Iraq's economic outlook (page 2 of 2)

Foreign firms may remit profits and capital freely. Also, the Banking Law has been an important complement to the foreign investment law, allowing foreign banks to enter Iraq as branches, subsidiaries, representative offices or through joint ventures with local banks.

The passing of these two legislations, should pave the way for the inflow of international funds for the reconstruction of the country. The reconstruction effort has seen giant leaps forward.

The few authorities which are organizing and awarding contracts (USAID, Iraq Interim Government, various Ministries) have taken effective measures at assessing and tackling the most significant infrastructure projects and awarding contracts to rehabilitate those segments.

Although oil production has been erratic during 2003, production has been gathering steam. The Iraqi economy, which is heavily dependent on the sale of crude oil should see further improvements in 2004 as both the CPA and the Ministry of Oil have set out the aim of expanding production to pre-war levels.

The CPA has also set the aim of achieving some level of fiscal discipline and has established a budget for the coming period, which highlights a number of issues.

One of the key issues highlighted is the continued dependency of the government on oil revenues, with about 89% of revenue budgeted to come from oil. The budget also points to the inevitability of a heavy fiscal deficit.

On the positive side though, the deficit does not rely on increased borrowing or printing money, instead the deficit will be financed using unspent Oil for Food Program (OFFP) funds and other assets confiscated from the previous regime.

The Iraqi economy has experienced continuous deterioration since 1980. In terms of per capita GDP, Iraq may be classified as one of the few Least Developed Countries (LDCs). EIU estimates real GDP to have declined by nearly 20% in 2003 over the previous year due to the fall in oil production and export levels.

Iraq's oil output is expected to recover to pre-war levels by the second half of 2004, and the non-oil sector is projected to expand rapidly as aid and reconstruction spending flows into the economy. Real GDP is estimated to grow by 19% and 15% in 2004 and 2005 respectively.

A strong recovery in economic growth levels is projected for 2004, subject to the restoration of adequate security, proper functioning of public services (particularly electricity), and the availability of external resources for reconstruction.

The oil sector will continue to be the driving force behind economic growth in Iraq, with securing pipeline security the main impediment. At the same time, significant political, economic, and social changes will continue to take place that would open up new opportunities for economic activity.