Global Policy Forum

By Oliver Morgan

$18bn reconstruction cash fuels demand for housing and consumer goods

The British head of the ruling Coalition Provisional Authority in southern Iraq is warning of serious inflation as signs of economic take-off emerge. Patrick Nixon, the former British diplomat heading the CPA in Basra, said the impact of initial efforts at stabilising Iraq and beginning reconstruction was increasing the demand for housing, transport and consumer goods.

'They have got a problem coming with inflation and housing. Rents have gone up hugely, and there is bound to be tremendous inflationary pressure,' he said. But he stressed the problems were inevitable for a country emerging from war and a decade of sanctions, and seeing an influx of international reconstruction efforts.

Officials at the CPA, which is overseeing reconstruction and security, privately estimate that the gross domestic product will grow by 30-40 per cent as the country recovers. Much of the growth will be stimulated by $18.6 billion (£10bn) reconstruction funding being channelled from the US government, which represents 74 per cent of last year's estimated $25bn GDP.

Last week the US Defence Department awarded $1.1bn of electricity and water reconstruction contracts under this programme, with UK engineer Amec and its US partner Fluor winning a $500 million power generation contract. Black & Veatch, another UK company, was part of the successful consortium bidding for the $600m water and public works contract.

CPA officials believe the money will mark a step change in Iraq's economy, particularly in the relatively secure south. But Nixon warns that the burgeoning of commercial activity is likely to put pressure on basic infrastructure and services as demand outstrips efforts to expand capacity.

Statistical information is sparse, but officials point to a recent survey of 25,000 households that indicated average unemployment of 33 per cent. In Basra it is 15 per cent, and in Baghdad it is double that.

But monthly wages have risen and officials point to evidence of buying patterns that warn of capacity strains to come. For example, white goods, particularly air conditioning units - costing about $400, more than a month's wage - and freezers, have been sold in large quantities in shops and markets in Basra in recent weeks.

This is likely to strain the electricity system to the point where the widespread blackouts of last summer could re-emerge, despite a large part of a $127m emergency infrastructure fund being dedicated to reinforcing the transmission network since then.

The CPA is planning to have raised generation capacity across the country 50 per cent by the peak summer period. Meanwhile, car ownership is soaring as vehicles, mostly secondhand, arrive in the country.

In November, 7,000 new cars were registered. In December, some 400 a day were being registered. And queues of up to 2km continue to form outside Basra's eight petrol stations, where pumps often break down, and where further reconstruction effort is being focused.