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

Criticism Of Iraq’s Score On 2012 Failed States Index

In June 2012, Foreign Policy magazine and the Fund For Peace released its annual Failed States Index. The list covered 177 countries around the world from the United States to the Maldives islands. The Fund for Peace looked at twelve social, political, and economic indicators to rank the various nations. In the latest index, Iraq was #9, the same place it had in 2011. While no details were released on how each country did on each category, there appeared to be some major problems with Iraq’s score. The country is still beset by major structural and institutional problems, but some things have improved since the civil war ended in 2008. Those changes seemed to be overlooked by the Fund For Peace, which brings into question whether Iraq might deserve a better ranking.

The Fund For Peace was responsible for the collection and analysis of each country in the Failed States Index. It went through news articles and reports about each country, and then put that information into a software program that sorted and prioritized it into twelve social, economic, and political indicators. That was then analyzed, and each topic was ranked 1 to 10 with 1 being good, and 10 being bad. The first topic was Demographic Pressures, which covered health issues, the environment, the food situation, population figures, and mortality rates. The second category was Refugees and Internally Displaced Persons. Third, was Group Grievances, which included violence, and discrimination by the security forces. Fourth, was Human Flight, which seemed to cover some of the issues that should have been in the Refugees and Internally Displaced Persons category such as a brain drain, but also people moving within a country voluntarily. Next, was Uneven Economic Development that included disparities between ethnosectarian groups, uneven distribution of wealth, and differences between rural and urban areas. Economic Decline was next, which handled budget deficits, unemployment, per capita Gross Domestic Product (GDP), GDP growth, and inflation. Seventh, was Delegitimization of the State that covered corruption, the lack of representation, government effectiveness, political participation, elections, levels of democracy, power struggles, and protests. Eighth, was Public Services that had policing, crime, education, water, health care, electricity, and infrastructure. Ninth, was Human Rights and Rule of Law, which was about press freedom, civil liberties, political freedom, human trafficking, political prisoners, torture, executions, and religious persecution. Tenth, was the Security Apparatus, which was about internal conflict, small arms proliferation, riots, deaths, and insurgencies. Again, that seemed to partially overlap with Group Grievances. Eleventh, was Factionalized Elites that included elite power struggles, flawed elections, and political competition. Last, was External Intervention, which was about foreign aid, peacekeepers, United Nations’ missions, foreign military intervention, and sanctions. The fact that some of the categories might overlap with each other was a problem. That could mean a country could get penalized twice for the same issue.

Iraq was in the top ten on the 2012 Failed States Index. Iraq was ranked #9, the same as it was in 2011. Above it was Somalia at #1, Congo at #2, Sudan at #3, Chad at #4, Zimbabwe at #5, Afghanistan at #6, Haiti at #7, and Yemen at #8. Iraq received such a poor ranking, because it has consistently scored badly across the twelve indicators used in the Index. In 2012, it had an 8.0 on Demographic Pressures, 8.5 on Refugees and Internally Displaced Persons, 9.7 on Group Grievances, 8.6 on Human Flight, 8.7 on Uneven Development, 7.7 on Economic Decline, 8.4 on Delegitmization of the State, 7.8 on Public Services, 8.3 on Human Rights, 9.9 on Security Apparatus, 9.6 on Factionalized Elites, and 9.0 on External Intervention. What the top ten had in common was that they were either lacking a functioning government like Somalia, were conflict zones like Afghanistan, or were dysfunctional such as Haiti, Zimbabwe, and Iraq. The Fund For Peace gave some specific reasons for why Iraq was a troubled country. It noted the lack of security and reconciliation, the on going crisis between the political elite, the poor human rights situation, and the anti-government protests that took place in 2011, which were broken by the authorities. The only positive it noted was the withdrawal of the American military at the end of 2011. Otherwise, the Fund did not see many good events occurring in Iraq in the near future. While the issues brought up were real, the Fund did not seem to think the nation had changed much in the eight years it had been putting together the Index. In fact, Iraq did the same or worse in six out of the twelve categories in 2012 compared to 2005. That raised problems, because some things in Iraq have gotten better, but they didn’t seem to be recognized by the Fund.

Top 10 2012 Failed States And Overall Scores

1. Somalia 114.9

2. Congo 111.2

3. Sudan 109.4

4. Chad 107.6

5. Zimbabwe 106.3

6. Afghanistan 106.0

7. Haiti 104.9

8. Yemen 104.8

9. Iraq 104.3

10. Central African Republic 103.8

Iraq’s Scores On Failed States Index 2005-2012

	2005	2006	2007	2008	2009	2010	2011	2012
Demographic Pressures	8.0	8.9	9.0	9.0	8.7	8.5	8.3	8.0
Refugees/ IDPs	9.4	8.3	9.0	9.0	8.9	8.7	9.0	8.5
Group Grievances	8.3	9.8	10.0	9.8	9.7	9.3	9.0	9.7
Human Flight	6.3	9.1	9.5	9.3	9.1	9.3	8.9	8.6
Uneven Development	8.7	8.7	8.5	8.5	8.6	8.8	9.0	8.7
Economic Decline	8.2	8.2	8.0	7.8	7.6	7.6	7.0	7.7
Delegitimization Of The State	8.8	8.5	9.4	9.4	9.0	9.0	8.7	8.4
Public Services	8.9	8.3	8.5	8.5	8.4	8.4	8.0	7.8
Human Rights	8.2	9.7	9.7	9.6	9.3	9.1	8.6	8.3
Security Apparatus	8.4	9.8	10.0	9.9	9.7	9.5	9.5	9.9
Factionalized Elites	10.0	9.7	9.8	9.8	9.6	9.6	9.6	9.6
External Intervention	10.0	10.0	10.0	10.0	10.0	9.5	9.3	9.0

One category that Iraq could have received a better score on was Demographic Pressures. In 2012, it received an 8.0, which was an improvement from the 8.3 it got in 2011, but the same as it had in 2005. Some things included in the subject such as the food situation have not changed much at all over the years. For instance, many Iraqis rely upon a public food ration system, the largest in the world. Iraq also has the firth largest population in the region, the second youngest, and fourth fastest growing. These issues have been true for years however, and have changed little. Infant mortality has also improved since 2003. That doesn’t appear to justify Iraq’s worsening score from 2006-2008, and then its improvement from 2010-2012.

Group Grievances deals with violence and the security forces. Iraq stared off with an 8.3 in 2005, and then that increased as the country fell into civil war with a 9.8 in 2006, 10.0 in 2007, and then slightly improved as that conflict receded scoring a 9.8 in 2008, 9.7 in 2009, 9.3 in 2010, 9.0 in 2011. In 2012 however, Iraq jumped back up to a 9.7. There seemed to be no reason why Iraq should falter in this category. In 2009 and 2012 it received the same score. In 2009, the United Nations counted 8,909 security incidents, an average of 742.4 per month. In 2012, it recorded 1,521 attacks in the first six months of the year, for an average of 253.5, a two-thirds drop. Deaths were around the same however. Iraq Body Count had 4,785 deaths in 2009 for an average of 398.7 per month, compared to 2,078 in the first half of 2012, for an average of 346.3. The security forces are being politicized by Prime Minister Nouri al-Maliki, but that has been true for a while. It likely included the arrest warrant against Vice President Tariq al-Hashemi as a negative. Despite that, this was a category where most things had either improved or stayed the same. In 2007, Iraq was in the middle of a full-blown civil war, and received a 10.0. Now Iraq is only facing a serious terrorist problem, but the difference between the two only appears to be 0.3 according to the Fund For Peace. That brings into question the entire scoring method used. On this issue, it doesn’t appear that the score was based upon comparing or analyzing the security situation in the last year compared to previous ones. This is a fault with much of the reporting on violence in Iraq, and the Failed States Index looked to be in the same boat.

A third questionable score was for Economic Decline. In 2012, Iraq received a 7.7, which was an increase from the 7.0 in 2011. Iraq’s 2012 budget is predicted to have a $12.7 billion deficit, but Baghdad never spends all of its money, and has had a surplus every year since 2005. Therefore this is not a real problem. The International Monetary Fund (IMF) estimated that Iraq’s Gross Domestic Product (GDP) grew 9.9% in 2011, and predicted that it would expand 11.1% in 2012, and 13.5% in 2013. Foreign investment jumped 40% in 2011 as well. GDP is a misleading statistic for Iraq, because it is largely based upon the oil industry, which does not trickle down the average citizen. Iraq’s GDP purchasing power parity was right in the middle of the region. Inflation was another factor included in Economic Decline, and it remained steady around 6% from 2011-2012. Finally, Baghdad claimed that unemployed dropped from 15% in 2008 to 12% in 2012. Non-government estimates believe that the jobless rate was as high as 30%. Still, that figure has not changed much over the last several years. All together, the economic figures looked at by the Fund were for the most part improving. You couldn’t tell that from the Failed States Index, because Iraq had a worse score in 2012 than 2011.

Overall, there’s no way to actually test the validity of Iraq’s scores, because the Fund For Peace does not provide details on each country. Its short write up of Iraq paints almost everything in a negative light. That was probably the leading cause of Iraq receiving the same or worse scores in half of the nation’s categories. Iraq is a mixed bag today, but for some of the twelve categories such as Demographic Pressures, Group Grievances, and Economic Decline a good case could have been made that Iraq should have scored better. Those could have moved Iraq out of the top 10. Instead, Iraq stayed just where it was from 2011 to 2012. During the civil war years Iraq was definitely a failed state. Things were so insecure that many government offices were never open, because the employees were afraid to show up, dead bodies littered the streets, insurgents and militias openly operated throughout the country, and Iraq relied upon the Americans to keep a lid on things. Today, the sectarian conflict is over, the militias are inactive, the insurgency has declined, the security forces are all over, the U.S. military has left, the oil industry has recovered, and is fueling an expansion of the government. That still leaves structural problems with the economy, a fast growing and youthful population, a government with feuding elites and an inability to provide services, and a large terrorist problem. Still that does not make Iraq a failed state. It’s definitely dysfunctional, but did not deserve to be in the top ten on the Failed States Index.

SOURCES

Fund For Peace, “About The Failed States Index,” 6/18/12

- “The Troubled Ten (+1): 2012’s Worst Performers,” 6/18/12

Fund For Peace and Foreign Policy, "2005 Failed States Index"
- "2006 Failed States Index"
- "2007 Failed States Index"
- "2008 Failed States Index"
- "2009 Failed States Index"
- "2010 Failed States Index"
- "2011 Failed States Index"
- “2012 Failed States Index,” 6/18/12

Information and Analysis Unit, “Security in Iraq”

Iraq Body Count

Iraq Business News, “Double-Digit Growth Forecast for Iraq,” 4/19/12

Special Inspector Generation for Iraq Reconstruction, “Quarterly Report to the United States Congress,” 4/30/12

Inflation Worries Return For Iraq

The latest statistics for Iraq show that core inflation is creeping back up in the country. Since early 2008 core inflation, that which excludes fuel, electricity, communication, and transport costs, has dropped in Iraq from 15.9% in April to 3.8% in April 2009. Since then however, it has crept back up to 10.8% in August. A United Nations report from that same month warned that food prices were rising sharply in Iraq, while other costs like medicine and rents have also increased.

Overall inflation has not followed the same pattern. In February 2008 it stood at 8.1%, only to drop to -6.3% in June, then rose at the end of the year to 7.6% by October. After that it dropped again to -5.7% in April 2009, and has since gone back up to -0.3% by August.

While of concern, these numbers are nowhere near what inflation was like before. In 2002 it was around 60%. The instability and sectarian violence after the U.S. invasion caused inflation to rise to 65% by 2006. After the Central Bank tightened the money supply, and linked the Iraqi dinar to the U.S. dollar inflation has largely been under control. By 2007 for example, it was down to 12%. Those policies have increased the buying power of the average Iraqi, and any increase in inflation will cut into that.

Iraq’s Inflation/Core Inflation Rate
2008
Jan. 1.3%/10.8%
Feb. 8.1%/13.8%
March 5.6%/12.1%
April 5.5%/15.9%
May 4.6%/14.7%
June -6.3%/12.4%
July -1.4%/13.6%
Aug. -5.2%/12.0%
Sep. 0.3%/12.9%
Oct. 7.6%/13.6%
Nov. 6.7%/12.7%
Dec. 6.8%/11.7%
2009
Jan. 0.6%/9.2%
Feb. 0.2%/7.1%
March -3.1%/8.3%
April -5.7%/3.8%
May-5.6%/4.7%
June 0.7%/8.8%
July -1.5%/7.9%
Aug. -0.3%/10.8%

SOURCES

Department of Defense, “Measuring Stability and Security in Iraq,” March 2008

Inter-Agency Information and Analysis Unit, “Iraq Food Prices Analysis,” August 2009

Reuters, “Iraq inflation rises to 8.11 pct in August,” 9/21/08

Special Inspector General for Iraq Reconstruction, “Quarterly Report and Semiannual Report to the United States Government,” 7/30/07
- “Quarterly Report and Semiannual Report to the United States Congress,” 7/30/09

U.S. Department of State, “Iraq Status Report,” 1/28/09
- “Iraq Status Report,” 6/10/09
- “Iraq Status Report,” 10/7/09

Whitelaw, Kevin, “After The Fall,” U.S. News & World Report, 12/2/02