Vantage View: Iraq situation tough but not hopeless

Iraq is endowed with abundant economic and human resources and has the second highest proven oil reserves in the world at around 112 billion barrels after Saudi Arabia with 262 billion barrels.

However, despite this wealth, Iraq has witnessed continuous economic deterioration since 1980 and has become one of the least developed economies. A country that could have been a model of development for the Arab world, turned out to be a devastated case of economic decline, mismanagement and massive corruption.

The Iran-Iraq war of the 1980s, the first Gulf war of 1990-91, 12 years of economic sanctions and the multiple failures in economic and strategic leadership have slashed Iraq's GDP per capita by over 70 per cent since 1980.

The United Nations Development Programme calculates that on a purchasing power parity basis, Iraq's per capita income is only $800, placing it below all other Arab countries except Mauritania and Sudan.

Since 1991, the regime has been printing local currency to soak up whatever dollars are available in the local market. This created high inflation rates, estimated at 60 per cent annually, and destroyed the value of the dinar.

On the black market, the Iraqi currency has plunged from about three dinars per dollar to about 2,800 now. Unemploy-ment surged to 50 per cent and members of the once thriving middle class found that the only way to survive is to sell their jewellery and household goods and to depend on transfers from relatives abroad.

Over 40 per cent of Iraq's 24 million population is under the age of 14, one quarter of the children are not in school but working to help their families make ends meet.

A series of GDP estimates in current U.S. 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.

Debt burden

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 fixed foreign exchange rate when converting GDP value of non-oil sectors from Iraqi dinars to U.S. dollars. If the black market rates are used, Iraq's GDP figure would not exceed $20 billion.

Iraq is a country heavily in debt. The official and commercial debt of the Iraqi government is estimated by the World Bank at around $127.7 billion, including $47 billion in accrued interest plus some $200 billion of reparation claims resulting from Iraq's invasion of Kuwait in 1990.

Even for a country that might earn $15 to $25 billion in oil revenues a year, the debt is still a very heavy burden. The market's view is that Iraq will be able to negotiate the write-off of between 70 per cent and 90 per cent of its official and commercial debt, while the UN is likely to cut the reparation claims to $40 billion, bringing Iraq's existing obligations to say $60 billion.

Before the first Gulf war of 1990, Iraq's oil production reached 3.5 million bpd. The international sanctions that followed prohibited the country from exporting oil until 1996.

Iraq returned to the market after accepting the "Oil for food programme", which gave the UN the right to monitor oil proceeds to make sure that they were used for basic humanitarian needs. Oil production rose gradually to 2.5 million bpd by March 20 this year before the war on Iraq started.

With oil prices at around $24 a barrel, and average Iraqi oil exports of around 1.7 million bpd, oil revenues last year were estimated at $15 billion.

Iraq's oil production is projected to reach 1.6 million bpd by July this year, catering first for local consumption with exports following when a new Iraqi government is in place.

To raise production to the 3.5 million bpd last seen in the late 1980s, it would take $5 billion to $7 billion and two to three years.

Given the large size of Iraq's proven oil reserves, it is estimated that output could reach six million bpd over the next decade if the capital needed is made available. Given Iraq's precarious financial position, its huge external debt outstanding and the massive reconstruction needs, the only way for it to boost its oil production capacity is to depend on large scale investments by international oil companies.

Foreign oil firms need to be persuaded to put up capital in exchange for the right to oil reserves through production-sharing agreements.

In such circumstances, the highest prices are likely to be obtained by having an auction open to all. Any restriction of bidders to oil companies from countries that supported the war would clearly not be in the interests of the Iraqi people.

Contracts signed under the previous regime were not in the best interests of the Iraqi people either, both because firms from countries that abided by UN sanctions such as the U.S. and the UK could not bid and because some of the deals were driven by private interests of Saddam Hussain.

There are strong grounds for starting the bidding again on those contracts.

Decades ago, Iraq's financial sector was considered one of the region's most modern. However, a tightly controlled and grossly mismanaged financial system was left in shambles by the previous regime.

In 1990, the banking system consisted of the Central Bank, the Agricultural Bank, the Industrial Bank, the Real Estate Bank and the Rafidain Bank, which was the country's dominant public sector commercial bank.

Few private sector banks were allowed to operate and had a market share of around 6.6 per cent of deposits and 21 per cent of loans. Ninety-five companies were listed on the Baghdad Stock Exchange (BSE) before the war, in various sectors such as agriculture, banking, hotels, electrical, textiles, construction materials, packaging and paints, among others.

Telecom troubles

The Baghdad Stock Exchange was grossly under-developed compared with other stock exchanges in the region with low capitalisation to GDP ratio and very low daily turnover.

Iraq has one of the least advanced telecommunication networks in the world due to lack of investment and access to the latest technology and damage resulting from years of war and sanctions.

It is estimated that there were only 675,000 fixed telephone lines in the country before the war started. The number of telephone lines per 100 inhabitants declined from 5.6 per cent in 1990 to around 2.9 per cent at present.

Iraq is also the only country in the Middle East that does not have a mobile network. It has been estimated that an investment of around $1 billion will be required to repair and rebuild Iraq's telecom infrastructure.

A new government in Iraq might be more favourably disposed to telecom companies from the U.S. to provide the investment required for rehabilitation.

An important precedent came after the 1991 Gulf war when the $4.5 billion deal to overhaul fixed-line networks in Saudi Arabia was awarded to Lucent of the U.S., which was widely regarded then as a Gulf war dividend.

Transforming Iraq from a military dictatorship and a secret police state into a real private econo