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01/07/2007
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Iraq’s economy

In the 1980s Iraq had a per capita income level comparable to South Korea, one of the best education systems in the Arab world and generally good standards of medical care. However, despite this wealth, Iraq is a lower-middle income country with up to 20% of people living below the absolute poverty line.

Iraq has substantial resources for investment

Since 2003 the Iraqi economy has seen major improvements, first through the removal of and since then by a steady and steep rise in the oil export price.

Iraq has the third largest proven reserves of oil in the world – enough, once managed properly, to create a good standard of living for all Iraqis. In 2007 it raised more than $33 billion (93% of the budget) from oil exports. The challenge will be to successfully unlock Iraq’s substantial resources and invest them effectively.

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So what’s the problem?

It is widely accepted by donors and government experts that Iraq needs significant amounts of public investment to boost oil production, invest in basic services (such as electricity and hospitals) and generate jobs. The Government has allocated significant amounts of money (US$10.2bn in 2006/2007) for public investment. But the pace of actual government investment has been very slow, at only slightly over US$1 billion in 2005 and 2006, despite ambitious plans.

The Government of Iraq faces major challenges in rebuilding its infrastructure and providing essential services such as healthcare. The new Government Departments and Provincial Councils have not had much experience of managing big development projects, and until recently the Provinces have not had the financial support they need from Central Government.

Violence continues to make investment and development difficult. As a result, infrastructure remains outdated and living conditions are poor. For example, the southern province of Basra receives a daily average of only 9-10 hours of electricity and in Baghdad the average can be as low as 5 hours.

To help address this, DFID is focusing on strengthening the Government’s management of the economy, helping them to begin structural reforms, and tackling blockages in domestic investment. DFID is providing expert advice to key ministries in the Iraqi Government to achieve this.

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What else needs to be done?

Critical economic challenges for the Iraqi Government over the next few years include:

  • Preserving macroeconomic stability, free of hyperinflation and providing plentiful job opportunities for the Iraqi population
  • Clarifying the relationship between Provincial and Central Government, so that responsibilities are clearly defined
  • Improving efficiency in key Government Ministries
  • Meeting the commitments set out in the International Monetary Fund’s Standby Arrangement, which is a prerequisite to debt forgiveness

Iraq and the International Monetary Fund

In December 2005, Iraq signed an 18-month Standby Arrangement with the external linkIMF. This sets out a blueprint for future economic reforms. It also paves the way for further debt forgiveness on Iraq’s $110 billion debts.

In July this year, the IMF board commended the Iraqi authorities for bringing their economic program back on track despite the difficult political and security circumstances. Further progress will crucially depend on improvements in the political and security situation.

DFID’s economic reform programme is helping the Iraqi government in its negotiations with the IMF, and in preparing the initial budget.

Last updated 17 April 2007


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