Global Policy Forum

By Alister Bull

If the Violence in Iraq Ceased Tomorrow,
its Economy Would Still be in Deep Trouble

Corruption is endemic, its state-owned industries inefficient and while there is plenty of money around, it has done little to help ordinary Iraqis. Inflation has soared since the 2003 invasion, sapping the living standards of Iraqis as they cope with bombs and sectarian killings which kill 100 every day. "The prices of everything has gone up but the salaries have stayed the same," said Nada, a 33-year old laboratory assistant who works for a branch of the health ministry on a monthly salary of 200,000 dinar ($135). Nada, who declined to give her last name, now stays indoors as much as possible and with the latest hike in black market petrol prices, has even stopped going to work.

Dire security conditions are a root cause of the problem, according to the country's central bank chief. "Inflation is a function of the real sector, not the monetary sector ... wages, insurance cover, the smooth delivery of goods. "Security is the important factor," Sinan al-Shabibi told Reuters in a recent interview. U.S. officers say rising sectarian bloodshed has pushed Iraq to the brink of civil war and efforts to overhaul the Iraqi economy will be in vain if stability isn't restored.

But success in restoring security demands economic policies that can help create jobs, lift living standards and ease the poverty swelling the ranks of the insurgency. "If these other (security) actions are able to gain some traction, the attention could shift to the economy and if we had not been laying the groundwork, then very quickly it could become the focus of blame for why things were not going well," said Jeremiah Pam, U.S. Treasury Attaché to Iraq.

Banking on Debt Forgiveness

For evidence of progress, Pam points to the debt forgiveness from Western creditors that Iraq won last year to ease its re-entry to the world financial community. It also has the backing of the International Monetary Fund, which agreed a $685 million standby credit in December 2005 and said earlier this month that Iraq remained on the right track. But the IMF also had some stern words about prices, spiraling by over 50 percent year-on-year, and warned that conditions risked getting worse. "Inflation remains ... a serious source of concern. The ongoing violence and supply disruptions in the non-oil economy will undoubtedly continue to put pressure on prices," it said.

Corruption is another major problem. An audit sponsored by the United Nations last week found hundreds of millions of dollars of Iraq's oil revenue had been wrongly tallied last year or had gone missing altogether. Business is being done, but it isn't often very productive in nature. "There is a lot of activity in terms of trade and finance but there is not much activity in terms of production and that is not very healthy," said the central bank's Shabibi.

Despite the world's third largest oil reserves, a well- educated work force, an abundance of water and other valuable resources, Iraq's economy was in a mess even before the first bomb was dropped in the 2003 war. A decade of sanctions after the first Gulf War compounded the shortcomings of Saddam Hussein's Baath Party economic model of heavily centralised state control. At border crossings, officials from half a dozen ministries are involved and if an Iraqi Army unit wants fuel from the oil ministry, rather than rely on the Americans, it requires 14 signatures.

The new Shi'ite led government of Prime Minister Nuri al- Maliki wants to shake things up but faces big obstacles. It must navigate any new laws through a parliament hostile to change, which took the whole of August off as a holiday, despite the security crisis and a mountainous backlog of work. As a result, a cabinet proposal to ease chronic fuel shortages by opening the energy sector to private imports has gone nowhere and black market petrol prices have surged. This stokes resentment and many businesses have already closed up shop. Some carry on, but only just.

One of the businessmen to remain in Baghdad is Munem al- Khafaji, managing director of the Al-Ameen Insurance Co., who continues to insure homes and vehicles from fire and theft. Client visits are confined to the immediate neighbourhood or relegated to the internet and telephone. But premiums have not gone up by all that much, he said. Insuring a small family car will cost about four percent of its value a year, while shipments of goods to Baghdad from Amman can be covered for 2 dinar per 1,000 dinar (67 cents), up to a cap of $50,000. On the other hand, there are a lot of risks he won't touch, including anything to do with the current violence. "We are very conservative in our underwriting policies and don't insure against war and terrorism. To cover these things would be a very high rate. No one could afford it," he said.