Iraq's economic outlook (page 1 of 2)

The Iraqi economy is undergoing a transition from one tightly controlled by the government to a free market economy. Significant political, economic, and social changes are taking place, which should open up new opportunities for the rapid economic development of the country.

A US-led Iraqi interim government was set up and is expected to take sovereign power in June 2004. This interim government has played a critical role in supporting the rebuilding initiatives.

During the last three decades, Iraq has suffered from persistent state intervention, costly militarization, three wars, and over a decade of international sanctions.

Even without taking into account reparation claims, Iraq is amongst the most heavily externally indebted countries in the world. This makes the rebuilding of Iraq in no way an easy task and a collective effort will be needed to scrape together funds to fulfill the heavy price tag associated with reconstruction.

With tremendous amounts of interest channeled towards succeeding in rebuilding the devastated nation, the situation has advanced considerably. Although far from becoming the regional powerhouse it has the potential to be, remarkable steps to reshape and rebuild the ruined economy have transpired in the wake of the liberation.

Advances have been made on all fronts entailing the humanitarian, political and economic arenas. A US-led Iraqi interim government was set up and is expected to take sovereign power in June 2004. This interim government has played a critical role in supporting the rebuilding initiatives many times deemed doubtful by skeptics.

The reconstruction efforts are however being hampered by the continuing attacks on US troops and the lack of security in the country. A large part of the funds required for reconstruction will be obtained from crude oil exports.

International aid in the form of grants and loans are also expected to meet a significant portion of the costs of reconstruction. A joint UN and World Bank report estimates the overall stock of medium-term reconstruction needs to be on the order of US$36bn, US$9bn of which would be needed in 2004.

These figures cover physical reconstruction, technical assistance, and training needs, plus additional operational and maintenance costs associated with new investments.

In addition, critical sectors that have been identified outside the UN/World Bank scope, including security and oil have been estimated by the CPA to cost an additional US$20bn over the coming years. Thus the total estimated cost of reconstruction amounts to around US$56bn.

On the humanitarian front, the international community, led by the United Nations has been able to respond to the needs of the Iraqi people. Electric power has returned to slightly below pre-war levels, while hospitals, health clinics and schools have reopened across the country.

A wide range of goods and services are available in the markets. Food, water and medical necessities from the international community have been made available to Iraq's needy, which has helped stave off a potential humanitarian crisis. On the political front, many issues have been resolved although several still remain.

On the economic front, the Iraqi government, recognizing the importance of capital inflow to the nation and to encourage much-needed capital investment, adopted a liberal regime for foreign direct investment.

It permits foreign firms to establish wholly owned companies or to purchase 100% of Iraqi firms.