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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