Transcript No Slide Title

Iraq Institute for Economic Reform
Iraq Economy:
the challenges & Opportunities
Dr. Kamal Al-Basri
26th Apr, 2006
Iraq Institute for Economic Reform
Iraq Economy: the challenges
1.
Security and Economic Welfare
2.
Diversity of Revenue Generation
3.
State Owned Enterprises
4.
Agriculture
5.
External Public Debt
6.
The Unemployment and the Infra Structure
7.
Unstable Economic Policy
8.
Reforming the Subsidies System
Iraq Institute for Economic Reform
Security & Economic Welfare
 Security continues to be a challenge to reconstruction. The issue is expected
to be serious as “Multi Nation Forces” are going to be dropped off.
 The challenge for the coming years is to ensure sufficient financial resources.
 The problem is rapid expenditure on security (in short period of time) could
not reduce violence and disruptions (law of diminishing return may apply).
Iraq Institute for Economic Reform
Security & Economic Welfare
 As complementary policy, Iraq needs to spend on activating civil society
organizations. Community participating will help in establishing law and order.
Iraq Institute for Economic Reform
Security & Economic Welfare
Community participation can be achieved by relating the country
resources and assets to ownership of the citizens, and any damage
to them will affect their economic welfare in negative way,
It is important that for the government to demonstrate it real
attention for not discriminate against the citizens, whether they are
in the north or in the south,
An effective way to demonstrate these policy, is through equal direct
distribution of oil’s revenue to citizens.
Iraq Institute for Economic Reform
Security & Economic Welfare
 Economic reform can not be achieved in absence of law and order, which is
badly need it.
 There is serious disruption to economic reconstruction and employment
generation programmers. This can not be allowed to continue (because of
possible large population revolt).
 As alternative, while the political process is evolving, International
communities
should put the necessary pressure on the politicians to form a technocrat
based
committee to mange establish law and order and ensure efficient use of
resources.
Iraq Institute for Economic Reform
Diversity of Revenue Generation
Iraq Institute for Economic Reform
% Contribution of elements of GDP over time
The Economy very
much dependent
on oil production
100%
Agriculture,
Industry&
construction
sectors are all
shrinking more
than ever.
80%
Social Services
Housing
Banking & Insurance
60%
Sale and Retail
Transport & Communications
Electricity & Water
Constructions
40%
Industry
Mining
Agriculture
20%
0%
1968
1978
1988
1998
2004
Iraq Institute for Economic Reform
Nominal GDP and Oil Exports (US$ Billion)
In Recent Years Iraq Economy become Depended on
40
Oil Export
30
20
10
0
1997
1998
1999
2000
GDP at market prices
2001
2002
2003
2004
Oil Exports
2005
2006
Iraq Institute for Economic Reform
Gross Domestic Product 2005
Wholesale and
Retail Trading
6.4
Money and
Inssurance
1.4
Transportation &
Communication
6.7
Social and
Personal
Development
Services
10.2
Agriculture
7.3
Building and
Construction
1
Electricity and
Water
0.5
Transformation
Industry
1.7
Mining
63.9
Iraq Institute for Economic Reform
The Budget 2006: Expenditure, Revenue & Defects
Billion I.D
60000
50000
Expenditures
50,963
Revenues
45,392
40000
30000
20000
D eficit
5,571
10000
0
2006
Iraq Institute for Economic Reform
Percentage of operating and Investment Expenditures 2006
90
Operating expenses
80
70
60
50
40
30
Project investment
expenditures (18%)
20
10
0
2006
(82%)
Iraq Institute for Economic Reform
Revenue Generation

Government revenue is very much limited to oil exports, currently Iraq
cannot produce more than 2.3 mbd and export 1.6 mbd.

This export makes more than 90% of total Iraqi revenue.
Iraq Institute for Economic Reform
Crude Oil Production and Exports ('000b/d)
There is a need to reduce rate of change in the
production
Production
3500
Exports
3000
2500
2000
1500
1000
500
0
May-98 Dec-98
Jul-99
Feb-00 Sep-00 Apr-01 Nov-01 Jun-02
Jan-03 Aug-03 Mar-04 Oct-04 May-05 Dec-05
Iraq Institute for Economic Reform
Revenue Generation
rates of estimated revenues planned for the year 2006
budget according to their sources
Interestincome
0.16
Ttransfers
from SOFs
0.40
Income tax
(staff)
0.19
Services fees
0.07
Other taxes &
duties 1.08
Income tax on
corporation
3.13
Pension
contribution
0.32
Income tax
(personnel)
0.20
Construction
1.32
Excise duty
0.37
In Budget of 2006, 92% of the revenue is from export oil
Oil revenues
92.76
Iraq Institute for Economic Reform
Revenue Generation
Iraq is facing a huge bill for financing reconstruction at a time where donated
grants are declining.
a) to increase the production and the export rates:
There is a need for massive investment (to bring current field up to standard and
develop new fields),
Improve the competency and capacity at the management level, The national
state oil company is to be re-established (without monopoly),
There is a need to remove the confusion in the constitution about authority in
policy making. In some paragraph grant authority to central government, but in
other paragraph authorise the regions (see, paragraph 108 &109)
Iraq Institute for Economic Reform
Revenue Generation
b) to increase diversity of income generation.
The current strategy is to is:
to invest in oil sectors to the permitted limit by capacity of expanding,
and
to implement other measures to increase income generation through
various type of taxations.
Iraq Institute for Economic Reform
Industry
Iraq Institute for Economic Reform
State Owned Enterprises
 Most enterprises in the industry are State Owned Enterprises,
 In the past, SOEs used to contributions to GDP by $12 Billion
( before the ware with Kuwait )
 Prior to 2003, many SOE’s earned profits, a portion of which was transferred to
the national budget, but since 2003, this contribution has ceased.
 Currently, SOEs are inefficient: employing over 580 thousand employees, and
receiving ( I.D 1.26 Trillion or USD 840 M ) as subsidies.
Iraq Institute for Economic Reform
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
Contributions to GDP by $12 Billion
1968
(2002 $B)
The State Owned Enterprises
Iraq Institute for Economic Reform
The State Owned Enterprises

Opening Iraqi markets to import competition, and opening government
procurement to more private firms, has made many SOE’s “nonprofitable”, so that they face a “bleak future.”
Even the good enterprises (e.g.; Leather) ceased producing because
of their inability to compete.
Iraq Institute for Economic Reform
The State Owned Enterprises
The challenge, is to make concise policy on what should we do:
1)
Is it possible now to privatising the SOEs? If not
2)
Shall the government invest to improve their performance?
Iraq Institute for Economic Reform
Privatization & State Owned Enterprises
The effort to privatize state-owned enterprises (SOE’s) in Iraq has suffered from
a)
lack of commitment on concise strategy,
c)
Investment Law: Current investment law opened Iraq-based enterprises to up
to 100 percent foreign ownership. Its weakness, however, is that it does not
permit foreign individuals or enterprises to own land. The clause was initially
intended to restrict direct foreign investment in real property, but has been
interpreted to prohibit even indirect foreign investment, such as foreign
purchase of shares in Iraqi companies that own real property. The effect has
created a formidable barrier to any but small and informal capital inflows.
d) Strangely, some advocates of privatization have tended to view it as a one-step
solution, rather than as part of a process of economic reform.
Iraq Institute for Economic Reform
The Agriculture Sector
Iraq Institute for Economic Reform
Structure of the Land in Iraq
Agriculture is the second important sector in the economy
Mountains
8.04 %
Land Suitable for
Cultivation
‫ال‬
24.68%
Desert ‫الصحارى‬
%
41.90%
Pasture ‫مراعي‬
14.88%
Forest
Rivers And Lakes
‫األنهار والبحيرات‬
3.37%
Swamp & Marshes
( Ponds )
4.54%
2.58%
Iraq Institute for Economic Reform
Improving Agriculture Productivity
 In the past Iraq used export agriculture products, but now this is not the
case and currently, Iraq import even what used to export,
 In general, the challenge to improve productivity & efficiency is through:
1. Improving Irrigation system,
2. Utilizing fertilizers,
Iraq Institute for Economic Reform
Productivity in Agriculture
Iraq
Syria
Jordan
Egypt
Iran
Turkey
America
Canada
Fertilization usage in different of Countries, by
Hectare
500
450
400
350
300
250
200
150
100
50
0
1990Year
1990
Year
1991
Year
1992
Year
1993
Year
1994
1995 Year
Year
1995 1996
Year
1997
Year
1998
Year
1999
2000
Year
2000
Iraq Institute for Economic Reform
Productivity in Agriculture
Iraq
Numbers of Tractors (1000 Hectare)
120
120
Syria
Jordan
Egypt
100
100
80 80
Iran
60
Turkey
America
Canada
60
40
40
20
20
0
0
1990
1995
2000
Year 1990 Year 1991 Year 1992 Year 1993 Year 1994 Year 1995 Year 1996 Year 1997 Year 1998 Year 1999 Year 2000
Iraq Institute for Economic Reform
International Debts
Iraq Institute for Economic Reform
Structure of International Debt
Iraq: External Public Debt as of Decem ber 31, 2004
Mult ilat eral
O rganizat ions
0.8%
Commerc ial
c redit ors
13.9%
Japan
4.7% Franc e
3.6%
G
ermany
3.6%
Paris Club
It aly
2.5%
Russia
3.3%
O t her Non Paris
Club
20.8%
O t her
5.2%
Saudi Arabia and
Kuwait
41.5%
Iraq Institute for Economic Reform
External Public Debt

International Debts are a major issue in Iraq economy, the total amount is
approximately $195 billion.

Iraq successfully negotiated with Paris Club & IMF to reduce the debts by 80%
for members of Paris Club and Iraq had already signed two important
agreements with IMF, these are: EPCA and SBA in 2004 and 2005,
respectively.

These agreements requires Iraq to restructure the economy toward reduce
government control of the economy in ordered improve efficiency and reduce
waste as in the subsidy system.
Iraq Institute for Economic Reform
International Debts

Each agreement had enabled Iraq to reduce debts with members of Paris
Club by 30%. After three years, and if Iraq satisfied IMF’s requirements in
restructuring the economy towards free market economy, Iraq will be
entitled for the remaining 20%.

The agreement with Paris Club is now taken as an important guideline for
Iraq’s negotiations with other, non Paris Club governmental creditors.

For members of non Paris Club, Iraqi Government has achieved
considerable success in its foreign debt resolutions, these include:
Iraq Institute for Economic Reform
International Debts
A) Resolution of the debt of the large private creditors
(those with over $35 million in claims)
For this group, Iraq proposed issuing bonds, together with a possible
alternative syndicated loan, that will be used to satisfy these claims
within the terms of the Paris Club deal. The bonds will have a face value
of 20% of the claim, will carry a fixed coupon slightly above the
best credits, and will have an average term of nearly 20 years at fixed
interest rate 5.8%.
Iraq Institute for Economic Reform
International Debts
B) Resolution for small private creditors
(those with less than $ 35 million in total claims):
For this group a cash alternative offering the creditor 10.25% of the total
reconciled claim value.
C) Non Paris Club government creditors:
Iraq is now in advanced negotiation with these group of governments.
There are strong indications that a satisfactory outcome to a number of
these claims can be concluded in 2006.
Iraq Institute for Economic Reform
International Debts
D) Resolution with GCC creditors:
There is a strong indication from GCC creditors that they are willing to
resolve their debt issues after the establishment of the new government
and
after some evidences of political stability.
The reduction of Iraq’s foreign debt will create the necessary climate for
investment and economic recovery.
Iraq Institute for Economic Reform
Unemployment
Iraq Institute for Economic Reform
The Unemployment
Unemployment rate is currently between (27 - 30)%. This creates both human and
security costs.
Services
%Labor
Manufacturing
%GDP
Agriculture
Petroleum
0%
25%
50%
75%
Distribution of Employments & Contributions of Sector to GDP
Iraq Institute for Economic Reform
The Unemployment
 A potential solution to this problem is to expand in spending on
building (housing) the damaged infra structure overall the country,
 In this investment will create incentive for the rapid growth in all
sector of the economy and reduce the rate of unemployment,
 The government needs to set up priorities of projects.
Iraq Institute for Economic Reform
The Unemployment
 Creating Secure Zones over all the country, will encourage business
development and then reduce unemployment rate.
Iraq Institute for Economic Reform
Unstable Economic Policy
Iraq Institute for Economic Reform
Unstable Economic Policy
From past years evidences have shown that members of
successive governments have different priorities and different
policy this hampered the processes of reconstruction and make it
more costly.
For example: considerable work has been on privatization, Allawi’s
government established a commission for privatizations. The new
government of last year demolished without any warning the
commission. Such a action created confusion and a waste.
Iraq Institute for Economic Reform
Reforming Economic Subsidies
Iraq Institute for Economic Reform
The Cumulative Distribution of Subsidies per Capita
Value in $
per month
60
Per Capita per month the
value of food basket and
fuel subsides is $ 49.
50
40
These subsidies create waste
and corruption and distortion
of resource from market
values
30
20
Is it in the advantage of
the citizen to monetise
these subsidies?
10
0
Food Basket Fuel Prices
Subsidies
Electricity
Farmers
Type of Subsidies
SOEs
Al-Hajj
Social
Safety net
Iraq Institute for Economic Reform
Subsidies System
Cumulative
Distribution
per Family
per Month
in $
Type of Subsidies
If 50% of the Oil
revenue distributed
directly to the
population, then the
per capita and per
family and per
month dividend is
$37 and 185
Cumulative
Subsidies per
capita per month
In $
Food Basket
10
49
Fuel Prices
49
244
Electricity
50
249
(Based on 2005 oil
returns)
Farmers
50
252
SOEs
53
266
Al-Hajj
53
266
Social Safety net
54
272
Iraq Institute for Economic Reform
Subsidies System
Direct distribution of Oil’s return will have impact on the following:
1)
Politically: will show there is no different treatment for member of the
population,
2)
Security: there will be a feel of ownership of resources and motivation to
protected,
3)
Economically: reduce the waste of administration and corruptions
Iraq Institute for Economic Reform
Reforming the Subsidies System
 To reduce inefficiency, the government started to reforming the
untargeted subsidies programmes and to begin the process of replacing
their welfare implications with a well-prepared and efficient system of
income transfers. The major two policies here are the food basket and fuel
price subsidies.
 The strategy is to reduce subsides gradually and as form the budget year
2006. Therefore, government for 2006 reduce the budget for both of
importing fuel and for the food basket by 25%. Iraq currently spending 17%
of the total budget on two subsidies (8.1% for fuel and 8.9% for food
basket).
Iraq Institute for Economic Reform
Reforming the Subsidies System
The following actions have been recommended:
A)
Fuel subsidies: increase full prices and introducing for the first time
a new system ‘Social Safety Net’ to target the poor families and
compensate them.
b)
this
Food basket: The government anticipated that some time during
year to start experiment with monetising the food basket in three
provinces
Iraq Institute for Economic Reform
Reforming Fuels Prices
This reform is at present time attracting considerable attentions. The
government is already announce new prices. This action, as it is
expected create unrest, the citizens of Iraq start asking the question:
Why is a country with rich oil reserve (such as Iraq) can not afford cheap
fuel?
To address this important question, let us look to the following slides.
Iraq Institute for Economic Reform
Prices of the improved Benzene (gasoline
‫الممتاز‬Benzene
‫البنزين‬
Super
$
120
100
80
60
101
40
41
20
24
24
24
29
27
12.05
0
3.3
Iraq
‫العراق‬
Syria
‫سوريا‬
Kuwait
‫الكويت‬
KSA
‫السعودية‬
UAE
‫االمارات‬
Egypt
‫مصر‬
Bahrain ‫ايران‬
Iran
‫البحرين‬
Turkey
‫تركيا‬
Iraq Institute for Economic Reform
Percentage of Government and Consumer
Contribution to the Cost of Fuels
%100 100%
90%
Government
Contribution
80%
70%
60%
50%
Consumer
Contribution
40%
30%
20%
10%
%0
0%
‫البنزين العادي‬
Regular Benzene
‫البنزين الممتاز‬
Super Benzene
‫النفط االبيض‬
White Oil
‫زيت الغاز‬
Gas Oil
‫اسطوانة الغاز السائل‬
Liquid Gas
Cylinder
Iraq Institute for Economic Reform
Component of Fuel Subsidies (in Trillions ID)
Crude
Oil Price
Subsidies for
Locally Produced
(5)
Subsidies for
Imported Fuel (6)
Iraq Institute for Economic Reform
The Deficit in the 2005 Budget (in Billions I.D.)
40,000
Expenditures
35,981
35,000
30,000
Revenues
28,959
25,000
20,000
15,000
10,000
5,000
0
Budget Deficit
7,023
Iraq Institute for Economic Reform
Allocation of the Budget on Select Items
Budget Allocation/
Actual Spending
for 2005 (Trillion .D )
Per Capita
(Thousand ID)
Items
12
477
Fuels
4
144
Food Basket
2
59
Heath
2
70
Education
0.5
18
Public Work
Iraq Institute for Economic Reform
Budget Allocation to Fuels and other Items
Fuel
Food Basket
Education
Health
Public Work
Iraq Institute for Economic Reform
Thank you