BAGHDAD // By any measure, Iraq has had a terrible time since 2003. Yet when it comes to the global financial crisis, the nation may be in a privileged position. Years of sanctions and isolation under Saddam Hussein's rule mean Iraq has not been integrated into a global financial system that is in the grips of its worst crisis since the Great Depression of the 1930s.
"The good news, perversely, is that Iraq is not that tied into the international economy," an official at the US Embassy in Baghdad said. As of July, only about half of Iraq's banks were equipped to make international currency transfers. Large transactions are often conducted in cash, with businessmen carrying large bundles of dollars. While slowing global growth could depress private investment into some industries outside the oil sector, Iraq is sheltered from the worst of the financial turmoil.
"In that sense, they're insulated from these shocks," said Erik de Vrijer, the International Monetary Fund Iraq mission chief, who says Iraq's problem has been finding ways to spend the money it does have. Still, a sharp drop in oil prices in recent weeks could spell trouble in the long run for the nation, where oil exports account for more than 90 per cent of government revenues. Iraq is desperate to improve basic services such as electricity and water, to attract investment and create jobs. Many fear a new round of bloodshed could erupt if services, jobs and prosperity do not materialise.
Iraq holds the world's third-largest oil reserves and the US-backed government of Nouri al Maliki, the prime minister, is taking steps to boost production. Last week, the oil minister, Hussain Shahristani, held meetings in London with the world's major oil companies, such as Exxon Mobil and Royal Dutch Shell, who are jockeying for contracts to operate eight big oil and gas fields. A surge in world oil prices, peaking at more than US$147 a barrel in July, has helped improve Iraq's finances.
In August, the US predicted oil revenues could rise to US$79 billion (Dh290.2bn) this year, more than twice the average annual amount Iraq generated between 2005 and 2007. However, oil prices have dived more than 50 per cent from July as global growth sputters. Lower prices may not deter oil investors, who tend to look far past the day's market, but they do threaten to undermine Iraqi government spending if prices stay low.
Iraq has already revised the price on which it based its $79bn proposed budget for next year to $80 a barrel and may do so again. The government said on Wednesday it was reviewing the budget because of falling oil prices. Last year, Iraq spent less than 30 per cent of the $12bn it budgeted for investment and capital projects, angering some US politicians who complain Iraq needs to cover more of the bill for its own reconstruction.
The government has allocated billions of dollars in recent years for the oil, water and power sectors which have not been spent. As of last December, it had $29.4bn in reserves, US officials said. Yet Iraqis' needs are acute. Many people have just a few hours of grid electricity a day. For some, clean water is a luxury and unemployment remains sky-high. While overall economic growth is forecast at nine per cent for this year, the story outside the oil sector is more dark. Officials say there was a slight contraction last year.
Moreover, Timothy Mills, the president of the American Chamber of Commerce-Iraq, said the global financial crisis could create problems for small and medium-sized companies looking for credit for projects in Iraq. Iraq will also be competing for attention with bargain hunters who, under current conditions, have an array of cheap options to invest in places without security worries. "Investment in non-oil sectors is likely to be impeded while this gets sorted out, except for projects that are very clear winners and are privately funded with either Iraqi or Gulf money," Mr Mills said.
Private investment in the hotel or construction sectors might be the first to suffer. "Hopefully this crisis will not influence workers' ability to find opportunities," said Amjed al Juburi, the chairman of the Baghdad Chamber of Commerce. "Iraq may be able to weather this better than others," the official at the US Embassy said. "On the other hand... the economy is still very fragile and even a little bit of a reduction in growth is bad. Iraq needs everything it can get." * Reuters