One year later: a rebound in Iraq

By , Columnist

Rocket attacks. Political and sectarian strife. Given all the turmoil in Iraq, it's easy to miss what's going right there one year after the war: economic recovery.

Despite high unemployment and power blackouts, Iraqis are seeing a big rebound in business. That turnaround is one key to improving the nation's political stability.

Yet, even with recovery, Iraq will not be able to fully repay its massive debts, so they'll have to be forgiven. And it will need huge sums in aid from the United States and others.

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The short-term outlook is encouraging. "Iraq may now be the world's leading country for pent-up demand," notes Iraq Reconstruction Report, a newsletter in Waltham, Mass. "Right now, millions of Iraqis are buying their first cellphone, satellite dish, TV, washing machine, air conditioner, car, and so on. Companies are buying their first computers, earth-moving equipment, satellite Internet connection, and all manner of corporate tools."

There's "significant progress" in reconstruction and political transition, a blue-ribbon task force of the Council on Foreign Relations (CFR) in New York reported this week. Here's a look at the good, the bad, the in-between:

Overall economy: The World Bank Group estimates that Iraq's gross domestic product - its total output of goods and services - will rebound by a huge 33 percent this year after two years of decline. At $17 billion to $22 billion in size, its economy will rival tiny Luxembourg.

Oil: Key to the World Bank outlook is the assumption that Iraq can continue to revive its output of oil - its greatest source of income. By year's end, the bank predicts a recovery to nearly prewar levels: 2.7 million barrels per day, with 2.3 million b.p.d. exported.

Reconstruction: Oil and other exports won't fully provide the massive sums needed for rebuilding. The World Bank figures that oil revenues and other Iraqi assets will only cover "recurrent" expenditures this year of $12.1 billion and $1.4 billion of modest investments.

What will fill the gap? About $59 billion in aid funds have been promised to Iraq by the US and other nations, of which about $28 billion have been committed. The US this year expects to pump $18 billion into Iraq reconstruction projects. In the end, cumulative US nonmilitary expenditures could total in the range of $100 billion, says James Schlesinger, cochair of the CFR task force and a former US secretary of Defense and secretary of Energy. The CFR report calls on the US "to sustain a multibillion-dollar commitment to Iraq for at least the next several years."

The other hope is that Iraq can boost oil exports even more. At present, oil is being exported from the south, through the port of Basra. Sabotage has stopped oil exports from the north through Turkey. A Baghdad report says Iraq's oil minister has agreed in principal with Iran to build a short pipeline across the Shatt al-Arab (waterway) to the Iranian port of Abadan to boost Iraq's oil-export potential.

Economic reforms: The World Bank calls them significant and lists them as: "the liberalization of all prices, with the significant exception of energy and some food items; the simplification of taxes; the abolition of licensing requirements for trade; the abolition of tariffs; and the decision to place a 5 percent reconstruction levy on all imports." The levy actually exempts food, medicine, clothing, and books. In addition, the central bank was given statutory independence from the government. A currency reform has resulted in a rise in the value of the Iraqi dinar in the past few months of more than 25 percent against the US dollar.

Consumer market: Most Iraqis are poor and half are unemployed. Still, the nation has a fast-growing middle class that has benefited from Saddam Hussein's fall, the Iraq Reconstruction Report states. Rebuilding should add jobs. Firms from the US and elsewhere are scrambling to win contracts from the Coalition Provisional Authority, government ministries, and private firms. "There is simply no 'exit strategy' " from Iraq, says Brookings Institution economist Kenneth Pollack. "Given the history of failed states, we simply cannot allow Iraq to slip into chaos and civil war."

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