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The Iraqi Economy’s Huge Potential
09/02/2013
By Takema Sakamoto
Takema Sakamoto, Chief Representative of the Japan International Cooperation Agency (JICA) Iraq Office.
Based on its rich natural resources and huge market potential, Iraq’s economic prospects seem promising.
Its
population, currently 32 million, is forecasted to increase by over 3
percent annually, which will create a larger number of future consumers.
Its gross national income (GNI) per capita, currently $2,640, is
estimated to grow by around 10 percent per year on average. Spending
power is expected to grow rapidly.
In order to service this large
future market, foreign commercial activities have skyrocketed from
around $3 billion in 2007 to nearly $60 billion in 2011. In other words,
the amount is twenty times larger than four years ago. Although risks
still remain, the security situation has been generally improving,
compared with the most chaotic period from 2006 to 2007.
The oil
price, hovering at a relatively high level, is also contributing to the
expansion of Iraq’s economy. The Iraqi government’s budget for 2012
assumed that oil would be sold for $85 per barrel, but the current
market price is over $100.
To date, Iraq is achieving a
relatively strong performance of oil production and export. Recently,
Iraqi oil production reached over 3 million barrels per day. That figure
is higher than Iran’s production, and Iraq has now become the second
biggest oil producer among the Organization of the Petroleum Exporting
Countries (OPEC), just behind Saudi Arabia.
In addition, oil
export facilities in Basra have been completed or are approaching
completion. Recently, Iraqi oil exports amounted to approximately 2.6
million barrel per day. Thus, the Iraqi government is receiving oil
revenues to fund its budget as expected.
Taking into account all of the above, Iraq is deemed as one of the world’s economies with the highest growth potential today.
The Fragility of the Iraqi Economy
However,
at the same time, it is critical to underscore that Iraq’s prosperity
is not predetermined, and the country is now at a crossroads.
Enormous
budgets for investment, especially for infrastructure, are essential,
but the Iraqi government in recent years has faced growing budget
deficits. (For example, at the time of drafting each year’s budget, the
deficit was envisaged at approximately $13 billion for 2011, $15 billion
for 2012, and $19 billion or more for 2013.)
According to Dr.
Sami al-Araji, the chairman of the National Investment Commission (NIC),
Iraq needs up to $1 trillion over the next 10 years to rebuild its
crumbling infrastructure and battered economy. But the question looms:
How can the government of Iraq mobilize such gigantic sums of money and
build its capacity to execute such a large budget for infrastructure
investments?
The volatility of oil prices needs acute attention,
too. As we have observed, Iraq has enjoyed the high price of oil
recently, but the price fluctuates. In 2009, Iraq had a bitter
experience due to the sudden and rapid depreciation of oil prices. The
economy suffered severe damage, and the Iraqi government was forced to
seek emergency financial support from the International Monetary Fund
(IMF) and the World Bank.
In addition, oil dependent economies
often face their own unique challenges, such as ‘Dutch disease’ (the
decline in competitiveness of non-oil tradables following real exchange
rate appreciation caused by the rapid infusion of new income into the
country) and ‘the resource curse’ (poor economic governance and
management because governments are heavily dependent on resource
revenues rather than on taxes from citizens, resulting in a weak chain
of accountability between citizens and governments). In short, Iraq’s
reliance on oil revenues can be seen as both a blessing and a curse.
A
report compiled by the U.S. Agency for International Development
(USAID) for the Iraq Prime Minister’s Advisory Commission (PMAC) in
October 2012 clearly warned that over-dependence on oil revenues has the
potential to create significant economic and market distortions. Oil
wealth may hit non-oil exports as a result of exchange rate valuation.
Furthermore oil wealth may mask costly economic inefficiencies,
including an oversized public sector, and it can create distortions and
perverse incentives. The report dared to state that Iraq’s growth path
is on a dangerous trajectory that has significant political, economic
and societal risks.
Iraq’s Struggle for Private Sector Development and Economic Diversification
Beyond
the oil sector, the Iraqi government is struggling to attract private
sector investment and to diversify its economy by promoting sectors such
as agriculture.
Currently, Iraq is ranked 165 among 185
countries and economies in the World Bank’s ‘Doing Business’ report,
which assesses economies in 10 areas of business regulation. If one
considers other factors not included in the report (such as service
delivery on the ground, security constraints and corruption), Iraq’s
ranking might be even lower. It is also worthwhile noting that
Transparency International’s 2012 corruption perceptions index ranked
Iraq at 169 among 174 countries, although the Iraqi government has
complained about the ranking in the past.
In order to promote
sustainable development, the Iraqi government must take steps to improve
its business environment in order to attract reputable foreign
companies. Revitalizing the private sector and attracting foreign
investment is also crucial from a job creation perspective. Iraq’s
unemployment rate, which is calculated at 16 percent in total, is over
35 percent for youth. Employment opportunities are needed to avoid
social disruption and to offer economic prospects.
And the
necessity of economic diversification is also apparent when one takes
into account the risks of oil dependent economies mentioned above, such
as ‘Dutch disease’ and ‘the resource curse.’ Job opportunities in the
oil sector are limited.
So what is the most promising sector
other than oil? Many believe that the agricultural sector holds the
greatest potential for broad-based growth.
There are many reasons
why agricultural sector shows promise, including its job absorption
capacity, current GDP share, the importance of rural development to
reduce economic inequality, and the significance of food security in the
MENA region. Also, one must not forget Iraq’s shining history in
agriculture, as part of the Fertile Crescent and mankind’s first bread
basket. Hence, the agricultural sector is a good place to start to
encourage economic diversification.
International Partnership’s Role to Support a Brighter Future for Iraq
In
Iraq, the Japan International Cooperation Agency (JICA), the Japanese
government’s agency in charge of supporting developing countries, has
been acting as a close partner to the government.
To stimulate
foreign direct investment and support private sector development, JICA
has been working to improve the business environment, through the
provision of soft loans and various advisory services. The main business
obstacles can be attributed to a shortage of infrastructure and
institutional/ human capacity, as well as a lack of internationally
standardized business procedures. Belated payments along with vague
bidding and contracting operations are the biggest risks pointed out by
many private companies.
JICA has also been working jointly with
the Iraqi government on economic diversification, especially in the
field of agriculture. In dry parts of the country, effective water usage
remains the most critical issue. To address this challenge, the
establishment of water users associations, promotion of water-saving
irrigation, and rehabilitation of devastated irrigation systems are
required. In this context, JICA has provided advisory services, such as
sharing know-how on both technical and management skills, and physical
support for the procurement of goods and construction of irrigation
systems to assist the Iraqi government.
Iraq remains an important
player in the global economy. Both in terms of its contribution to
world energy markets and its role in the Middle East, the international
community has a vested interest in seeing Iraq succeed. While the
country faces significant challenges, these obstacles must be tackled
collectively, with support from the international community, to build a
brighter future for Iraq and the world.
[You must be registered and logged in to see this link.]
09/02/2013
By Takema Sakamoto
Takema Sakamoto, Chief Representative of the Japan International Cooperation Agency (JICA) Iraq Office.
Based on its rich natural resources and huge market potential, Iraq’s economic prospects seem promising.
Its
population, currently 32 million, is forecasted to increase by over 3
percent annually, which will create a larger number of future consumers.
Its gross national income (GNI) per capita, currently $2,640, is
estimated to grow by around 10 percent per year on average. Spending
power is expected to grow rapidly.
In order to service this large
future market, foreign commercial activities have skyrocketed from
around $3 billion in 2007 to nearly $60 billion in 2011. In other words,
the amount is twenty times larger than four years ago. Although risks
still remain, the security situation has been generally improving,
compared with the most chaotic period from 2006 to 2007.
The oil
price, hovering at a relatively high level, is also contributing to the
expansion of Iraq’s economy. The Iraqi government’s budget for 2012
assumed that oil would be sold for $85 per barrel, but the current
market price is over $100.
To date, Iraq is achieving a
relatively strong performance of oil production and export. Recently,
Iraqi oil production reached over 3 million barrels per day. That figure
is higher than Iran’s production, and Iraq has now become the second
biggest oil producer among the Organization of the Petroleum Exporting
Countries (OPEC), just behind Saudi Arabia.
In addition, oil
export facilities in Basra have been completed or are approaching
completion. Recently, Iraqi oil exports amounted to approximately 2.6
million barrel per day. Thus, the Iraqi government is receiving oil
revenues to fund its budget as expected.
Taking into account all of the above, Iraq is deemed as one of the world’s economies with the highest growth potential today.
The Fragility of the Iraqi Economy
However,
at the same time, it is critical to underscore that Iraq’s prosperity
is not predetermined, and the country is now at a crossroads.
Enormous
budgets for investment, especially for infrastructure, are essential,
but the Iraqi government in recent years has faced growing budget
deficits. (For example, at the time of drafting each year’s budget, the
deficit was envisaged at approximately $13 billion for 2011, $15 billion
for 2012, and $19 billion or more for 2013.)
According to Dr.
Sami al-Araji, the chairman of the National Investment Commission (NIC),
Iraq needs up to $1 trillion over the next 10 years to rebuild its
crumbling infrastructure and battered economy. But the question looms:
How can the government of Iraq mobilize such gigantic sums of money and
build its capacity to execute such a large budget for infrastructure
investments?
The volatility of oil prices needs acute attention,
too. As we have observed, Iraq has enjoyed the high price of oil
recently, but the price fluctuates. In 2009, Iraq had a bitter
experience due to the sudden and rapid depreciation of oil prices. The
economy suffered severe damage, and the Iraqi government was forced to
seek emergency financial support from the International Monetary Fund
(IMF) and the World Bank.
In addition, oil dependent economies
often face their own unique challenges, such as ‘Dutch disease’ (the
decline in competitiveness of non-oil tradables following real exchange
rate appreciation caused by the rapid infusion of new income into the
country) and ‘the resource curse’ (poor economic governance and
management because governments are heavily dependent on resource
revenues rather than on taxes from citizens, resulting in a weak chain
of accountability between citizens and governments). In short, Iraq’s
reliance on oil revenues can be seen as both a blessing and a curse.
A
report compiled by the U.S. Agency for International Development
(USAID) for the Iraq Prime Minister’s Advisory Commission (PMAC) in
October 2012 clearly warned that over-dependence on oil revenues has the
potential to create significant economic and market distortions. Oil
wealth may hit non-oil exports as a result of exchange rate valuation.
Furthermore oil wealth may mask costly economic inefficiencies,
including an oversized public sector, and it can create distortions and
perverse incentives. The report dared to state that Iraq’s growth path
is on a dangerous trajectory that has significant political, economic
and societal risks.
Iraq’s Struggle for Private Sector Development and Economic Diversification
Beyond
the oil sector, the Iraqi government is struggling to attract private
sector investment and to diversify its economy by promoting sectors such
as agriculture.
Currently, Iraq is ranked 165 among 185
countries and economies in the World Bank’s ‘Doing Business’ report,
which assesses economies in 10 areas of business regulation. If one
considers other factors not included in the report (such as service
delivery on the ground, security constraints and corruption), Iraq’s
ranking might be even lower. It is also worthwhile noting that
Transparency International’s 2012 corruption perceptions index ranked
Iraq at 169 among 174 countries, although the Iraqi government has
complained about the ranking in the past.
In order to promote
sustainable development, the Iraqi government must take steps to improve
its business environment in order to attract reputable foreign
companies. Revitalizing the private sector and attracting foreign
investment is also crucial from a job creation perspective. Iraq’s
unemployment rate, which is calculated at 16 percent in total, is over
35 percent for youth. Employment opportunities are needed to avoid
social disruption and to offer economic prospects.
And the
necessity of economic diversification is also apparent when one takes
into account the risks of oil dependent economies mentioned above, such
as ‘Dutch disease’ and ‘the resource curse.’ Job opportunities in the
oil sector are limited.
So what is the most promising sector
other than oil? Many believe that the agricultural sector holds the
greatest potential for broad-based growth.
There are many reasons
why agricultural sector shows promise, including its job absorption
capacity, current GDP share, the importance of rural development to
reduce economic inequality, and the significance of food security in the
MENA region. Also, one must not forget Iraq’s shining history in
agriculture, as part of the Fertile Crescent and mankind’s first bread
basket. Hence, the agricultural sector is a good place to start to
encourage economic diversification.
International Partnership’s Role to Support a Brighter Future for Iraq
In
Iraq, the Japan International Cooperation Agency (JICA), the Japanese
government’s agency in charge of supporting developing countries, has
been acting as a close partner to the government.
To stimulate
foreign direct investment and support private sector development, JICA
has been working to improve the business environment, through the
provision of soft loans and various advisory services. The main business
obstacles can be attributed to a shortage of infrastructure and
institutional/ human capacity, as well as a lack of internationally
standardized business procedures. Belated payments along with vague
bidding and contracting operations are the biggest risks pointed out by
many private companies.
JICA has also been working jointly with
the Iraqi government on economic diversification, especially in the
field of agriculture. In dry parts of the country, effective water usage
remains the most critical issue. To address this challenge, the
establishment of water users associations, promotion of water-saving
irrigation, and rehabilitation of devastated irrigation systems are
required. In this context, JICA has provided advisory services, such as
sharing know-how on both technical and management skills, and physical
support for the procurement of goods and construction of irrigation
systems to assist the Iraqi government.
Iraq remains an important
player in the global economy. Both in terms of its contribution to
world energy markets and its role in the Middle East, the international
community has a vested interest in seeing Iraq succeed. While the
country faces significant challenges, these obstacles must be tackled
collectively, with support from the international community, to build a
brighter future for Iraq and the world.
[You must be registered and logged in to see this link.]
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