents a huge source of wealth, but it could undermine the country as well.

In the aggregate, Iraq looks like it has a bright future. Its economy grew 8.4% in 2012, and is expected to grow 9% this year. That contributed to per capita Gross Domestic Product (GDP) going from $1,300 in 2004 to an estimated $6,708 by 2013. Inflation dropped as well from 6% in late-2011 to 3.6% by the end of 2012, but is expected to go up this year to 5%. Its foreign reserves went from $61 billion at the end of 2011 to $70 billion by the end of 2012, while the reserves held at the Development Fund for Iraq increased from $16.5 billion to $18 billion. Iraq failed to execute its investment budget as it usually does, which contributed to those amounts. Overall, Iraq will probably be one of the fastest growing economies in the next few years. That is due to the predicted expansion of the oil industry. At the same time, the IMF noted that there are governance issues that will have a detrimental affect.


2010
2011
2012
2013
Real GDP growth
5.9%
8.6%
8.4%
9.0%
GDP
$135.5 bil
$180.6 bil
$212.5 bil
$233.3 bil
GDP per capita
$4.278
$5.529
$6,305
$6,708

The IMF pointed to budget execution and the exchange rate as two problems that Baghdad had. The government suffered from not only poor budget planning and execution in the last few years, but large off budget spending as well. In 2013, that led to a large number of unfunded projects. The IMF suggested that public expenditures be reduced as a result by cutting the number of government jobs, and slashing energy subsidies and support for state-owned enterprises. Recently there has been a run on the dinar. That created a gap between the official exchange rate offered at state-run banks and the rate offered at private money exchanges. The IMF believed that the dinar needed to be stabilized. It suggested that the authorities support the Central Bank of Iraq’s policies, which are aimed at achieving that goal. After 2005, the Iraqi government suffered from a lack of trained staff to plan and execute the budget.  That led to almost the entire budget going to paying government employees, and very little for investment. The money that was set aside for that task in the capital budgets was hardly spent as well. Officials eventually improved, but then in recent years the budget has grown tremendously due to rising oil prices. This has led to far more money being appropriated than the bureaucracy can handle, and the investment rate has gone right back down. The government appears to be more interested in the amount of each budget, so that it can brag to the public rather than whether those funds can actually be expended. As for the dinar, it is being manipulated by political parties, gangs, money exchanges, and foreign countries right now. The acting Central Bank Governor Dr. Abdul Basit Turki claims that he is reforming the anti-money laundering department, and trying to place more regulations on the weekly money exchanges, but there doesn’t appear to be any changes on the ground yet.

More importantly, the IMF noted the major structural problems that could hinder Iraq in the long-term. First, Iraq is heavily dependent upon oil. Its GDP and growth are directly related to how much petroleum it can produce and export. That means that if oil prices were to drop, Iraq’s budget and growth would be threatened as well. The government’s entire development plan is based upon boosting oil output as quickly as possible. The money that it raises is supposed to help diversify the economy, but that hasn’t happened. Instead, this has swelled the government’s coffers, and increased the state’s role. This is a classic example of the oil curse. Like many other bodies, the IMF has suggested that the authorities speed up their reforms to support the private sector, so non-oil jobs can be created. Finally, political and security instability were noted. Iraq has seen a huge increase in investment in recent years, but that was directly related to the end of the civil war when foreigners finally felt comfortable about sending their money to the country. Now security is worsening as the insurgency is growing. The rival political parties have been in an on going test of wills against each other that has led to deadlock in Baghdad as well. Together this has economic repercussions as major legislation like the oil law has no chance of being passed in the current political environment. The growing threat by militants could also scare away investors. All together this poses a daunting set of barriers to Iraq’s future. The government isn’t following its own suggestions, and warnings by various international bodies about its oil dependency. Instead, it is making the situation worse. The fact that Iraq’s ruling elite are at each other’s throats doesn’t help either, because it means that no major decisions can be made or the business environment improved. Finally, the worsening security situation could reverse the flow of investment to Iraq.

At first look, Iraq looks to be a dynamic economy with high economic growth rates and vast natural wealth. Under the surface, there are major structural problems that severely limits realizing that potential. The oil curse means that Iraq can bring in huge amounts of cash, while the majority of the population faces high poverty and unemployment with the best hope being getting a job with the government. Unless Iraq changes its regulations, and begins to truly support its private sector this trend will not be broken. The political and security situation may not allow that to happen by blocking necessary legislation and decreasing investment. These were the warnings that the IMF tried to raise. It’s yet to be seen whether Baghdad is listening.

SOURCES

International Monetary Fund, “IMF Executive Board Concludes 2013 Article IV Consultation with Iraq,” 5/21/13

Joint Analysis Policy Unit, “Iraq Budget 2013, Background Paper,” Inter-Agency Information and Analysis Unit, January 2013

Special Inspector General for Iraq Reconstruction, “Quarterly Report and Semiannual Report to the United States Congress,” 7/30/12
- “Quarterly Report to the United States Congress,” April 2013

Tijara Provincial Economic Growth Program, “Assessment of Current and Anticipated Economic Priority In Iraq,” United States Agency for International Development, 10/4/12

No comments: