Dissecting the Iraqi Economy

Below is a look at selected macroeconomic indicators in Iraq, from the IMF report , with explanatory footnotes and comments at the bottom by Anand, who has obviously studied this much more than I have.  Thank you Anand.

 

Iraq : Selected Macroeconomic Indicators, 2004-07
	2004	2005	2006	2007
			Est.	Proj
Oil and gas sector
Total exports of oil and gas (in billions of U.S. dollars) [i]	17.3	19.2	27.7	28.6
Average crude oil export price (in U.S. dollars/barrel) [ii]	31.6	43.9	55.7	50.6
Crude oil production (in millions of barrels/day)	2.0	1.9	2.0	2.1
(Annual percentage change)
Output and prices
Real GDP	46.5	3.7	6.2	6.3
Non-oil real GDP [iii]	14.9	12.0	7.5	5.0
Consumer price inflation (end-of-period) [iv]	31.7	31.6	64.8	30.0
(In percent of GDP)
Investment and Saving
Gross domestic investment	27.7	31.6	16.3	20.0
Of which: non-government [v]	5.5	12.3	3.3	4.2
Gross national savings	-9.8	31.2	27.7	14.7
Of which: non-government [vi]	29.4	0.2	2.4	8.6
(In percent of GDP, unless otherwise indicated [vii] )
Public Finances (cash basis)
Government revenue (including grants)	79.6	107.4	80.5	62.3
Of which: Oil revenue [viii]	69.2	76.7	65.2	51.1
Expenditure	120.8	96.6	68.5	72.0
Of which: Current	98.6	77.2	55.5	56.1
Of which: Capital [ix]	22.2	19.4	13.0	15.8
Budget balance (including grants) [x]	-41.2	10.9	12.0	-9.7
Primary fiscal balance	-40.2	11.1	12.5	-9.0
Non-oil primary fiscal balance [xi]	-88.6	-49.3	-41.2	-52.5
Total government debt (in billions of U.S. dollars) [xii]	97.6	68.9	54.7	56.4
(Annual percentaje change unless otherwise indicated)
Monetary Sector
Base money [xiii]	116.9	12.0	29.0	38.9
Currency issued	74.9	27.9	16.2	41.7
(In percent of GDP, unless otherwise indicated)
External Sector
Non-oil exports of goods (in U.S. dollars, percentage change)	...	30.3	22.2	23.2
Imports of goods (in U.S. dollars, percentage change)	216.7	-3.1	12.4	42.6
Trade balance	-8.4	3.3	14.0	-2.3
Current account excluding official transfers	-43.3	-18.9	2.9	-11.5
Current account including official transfers [xiv]	-37.6	3.9	12.3	-5.5
Overall external balance [xv]	6.6	11.2	15.1	4.3
Foreign Direct Investment [xvi]	0.8	1.3	0.6	0.6
Total external debt [xvii]	378.9	219.5	110.6	90.4
Central banks gross reserves (in billions of U.S. dollars) [xviii]	7.9	12.0	18.7	21.3
In months of imports of goods and services	3.2	5.4	6.2	6.9
Memorandum Items
Nominal GDP (in billions of U.S. dollars) [xix]	25.8	31.4	49.5	62.4
Unemployment rate 1/	10.5	18.5	...	...
Local currency per U.S. dollar (period average) 2/	1,453	1,469	1,467	1,275
Real exchange rate (Jan. 2004 = 100) [xx] 3/	145.5	183.4	311.9	341.8

[i] This is all the revenue measured in dollars that the GoI (Government of Iraq) has to work with

[ii] The price GoI gets for its crude is more than $10 less than Brent, because of the type of crude it is

[iii] Non oil GDP growth is slowing down this year (non-oil 2007 GDP had been projected to grow 7% instead of the now forecast 5% in the previous IMF report.) But there might be a pickup next year if Al Anbar, Ninevah, At Tamin and some southern provinces can maintain momentum. Iraq's non-oil economy has had moderate growth in recent years from a low base, although economic growth varies enormously by region.

[iv] Core inflation is likely to be 19% this year. But more GoI spending and US taxpayer spending in Iraq risks driving up inflation, unless it is targeted at increasing the supply of Iraqi goods and services. For example, a jobs program would worsen the situation in Iraq by driving up prices unless the workers hired worked efficiently at producing goods and services (which would lower prices by increasing the supply of goods and services in Iraq.)

[v] Non-government (private sector) investment is very low in Iraq. Further down in this report you can see that foreign private sector investment is also extremely depressed. This has to turn around if Iraq is to have a sustainable and continuing non-oil economic growth. Even government investment has fallen in Iraq because the GoI is having great difficulty executing its capital spending budget (including increasing electricity (the GoI is spending only $40 million this year on electricity generation compared with more than $4 billion that has been contributed by the US government and the more than $20 billion the IMF and World bank project is necessary http://www.defenselink.mil/news/newsarticle.aspx?id=47150 ) and oil production (executing only 3% of its oil capital investment budget in 2006 ), as well as construction), executing only 22% of its capital investment budget in 2006. For a more detailed discussion on why please see the comments at http://www.haloscan.com/comments/harrywr2/6755988074538520454/ , with respect to the article http://soldiersdad2.blogspot.com/2007/06/isf-readiness.html )

[vi] Private Iraqis are not saving very much. If Iraq prospers in the future, it is in their interest to borrow as much as possible to invest in Iraq's future growth. If Iraq does not prosper, private Iraqis will have very strained finances.)

[vii] Multiply all of these percentages by $13 trillion determine the equivalent dollar amounts for America

[viii] Difference = mostly US grants to Iraq

[ix] Depressed because of the failure to execute the capital part of the Iraqi budget See note ( v) above.

[x] Soaring budget deficit in spite of receiving huge grants from the US government and the failure to execute the capital investment portion of the Iraqi budget. This is why it is urgent to increase oil production quickly.

[xi] if oil prices drop, Iraq is in big trouble

[xii] This is inclusive of Iraq's three step 80% NPV debt forgiveness mentioned in summary portion of this IMF report.

[xiii] The Central bank is trying to restrict money supply to control inflation. This is driving up interest rates and causing the currency to soar, suppressing non oil GDP by driving Iraqi exporters and import competing firms out of business. The central bank is simultaneously moving the monetary base from Iraqi Dinar assets to dollars to weaken the Iraqi Dinar. If the Iraqi Dinar were to continue strengthening, the GoI will lose a lot of money.

[xiv] The difference primarily reflects grants by the US government to Iraq.

[xv] Soaring currency is causing imports to soar, and depressing non-oil exports

[xvi] Extremely depressed because of the bad security situation. It is urgent that foreign businesses be encouraged to invest more as quickly as possible.

[xvii] Reflects Iraq's 80% NPV debt forgiveness in three stage process.

[xviii] A consequence of high oil prices and America's grants to Iraq driving up the Iraqi Dinar, coupled with the Iraqi Central bank's attempt to weaken the Iraqi Dinar.

[xix] Caused by high oil prices. To determine the dollar values of any of the of the above statistic which are measured as a percentage of GDP, please multiply the (percentage of GDP figure) by this row.

[xx] Iraqi Dinar is soaring in real inflation adjusted terms against other currencies.

 

Some final thoughts to consider:

1.         The IMF is perhaps the best data source on the Iraqi economy, although estimates regarding Iraq's black economy are subject to considerable uncertainty

2.         There is a shortage of goods and services and too much GoI and US gov't spending in Iraq at the moment, which is driving up inflation. It is urgent that the GoI and US government use the money they are spending far more efficiently. i.e. buy more goods and services for less money. Without significantly increasing the supply of Iraqi goods and services, including by improving security, more GoI and US government spending in Iraq is likely to drive up inflation without improving the Iraqi economy.

3.         Additional US grants to Iraq might suppress Iraq's non-oil GDP. Large US grants to Iraq coupled with high oil prices are causing the Iraqi Dinar to soar in real terms (adjusted for Iraq's inflation rate) relative to foreign currencies. This is because the US government buys Iraqi Dinars with its dollars to spend on Iraqi reconstruction, goods and services. The Iraqi central bank has tried to stop Iraqi Dinar from strengthening by buying dollars with Iraqi Dinars (if not for that, the Iraqi Dinar would be a lot stronger than it is now), but with limited success. This is suppressing Iraq's non-oil economy by hurting exporters, as well as Iraqi businesses that compete with imports.

4.         The GoI has a major budget crunch, unless they can boost oil production quickly. The Iraqi government is expected to have a budget deficit of 9.7% of GDP this year, even after receiving very large grants from the US government, and massively under-spending and under-executing its capital budget. If not for the later two issues, the budget deficit would be much larger. To put this into perspective, this is similar to America running a 1.3 Trillion dollar budget deficit, or 2.5 – 3 Trillion dollar budget deficits excluding money other countries were giving us and assuming a normal capital budget execution. And this is with $70 oil (almost all GoI revenue comes from oil and American tax-payers.) If oil prices were $50, the deficit would be far worse. And the GoI has a very bad credit record, making it very hard to borrow large sums of money.

5.         The IMF technical staff (and most other people who follow this) are very skeptical that Iraq can significantly boost oil production any time soon. There is considerable risk that the GoI will be compelled to spend less on the ISF (Iraqi Security Forces), reconstruction and social services over the next couple years than currently expected. Reduced spending on the ISF risks increased violence and reduced security across Iraq.

6.         The administration, Congress, and MNF-I need to increase US grants to the ISF ASAP to reduce violence and increase security across Iraq.

7.        The Iraqi economy is becoming increasingly important as MNF-I shifts emphasis to 3 Dimensional operations (civil affairs, governance, ISF training and equipping, economics) in the growing majority of Iraq that is secure.