Iraqs Economy: Past, Present, Future
CRS Report for Congress
Iraq’s Economy: Past, Present, Future
June 3, 2003
Jonathan E. Sanford, Coordinator
Specialist in International Political Economy
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress
Iraq’s Economy: Past, Present, Future
For most of its history, the government of Iraq has played an active role
stimulating and directing the Iraqi economy. This pattern was most pronounced
during the recent regime of Saddam Hussein, which was at root a centrally-directed
command economy with some trappings of market economics and crony capitalism.
Iraq’s industrial sector was created, in large part, as a result of government efforts to
diversify the economy through economic development projects using the proceeds
from Iraq’s oil wealth and borrowed funds. Many of these initiatives were not viable
without government subsidies. Much of the industrial base has now been destroyed,
either by direct attack in the Iran-Iraq or the two Gulf wars or through atrophy caused
by neglect. Iraq has suffered absolute declines in gross domestic product (GDP),
chronic inflation, wholesale depreciation of its currency, virtually non-existent
foreign investment and the accumulation of a crushing debt burden.
This report, which will be updated periodically, identifies issues to be addressed
before Iraq can participate normally in the world economy. It will need civil peace
and a new legitimate government — Hague and Geneva conventions place limits on
the capacity of an occupying power to restructure or develop the economy of an
occupied state by its own decisions alone. It will need a sound monetary system and
a market-oriented banking and finance system. It will need to recast its industrial
sector on sounder principles with attention to productivity and relative prices. It will
also need to ensure that the government cannot use the massive oil revenues passing
through its hands to establish once again a new authoritarian regime.
Should Iraq’s oil fields be restored to their pre-war conditions, Iraq could re-
enter the world oil market as one of the largest suppliers, generating up to $24 billion
in annual revenues. It has large undeveloped potential. Long term, it may be the
world’s largest oil producer, generating even larger export revenues — perhaps
doubling or more its income within a decade. How Iraq uses this prospective oil
wealth — and its effect on the rest of the economy — will be a concern. At present,
its oil revenue will go into the internationally-audited Development Fund for Iraq.
Iraq’s agricultural sector is small. Output during the 1980s was stimulated by
incentives and subsidies, but production lagged and imports supplied most of the
country’s agricultural needs. During the 1990s, through poor practices, Iraq’s
farmland was heavily damaged by salinization. Years will be required to rebuild
Iraq’s agricultural productivity. In the meantime, Iraq will rely on imports to meet
its agricultural needs. As a result, among other things, urbanization will increase.
Iraq has large foreign debts, with estimates ranging from $42 billion (plus
unpaid interest since 1991) to $64 billion and $78 billion. This does not include
1980s war-loans from Gulf or other Arab states or war damage claims. Most of the
debt stems from the Iran-Iraq war or from loans incurred before 1990 to fund
consumer needs and industrial or infrastructure projects. The earlier U.N. sanctions
regime and the Security Council resolution of May 22, 2003 shield Iraq against action
by its creditors and claimants to settle claims. The issue will need to be resolved
before normalization of Iraq’s international trade and financial relations can occur.
In troduction ......................................................1
Government and the Economy........................................2
The Constitutional Monarchy ...................................2
The Military Regimes..........................................3
The Baathist Regime...........................................4
Demographic and Social Conditions...................................6
Role of Women in the Government and Economy of Iraq..............7
Iraq’s Economy in Recent Years......................................8
Macroeconomic Policy and Conditions.............................8
Gross Domestic Product (GDP)..............................10
Currency and the Balance of Payments........................13
The Oil for Food Program......................................17
Oil Resources — Overview.................................18
Oil Production — History..................................19
Iraq’s Oil Industry — Current Status..........................20
Iraq and OPEC...........................................21
Potential Iraqi Oil Revenues................................22
Pre-U.N. Sanctions (1980-89)...............................24
U.N. Sanctions Period (1990 to 2003).........................25
Banking and Financial Institutions...............................27
Transportation and Infrastructure.................................29
War and Sanctions........................................33
Fiscal Levies on Foreign Trade..............................37
The Post-War Situation............................................38
Assessing the Damage.........................................38
Humanitarian Assistance and Post-War Relief......................40
Provision of Relief........................................40
Major Issues Affecting Iraq’s Economic Future.........................42
Preconditions for Economic Development.........................42
Avoiding Rentier State Authoritarianism..........................49
Oil and Authoritarianism...................................49
Reviving the Non-Oil Economy.................................50
Settling Debt and Overhanging Claims............................52
Establishing a Currency and Monetary System......................54
The Dinar Lacks Sufficient Credibility........................55
Interim Dollarization by Default.............................55
A New Currency Requires Key Decisions......................55
Importance of Monetary Control.............................56
Choosing an Exchange Rate Regime..........................56
Short-Run Credibility vs. Long-Run Flexibility.................57
Oil and Monetary Policy...................................57
Rebuilding the Financial System.................................58
Change to a Market-Based System...........................58
Export and Border Control Capabilities ..........................61
Access to Foreign Resources....................................61
Iraq and the International Financial Institutions.................61
The United Nations Development Programme..................63
Figure 1. Iraq’s Gross Domestic Product..............................11
Figure 2. Sectoral Composition of GDP, 1989..........................12
Figure 3. Iraq's Oil Production and Consumption, 1980-2002 (Est.).........20
List of Tables
Table 1. Iraqi Oil Production, Current and Potential.....................22
Table 2. Iraq’s Top Exports, 1989...................................35
Table 3. Iraq's Top Ten Imports, 1989................................36
Table 4. Iraq’s Imports under OFFP, 1997-2003........................36
This report was originally prepared at the request of the Senate Committee on
Foreign Relations. With the Committee’s permission, it is being made generally
available for the use of Members.
Iraq’s Economy: Past, Present, Future
This report provides information on the economy of Iraq in the recent past and
on current post-war conditions. It also discusses issues and factors which will likely
influence Iraq’s future economic prospects. In the 1980s, Iraq had one of the Arab
world’s most advanced economies. Though buffeted by the strains of the Iran-Iraq
war, it had — besides petroleum — a considerable industrial sector, a relatively well-
developed transport system, and comparatively good infrastructure. Iraq had a
relatively large middle class, per capita income levels comparable to Venezuela,
Trinidad or Korea, one of the best educational systems in the Arab world, a well
educated population and generally good standards of medical care. Nevertheless,
Iraq was a centrally directed command economy that was heavily dependant on oil
revenue to fund its key institutions and its development program. Iraq experimented
in the late 1980s with privatization, functional autonomy for some elements of the
economy, and limited use of market forces. This initiative ended, however, with the
advent of the first Gulf war.
In the dozen years since 1991, Iraq’s industrial and agricultural capacity has
decayed, its transportation and infrastructure systems have deteriorated, and the
education levels and standard of living for its population have declined. Oil exports
resumed under the U.N. Oil for Food Program (OFFP) after 1995, albeit at a lower
rate. However, its production capacity deteriorated from lack of inputs. Some
economic facilities were damaged in the recent war and its chaotic aftermath. In
effect, Iraq must start over as it rebuilds its economy. Its massive oil resources can
serve as an engine of future growth and development. It does not start, though, with
a blank slate. The experience, expectations, and aspirations of the past will have
important — if unknown — effects on Iraq’s future economy. What Iraq learns from
its past and how it adapts itself for the future will be important considerations.
An important feature of centrally planned economies, such as Iraq under
Saddam Hussein, is the absence of the legal, political, economic, and regulatory
institutions that are the necessary underpinning of successful market economies.
According to Dani Rodrik, a prominent development economist, “in the long run, the
main thing that ensures convergence with the living standards of advanced countries
is the acquisition of high-quality institutions.”2 Institutions are the “rules of the
1 Prepared by Jonathan E. Sanford, Specialist in International Political Economy, and Martin
A. Weiss, Analyst in International Trade and Finance, Foreign Affairs, Defense and Trade
2 Dani Rodrik. “Growth Strategies.” April 2003. Available at
game,” the sets of rules and norms that organize society and allow a market economy
to function. Thus, the focus of the Iraqi reconstruction efforts must be the creation
of institutions that not only stabilize the economy, but can serve as an engine for
sustained long-term growth. Iraq will need to learn how to build and maintain good
institutions and how to use them effectively to rebuild its economy.
This report provides background on the different sectors and institutions of the
Iraqi economy. It also identifies some questions and issues which may have
significant bearing on Iraq’s future prospects and may need to be addressed as Iraq,
the United States, and the international community seek to put the economy of Iraq
on a sounder long-term foundation.
Government and the Economy3
The history of Iraq during the 20th century falls into three fairly distinct periods:
!1921-1958: A constitutional monarchy under direct British control
at first and later under significant British influence.
!1958-1968: A series of nominally republican regimes headed by
military officers who assumed power in most cases through a
military coup d’etat.
!1968-2003: A government controlled by the socialist, pan-Arab
Baath Party, which quickly developed into a vehicle for one-man
rule by leading party official Saddam Hussein.
The Constitutional Monarchy
Government. During the first period, Britain established a monarchy in Iraq
under King Faysal I, a leading member of the prestigious Hashemite family (of which
a collateral branch continues to govern Jordan). In 1932, Iraq became an independent
country, but the bilateral treaties replacing the British mandate provided for a
continued British role in Iraq, particularly in defense and foreign affairs. Rising
opposition to Iraq’s western ties and mounting nationalist sentiment among younger
Iraqis including the armed forces created growing disaffection from the regime. In
July 1958, a group of army officers led a coup in which the King and leading officials
were killed, many other officials imprisoned, and a republic was proclaimed.
Economic Policies. Economic institutions developed slowly during the early
years of the Iraqi monarchy as the nascent government sought to establish itself and
deal with internal tensions and ripple effects of World War II. With the advent of
mounting oil revenues in the 1950s, Iraqi were able to concentrate to a greater degree
on the nation’s economy. At this time, Iraq’s economy was largely market-oriented,
[ h t t p : / / www.ks g.ha r va r d.e du/ r odr i c k. ]
3 Prepared by Alfred Prados, Specialist in Middle East Affairs, Foreign Affairs, Defense and
but based more on feudal and traditional rather than on modern principles. A
development board, established in 1950, promulgated multi-year plans that
emphasized three priorities: agriculture (including irrigation and flood control),
transportation and communications, and construction. Commentators have praised
the board for using most of the country’s oil income for capital investment and
infrastructure development. Some fault it, however, for over-emphasizing agriculture
and under-emphasizing industry and human resources, which would have appealed
to two increasingly important constituents: the educated elite and the workers.4 By
neglecting these groups, the government may have contributed toward the climate of
disaffection that helped bring on the revolution in 1958, although political opposition
appears to have been a more important factor in the demise of the old regime.
The Military Regimes
Governments. Three military leaders governed Iraq in succession during the
decade that followed the overthrow of the Iraqi monarchy by left-wing nationalist
army officers. The somewhat eccentric General Abd al-Karim Qasim, who led the
coup of 1958, terminated Iraq’s ties with the West, withdrew Iraq from the Baghdad
Pact, and aligned Iraqi policies to a considerable degree with those of the Soviet
Union. Steady erosion of his power base, sapped by growing domestic unrest
(including the beginning of a Kurdish insurgency) and regional quarrels, led to a
second coup in which Qasim was overthrown and killed in February 1963. Qasim’s
successors, Generals Abd al-Salam Arif and Abd al-Rahman Arif,5 took somewhat
more moderate positions on regional and international affairs, established better
relations with other Middle Eastern states (particularly Egypt under then President
Gamal Abd al-Nasser), and adopted a more friendly stance toward the West, while
retaining ties to the Soviet Union. However, the Arif regimes faced further domestic
instability, the Kurdish insurgency continued to simmer, and the government lost
much of its credibility — as did other Arab regimes — after Israel quickly defeated
Arab armed forces during the “six-day war” in June 1967. A year later, on July 17,
Economic Policies. The revolutionary regimes of 1958-1968 reversed many
of the economic policies of the old regime, although like the monarchy they
continued to devote major resources to transportation and communications, as well
as military modernization. General Qasim, the first of the military rulers, and his key
advisors were influenced by socialist models and emphasized several themes which
bore this stamp: a planned economy, elimination of foreign economic influences
(notably in the oil sector), and land reform. The Development Board, associated by
Iraq’s new leaders with the old regime, was abolished and replaced by a ministry of
planning, together with a planning board. In 1961, Qasim moved against one of the
principal vehicles for foreign involvement in Iraq’s oil sector, the partly British-
4 See, for example, Phebe Marr, The Modern History of Iraq, Boulder, Colorado, Westview
Press, 1985, pp. 134-135.
5 General Abd al-Salam Arif came to power in conjunction with the Baath Party but ousted
his erstwhile Baathist collaborators in a third military coup nine months later. President Arif
was killed in a helicopter crash in April 1966 and succeeded by his brother, General Abd
al-Rahman Arif, who was serving as chief of staff of the armed forces.
owned Iraq Petroleum Company (IPC). Law Number 80 expropriated 99.5% of
IPC’s concessionary area, leaving the company only those areas currently in
production. (Iraq subsequently nationalized the company itself, in June 1972.) Land
reform, perhaps the most significant of Qasim’s economic measures, was an
ambitious undertaking designed to break up the old feudal system of land ownership
and redistribute land to peasants; however, implementation was slow as the
government sought to put in place the necessary machinery to administer the
program. One commentator has said the early reform measures “did more to destroy
the edifice of the old regime than to construct the foundations of the new.”6
Basic economic policies inaugurated by Qasim continued under his two
successors, although at a somewhat slower pace. The Arif governments adopted
additional measures to increase the role of the public sector in the economy; in July
1964 it nationalized all banks and insurance companies and in the same month it
nationalized the 27 largest privately owned industrial firms. The government also
reorganized other companies, required profit sharing with workers, and participation
by workers in management. These and similar measures contributed toward capital
flight and departure of trained management, with an accompanying decline in
industrial development during the 1960s.
The Baathist Regime
Government. Baathist leaders quickly established one party rule. By the early
1970s, Saddam Hussein, a dynamic but ruthless party official, had consolidated his
control over the party leadership and government apparatus. In 1979, Saddam
Hussein replaced the aging President Ahmad Hasan al-Bakr as president of the
republic and in several ancillary positions. Saddam’s position as president was
endorsed in 1995 and 2002 by ritual majorities of 99.6% and 100%, respectively.
Parliamentary life, suspended after the overthrow of the monarchy in 1958, was
nominally restored in 1980, when a new law established an elected 250-member
National Assembly; however, most observers have characterized Iraq’s post-1980
assemblies largely as rubber stamps.
After a period of international strain in the early 1970s, Saddam mended fences
with most Middle East countries in the later 1970s and 1980s and reestablished
relations with the United States in 1984. Trade relations flourished with the United
States, which — like the conservative Arabian Peninsula monarchies — regarded
Saddam’s secular regime as a bulwark against the militant clerical regime that came
to power in Iran in 1979. U.S. concerns over Iran in the 1980s tended to obscure
Saddam’s poor human rights record (illustrated by a brutal campaign of repression
and forced resettlement of his Kurdish population) and his efforts to develop
weapons of mass destruction. Meanwhile, the inconclusive Iraq-Iran war, which
lasted eight years and resulted in a total of perhaps a million casualties, left Iraq
significantly weakened and encumbered with an $80 million debt to oil-rich Gulf
states who had helped finance Iraq’s war. The occupation of Kuwait, which Saddam
may have thought would elicit no U.S. action beyond verbal condemnation, resulted
6 Phebe Marr, The Modern History of Iraq, p. 169.
in a major military defeat by a U.S.-led coalition, widespread damage to Iraq, and
stringent economic sanctions, while relegating Iraq to the status of a pariah state.
Economic Policies. During the early years of his rule and in line with the
socialist principles of the Baath Party, Saddam followed economic policies similar
to those of the preceding military regimes. The government employed central
economic planning to manage its resources. Expenditures were divided into three
categories: a government operations budget, an investment budget, and an annual
import budget. Flush with mounting oil revenues, Iraq was able for some years to
pursue its socialist model without having to make hard choices between solvency and
other priorities such as welfare benefits, infrastructure development, and even armed
forces modernization. One commentator observes that in the early years of the
Baathist regime, “[t]he responsibility of the state was not so much to allocate scarce
resources as to distribute the wealth, and economic planning was concerned more7
with social welfare and subsidization than with economic efficiency.”
Growing economic burdens resulting from the protracted Iraq-Iran war led
Saddam to change course in the mid-to-latter 1980s. Abandoning to some degree the
socialist ideology that had dominated Baathist thinking in the past, he embarked on
a more pragmatic course of economic reform. In June 1987, a speech by Saddam
exhorted provincial governors that “[f]rom now on the state should not embark on
uneconomic activity.” That year, the government abolished a labor law that had
guaranteed full employment; laid off thousands of government workers (many of
whom were foreign nationals); transferred other civil service workers to factory jobs;
and took steps to privatize government-owned enterprises, including bus companies,
gas stations, agricultural enterprises, department stores, and factories. In an even
more profound departure from the three previous decades, Iraqi officials announced
in late 1987 that the government would offer inducements for foreign companies to
operate in Iraq by easing former restrictions on foreign direct investment.
Iraq’s invasion of Kuwait and its aftermath dramatically altered the economic
scene in Iraq. Henceforth, Iraqi efforts were concentrated on circumventing the
international sanctions imposed as a consequent of the invasion, taking advantage of
the Oil for Food Program, and obtaining additional assistance through humanitarian
donations, illicit trade, and private barter arrangements. This “twilight” economy
might well have lasted for some time to come had not the Bush Administration
decided that the current situation was no longer tenable and required another
application of military force.
7 Helen Chapin Metz (ed.), Iraq: A Country Study, 4th ed. Washington, Federal Research
Division, Library of Congress, 1990, p. 127.
Demographic and Social Conditions
Overvi ew 8
Before 1990, Iraq was one of the more prosperous and advanced countries of the
Arab world. It was an upper middle income country with a substantial middle class,
considerable technical capacity, high (by regional standards) female participation in
education and the economy, and relatively high standards overall of education and
health care. Since 1990, economic conditions in Iraq have deteriorated and
education, health and living standards have declined. A new generation has grown
up having had little participation in or memory of the earlier years. Social, religious,
and ethnic differences have become more pronounced and perhaps more significant.
Iraq’s population has grown steadily in recent decades, from 9.4 million in 1970
and 13 million in 1980 to 22.3 million in 2000, a rate of increase comparable to most
other countries in the region.9 This is despite population losses due to war, civil
conflict, and emigration. In 1965, 51% of the population lived in urban centers. The
urban share rate reached 73% in 1988 and 77% in 2000. Baghdad held 35% of the
population in 1960 and 55% in 1980. Its share has since declined to 27% as the other
major population centers grew in size. This broadened pattern of urbanization is
typical for most advanced developing countries. In 1989, Iraq had life expectancy
and mortality rates comparable to those for Saudi Arabia, Libya, and other high
income Arab countries.10 By 2000, life expectancy in Iraq had fallen to 61 years
while it had grown in the Middle East as a whole to over 67 years. Likewise, the
Iraqi mortality rate for children under 5 rose from 95 per thousand in 1980 to 121 in
2000. Primary school enrollment rates fell from 100% of the relevant age group in
In the late 1980s, Iraq’s middle class was a highly urbanized, secular, well-
educated group, consisting mainly of state employees and civil servants. According
to one estimate, the middle class rose from 28% of Iraq’s urban population in 1958,
to 54% in 1988.11 The middle class benefitted greatly from the expansion of
educational and government employment opportunities and from increased levels of
government revenue. Since 1991, however, the lower ranks of state employees
suffered greatly from years of war, economic sanctions, and the general decline of
government revenues. Salaries did not keep up with hyperinflation. Many families
were obliged to sell household items and other assets. The flow of population to
cities also swelled the ranks of the urban poor. Unemployment or underemployment
8 Prepared by Martin Weiss, Analyst in International Trade and Finance, Amy Thayer,
Research Associate, and Jonathan Sanford, Specialist in International Political Economy,
Foreign Affairs, Defense and Trade Division.
9 Unless otherwise stated, data in this section were taken from the World Bank’s World
Development Indicators, 2002, and its World Development Reports for 1990 and 1992.
10 Life expectancy (years) in 1989: Iraq 63; Libya 62; Saudia Arabia 64/ Crude death rate
(per 1,000): Iraq 8; Libya 9; Saudi Arabia 8.
11 War in Iraq: Political Challenges After the Conflict, International Crisis Group Middle
East Report No. 11, March 25, 2003.
among former rural residents was a problem and has become more so in the past
dozen years. In recent years, Iraqis have come to rely increasingly on kinship
networks and religious charities for support the government no longer provides.
Iraq’s population comprises a wide diversity of religious and ethnic groups.
Some 95% of the people are Muslim, Islam being the officially recognized religion.
Most of the Arabs in Northern Iraq, the Bedouins, the Kurds, the Turkomans and
some inhabitants of Baghdad and Basra are Sunni, while most Arabs in the South are
Shiite. There are also small Christian communities, particularly near Mosul, as well
as other small groups such as the Sabian and Yazidis.12 While the majority of Iraqi
Muslims are Shiite, Sunnis are disproportionately represented among Iraq’s wealthy
Muslims. The predominance of Sunnis in Iraqi political, economic, and defense
institutions goes back to the Ottoman period and continues to be a major grievance
of the Shiite community. The government of Saddam Hussein sought to mold from
these disparate groups a common sense of Iraq nationality. It was successful in part
during the Iran-Iraq war, as few Shiites went over to support the Iranian side despite
commonalities in religion. Whether that identity is strong enough to weather the
current difficulties remains to be seen. The answer to that question will have
considerable bearing on Iraq’s future economic and political prospects.
Role of Women in the Government and Economy of Iraq13
Iraq has a mixed record in its treatment of women. Under the relatively secular
Baathist regime, women enjoyed significantly more privileges and opportunities (at
least in theory) than they did under some traditional regimes that enforce Islamic
tenets more strictly. Article 19(a) of the Provisional Constitution of 1970 specifies
that “Citizens are equal before the law, without discrimination because of sex, blood,
language, social origin or religion.” Under the Baathist regime, women could vote,
serve in the Peoples’ Assembly (Iraq’s rubber stamp legislature), and serve in the
police. Though not subject to conscription, women holding university degrees in
health care could serve in the armed forces, mainly in health care fields, and
manpower shortages during the Iraq-Iran war of 1980-1988 led the government to
allow women in other branches of the military service as well. According to the most
recent U.S. State Department report on human rights practices, the government
enacted laws to equalize women’s rights in divorce, landownership, taxation, and
suffrage. Women made strides in education; for example, female attendance in
primary schools rose from 34% to 95% between 1970 and 1980. Government
programs to improve the status of women helped increased job opportunities for
women; in 2002, women comprised 20% of the labor force, and some were
represented in medicine, engineering, academia, and the civil service.
In practice, women faced various forms of discrimination and mistreatment
under Saddam Hussein’s regime, despite legal protections. For example, Iraqi police
and security officers frequently raped female detainees despite laws to the contrary.
Furthermore, as the Iraqi regime sought to polish its Islamic credentials and appeal
12 The Middle East and North Africa, 2003, Europa Publications, 2002, pp.477-78.
13 Prepared by Alfred Prados, Specialist in Middle East Affairs, with the assistance of Amy
Thayer, Research Associate, Foreign Affairs, Defense and Trade Division.
to tribal groups in the aftermath of the 1990-1991 Gulf war, the government became
more lax in implementing official guarantees of equality. “Honor killings” of women
by male relatives increasingly went unpunished. Despite greater access to the labor
force, most female employees tended to work in fields where they had little contact
with men and no authority over male employees. Even legal guarantees of women’s
rights had loopholes; women under age 45 are not allowed to travel outside of Iraq
unless accompanied by a male relative. Finally, many women from more traditional
segments of Iraqi society did not benefit to a significant degree by the progress
achieved in women’s status over the past 30 years.
The status of women in a post-Saddam era is open to conjecture. Some groups,
particularly more fundamentalist elements within the Shi’ite Muslim community,
probably look askance at an expanding role for women. Should such groups find
themselves in a position to influence or dominate a post-Saddam government, they
might seek to dismantle the legal protections women have gradually gained in recent
years. Already, press reports indicate that many Iraqi women are feeling “sidelined”
and have become fearful of moving about freely as they did before.14 Should Iraq
move toward a less centralized system of government or even toward fragmentation,
some of the resulting mini-states or entities might pursue widely differing gender
policies. The issue of women’s roles in the months ahead will be an important one
for those who seek to shape the future of Iraq.
Iraq’s Economy in Recent Years
Macroeconomic Policy and Conditions15
The structure of the Iraqi economy has been characterized by heavy state control
and involvement since the time of the Ottoman empire. According to one source,
different governments from the British mandate and the monarchy, to Baathist rule
and Saddam Hussein have all had the common goal: to fix prices and to stabilize
consumption.16 Government control of the economy tightened from one regime to
the next. Nevertheless, an underlying goal was to satisfy the large sector of the
population that was employed by, and dependent on, the state. During the 1970s, hard
choices were avoided as oil revenues financed development projects and obscured
economic mismanagement resulting from state control of the economy. The eight
year war with Iran drained the economy of its surplus oil revenue and forced the
regime into debt. The first Gulf war and economic sanctions imposed new constraints
on an already crippled economy. Economic statistics were considered state secrets
during the Baathist regime and were suppressed or not kept at all. Such fragmentary
data that do exist indicate that the Iraqi economy since 1980 has suffered absolute
14 “Iraqi Women Out of the Picture,” Washington Post, May 17, 2003.
15 Prepared by Ian Fergusson, Analyst in International Trade and Finance, Foreign Affairs,
Defense and Trade Division.
16 Kirin Aziz Chaudhry, “Consuming Interests: Market Failure and Social Foundations of
Iraqi Etatisme,”in Iraq’s Economic Predicament, ed. Kamil Mahdi (Reading UK: Ithaca
Press, 2002), p.234.
declines in gross domestic product (GDP), chronic inflation, wholesale depreciation
of its currency, virtually non-existent foreign investment, and the accumulation of a
crushing debt burden.
Economic Policy. As noted above, the predominance of the state in the
economic affairs of the nation was confirmed by a series of expropriations and
nationalizations in the 1950s and 1960s. In agriculture, expropriation of land
occurred faster than redistribution to the detriment of that sector. The petroleum
industry was nationalized in stages from 1961 to 1973. Large-scale industry,
banking, insurance and services were nationalized in 1964. These nationalizations
also enabled the government to weaken rival power centers, whether landlords, the
Shia business community or foreign oil companies.
From 1968, the Baathist regime placed greater emphasis on the industrialization
of the economy. The government embarked on two five-year development plans
between 1970-1980. The first plan was primarily concerned with “economic
independence” — the final nationalizations in the oil sector and investment in that
sector. The modesty of the goals reflected a consolidation period for the regime, and17
in part, the lack of money to achieve more far reaching development goals. This
changed with the oil boom following the first Arab oil embargo. The second five-year
plan (1976-80) reflected an Iraq that was flush with cash and ready to spend money,
nearly $14.2 billion on economic development, often indiscriminately. Heavy
industrial complexes such as the petrochemical complex at Basra, the iron and steel
mill at Khor al-Zubair, the development of sulphur and phosphate extraction and
processing, and the fertilizer industries were developed during this period.
Much of this industrial structure was not effectively utilized after the outbreak
of the war with Iran in 1980, due largely to the shortcoming of Iraq’s administrative
apparatus. Direct attacks on Iraqi industry around Basra were less significant than
the Iraqis’ inability to obtain inputs, spare parts or to export oil or other products due
to damaged ports. Iraqi economic management during the war was predicated on a
belief that Iraq could fight a quick and limited border war without disrupting the18
home front or its economic development plans. To pull this off, the regime
borrowed to finance its continued spending.
As the war drained away funds that could have been utilized for economic
development, weak points in the economic development strategy became apparent.
Despite the pervasiveness of the state sector in the management and planning of the
economy, there seemed to be very little actual planning. An industrial infrastructure
was developed seemingly without regard for transportation or supply bottlenecks.
There were no clear priorities for development. Workers often did not possess the
technical capabilities that were required to operate the plants and there existed a
shortage of managerial and administrative skills to run the public and private sector.
Many of these shortcomings reflected problems in the state sector itself. Officials
17 Anthony A. Cordesman and Ahmed S. Hashim, Iraq: Sanctions and Beyond, (Boulder
CO: Westview Press, 1997), p. 128.
18 Ibid, p. 133.
were often unwilling to assume authority or accountability, and rigid (and
ideologically driven) economic policies were common.19
As noted, the government embarked on a series of economic reforms designed
to make the economy more flexible and more market-driven in 1987. It removed
price controls on commodities. It privatized several sectors of the economy either
by selling assets directly to domestic investors, through public offerings on the newly
constituted Baghdad stock exchange, or through long-term leases of state assets. The
most prominent of these divestments was Iraqi Airways, in which a majority of the
enterprise was sold off to the public. It also lowered or removed state subsidies to
enterprises remaining in government hands and for agriculture. The country’s labor
law, which largely guaranteed lifetime employment, was abolished and thousands of
white collar officials of state enterprises were laid off. The government also eased
direct investment restrictions, allowing limited foreign ownership of investment
projects. This last reform reflected the increasing unwillingness of western creditors
to loan money directly to the Iraqi government for development projects.20
These economic reforms did not long survive the end of the Iran-Iraq war. By
1989, the economic crisis deepened and exacerbated the decline in living standards
for most Iraqis, creating a threat to the viability of the regime.21 In addition, the
success of the privatization program was disappointing with many enterprises sold
for under either book or replacement value. With the economy facing dire straits, the
government reimposed price controls, re-nationalized some state enterprises, and
raised industrial and agricultural subsidies.
The first Gulf war and the subsequent sanctions wreaked havoc on an already
distressed economy. The bombing campaign of 1990-1991 severely damaged or
destroyed much of the petroleum, transportation, power and industrial infrastructure.
The government initially channeled its efforts to repairing the oil infrastructure,
communications, and the state security apparatus. It instituted a rationing program
to spread available food and consumption items. However, government policy
essentially has been reactive, because the sanctions regime (and the regime’s
priorities) left little for reconstruction and development of the economy. Because Iraq
relied on international trade in oil for the functioning of its economy, the sanctions
regime had an immediate deleterious effect. The Oil for Food Program ameliorated
this situation somewhat, but shortages, rationing, hyperinflation, and the absence of
international trade characterized the Iraqi economy in the 1990s.
Gross Domestic Product (GDP). Economic data were considered state
secrets during the Hussein era, thus no reliable data are available for much of the
period. The figures available for the sanctions era are based on extrapolations from
oil production and anecdotal evidence. According to one source who estimated GDP
19 Mahdi, “Rehabilitation Prospects...”, p. 42; Cordesman and Hashim, Iraq: Sanctions and
20 Metz. Iraq: A Country Study, p. 128-9.
21 Chaudhry, p. 233.
for the period 1950-2000 on constant 1980 dollar prices,22 the gross domestic product
peaked at $53.9 billion in 1980 because of the oil boom, and fell by about one-half
to $26.9 billion in 1989. GDP reached its low point in 1994 falling to $6.5 billion
under the weight of economic sanctions. Since the resumption of oil shipments under
the Oil for Food Program, this source estimates GDP has recovered to $46 billion.
However, these figures may be suspect. It seems optimistic to report that the Iraqi
economy in the late 1990s could nearly recover to its 1980 level in constant dollars
in the presence of sanctions, a heavily depreciated currency, and chronic inflation.
However, the figures may reflect the use of the fixed exchange rate of 1ID=$3.11,
although the usefulness of such figures is limited.
Figure 1. Iraq’s Gross DomesticAccording to the Economist23
ProductIntelligence Unit (EIU), Iraq’s GDP
stood at $66.2 billion 1989, measured in
nominal dollars. In the 1996-2002
period (see figure 1), the EIU data also
showed a gradual recovery as GDP (in
nominal dollars) increased from $10.8
billion in 1996 to $31.8 billion in 2000,
before falling back to $26.1 billion in
2002.24 These figures are subject to a
wide margin of error, given the limited
data on which they are based. Another
source, quoted by GAO,25 estimates
nominal GDP, in purchasing power
parity terms, to have risen from $9.2
billion to $14.8 billion from 1996-2002.
Per capita GDP figures have also experienced wide swings. According to Al-
Nasrawi, GDP per capita reached $4,083 (in 1980 constant dollars) at the height of
the oil boom in 1980. By the end of the Iran war, he says, it had plummeted to
$1,537 and reached a nadir of $343 in 1996. Again, the Oil for Food Program
boosted per capita GDP in the late 1990s to reach $1,941 in 2000. In nominal
dollars, EIU figures indicate per capita GDP was $3,675 in 1987. From 1997-2000,
EIU reported per capita GDP increased from $503 to $1,385, before falling to $1,184
in 2001. Per capita GDP, in nominal terms was estimated to have risen from $448
to $644 from 1996-2002.26 Such per capita figures, as they are derived from the GDP
data above, are also highly speculative. Income inequality probably grew during this
period. With wealth being concentrated increasingly in the hands of regime
22 See Abbas Al-Nasrawi , Iraq’s Burdens: Oil, Sanctions, and Underdevelopment,
(Westport CT: Greenwood Press, 2002), p. 103.
23 Economist Intelligence Unit, Country Profile Iraq, 2002/2003, July 24, 2002. Obtained
24 Using purchasing power parity, the CIA estimates 2001 GDP to be $59 billion.
25 GAO-03-792R (GAO), Rebuilding Iraq, May 15, 2003, Enclosure 1, p.6. Source, Global
adherents, most Iraqis probably subsisted on a much smaller figure than the average
Figure 2. Sectoral Composition of GDP,
Attempts to disaggregate Iraq’s GDP into its sectoral components are also
hampered by the lack of hard economic data. Figure 2 shows one source’s effort in
1989.28 According to this source, oil comprised about 60% of the economy during the
1980s. Its share declined as the economy shrank with the imposition of sanctions, but
later recovered as oil became the sole source of export earnings during the 1996-2003
U.N. Oil for Food Program. Agriculture’s share of GDP had been declining since
the 1960s. However, since the 1991 war, its share of GDP reportedly expanded as the
economic pie shrank and food imports were cut off.29 The resumption of agricultural
imports (under the OFFP) has caused a decline of domestic production and probably
shrank the sector’s share of GDP once again. Although the industrial sector
accounted for an increased share of GDP in the 1970s and 1980s due to extensive
economic development programs, later war damage and diminished operability
27 The figures from EIU and Global Insight do not appear to be directly comparable. The
EIU data seem to use the exchange rate conversion method for calculating GDP. In other
words, it takes the local currency value of the economy and converts it to dollars using the
prevailing exchange rate. By contrast, the PPP method looks at what local people can buy
from a common international marketbasket of goods using their local income and then states
the U.S. dollar value of those goods as though they were purchased in the United States. In
effect, it shows what standard of living those people would have if they lived in the United
States on their dollar-equivalent local income. The two methodologies often produce widely
different results, both of which are accurate in their own way but are not interchangeable.
28 Economist Intelligence Unit, Country Profile: Iraq, 1995-1996, p. 13.
29 One source, Ahmad, p. 179 reports agriculture share of GDP expanding during the 1980s.
However, these figures are hard to interpret as they are based on current dinars during a
period when GDP in dollar terms was declining.
probably lowered its contribution to GDP. Both industry and agriculture’s true share
of GDP, after accounting for subsidized raw materials and inputs, may have been
overstated during the 1970s and 1980s.
Currency and the Balance of Payments. The Iraqi dinar was long
considered a strong currency aided by oil revenues and rising foreign exchange
reserves. Some of this reputation may be attributable to the decision, by the National
Bank of Iraq in the 1950s, to maintain 100% reserves behind outstanding domestic30
currency. The official rate was variously set between $3 per dinar to $3.38 per
dinar in the 1970s, the last official rate of $3.11 per dinar was set in 1982. During
the 1970s, the official and markets rates generally corresponded and by 1980 the
country had $35 billion in foreign exchange reserves. By 1987, that figure had fallen31
to $2 billion. The currency depreciated steadily during the Iran-Iraq war, and the
pace of descent quickened after the first Gulf war. One estimate had the currency32
depreciate from 4 to 8 dinars per dollar in 1990-91. The advent of sanctions
paradoxically stabilized the currency for a brief time as foreign exchange transactions
virtually ceased. However, the onset of limited food and medicine trade under
sanctions renewed the downward slide. The dinar reached an all-time low of 2,660
per dollar in December 1995. It has slowly appreciated from that low, yet has
fluctuated widely from 1,000 to 2,300 dinars per dollar in the period 1997-2001 on
the black market. Although the regime did not alter the official exchange rate, it
acknowledged the rate differential in 1999 by allowing state banks to exchange hard
currency at the rate of 2000 per dollar. The depreciation of the exchange rate in the
1990s was enhanced by capital flight and emigration, the restrictions of the sanctions
regime on exchange transactions, and the progressive dollarization of the economy.
Up to the 1980s, the country ran consistent balance of payments surpluses with
oil sales producing increasing foreign exchange reserves. While the earnings of the
oil fields allowed the government to implement development plans without becoming
indebted, the dependence on oil revenue also had less salutary effects on other sectors
of the economy. With increased income from oil exports, the value of the dinar
appreciated. This made the country’s non-oil tradable goods less competitive with
imports and depressed those sectors of the economy. (See the discussion of “Dutch
Disease” in the concluding discussion of factors affecting the non-oil.) Falling oil
prices in the 1980s put heavy pressure on Iraq’s balance of payments. Iraq responded
by increasing its oil production and by borrowing heavily from abroad. The problem
was acute by the end of the Iran war. Relatively low oil prices, the exhaustion of its
foreign exchange, growing import bills, and debt service payments all strained Iraq’s
balance of payments.
Ironically, in the 1990s, Iraq regained a trade surplus position with sanctions and
the Oil for Food Program in place. Imports were tightly controlled and income from
oil exports exceeded outlays for imports — even after 25% to 30% of OFFP revenue
was diverted for war compensation. As of May 2003, the OFFP reported it had an
30 Metz. Iraq, a Country Study, p. 131.
31 Middle East and North Africa Yearbook, 2003 p. 599.
32 Mahdi, “Rehabilitation Prospects...”, p. 48.
unencumbered balance from oil sales of $3.2 billion maintained in escrow accounts.33
It should be noted, however, that Iraq made no payments on its foreign debt after
Inflation. As with other indicators, data on inflation are spotty and, during the
1990s, price data have a highly anecdotal quality. Before the oil boom, the Iraqi
economy was characterized by price stability with an inflation rate at 5-6% during
the period 1960-73.34 This source calculates inflation increasing from 18% to 68%
between 1975-79 as a consequence of substantial currency inflows related to the oil
boom.35 Prices continued to rise during the Iran-Iraq war as resources were diverted
toward the military and government borrowing from the central bank expanded the
monetary base. Inflation was recorded at 95% in 1980 and had increased to 400%
by 1989. During the 1990s, a period of hyperinflation occurred. The government
continued to print money to meet expenditures while economic sanctions shut off the
supply of imported goods leading to a classical monetary overhang. A yearly inflation
rate of upwards of 2,000% per cent was reported in open market food prices between36
1990-1991. Another source estimated that inflation increased 5,000% between 1990
and 1995.37 In the period 1996-2001, however, another source estimated that
consumer price inflation gradually declined from about 200% to about 60% due to
the reappearance of goods as a result of the Oil for Food Program.38
The deepening inflationary spiral had many consequences. Most importantly,
it led to a decline in living standards and the impoverishment of the great majority
of the population, especially of state sector employees whose salaries did not keep
up with inflation. Two decades of high inflation — at times, hyper inflation — also
led to the loss of confidence in the dinar as a store of value. This led to the
widespread dollarization of the economy. Many Iraqis also sought to convert their
liquid assets into other assets, real estate and gold. Goods were purchased and39
hoarded when available and then bartered for other goods. Another consequence
of inflation was capital flight, as money left the country to avoid further erosion in
its value. Declining confidence in the currency and capital flight further weakened
the economy and led to new rounds of inflation, deteriorating confidence and capital
flight. These patterns of behavior will need to be changed if the economy is to
recover. (See the concluding discussion of monetary policy below.)
Foreign Investment. Foreign direct investment (FDI) was discouraged in the
Baathist era for reasons of economic nationalism. During the 1970s oil boom, Iraq
paid directly for economic development projects (plants, industry, and infrastructure)
33 United Nations, Office of the Iraq Program, Oil for Food Program site,
34 Abbas Al-Nasrawi, The Economy of Iraq, (Westport CT: Greenwood Press, 1994), p. 164
36 Mahdi “Rehabilitation Prospects...”, p. 48.
37 Cordesman and Hashim, Iraq: Sanctions and Beyond, p. 141.
38 Economist Intelligence Unit, Country Profile: Iraq, 2002-3
39 Al-Nasrawi , The Economy of Iraq, p. 165.
without resorting to credit or foreign ownership. During the Iran-Iraq war, Iraq
continued to contract for economic development projects, but it borrowed from
overseas creditors to pay for them. The regime attempts at economic reform in the
late 1980s provided for some limited venues for foreign investment. However, such
reforms provided little incentive for foreign investors, and the UN sanctions regime
specifically prohibited foreign investment. Thus, Iraq has little experience with
foreign direct investment and will require extensive capacity and institution building
in order to attract and facilitate such investment.
Foreign Debt. Iraq’s indebtedness primarily has been the result of the war
with Iran. Iraq traditionally had been free of foreign debt and had accumulated
foreign reserves that reached $35 billion by 1980. These reserves were exhausted in
the early stages of the war. One source cites estimates of Iraqi arms purchases alone
during the 1980s as between $52 - $102 billion.40 Borrowing was heightened by the
government borrowed increasingly to pursue its economic development strategy.
Foreign creditors initially were willing to provide loans to Iraq in order to preserve
access to the Iraqi economy, but as oil prices slumped in the mid-1980s investor
enthusiasm waned.41 After the war with Iran ended, Iraq faced a particular concern
with its short-term debts, estimated at $35 to $45 billion, from western creditors.
However, the regime was resistant to western attempts to reschedule the debt on
terms more favorable to Iraq. This stance was, in part, due to its reluctance to
engage in greater transparency with regard to its economy.42 Based on the
calculations of one source, Iraq has the highest debt burden in the world in terms of
debt to GDP or debt to exports.43
Figures vary widely as to the extent and composition of the debt. In 1991, at the
end of the first Gulf war, Iraq told the United Nations that its debt totaled $42.1
billion. This submission stated that this debt had a maturity of five years at 8%44
interest. This figure excluded interest and funds from the Gulf Cooperation Council
(see below). OECD figures indicate that Iraq’s outstanding total debt was $18.4
billion at the end of 2001. However, these figures only include OECD country
bilateral loans and export credits. The joint Bank of International
Settlements/International Monetary Fund/ World Bank debt tables list the debt as
$26.6 billion at the end of 2001. This likely does not include accrued interest. The
Economist Intelligence Unit estimated total debt in 2002 to be $64.3 billion. Of this,
EIU estimates $35 billion is long-term principal, $8.5 is short-term principal and45
$21.7 billion is interest arrears. Another estimate placed accrued interest at
between $23.6 billion to $30.1 billion depending on the whether the interest is
40 Mahdi,”Rehabilitation Prospects...”, p. 60
41 Iraq Country Study, p. 129.
42 Cordesman and Hashim, Iraq: Sanctions and Beyond, p. 134.
43 Al-Nasrawi, Iraq’s Burdens: Oil, Sanctions, and Underdevelopment, p. 145.
44 Mahdi, “Rehabilitation Prospects...”, p. 60.
45 Economist Intelligence Unit, Country Profile: Iraq, 2002-3, Table 16.
capitalized.46 A survey of the debt conducted by the Center for Strategic and
International Studies breaks down public and private debt at more than $108.1
billion, $47 billion of which is calculated as interest. The CSIS figures include an
estimate of $30 billion payable to the Gulf states.47
Iraq’s foreign debt originated from several sources. Western credit provided
military assistance, development finance and export guarantees. This assistance has
been estimated at $35 billion in principal. In the 1980s, the Soviet Union and other
eastern European states provided loans for military assistance and development
projects estimated at $7-8 billion. The Gulf states of Saudi Arabia, Kuwait, and the
United Arab Emirates provided between $30-40 billion to fight Iran. One source
suggests much of this latter figure represents oil sold on behalf of Iraq from the two
shared neutral zones between Iraq and Kuwait and Saudi Arabia, respectively.48 The
Gulf states consider these funds to be loans, but Iraq considered these to be grants in
a common endeavor to curb the spread of Iranian fundamentalism.
Compensation Claims. Claims have been made on Iraq based on damage
inflicted on Kuwait as a consequence of the war with Kuwait. The United Nations
Compensation Commission (UNCC) has received and processed such claims since
its establishment in 1991, pursuant to U.N. Security Council Resolution 692. The Oil
for Food Program provided that 30% of oil sales would be used to settle
compensation claims authorized by UNCC. During the operation of this process,
individual and family claims of $148 billion were received, and from that $43 billion
has been awarded. Oil sales had netted $16 billion for this fund by the end of 2002.
Additional claims of $172 billion from companies, governments, and international
organizations have been received, though not resolved, by the UNCC.49 This figure
does not include potential reparations claims by Iran, estimated by one source at $97
billion, for damaged inflicted during the Iran-Iraq war. 50
Pending Contracts. This category of claims represents contracts signed with
public and private foreign companies. According to CSIS, the overwhelming
majority of these contracts have been with Russia, although companies from the
Netherlands, Egypt, the United Arab Emirates, China, and France have also been
identified. These contracts have been estimated at $57.2 billion primarily in the
energy and telecommunications sectors. Many of these contracts have not been
executed due to the sanctions regime, and it is unclear whether they will be honored.
46 Ahmed M. Jiyad, “The Development of Iraq’s Foreign Debt,” in Iraq’s Economic
Predicament, p, 115.
47 Center for Strategic and International Studies, A Wiser Peace: An Action Strategy for
Post-Conflict Iraq, Supplement One, “Background Information on Iraq’s Financial
Obligations”, January 23, 2003.
48 Mahdi, “Rehabilitation Prospects...”, p. 61.
50 Al-Nasrawi, Iraq’s Burdens: Oil, Sanctions, and Underdevelopment, p. 158.
The Oil for Food Program51
In August 1990, the United Nations Security Council imposed on Iraq
(Resolution 661) a comprehensive international trade embargo as a consequence of
its invasion of Kuwait. Following the first Gulf war, the Security Council resolved
in April 1991 (Resolution 687) that the embargo on oil exports established in 1990
would remain in effect until Iraq fully complied with U.N. efforts to end its weapons
of mass destruction (WMD) programs.
The first version of the OFFP was approved by the Security Council on August
15, 1991 (Resolution 706). It allowed Iraq to export $1.6 billion in oil every six
months. Iraq rejected it as too limited in scope and an infringement on Iraq’s
sovereignty. Without oil revenues, Iraq was not in a position to import sufficient
quantities of food and medical supplies, and living conditions in the country
In April 1995, the Security Council adopted a new plan (Resolution 986) which
allowed Iraq to export $2 billion in oil every six months. A memorandum of
agreement between Iraq and the United Nations went into effect in May 1996 and the
first oil exports occurred in December 1996. When the Secretary General determined
that the program was not meeting the food and medical needs of the Iraqi people, the
Security Council raised the oil export ceiling in February 1998 (Resolution 1153) to
$5.256 billion every six months. The Council abolished the export limit in December
1999 (Resolution 1284) to encourage Iraqi cooperation with the effort to eliminate
its weapons of mass destruction.
Under the OFFP, Iraq’s State Owned Marketing Organization (SOMO) sold oil
(under the supervision of the U.N. Sanctions Committee) to international oil
companies. The oil was exported through an Iraq-Turkey pipeline and from Iraq’s
terminals in the Persian Gulf. The purchasers deposited their payments directly into
a U.N.-monitored escrow account held at the New York branch of France’s Banque
Nationale de Paris (BNP). Recently, U.S. firms purchased a third to half (often the
latter) of the 2.1 million barrels Iraq exported daily under the OFFP program.
The revenues from OFFP exports were allocated by the Sanctions Committee.
Most recently, 25% of the total was transferred to the U.N. Compensation
Commission to pay reparations to the victims of Iraq’s invasion of Kuwait. Another
59% was allocated for purchases of humanitarian items for Baghdad-controlled Iraq
and 13% was used for purchases by the Kurdish-controlled areas in northern Iraq.
The U.N. took the remaining 3% to fund the costs of administering OFFP and the
UNMOVIC weapons inspection program.
Under the OFFP, Iraq purchased goods and services directly from supplier firms.
The OFFP program specified what share of the oil revenues could be spent for
51 Prepared by Kenneth Katzman, Specialist in Middle East and African Affairs, Foreign
Affairs, Defense and Trade Division. For more on the Oil for Food Program, see CRS
Report RL30472, Iraq: Oil-For-Food Program, International Sanctions, and Illicit Trade.
various categories of goods. The Sanctions Committee reviewed all contracts for
such purchases. Any member of the Committee could place a “hold” on a contract
for goods to be imported by Iraq. The United States often placed holds on exports
of dual use items (civilian items that could have military applications).
Oil Resources — Overview. Iraq has 112 billion barrels of proven oil
reserves, the world’s second largest endowment. The U.S. Department of Energy
(DOE) also notes that “probable” and “possible” reserves may be as high as 220
billion barrels.53 Saudi Arabia, with 260 billion barrels, holds the largest proven
reserves. While Iraq’s reserves are smaller than those of Saudi Arabia, they rank well
ahead of other important oil producers, including the United States.
The United States — which by contrast has high output from relatively small
reserves — produces 5.6 million barrels per day (mbd) from 24 billion barrels of
proven reserves. Iraq was able recently to produce 2.8 mbd of output from an
estimated 1,500 to 1,700 operational wells. Compared with U.S. production, which
comes from over 150,000 wells in Texas alone, Iraqi oil can be produced easily and
at low cost. The ease of production in these fields has permitted Iraq to remain in
production since 1980, when its war with Iran began, without a steady supply of
spare parts, state-of-the-art technology, or the ability to drill many new wells.
Adding to the appeal of Iraq’s resources are possibilities of much greater output
from the country’s 73 known fields — of which only a fraction are in production.
Greater reserves could result from re-evaluation of known fields using the advances
in geophysical science made during the past 25 years. And there is a likelihood of
even further new field discoveries — especially in the unexplored Western Desert
region54 — which could boost reserves and possibly raise production even further.
Iraq certainly holds the potential to become the world’s largest oil producer. For
this to become a reality, however, the Iraqi oil industry would require large financial
investments for all manner of technical services, capital equipment, and
infrastructure. As a recent Council on Foreign Relations report notes, Iraq’s oil
sector is being held together by “Band-aids.” “War, sanctions and political55
manipulation have all seriously challenged Iraq’s highly skilled oil industrialists.”
The fact that Iraq’s oil output has been so resilient speaks to the quality and size
of the underlying resource as well as the abilities of those keeping the oil fields
52 Prepared by Larry Kumins, Specialist in Energy Policy, Resources, Science and Industry
53 Energy Information Administration (EIA). Iraq Country Analysis Brief, February 2003.
54 EIA, Iraq Country Analysis Brief, February 2003. p. 2.
55 Guiding Principles for U.S. Post-Conflict Policy in Iraq, Report of an independent
Working Group Cosponsored by the Council on Foreign Relation and the James A. Baker
III Institute for Public Policy of Rice University. January 2003. See Addendum, page 17.
operating. With sufficient technology, spare parts, and infrastructure reconstruction,
Iraq’s oil fields should be able to return to output levels of the recent past and reach
higher levels in a few years.
Oil Production — History. Iraq’s all-time peak oil production was 3.5
mbd56 in 1979, just prior to the war with Iran. Output dropped sharply as the war
began and gradually recovered to 2.9 million barrels per day by 1989. The Gulf Crisis
sharply cut production again in 1990. U.N. sanctions imposed after the war
prohibited oil exports, so post-war production was limited to the amount needed to
meet internal demand plus small amounts that may have been illegally exported.
Domestic demand was estimated at 450,000 barrels per day before the recent war
began. Figure 3 shows Iraq’s annual oil output and domestic consumption since
Iraqi oil exports resumed under the Oil for Food Program in May 1995.
Production rose accordingly, peaking at 2.6 mbd in 2000. During 2001 and 2002,
frequent disputes with the United Nations over pricing and other aspects of program
administration led Iraq to halt exports sporadically. Despite approaching 3.0 mbd on
a monthly basis several times, annual output trended down, with a brief spurt above
2.5 mbd during January and February 2003. This spurt suggests that, despite a
shortage of parts, production techniques that allowed water intrusion into oil-bearing
geologic zones, isolation from increasingly powerful geophysical technology,
inability to work-over production wells, and generally deteriorating infrastructure,
Iraq’s oilfield workers were able to sustain relatively high production capability.
Current Situation. Iraq’s oil deposits lie in two general regions: the north,
in and around Kirkuk, and in the south, in and around Basra and Umm Qasr, near the
Persian Gulf port of Mina al-Bakr. Production is centered on the Rumaila field — the
largest producing field in the south, with 663 producing wells. Together with
adjacent fields, it has produced more than half of Iraq’s output. In the north,
production from Kirkuk (the largest northern deposit) and satellite fields has
accounted for about 40% of Iraq’s production since it restarted under the OFFP.
Port facilities for southern oil were severely damaged during the first Gulf war
but were sufficiently repaired to handle the amounts of oil — exceeding 1 mbd —
exported under the Oil for Food Program. Oil from Kirkuk and nearby fields was
exported via the 600-mile pipeline to Ceyhan, Turkey, a port on the Mediterranean.
This 40-inch pipeline — which appears operable — has a capacity of 1.1 mbd,
although it is not clear that it can be run at that throughput level in its current
condition. A second, parallel pipeline with 500,000 barrels per day of nominal
capacity exists, but it is reportedly inoperable.57 Potentially, the two pipelines could
have a combined capacity of 1.6 mbd, although extensive rehabilitation of the unused
pipeline and some repair to the operable pipeline would likely be needed.
56 Energy Information Administration, Monthly Energy Review, Table 11.1.
57 EIA. Iraq , Country Analysis Brief. p. 6.
Figure 3. Iraq's Oil Production and
Consumption, 1980-2002 (Est.)
Million Barrels per Day
Note: Production includes crude oil, lease condensate,
natural gas liquids, ethanol, and refinery gain.
Source: EIA, Feb. 2003
In February 2003, DOE characterized Iraq’s near-term production capacity “at
no higher than about 2.8-3.0 million barrels per day, with net export potential of
around 2.3 to 2.5 million barrels per day....”58 It appears possible that this level of
production could be reached in less than a year were oil production facilities,
pipelines, ports, and other infrastructure in operation before the current conflict to be
restored and deferred maintenance performed.
Iraq’s Oil Industry — Current Status. While oil field security is in the
process of being established, oil to meet domestic needs is beginning to flow. Platts59
Oilgram News reports that production has reached 700,000 barrels per day,
500,000 from northern fields and 200,000 from the south. This is more than current
daily needs, although refineries are unable to turn this oil barrel-for-barrel into the
products desired, chiefly gasoline and propane. These fuels remain in short supply.
An interim oil minister, Thamer Abbas Ghadhban, has been appointed, and is
soliciting new bids for contracts of Iraqi crude. Brig. Gen. Robert Crear heads the
U.S. Army Corps of Engineers team that is helping rebuild the oil industry and
infrastructure. He is aided by Phillip Carroll, a former head of Royal Dutch/Shell’s
U.S. operations. The Halliburton subsidiary KBR is performing the work using local
oilfield workers. The Washington Post reported the Minister’s goal is to increase
production to 1.5 mbd “within weeks.” More recently, Platts reports a June 1 goal
of 1.13 mbd, although this goal may be difficult to achieve.
58 Iraq, More Details, A supplement to EIA, Iraq, Country Analysis Brief. p. 2.
59 Iraq to begin exports in two weeks: oil minister: US, Platts Oilgram Price Report, May
Several barriers must be overcome for Iraqi oil to be successfully marketed in
international commerce. First, needed production increases must be achieved. It is
unclear that Halliburton and the U.S. Corps of Engineers are successfully engaging
the Iraqi oil workers. Exportable output seems much further off than expected.
Next, clear title to the crude must be established, so that a would-be purchaser
can be assured that he is buying oil from its rightful owners. Until very recently, this
was a problem. Under the old regime — exporting oil under U.N. auspices — title
was granted by the Iraqi Ministry of Oil. In April 2003, it was unclear who had the
authority to certify that oil had been properly sold. The U.N. Security Council
resolved this issue May 22, 2003, in lifting the U.N. sanctions on Iraq. The U.N.
resolution allows essentially free trade in non-military goods, authorizes procedures
whereby Iraq can legally export oil, and specified that the proceeds from oil sales
must be put into the Development Fund for Iraq (DFI). (See the discussion of this
below.) The resolution also shields Iraq’s oil revenues(until December 31, 2007)
from seizure, attachment, or garnishment by creditors and claimants. Platts quotes
Ghadhban: “We are now free.... The sanctions are out. We are free to go back to the
market and also an open market so we can maximize the return....We want to get the
maximum price for the Iraqi barrel...No more discounts, etc, etc.”
Iraq and OPEC. Iraq was a founding member of the Organization of
Petroleum Exporting Countries (OPEC). It has always participated in its
deliberations, even after 1991. There are too many unresolved issues to attempt a
reliable analysis of a future Iraq-OPEC relationship, although many factors point
toward Iraq’s continuing OPEC participation. In addition to OPEC membership being
an accustomed situation, there is the fact that Iraq’s geographic neighbors are all
participants, and its stake in the world oil market will grow as exports expand, and
that OPEC offers an oil price security blanket as well as a voice — most recently
effectual — in price determination. Looking further forward in time, OPEC could be
useful to any efforts by Iraq to reach the pre-Iran war’s production levels of 3.5 mbd,
an amount that OPEC would most likely act to accommodate. However, the length
of time it might take to get production up to that level is a matter of speculation,
given current difficulties in Iraq’s oilfields.
From a U.S. perspective, Iraq’s return to OPEC as a full-fledged cartel member
would not dovetail with stated policy of encouraging non-OPEC supply sources. If
the United States establishes broad control over Iraq’s oil industry during its
rebuilding phase, it seems unlikely that Iraq will be able to participate in OPEC
strategy and decision making during that period. But if Iraq’s Ministry of Oil is
reconstituted, it is more likely that OPEC will be seen as a help in getting exports
flowing, since it may take some time for Iraqi production to ramp to 3.5 mbd.
In the first months of 2003, most OPEC members increased production to offset
lost Iraqi supplies as well as coincident (but unrelated) losses from other members.
In June 2003, new OPEC quota figures rolled back most of the 2003 Saudi Arabian
increase (up nearly 1.5 mbd)60 as well as significant increases by Algeria and Kuwait.
60 CRS Report RL31676, Middle East Oil Disruption: Potential Severity and Policy Options.
Presumably, this would make room in world markets for Iraqi exports (initially about
without adverse impact on OPEC pricing goals. OPEC has set a target price band for
the weighted average price of members’ crudes (the so-called OPEC basket) of $22
to $28 per barrel, FOB at export facilities.
The target price band was likely chosen to fall within OPEC’s market power to
influence prices. In order to exert market power, an entity must have control over
supply or demand, or some combination of the two. OPEC has scant influence on
demand, and limited influence over supply. But that limited influence over
incremental amounts of supply appears to give the cartel some price leverage, given
current demand and supply from non-OPEC producers. To the extent that OPEC can
control supply from its own members, it can influence prices given current market
conditions, as evidenced by its ability during the past two years to keep prices mostly
within its target range.
Compared to prices during the post-war crisis period — 1992 to 2001 — prices
have been quite stable since OPEC started implementing the price band in December
which has now corrected — and a brief drop below the band in late 2001/early 2002.
In contrast, prices previously fluctuated more significantly, touching a low of $10 per
barrel in February 1999 and reaching a top of $35 in September 2000.
Potential Iraqi Oil Revenues. Were production, development and export
issues to be fully resolved, Iraq could generate great wealth from oil exports. Much
depends on world oil prices, which have fluctuated between $10 and $35 during the
past decade. Given its pre-2003 production capacity of 2.8 mbd, Iraq could export
Annual gross revenues would be $18.5 billion at an assumed $22 price, and $23.5
billion at an assumed $28 per barrel price. Each million barrels per day amounts to
$8.0 billion per year at the lower end and $10.2 billion at the upper end of that range.
Table 1. Iraqi Oil Production, Current and Potential
Time PeriodMay2003Near Term (12 to 24 months)Within a Decade
Production700,0002.3 to 2.8 millionup to 6 million barrels per
Capacitybarrels per daybarrels per dayday or more
AnnualDomestic Use$19 to $25 billion$50 to $60 billion
Source: Prepared by Jonathan E. Sanford, CRS, based on discussion in text. DOE, Iraq, More
Details, A supplement to EIA, Iraq, Country Analysis Brief. Platts Oilgram Price Report, May 28,
2003. Energy Intelligence Group, in Petroleum Intelligence Weekly, March 12, 2003.
Updated April 29, 2003. See Table 1.
How much revenue could Iraqi oil exports generate? That depends on such
variables as how much total production can be achieved, domestic consumption,
world market prices, and to what extent Iraq can participate in international oil
markets without driving down market prices. The last variable depends at least in part
on how and if OPEC makes room for Iraqi exports.
The volatile history of oil prices is an important part of Iraq’s revenue equation.
This parameter has fluctuated almost as much as the volume of Iraqi exports since
the Iran-Iraq war. For Iraq’s economy, the combination of price and quantity — and
its unpredictability — provide some real uncertainty about monies that might be
available for reconstruction and development. These imponderables weigh on the
monetary contribution of oil to Iraq’s economy. Oil can be a potent revenue
generator, and Iraq has the potential to produce and export more oil than it ever has
in the recent past.
What might the future hold for Iraqi crude production? While there are many
imponderables, were these unknowns to be resolved over time in a manner favorable
to developments supporting greater exploitation of already known proven reserves,
future crude output could be far greater than the highest levels of production realized
at any time in the past.61
Ag r i c u l t u r e 62
Overview. Before the first Gulf war, Iraq imported a large share of its
agricultural needs and was a major agricultural export market for the United States.
During the prior regime, due to drought, lack of inputs, poor methods and weak
administration, Iraq had been unable to achieve agricultural production levels near
its potential. After 1991, the irrigation system fell into disrepair and much of the
irrigated cropland in central and southern Iraq was severely damaged by salinization.
Several years will be needed to remedy the situation. In the meantime, Iraq will rely
on imports once again for most of its agricultural needs. Absent a strong agricultural
sector, population movements from rural to urban areas will continue, adding to the
country’s social problems and further worsening unemployment. Absent positive
incentives (see the section on the non-oil economy and “Dutch Disease” below), Iraq
may have problems restoring productivity in the agricultural sector.
Agriculture comprises a relatively small share of the Iraqi economy. In the past
two decades, the sector has been injured by the pressures of military conflict
(particularly the 1980-88 Iran-Iraq War and the 1991 Gulf war) and by varying
degrees of government efforts to promote and/or control agricultural production. In
the mid-1980s, agriculture accounted for only about 14% of the national GDP. After
the imposition of U.N. sanctions and the Iraqi government’s initial refusal in 1991
61 Some analysts estimate that Iraqi oil exports could reach 6 mbd within a decade. See
Energy Intelligence Group, Inc. “Iraq is well primed for big oil opening.” Petroleum
Intelligence Weekly, March 12, 2003. Estimates differ from the various sources, but all
agree that future output could be very much greater than that likely in the near future.
62 Prepared by Randy Schnepf, Analyst in Agricultural Policy, Resources, Science and
to participate in the proposed U.N. Oil-for-Food Program, oil production fell and
agriculture’s share of GDP rose to an estimated 35% by 1992 63.
Rapid population growth during the past three decades, coupled with limited
arable land and a general stagnation in agricultural productivity, has steadily
increased dependence on imports to meet domestic food needs since the mid-1960s.
In 1980, Iraq imported about half of its food supply. By 2002, under the OFFP,
between 80% and 100% of many basic food staples were imported.
In the early stages of the post-2003 Iraq War period, the country’s agricultural
sector remains beset by the legacy of past mismanagement and the lingering effects
of a severe drought during 1999-2001. Iraq’s irrigation infrastructure is only partially
functional; salinization of prime cropland is widespread throughout the irrigation
system; and the fertility of cropland and rangeland has been badly depleted from over
exploitation due to poor soil management practices. The poultry and livestock
sectors have been devastated by a general lack of feedstuffs and pasture, as well as
from a lack of veterinary medicines used to control common parasites and diseases.
Agro-Climatic Setting. Iraq has a total surface area of 43.7 million hectares
(about the size of Wyoming and South Dakota combined) of which 34.0 million
(78%) is not viable for agricultural use. Less than 0.4% is in forest and woodlands
situated along the extreme northern border with Turkey and Iran.64 The remaining
22% (about 9.5 million hectares) are involved in agricultural activities, although
almost half of this is very marginal and used only for seasonal grazing (mainly goats65
and sheep). An estimated 340,000 hectares are in tree crops (mostly dates, but also
some figs, grapes, and olives).66
Area cultivated annually to field crops such as cereals, pulses, fruit, and
vegetables varies with weather and market conditions, but generally averages
between 3.5 to 4 million hectares.67 Between 75% and 85% of crop area is generally
planted to grains (mostly wheat and barley). Iraq is divided into a rain-fed northern
winter-grain producing zone and a center-south irrigated zone that produces
vegetables and fruit, as well as cereal crops. According to the U.N. Food and
Agriculture Organization (FAO), 2.55 million hectares were irrigated in 1989.
Pre-U.N. Sanctions (1980-89). During Saddam Hussein’s early years in
power (1979-1990) the state attempted to foster private sector control and investment
in Iraq’s agriculture. Surging oil revenues were used to acquire Western technology
63 Mahmood Ahmad. “Agricultural Policy Issues and Challenges in Iraq” Short- and
Medium-term Options,” in Mahdi, Iraq’s Economic Predicament, pp. 179-180.
64 FAOSTAT, FAO, United Nations. (A hectare equals about 2.47 acres.)
65 PECAD, FAS, USDA. “Iraq Crop Production.” January 16, 2003.
[ ht t p: / / www.f a s.usda.gov/ pecad/ hi ghl i ght s/ 2003/ 01/ i r aq_updat e / i ndex.ht m]
66 FAOSTAT, FAO, United Nations.
67 In the early 1990s, cultivated area temporarily expanded to nearly 5.5 million hectares
before returning to under 4 million.
and to lavish extensive government subsidies on the sector. Area and production
expanded through the 1980s for cereals, vegetables, and fruit.
However, cereal yields stagnated due to poor production practices and limited
varietal development. The Iran-Iraq War also diverted labor and other resources
away from agriculture. Population growth continued to outpace agricultural
production, increasing the importance of trade. Despite government efforts at
stimulating agricultural output, cereal and poultry imports nearly doubled as a share
of domestic consumption, 69% and 48 %, respectively, during the 1980s. By 1989
Iraq was importing over $2.5 billion in agricultural commodities annually including
Cereals, mostly wheat and rice, comprised 60% of calories consumed by the
average Iraqi in the 1980s. Meat — the principal source of dietary protein —
provided an estimated average132 calories per day per capita between 1985 and
1989. Poultry production made strong gains during the 1970s and 1980s. By 1989
poultry had surpassed beef as the main source of calories from meat in the Iraqi
In the 1980’s, U.S.-Iraqi agricultural trade expanded rapidly on the strength of
large USDA export credits to Iraq to buy U.S. agricultural products. From 1983
through mid-1990, Iraq received nearly $5 billion in U.S. export credit guarantees to
purchase significant quantities of U.S. agricultural commodities.69 By the mid-1980s
Iraq was the major destination for U.S. rice exports and also an important purchaser
of U.S. wheat, feed grains, oilseed products, cotton, sugar, dairy products, poultry,
and tobacco. In addition, Iraq also participated in other U.S. agricultural export
programs including the Export Enhancement Program, the Targeted Export
Assistance Program, and the Cooperator Foreign Market Development Program.
U.N. Sanctions Period (1990 to 2003). Under the U.N. sanctions regime
adopted in 1990, the importation of agricultural products was not banned; however,
foreign companies were prohibited from investing directly in Iraq.70 In addition,
because the Iraqi government was unwilling in 1991 to participate in the Oil for Food
Program, the country could not legally export oil and so had no revenues it could use
to buy food and agricultural inputs on the international market. From 1990 to 1994,
Iraq’s agricultural imports averaged slightly above $1 billion or less than half of the
pre-war level. USDA’s export credit offers to Iraq were stopped, and USDA’s
Commodity Credit Corporation had to pay over $2 billion in unpaid Iraqi export
credit guarantees. U.S. agricultural trade with Iraq fell to nearly zero.
After 1991, the northern portion of Iraq fell under de facto local Kurdish control
while the fifteen governorates in central and southern Iraq remained under central
68 FAOSTAT, FAO, United Nations.
69 U.S. General Accounting Office. Iraq’s Participation in U.S. Agricultural Export
Programs, NSIAD-91-76, Nov. 1990, p. 2. [http://126.96.36.199/d22t8/142766.pdf]
70 Country Factsheet, The Economist Intelligence Unit, The Economist.
[ h t t p : / / www.economi s t . com/ count r i es/ Ir a q] .
government control. This corresponds roughly to the rain-fed northern agricultural
zone and the irrigated center-south zone. The central government took steps to
increase both production and control of domestic food within its zone of control.
These changes included Government monopoly control over most grain production
and the introduction of a state-managed system of rationing of basic foodstuffs.
Government incentives coupled with rising internal food prices encouraged Iraqi
farmers to expand crop area by planting on marginal pastureland and fragile hillsides.
Record cropped area was attained in 1992 and again in 1993. However, agricultural
productivity suffered for lack of fertilizers, agricultural machinery and the means of
spraying planted areas with pesticides.
Anecdotal evidence suggests that the 1991 Gulf war resulted in significant
damage to the irrigation and transportation infrastructure vital to Iraq’s agricultural
sector, but it is difficult to evaluate the extent or severity of the damage. Iraq’s
irrigation infrastructure fell into disrepair and salinity has spread across much of the
irrigated fields of central and southern Iraq. Once severe salinization has occurred
in soil, the rehabilitation process may take several years according to FAO officials.71
In addition, rural areas were left with a severe labor shortage further hurting
agricultural productivity. According to the U.S. Census Bureau, in 1991 Iraq
experienced a 3.7% decline in population as an estimated 663,000 persons died or
left the country following the first Gulf war.72 Much of this exodus included foreign
guest workers from the agricultural sector.
Iraq’s poultry and livestock populations were devastated by the loss of rangeland
to grain crops and the drop off of feed grain imports and veterinary medicines needed
for routine control of parasites and diseases. A 1997 screw worm epidemic and a
By the mid-1990s severe macroeconomic problems related to the international
sanctions led the government to end most support to the sector and instead to
implement austerity measures that further curtailed agricultural investment.
Declining food availability resulted in a significant rise in malnutrition in Iraq,
particularly in the center and south of the country.73
By 1996, Iraq agreed to U.N. terms for establishing the OFFP. Once started,
however, OFFP food imports made Iraq’s trade dependence nearly complete for
many basic foodstuffs. According to the World Food Program, by early 2003 nearly
60% of Iraq’s population was totally dependent on imports via the OFFP. The Iraqi
population’s failing nutritional status and growing trade dependence was further
aggravated by a severe drought that persisted throughout much of the Middle East
from 1999 through 2001 and devastated crop output in Iraq.
71 The Economist, “Digging for defeat: Iraq,” May 2, 1998, Vol. 348, No. 8066, p.44.
72 U.S. Bureau of the Census, International Data Base (IDB), Iraq, Oct. 10, 2002;
[ h t t p : / / www.census.go v/ i p c/ www/ i dbacc.ht ml ]
73 UNDP, Iraq Country Office, 1999-2000 Report, June 2000.
Prospects. Some progress has been made at restoring lost agricultural
productivity; however, a return to normal weather patterns is critical for domestic
cereal production in Iraq. With the action of the U.N. Security Council on May 22,
2003, lifting trade and financial sanctions on all non-military goods, Iraq will be able
to import food and needed agricultural inputs. However, political stability and
increased internal security will also be necessary before Iraq’s agricultural sector
witnesses significant investment and growth. Restoration of the irrigation
infrastructure (including a long-term de-salinization program), as well as the grain
marketing infrastructure for handling, storing, and distributing agricultural inputs and
outputs will be vital. In addition, the development of a viable agricultural research
and extension service to develop and disseminate improved varieties and successful
production practices are needed to restore agricultural productivity.
Clearly, Iraq will be dependent on imports for meeting domestic food demand
for several years to come. In the long term, after the economy has regained its
viability and vibrancy, market forces and international competition will likely be the
driving forces behind Iraq’s agricultural trade patterns. Historical trade and food
consumption patterns suggest that food grains such as wheat and rice, feedstuffs
including corn, barley, and protein meals, vegetable oil, sugar, meat, and dairy
products are all likely to be important imports into Iraq.
Banking and Financial Institutions74
Iraq has never had what most Western analysts would call a market-oriented
banking system. Nevertheless, before 1991, it had one of the most modern financial
systems in the Arab world. The government created most of the country’s financial
institutions, with the exception of some private banks established after 1988. Iraqi
banks seem to have gotten most of their funds, not through borrowing in the market
or from deposits, but from allocations from the national treasury. Access to capital
and financial services seems to have been determined more by political factors than
by independent considerations of creditworthiness, profit and risk. Between 199175
and 2003, government control over the Iraqi financial system tightened further.
Iraq’s banking system was limited, until the 1930s, by the size of its economy
and the small level of savings. In 1936, the government created an agricultural and
industrial bank which split in 1940 into two separate institutions. Other specialized
banks, for real estate, mortgages, and cooperatives, were created in the 1940s and
early 1950s. A commercial bank, the Rafidain Bank, was created in 1941. It also
served for a few years as the central bank. A state-owned institution, the National
Bank of Iraq, was founded in 1947. It became the Central Bank of Iraq in 1956, one
of the earliest Arab monetary authorities. The Rafidain Bank was, for many years,
74 Prepared by Jonathan E. Sanford, Specialist in International Political Economy, Foreign
Affairs, Defense and Trade Division.
75 Much of the factual and descriptive information presented here on Iraq’s financial system
is drawn from the Europa Middle East and North Africa yearbook for 2003 and from Metz.
Iraq, a Country Study.
the only commercial bank in the country.76 Its original ownership is unclear. In
1964, all Iraqi banks and insurance firms were nationalized. The government’s
specialized banks were consolidated at that time into separate institutions for
agriculture, industry, and real estate. The industrial bank made loans to both public
and private sector firms and held equity positions in several public/private joint-stock
companies. Government policy evidently played a major role in its decisions and
those of the other specialty banks. In the early 1980s, for example, the industrial
bank was instructed to expand its lending to private and state-owned firms in order
to promote development. The real estate bank meanwhile was instructed to increase
its lending in order to promote the construction of housing and to encourage more
people to build their own houses.
Until the late 1980s, Iraq had one of the most modern financial systems in the
Arab world. It reportedly helped Jordan (and perhaps others) establish their own
central banks. The Rafidain Bank was a shareholder in several European-Arab
consortia banks and one of the seven founding shareholders of the Gulf International
Bank, a regional commercial bank founded in 1977. In 1981, Rafidain created a joint
venture bank with Banco do Brasil, with a capitalization of US$17.5 million. In
1987, its own capital base was doubled (to ID 100 million) as the first stage in a plan
to expand the national banking system. In 1988, the Iraqi government announced
that another commercial institution, the Rashid Bank, would be created (also at a
capitalization of ID 100 million) to compete with the Rafidain Bank. Some sources
report that Rafidain emphasized foreign connections while Rashid focused more on
the domestic economy. The government seems to have been the source of the new
capitalization for both banks. The government also encouraged more competition
among the three state-owned insurance firms. The banks and insurance firms were
encouraged to expand and given administrative and financial autonomy, bound
officially only by the Government’s fiscal policy.
In May 1991, the government rescinded the 1964 decree nationalizing all
financial institutions. According to recent reports, there were 17 privately owned
banks in Iraq in 2002. The role of the private banks is unclear. Given the legal
restrictions on access to foreign capital and the weakness of the Iraqi economy, most
of their resources likely came from official or regime sources. No information is
available as to where or for what purpose they invested their funds. In June 1991, the
government created a state-owned Socialist Bank, with a capitalization of ID 500
million, to make interest-free loans to civil servants and decorated war veterans.
76 The Rafidain Bank was the only commercial bank in the country until 1988 and it
remained the predominant institution thereafter. Some analysts have questioned whether
it was truly independent of the central bank. For most of their history, both were owned and
controlled by the government. With assets of more that US$17 billion in 1983, the Rafidain
Bank was reportedly the largest Arab commercial bank. In 1982, according to one report,
the American Banker newspaper named Rafidain the world’s fastest growing bank. In early
1989, Rafidain ranked number 83 in the world, with $54.5 billion in assets. In 1996, it had
152 local branches and nine branches abroad. Given the strength of the Iraqi economy
during this period, it seems likely that much of the capital to fund the bank’s operations
came from government or from regime sources.
Events since 1991 have substantially limited the capacity of Iraq’s financial
institutions. Much of the flexibility and autonomy implicit in the legalization of
private banking, in 1988 seems to have been overtaken by events. Most of the
country’s overseas assets were impounded (“frozen”) in October 1992 or shifted to
escrow accounts. This made it very difficult for Iraqi financial institutions to operate
internationally. The post-1991 sanctions regime and the Oil for Food program also
centralized financial control within Iraq in the hands of the government and the
international bodies administering the system. Iraqi banks had little access to capital
other than through official channels. Much of the lending by these institutions in the
past decade seems to have been based more on personal or political connections than
on normal banking principles. In many cases, it is not clear that these were in fact
loans which the borrowers were expected to repay.
Since the end of the recent war, most of Iraq’s banks have been severely battered
by looting. The Central Bank and other banks have been thoroughly looted, by
officials of the former regime as well as by post-war thieves.77 The financial capacity
of Iraq’s banks and their ability to continue operations may be in serious doubt. For
its part, the Rafidain Bank served during the 1970s and 1980s as the government’s
principal agent for borrowing funds abroad. After 1990 it became the principal venue
through which Saddam’s government defaulted on its foreign debts. The bank was
sued by most of the country’s creditors for collection of those debts. It is, in effect,
bankrupt. In April 1993, British liquidation experts informed creditors meeting in
London that the liquidation of the Rafidain Bank’s international operations would
yield only a minimal recovery.
Transportation and Infrastructure78
Iraq’s transportation and infrastructure systems have deteriorated substantially
in the past dozen years. The government invested heavily in them, during the1970s,
thanks to the inflow of oil revenues and, in the 1980s, as a matter of strategic
necessity due to the Iran-Iraq war. Much of this infrastructure was destroyed during
the first Gulf war, and rebuilding efforts were hobbled by the sanctions regime. The
telecommunications network was subsequently targeted in the 2003 hostilities.
Shipping. Iraq’s main port is at Basra, about 50 miles inland from the Persian
Gulf along the Shatt-al-Arab waterway. Before the oil boom of the 1970s, it was a
relatively small port, most trade being oriented overland through Syria and Jordan.
The port was damaged by Iranian shelling during the Iran-Iraq war and by coalition
bombing during the first Gulf war. The Shatt-al-Arab also was blocked by sunken
ships until cleared and dredged in 1993. Ports were built at Umm Qasr and Khor al-
Zubair in the 1980s, connected to the Gulf by the Khor Abd-Allah waterway. Limited
shipping was resumed at Umm Qasr in November 1993, although the condition of
the port prevented intensive use. The port at Khor al-Zubair was designed to handle
cargo destined to and from the large industrial and petrochemicals industries there,
77 Some money has been recovered, however, and turned over to occupation authorities but
its source and ownership are unknown.
78 Prepared by Ian Fergusson, Analyst in International Trade and Finance, Foreign Affairs,
Defense and Trade Division.
most of which remain idle. Certain contracts for forklifts and dredging equipment
were allowed by the UN sanctions commission in order to improve the ports for food
and medical shipments. The regime dredged stretches of the Tigris between Baghad
and Basra to facilitate barge traffic, and it commissioned navigation studies for other
areas along Tigris and Euphrates. A barge canal between Al-Nasiriyah on the
Euphrates and Baghdad was completed in December 1992.
Railways. The Iraqi railway system has five major routes. A northwest route
links Baghdad with Mosul and the Turkish border. A second runs north from
Baghdad to Kirkuk and Arbil. The third runs south from Baghdad to Basra and Umm
Qasr. A fourth line stretches from Baghdad west to Qusaybah at the Syrian border
and continues west to link the industrial complex at al-Qaim with the phosphates
mines at Akashat. A fifth line connects this route at al-Hadithat with Kirkuk, thus
linking the minerals processing complex at al-Qaim with sulphur mines in the
country’s northern region. Due to the dilapidated condition of the rails and
equipment, service is reportedly infrequent and unreliable. The U.N. sanctions
committee allowed the importation of 30 new mainline locomotives in 2000. The
Hussein regime commissioned studies to improve and expand the railways, but lack
of funds prevented the execution of these projects. In 1994, Iraq possessed 1,259
miles of operating track. No new construction has occurred since.
Air Transportation. Iraq has international airports at Baghdad and Basra.
Civil international air traffic was prohibited under UN sanctions, but several Middle
Eastern states and France and Russia operated flights sporadically into Baghdad.
Iraqi airways was effectively grounded by sanction, not only due to the prohibition
on flights, but also due to the lack of access to spare parts. In 1989, the last full year
of ‘normal’ operations, the airline carried approximately 1.2 million passengers to 42
destinations within Iraq and abroad. In 1987, the fleet contained 14 Boeing passenger
aircraft and 35 Russian-built Antonov and Ilyushin cargo planes. Iraqi airways was
divided into its aviation and ground services components in 1987 and the two entities
were partially privatized a year later. However, its virtual disappearance from the air
after the imposition of sanctions did not bode well for investors.
Roadways. In 1994, Iraq had an estimated 27,410 miles of paved roads and
highways. The road network received priority during the 1980s due to its strategic
value in the war against Iran. Consequently, the roads connecting the central
population centers with the Iranian frontier received the most attention. The
International Expressway #1, a six-lane highway linking Safwan on the Kuwaiti
border north to Baghdad and west to the Jordan border, was completed in 1989. It
was designed to link the Gulf states with the Mediterranean. Iraq’s roads and bridges
were heavily damaged during the first Gulf war, but they reportedly received priority
in the regime’s later reconstruction efforts. In 1994, approximately 765,000
passenger vehicles and 265,000 trucks were registered in Iraq.
Communications. Iraq’s telecommunications infrastructure was severely
damaged by the first Gulf war, the 1998 allied airstrikes, and the 2003 hostilities.
Before 1991, there were approximately 37 land-lines per thousand residents,
declining to 30 lines per thousand in 2001. The earlier figure indicates that the system
was not particularly widespread before the destruction of the central switching
facilities and trunk lines. The U.N. Sanctions Committee (UNSC) blocked most
contracts to replace damaged infrastructure on grounds that such equipment could be
utilized for military purposes. In 2001-2002, the UNSC approved several upgrades
to improve international connectivity and the domestic trunk networks. A wireless
phone network in the northern Kurdish-controlled operates with the European-
originated GSM standards.
Power Generation.79 Iraq’s government invested heavily in electric power
generation in the 1980s, contracting with Britain, West Germany, France, Italy, South
Korea, the Soviet Union, and Yugoslavia to build or expand thermal and gas
generating plants, hydroelectric facilities, and transmission wires. A great majority
of these installations are oil or gas fired, although hydro power accounts for about 2%
of capacity. A nuclear reactor at Osirik was destroyed in an Israeli attack in 1981.
Iraq’s transmission grid was linked with that of Turkey in 1987, and Iraq became the
first Middle Eastern state to export power. In 1990, capacity was reported to be 9,000
MW. Bombing during the first Gulf war reportedly destroyed about 90% of its
electronic generation and transmission facilities and electricity generation capacity
fell precipitously to 340 MW by March 1991. Although the regime declared that 75%
of generating capacity had been restored by early 1992, subsequently in 1998 an Iraqi
energy official claimed that the system was operating at 50% of capacity due to lack
of spare parts. Recently in 2002, the U.N. Iraq Program declared that operating
capacity to be 4,300-4,400 MW. Contracts for spare and maintenance equipment
were approved in 2001-2 to aid in boosting production, but chronic shortages of
power remained. Power was available only 12 hours per day in many areas. The
power supply deficit was estimated at 1,100 MW overall, with a peak load deficit of
I ndustr y80
For the most part, the industrial sector of Iraq was created during the 1970s and
1980s as a result of government attempts to diversify the economy through economic
development projects using proceeds from Iraq’s oil wealth. While some projects
were undertaken to exploit available economic resources, others were developed to
foster national identity or to enhance the prestige of the regime. Industrial enterprises
sustained heavy damage in the 1991 Gulf war. Such facilities that were not destroyed
were degraded or rendered inoperable during the remaining years of the Baathist
regime due to the shortage of spare parts and technical know-how. The age and
debilitation of the infrastructure, and the presence of a technically competent
workforce, may determine the economic viability of the industrial sector.
Industrial Development. Since the days of the monarchy, Iraq’s economic
development programs have emphasized the development of industry as a means to
modernize the nation. In the 1950s, the monarchy used oil revenues to undertake
large infrastructure projects, but most manufacturing industry remained in private
79 In addition to other sources cited in this section, information on Iraqi power generation
was also obtained here from the Energy Information Administration, Country Analysis
Brief: Iraq, February 2003 [http://www.eia.doe.gov/emeu/cabs/iraq.html#elec].
80 Prepared by Ian Fergusson, Analyst in International Trade and Finance, Foreign Affairs,
Defense and Trade Division.
hands. After the overthrow of the monarchy and extensive nationalizations of
industry in 1964, industrial development was characterized by extensive state
planning and public sector control of industry. Generally, however industrial
development programs sought to advance common goals, namely, (1) to diversify the
economy and to lessen reliance on oil revenue, (2) to provide employment
opportunities for the labor force, (3) to develop and exploit local resources, and (4)
to encourage import substitution industries.81
Large scale industrialization expanded during the oil boom in the late 1970s.
With more money in hand, the government was able to purchase heavy industrial
plants from foreign contractors on a turn-key, ready-to-operate, basis. Several
industrial zones sprang up in this fashion, notably at al-Qaim (minerals processing),
Khor al-Zubair (including a large French-contracted iron and steel plant) and a
petrochemical complex near Basra. Light manufacturing, including textiles, food
processing, and household goods, was centered around Baghdad.
The Soviet Union and other eastern bloc countries also contracted for the
construction of several projects in the 1980s. Among these were steel works and an
electrical equipment manufacturing plant in Baghdad, a tractor works in Musayib,
and a pharmaceutical plant in Samara. Romania provided two cement plants, in al-
Qaim and Sinjar. They reportedly produced 7.5 million tons of cement in 1987, of
which 4.5 million tons were exported. Iraq purchased these facilities through
Economic Cooperation Agreements signed with various eastern-bloc countries
beginning in 1985, which provided credits arrangements considered to be more
favorable to Iraq than those offered by western creditors at that time.82
To diversify away from petroleum dependency, Iraq sought to develop its
mineral resource industry. Sulphur mining and processing has been conducted in
northern Iraq near Mosul since 1972. Proven sulphur reserves in 1988 were
reportedly 515 million tons. At its peak in 1989, production was estimated at 1.4
million tons, of which 1.2 million tons were exported. Sulphur production was
enhanced by the opening of a sulphur recovery and sulphuric acid plant built by
Japanese firms in 1988. Phosphate extraction and processing is located in the
northwest region of the country in mines around Akashat. The reserves of the
Akashat mine, opened in 1981, have been estimated at 3.5 billion tons. Phosphate
is processed in al-Qaim, in a plant built by a Belgian firm in 1984. Production was
estimated at 1.2 million tons in 1989, of which 766 thousand tons were exported.
Before the first Gulf war, Iraq was self-sufficient in fertilizers.
Several problems have been identified in the manner of industrialization
undertaken in the 1970s and 1980s. Due to the large influx of petrodollars, these
projects were often ill-conceived and unproductive. They were often undertaken for
symbolic reasons, were grandiose in scale and did not reflect the absorptive capacity
of the economy. Plans for needed technical expertise, sources of supply input, and
81 Tariq al-Khudayri, “Iraq’s Manufacturing Industry: Status and Prospects for
Rehabilitation and Reform,”in Mahdi, Iraq’s Economic Predicament, p. 202;
82 Ahmed M. Jiyad, “The Development of Iraq’s Foreign Debt,” in Mahdi, Iraq’s Economic
Predicament, p. 98
transportation needs were often inadequate.83 One source estimated that at the peak
of its operations, the manufacturing sector imported 80% of its inputs. Hence it was
highly vulnerable to supply disruptions and currency volatility.
War and Sanctions. Aside from the internal weaknesses in the sector, war
and sanctions also crippled Iraqi manufacturing. During the Iran-Iraq war, most
industry escaped direct damage from Iranian attacks. However, much of the industrial
infrastructure was sidelined by the inability to obtain intermediate inputs and spare
parts due to interference with shipping and damage to ports. As the conflict dragged,
the government concentrated its resources on military industrialization projects and
this emphasis contributed to the decision to privatize some state industries in 1988.
In the manufacturing sector, approximately 50 state operations were sold to the
private sector or listed on the Baghdad stock exchange. Many of these entities were
sold at well below what was considered market cost.84
Much of the industrial infrastructure that survived the Iran-Iraq war was
destroyed or severely damaged by bombing during the first Gulf war. The Khor al-
Zubair heavy industry complex was heavily hit, and although some reconstruction
work has occurred, it has not operated since. For industries not destroyed, the
sanctions regime in effect between 1990 and 2003 closed off the possibilities of
obtaining inputs or spare parts or exporting manufactured products legitimately.
Reconstruction efforts did not concentrate on the revitalization of the manufacturing
sector, but rather focused on the more lucrative oil industry and on instruments of the
Prospects. The future outlook for the manufacturing sector is clouded. Most
facilities have been destroyed by war or degraded by sanctions. Few new inputs have
been put into the sector sine 1990. Iraqi manufacturing is saddled with aging, if not
damaged, equipment and infrastructure. The capacity and skills of the labor force
have deteriorated over time. In addition, much of the economic rationale for Iraqi
industry has evaporated, since much of the capacity built in the 1970s and 1980s was
based on national prestige, import substitution, or other non-market considerations.
New policies to facilitate and encourage the growth of industry on better and more
sound foundations will be needed. Given the large size of the urban population and
the limited growth prospects for agriculture, new employment opportunities in
industry likely will be needed. Iraq will need to take care (see the section on the non-
oil economy and “Dutch Disease” below) not to allow its currency to appreciate so
much in value (due to large oil exports) that the incentives and prospects for industry
and other sectors are unnecessarily diminished.
83 Cordesman and Hashim, Iraq: Sanctions and Beyond, p.129.
84 al-Nasrawi, Iraq’s Burdens: Oil, Sanctions, and Underdevelopment, p.99.
85 Cordesman and Hashim, Iraq: Sanctions and Beyond, p.149.
Exports. Oil has been Iraq’s main export since the 1930s. By 1953, oil87
exports accounted for 49.3% of national income. In the 1980s, crude oil made up
83% of all Iraqi exports.88 The figure in 2001, under the Oil for Food Program, was
over 95%. Non-petroleum export products included portland cement, fruit (mainly
dates), fertilizers, and reaction engines. Table 2 illustrates Iraq’s top exports in 1989.
In 2001, Iraq’s exports totaled $12.6 billion. Its largest export markets were the
United States ($6.3 billion), Canada ($1.1 billion), France ($887 million), the
Netherlands ($791 million), and Jordan ($736 billion).
International sanctions were imposed by the United Nations in August 199089
following Iraq’s invasion of Kuwait. (See the section on the Oil for Food Program
above.) The U.N. Security Council created the OFFP in 1995, allowing Iraq to
export $2 billion worth of oil every six months. The first Iraqi oil exports began on90
December 10, 1996, after it agreed in May to implement the program. The first
shipments of food under the OFFP arrived in March 1997, followed by imports of
medicines in May 1997. From the implementation date to March 2003,
approximately $26.8 billion worth of food, humanitarian supplies, and equipment91
was delivered to Iraq under the program.
86 Except for the portion on customs duties, this section was prepared by Cathi Jones,
Analyst in International Trade and Finance, Foreign Affairs, Defense and Trade Division.
87 Slugett, M. & Slugett, P. Iraq since 1958: from revolution to dictatorship. New York:
KPI Limited, 1987, p. 35.
88 Economist Intelligence Unit (EIU) calculations.
89 United Nations Security Council Resolution 661, August 9, 1990.
90 United Nations Document number S/1996/356.
91 United Nations. Office of the Iraq Programme. Oil-For-Food.
[http://www.un.org/ Depts/oi p/factsheet.html ].
Table 2. Iraq’s Top Exports, 1989
SITC Rev3 CommodityMillions of U.S.$
3330-Crude oil from bituminous minerals$11,545.4
3344-Fuel oils, not elsewhere specified$211.3
3341-Gasoline (motor spirit) and other light oils$78.8
2741-Sulfur of all kinds (except sblmd, prcpt, or coll)$39.2
6612-Portland cement aluminous, slag, supersulfate, etc.$35.7
0579-Fruit, fresh or dried, not elsewhere specified$30.8
5629-Fertilizers, not elsewhere specified$29.6
5222-Chemical elements, not elsewhere specified$27.7
Source: United Nations international trade data
The six-month ceilings on oil sales were raised from $2 billion to $5.3 billion
in 1998 and abolished altogether in 1999. This allowed Iraq to export and import
without limit so long as it complied with the U.N. screening process. Despite this,
Iraq’s oil exports ran significantly below capacity in 2001 and much of 2002, due, in
part, to disputes between Iraq and the U.N. over the formula for pricing Iraq’s oil.
Iraq imposed surcharges of about 30-50 cents per barrel on its oil buyers, resulting
in illicit kickbacks that the government allegedly used to buy unapproved goods. In
September 2001 the UN Sanctions Committee changed the pricing formula to
“retroactive pricing” in an attempt to block the surcharges. This policy reduced
Iraq’s oil sales by about 25%, although the UN noted a rebound to previous sales
levels by September 2002. In addition, Iraq has sometimes unilaterally interrupted
the sale of oil to protest Security Council policy or to challenge the United States and
its allies. For example, Iraq suspended its oil sales for the month of April 2002 in
protest of Israel’s military incursion in the West Bank.
Imports. Prior to the implementation of the Oil-for-Food Program, Iraq was
essentially a command economy with virtually all transactions conducted through
government contracts. Little or no private sector trade flowed across borders. Major
imports included food, motor vehicles, spare parts, iron and steel, and medicines.
Table 3 shows Iraq’s top ten imports in 1989. In 2001, Iraq’s imports totaled $4.2
billion. Its top suppliers were France ($592 million), Australia ($439 million), China
($397 million), Italy ($327 million), and Vietnam ($320 million).92
Importing via the public sector continued during the operation of the OFFP,
however, all government purchases were monitored by UN staff, who reviewed all
contracts and ensured that imported goods were on a list of commodities approved
by the UN Security Council. Besides food and humanitarian supplies, Iraq was
92 International Monetary Fund trade data.
permitted to import spare parts for repair of its oil infrastructure, limited quantities
of transportation and communications equipment, and some consumer goods. Table
4 represents Iraq’s imports under the OFFP. From 1997 to 2003, almost 60% of
Iraq’s people were, to some extent, dependent on food and other humanitarian
supplies provided by the program.
Table 3. Iraq's Top Ten Imports, 1989
SITC Rev3 CommodityMillions of U.S.$
0412-Wheat (including spelt) and meslin, unmilled, not
7843-Tractor, motor vehicle parts$170.4
6793-Iron and steel seamed tubes, etc. exterior diameter
0112-Meat of bovine animals, frozen$144.6
7812-passenger motor vehicles specified$139.6$139.6
6791-Iron and steel seamless tubes, pipes, and hollow
6762-Alloy steel bars, rods$130.7
6911-Metal structures and parts$105.4
Source: United Nations Trade Data.
Table 4. Iraq’s Imports under OFFP, 1997-2003
Sector Millions of U.S. $
Water and Sanitation$2.0
Communication and Transportation$2.0
Source: United Nations. Office of the Iraq Program
Illicit Trade. As noted earlier, the regime of Saddam Hussein imposed
surcharges on oil buyers, solicited kickbacks from suppliers of humanitarian and93
other civilian goods, and conducted illicit oil dealings with its neighbors. This
helped generate funds it could use without restrictions. Although there are no
authoritative figures for the value of Iraq’s illicit trade, the most widely cited
estimates come from a General Accounting Office (GAO) study released in May
2002 that estimated Iraq’s illegal earnings at $6.6 billion from 1997-2001. Countries
receiving illicit exports allegedly included Syria, Turkey, and Jordan.94
Prospects. Since so much of its GDP depends on oil exports, Iraq’s economic
prospects are linked to its ability to pump oil. Given the deterioration and current
disarray in the manufacturing and agriculture sectors, it does not appear that Iraq will
be able to produce sizable quantities in either sector for export any time soon.
Indeed, it appears that imports in the near term will need supply much of the
country’s demand for food, other agricultural products, and many manufactured
goods. Reconstruction and improvements in Iraqi competitiveness may diminish this
situation in the next few years, if the country pursues appropriate policies and
establishes adequate incentives for non-oil economic activity. In the meantime, as
discussed in the section on petroleum above, Iraq seems poised to became a major
exporter of oil to the world market. Some experts believe that it can double its
capacity to 6 million barrels per day within a decade.95
Fiscal Levies on Foreign Trade.96 No quantitative data are available on
Iraq’s past revenues from duties, taxes or fees on imports or exports. Likewise there
is little information available on government revenues in general. The future Iraqi
government’s fiscal system will have to be built from the ground up. The size of the
government’s fiscal needs and their financing will depend on the prospective
activities of the government as reflected in the budget. The extent to which Iraq will
rely on duties or taxes on foreign trade — as opposed to other domestic and foreign
sources of revenue such as income and business taxes (e.g. on petroleum and/or its
products, various fees, foreign assistance) — to finance such activities (as well as
their scope) is a matter yet to be decided by Iraqi’s future governing authorities.
Speculatively, the obvious source of a foreign-trade related fiscal levy would be
an export tax or duty on crude petroleum and/or its products, traditionally the most
important component of Iraq’s foreign trade. Similar levies on other exports would
not be a likely source of significant revenue because of the small share they hold in
Iraq’s exports. Moreover, at least in the short to medium run, in certain areas the
availability of output for export will be modest because of past deterioration of
production facilities and the damage caused by recent wars.
93 CRS Report RL30472, p. 12.
94 General Accounting Office, Weapons of Mass Destruction: U.N. Confronts Significant
Challenges in Implementing Sanctions against Iraq, GAO-02-625, May 2002.
95 Energy Intelligence Group, Inc. “Iraq is well primed for big oil opening.” Petroleum
Intelligence Weekly, March 12, 2003.
96 Prepared by Vladimir N. Pregelj, Specialist in International Trade and Finance, Foreign
Affairs, Defense and Trade Division.
A likewise less likely source of significant (if any) trade-related fiscal levies
would be Iraq’s imports, which consist mainly of articles for basic personal
consumption (food, medicine) and inputs for agriculture and industry, and for the
rehabilitation of Iraq’s economy. The obvious broad need for imports of this type and
the ultimate locus of the burden of such taxation (the general public) would make
this approach somewhat counterproductive. It would also lead to increases in the
prices of such commodities with their concomitant inflationary effect. This may have
a negative impact on the country’s non-oil economy. (See discussion below.)
In the matter of any levies on domestic and/or foreign transactions in petroleum
and its products, some consideration would have to be given to certain aspects of
world petroleum trade. In view of the overall uniformity of the world prices of such
products, for instance, an export levy could not be passed to the importer, but would
have to be absorbed by the exporter if Iraqi petroleum is to remain competitive on the
world market. Another aspect to be considered in this context is Iraq’s membership
both of the Organization of the Petroleum Exporting Countries and of the
Organization of Arab Petroleum Exporting Countries (OAPEC) and their role in
Iraq’s petroleum exporting policy and activities.
The Post-War Situation97
Assessing the Damage
Rebuilding the physical and social infrastructure of Iraq is a necessary
prerequisite to the functioning of the Iraqi economy. In addition to fixing utilities
and transportation, the government must be able to assure the basic welfare of its
citizenry through adequate food supplies, medical care, and security arrangements.
This cost of the reconstruction will likely be borne by the newly constituted
government of Iraq through oil revenues, by national and multilateral aid
organizations, and by the Iraqi people themselves.
Critical Infrastructure. Although the United States did not target much of
Iraq’s electrical, water, and telecommunications infrastructure during the war,
collateral bombing damage and the chaos which ensued following the downfall of the
Saddam Hussein regime has prevented coalition forces and local Iraqis from rapidly
repairing and restoring vital services such as electricity, water, sanitation, and
telecommunications. Some of Iraq’s power plants were looted after U.S. forces
entered Baghdad. Power lines also have been damaged, and in some instances, were
deliberately cut down by looters. In Baghdad, several towers, which hold up high
voltage power lines were wrecked by bombing and a central dispatch center that
coordinates the allocation of electricity was ravaged by looters. Most of all, many
employees of Iraq’s electricity system have been to afraid to go back to work, forcing
coalition forces to have to find vital electric engineers and other employees of Iraq’s
electricity system in order to restart service.
97 Prepared by Jeremy M. Sharp, Analyst in Foreign Affairs; Rhoda Margesson, Analyst in
Foreign Affairs; and Curt Tarnoff, Specialist in Foreign Affairs, Foreign Affairs, Defense
and Trade Division.
The water supply in Iraq’s main cities also was damaged both during and after
the war. Even before the war, Iraq’s water system was old and decrepit as nearly 40%
of all water is lost due to leaky pipelines. The war exacerbated this situation. In
Baghdad, there were breaks in the main water line that required repairs before
residents could receive water service. Some of Iraq’s water and sanitation
infrastructure was damaged by looters in the days and weeks following the cessation
of heavy fighting. The lack of electricity has had an impact on water service, as
engineers have had to rely on generators to power water stations. Many sewer
treatment plants are not functioning, allowing sewage to drain into water systems.
There also has been no garbage collection service, other than local efforts in
neighborhoods to collect and dispose of trash.
In an effort to disrupt Iraqi communications during the war, coalition forces
bombed Iraq’s telephone exchanges, cutting off telephone service for many Iraqis.
Some telephone lines also are down due to a combination of war damage and post-
war looting. Iraqis with satellite phones, which were banned under Saddam Hussein’s
regime, can make long distance calls and have begun charging other Iraqis for calls
abroad. Outside the Kurdish area, Iraq has no mobile phone network.
Transportation Infrastructure. Iraq’s roads, bridges, and highways were
not seriously damaged during the recent war. However, the war and the ensuing civil
unrest have disrupted the distribution of fuel throughout the country. Many drivers
of gasoline tankers have stopped making shipments, due to the insecurity on the
roads. This has caused shortages and long lines of cars waiting for gas at fuel
stations. The port of Umm Qasr, Iraq’s main outlet to the Persian Gulf and only deep-
water port, was only partially damaged during the war. British and Australian forces
continue to sweep it for mines, but massive dredging and rebuilding are required to
prepare the port for large cargo ships. A team of port management specialists and
engineers are reported assessing the damage and determining what needs to be done
to make it operational for the distribution of humanitarian aid.
Damage to Iraq’s airports varied during the war. During the first Gulf war,
Iraq’s national airline, Iraqi Airways, had lost many of its planes, some of which it
had flown to safety in neighboring states. Furthermore, international sanctions
preclude incoming commercial flights from flying into Iraq. Some legal experts
believe that these sanctions must be lifted before Iraq’s airports can be reopened to98
commercial traffic. Business analysts believe that it will take 2-3 years before Iraqi
Airways will be up and running, as the airline requires an entirely new fleet of planes.
Security. Police services have also been seriously diminished. Many
observers believe that one of the greatest challenges to Iraq’s recovery from war and
future economic growth is the security situation in Iraq’s population centers and rural
countryside. In the aftermath of the war, there has been a complete breakdown in law
and order with the dissolution of the Baath Party and Saddam Hussein’s repressive
security apparatus. With no cohesive local police forces, judicial system, or national
army, Iraq is entirely dependent on coalition forces to provide security. In Baghdad,
98 Over the last several years, some international carriers, in violation of sanctions, had
started offering flights to Baghdad.
several hundred Iraqi police officers have returned to work. However; many officers
have remained at home. Police officers who are back on duty face shortages in
equipment and have complained of being outgunned by armed bandits. There are
widespread shortages of reliable manpower to provide stability in many areas in Iraq.
In areas where U.S. forces do not have a large presence, local neighborhood
associations have started to organize security patrols. In more dangerous areas, armed
militias, some of which are associated with clerics and tribal sheikhs, have sprung up
to become the de-facto police, enforcing the rule of a local leader.
Humanitarian Assistance and Post-War Relief99
The war, which was followed by massive looting, destroyed critical
infrastructure, disrupted the delivery of basic services and food supplies, and
impacted the humanitarian situation inside Iraq. So far, the overall disruption has not
reached the crisis levels some predicted before the start of hostilities: Widespread
hunger, massive population movements, and severe health epidemics have not
occurred. However, basic services have essentially collapsed and the conditions are
serious and deteriorating. Lack of water, fuel, and electricity and inadeqate shelter,
sanitation, and medical care are creating hardship for many. While the humanitarian
situation continues to change with developments on the ground, the amount of
assistance that is ultimately needed will depend on the nature and duration of the
Provision of Relief. In the short term, security of humanitarian aid delivery
and distribution is a major concern. Looting and lawlessness have been extensive; the
situation remains volatile. Recurrent insecurity problems have made it impossible to
launch a full-scale humanitarian effort. Many aid agencies remain on Iraq’s borders
unwilling to enter for security reasons. There are more than 150 U.N. staff and
approximately 50 non-governmental organizations (NGOs) in Iraq. Local Iraqis are
also involved in the aid effort. Deliveries of priority items — water, food, and
medical supplies — are getting through slowly, although at times the chaos and
violence hamper the efforts of those trying to provide the most minimal vital
assistance. While they need protection, aid agencies fear that receiving it from
coalition-led forces could mean an increase in security risks for their staff. Coalition
troops are now patrolling cities and have been successful in controlling the looting
in some areas. Troops are also helping with the emergency restoration of critical
services, such as water and power. But it is slow going. Many Iraqis are growing
impatient with the lack of order and public service.
Medical Services. Many Iraqi hospitals were looted after the dissolution of
the Iraqi government, causing widespread shortages in medical equipment and
medicine. In some cases, hospitals have been stripped of furniture and plumbing.
Some looters stole ambulances, or stripped them of their tires and other parts. Despite
these challenges, many Iraqi doctors and medical staff have persisted and have
managed to provide treatment in emergency situations. At some hospitals, staff took
up arms to protect their facilities from looting during the immediate post-war chaos.
99 For more on humanitarian and reconstruction efforts, see CRS Report RS31833 Iraq:
Recent Development in Humanitarian and Reconstruction Assistance.
The International Committee of the Red Cross has reported that hospitals have
varying levels of capacity and security. There are reports of dramatic increases in
diarrheal cases, especially among children, as well as confirmed cases of cholera in
southern Iraq. The situation at the hospitals has been complicated by an insufficient
clean water supply along with a lack of electricity.
Food Supplies. At present, food supplies seem adequate, in part because extra
rations were distributed prior to the war and because the World Food Program (WFP)
has increased its food deliveries through humanitarian corridors. There is a high
dependence on WFP rations. Until their activities were suspended on the eve of war,
U.N. and other humanitarian agencies were providing aid to Iraq through the Oil for
Food Program, under which 60% of Iraq’s estimated population of 24 to 27 million
were receiving monthly food distributions. The WFP, Ministry of Trade (MOT) and
ORHA have launched a $2 billion post-conflict Public Distribution System (PDS),
which took effect on June 1.
U.S. Activity. Among the key policy goals the Bush Administration specified
when launching a war in Iraq was the economic and political reconstruction of the
country. An Office for Reconstruction and Humanitarian Assistance (ORHA),
staffed by personnel from State, USAID, Defense, and other agencies, was created
within the Pentagon for the purpose of implementing such a program, and it is now
deployed in Iraq. Until recently, retired Lt. Gen. Jay Garner headed the Office.
Recently appointed Presidential envoy to Iraq, Paul Bremer, is the senior official
responsible for the reconstruction program and the establishment of an Iraqi civilian
The FY2003 emergency supplemental appropriations bill (P.L. 108-11) provides
$2.48 billion for an Iraq Relief and Reconstruction Fund, roughly $1.7 billion of
which is expected to be used for reconstruction activities. Most analysts expect Iraq
reconstruction needs to greatly exceed this amount , likely needing supplements from
other sources, such as additional U.S. appropriations, contributions from other
donors, debt reduction or rescheduling, and profits from oil resources.
According to the statements of U.S. officials and budget justification
documents, U.S. reconstruction objectives in Iraq include the formation of an Iraqi
Interim Authority (IIA), leading to a constitutional commission and establishment
of a new Iraqi government. U.S. assistance is envisioned for repair of economic and
social infrastructure — including roads, schools, hospitals, and markets. U.S. and
Iraqi exile experts are to advise each of the 23 Iraqi ministries. U.S. funds are
intended to support efforts to encourage adoption of reformed judicial, legal, and
electoral systems; to provide education to all children, and basic health care for all
Iraqis. U.S. advisers are expected to help promote appropriate macroeconomic
policies and open the Iraqi economy to free-market private enterprise.
Most reconstruction efforts are in their early stages. General Garner announced
earlier that he expected the nucleus of an interim government to emerge by mid-May
and be fully established by early June. On May 21, U.S. civil administrator Bremer
postponed the formation of an interim government until at least mid-July due in part
to security concerns. Some suggest that a longer time period is needed to insure that
the interim government is sufficiently inclusive of all political groups Contractors
and grantees have been selected to implement programs in seaport and airport
administration, capital construction, theater logistical support, public health, primary
and secondary education, personnel support, and local governance. However, there
are few reports of actual work on the ground. Bechtel is reportedly actively
undertaking a dredging operation at the port of Umm Qasr. Iraqi exiles and U.S.-
appointed advisers are taking up positions in Iraqi ministries. USAID grants are
being provided to meet identified community needs, such as a sports facility and
communications center in Umm Qasr. Civil servants, including teachers, are
reporting to work. However, as the time since the end of hostilities lengthens, there
is increasing criticism of the lack of observable progress in the reconstruction effort,
including slow restoration of domestic fuel and gasoline production, shortage of
supplies at hospitals, and lack of public order and essential services.
Major Issues Affecting Iraq’s Economic Future
Preconditions for Economic Development100
A number of key issues will need to be addressed in order to normalize Iraq’s
economic situation and to open the door to its normal future participation in world
commerce. These are conditions which must exist before any substantial economic
development can occur.
A first requirement is the re-establishment of civil peace. Some economic
activity can proceed behind walls or surrounded by armed guards. Generally, though,
little progress can be made in Iraq so long as looting and civil conflict continue.
International law requires that the occupying powers in Iraq “take all measures in
[their] power to restore, and to ensure, as far as possible, public order and safety.”101
The United States and its coalition partners have a few thousand soldiers102
patrolling and performing police functions. Some commentators (military and
civilian) say that several multiples of the current total are needed. Some Iraqi police
from the former regime are also on duty. Additionally, several foreign governments
have indicated that they would be willing to assign police to Iraq to help restore
order. No final steps have yet been taken for internationalizing the police function
or restoring control to Iraqi police officials who are not tainted by their prior
100 Prepared by Jonathan E. Sanford, Specialist in International Political Economy, Foreign
Affairs, Defense and Trade Division, with the assistance of Jennifer K. Elsea, Legislative
Attorney, American Law Division.
101 See Hague Convention No. IV Respecting the Laws and Customs of War on Land, Oct.
Department of the Army. The Law of Land Warfare [hereafter “LLW”], section 363. This
is a compilation of the laws, prepared by the Department of the Defense and issued to U.S.
troops. See Department of the Army, Field Manual 27-10, July 18, 1956, updated July 15,
102 Newsweek reported in late May that 2,200 additional military police would arrive soon
in Baghdad, bringing the total to 4,000. Joshua Hammer and Colin Soloway. “Who’s in
Charge Here.” Newsweek , May 26, 2003, p. 29.
connections to the old regime. In the meantime, U.S. troops are in the uncomfortable
position of serving both as the military instrument of the occupying power and as the
force providing civil police functions. The Iraqi public will likely have mixed
feelings about this situation. The situation is rendered more complex if, as has been
reported, some of the civil unrest and looting seen in recent weeks has been
perpetrated by supporters of the Hussein regime (or perhaps others) in hopes of
destabilizing the current scene.
A second requirement is the establishment of a legitimate government.
International law sets limits on the actions an occupying power may take and the103
initiatives it may pursue. Legally, under the Hague Regulations, an occupying
power may use movable assets such as money, equipment, and oil from existing
wells to pay current obligations, such as health care, schools, transportation
infrastructure and the administrative costs of the occupation regime, until a viable104
Iraqi government is established. However, the occupying power must serve as a
trustee of the assets.105 Title for property does not pass to the occupation authorities
and property must be restored to its original owner at the end of the occupation.
Compensation to the owner may be required. The civil and penal laws of the prior
regime continue in effect and the occupying powers must enforce them (though they
can be altered, repealed or suspended if they constitute a threat to the security of the
occupying forces, restrict the political liberties of the subject population, or are
inconsistent with the duties of the occupant, for example, contravening international106
law.) The occupation authorities may “regulate commercial intercourse in the
occupied territory [and] may subject such intercourse to such prohibitions and107
restrictions as are essential to the purposes of the occupation.”
Under the Hague Convention, the occupying power may not reorganize, sell,
allocate, restructure or otherwise alienate immobile property (such as oil wells,
forests, mines, or farms). It can control property to prevent its military use against
the occupant and to meet the humanitarian needs of the population, but that “measure
103 For a discussion of this, see the CRS General Memorandum “The Law of Belligerent
Occupation: Rights and Responsibilities of an Occupying Power Regarding the Use of Oil
Resources,” by Jennifer K. Elsea, CRS American Law Division, April 8, 2003. See also
testimony by Robert Ebel, Director of the Energy and National Security Center at the Center
for Strategic and International Studies (CSIS) before the House Energy and Commerce
Committee Subcommittee on Energy and Air Quality, May 14, 2003. Several authorities
are cited on current issues and the rights and responsibilities of an occupying power.
104 See generally ERNST FEILCHENFELD, THE INTERNATIONAL ECONOMIC LAW OF
BELLIGERENT OCCUPATION (1942). Hague Regulations art. 53, 55; LLW, sections 399, 400,
105 Hague Regulations art. 55; 2 OPPENHEIM’S INTERNATIONAL LAW § 166 (7th ed. 1952)
106 Hague Regulations art. 43 (requiring the occupant to “respect, unless absolutely
prevented, the laws in force in the country”); LLW sections 369-72.
107 LLW section 376.
of control must not extend to confiscation.” The occupying power does not have the
right of sale or unqualified use of such property.108
In 1967, the United States insisted to Israel when it held Egyptian oil fields that
it could not drill new wells or otherwise develop those facilities.109 The 1967 case
is complex, as it involves privately owned assets and plans for using the oil for the
benefit of Israel itself. Some authorities believe the occupying powers in Iraq can
drill new wells if the proceeds are used to benefit of the Iraqis.110 Others disagree.111
In any case, the principles of trusteeship would apply. Any contracts, regardless of
the nationality of the companies, could last no longer than the occupation, and would
be subject to Iraqi contract law. Some assert that actions favoring U.S. firms, over
and against those of other countries such as Russia or France, would likely be
contrary to the requirements of the Geneva and Hague conventions.112
Iraq has strict laws (put into place during the prior regime) limiting foreign
investment in the country. Under the provisions of the Hague and Geneva treaties,
they cannot be altered by the occupation authorities — except perhaps to facilitate
the needs of the occupation regime — until a new independent government decides
whether they should be changed. The occupation authorities can establish courts,
108 LLW, sections 399, 402. Hague Regulations art. 53.
109 See United States Department of State, Memorandum of Law (Oct. 1, 1976), reprinted
in 16 I.L.M. 733 (1977). But see Evan J. Wallach, The Use of Crude Oil by an Occupying
Belligerent State as a Munition de Guerre, 41 INT’L COMP. L. Q 287, 296-300 (1992)
(documenting that U.S. and Allied practice during post-WWII occupation of Europe was to
treat oil as war material). Jordan J. Paust asserts that “an occupying power cannot engage
or participate in ‘privatization’ of Iraqi oil or the state-owned oil production and distribution
industry and must not tolerate rates of extraction beyond prior ‘normal’ rates of extraction
or excessive fees or profits by others administering such properties.” He notes that
violations of these provisions of the Hague convention would be a war crime. See “The
U.S. as Occupying Power over Portions of Iraq and Relevant Responsibilities Under the
Laws of War.” Available from the National Institute for Military Justice website,
110 Gerson argues that the development of such assets will make them more valuable when
they are returned to local control, so long as they are not spoilt or exhausted. Allan Gerson,
Notes and Comments, American Journal of International Law 71:725 et seq. (1977).
111 Langenkamp says that the consensus of legal opinion is against such expanded use. R.
Dobie Langenkamp. What Happens to the Oil: International Law and the Occupation of
Iraq. Unpublished paper, National Energy-Environment Law and Policy Institute, University
of Tulsa College of Law, January 17, 2003. 18 p. Available from [http://energy.uh.edu].
112 See Suzanne Nussell, in Legal Affairs, May-June 2003, cited by Ebel in his May 14,
2003 testimony. She says that new production could be developed so long as preference is
not given to U.S. firms. Earlier Jessup said the occupant’s use of property has “a solid basis
in law” if, among other things. the use is “not for his own enrichment.” Philip Jessup. “A
Belligerent Occupant’s Power over Property.” American Journal of International Law
38:461 (1944). Langenkamp says, op. cit, pp. 39-40, that efforts by the occupation
authorities in Iraq to use Iraqi oil output to push down the world price of oil, to the benefit
of their home economies would violate the Hague rules.
with binding permanent authority to adjudicate among conflicting property claims.113
In Iraq, such courts could sort out the conflicting claims of foreign firms that signed
contracts with the former regime (for the development of oil fields, for example.)
However, it could not substitute parties having no such claims for the exiting
claimants. The occupation authorities could also defer action on these claims until
a new Iraqi government in place to evaluate and decide them.114
On May 22, 2003, the Security Council directed, in Resolution 1483, that
countries should transfer to the Development Fund for Iraq (see below) any financial
assets or economic resources in their territory belonging to the Iraqi government or
to officials of the former regime.115 Claims by private individuals on those funds or
assets will be held in abeyance until decided by an internationally recognized,
representative government of Iraq. Earlier, the Administration had asked other
countries to transfer Iraqi assets, frozen in 1990 and 1991, to the occupation authority
for use in Iraq. It also asked countries to turn over illicit Iraqi funds. The U.S.
Treasury Department announced serious penalties for foreign governments and
financial institutions that fail to turn over such funds.116
Unilateral action by occupying powers without confirmation by recognized local
authorities may be questionable. In an extreme case, the Japanese and Germans were
found to have committed war crimes during the second world war, when local
officials in puppet regimes allowed them to make permanent social and economic
changes and to remove assets and develop resources for the benefit of the occupying
power. By contrast, in Japan after 1945, U.S. occupation authorities worked through
the existing Japanese government to effect major changes. In Germany after 1945,
the quadripartite agreement for the post-war administration had broad international
support, including support by the wartime United Nations.
Most authorities believe that Iraq will need a legitimate government before
permanent changes can be made in its laws, economy and institutions. Moreover, it
113 Hague Regulations, art. 43.
114 See Langenkamp, op cit, p. 25.
115 United Nations Security Council Resolution 1483, document S/2003/556.
116 Treasury General Counsel David Aufhauser observed, in testimony before the House
Financial Services Committee on May 14, 2003, that the USA PATRIOT Act gives the
Secretary of the Treasury authority to require U.S. financial institutions to take appropriate
countermeasures against foreign jurisdictions or foreign financial institutions that the
Secretary finds to be of primary money laundering concern. He noted that the
Administration was asking foreign governments and institutions to turn over all Iraqi assets
that might belong to Saddam Hussein or his associates. He stated that “Should it be
necessary, a jurisdiction’s or a foreign financial institution’s refusal to search for and
eliminate accounts holding illicit proceeds may fall within the purview of this [legislation].”
In other words, the Administration might cut off their access to the U.S. financial system if
countries or institutions failed to comply with the U.S. request. Aufhauser did not say how
illicit assets owned by members of the prior regime could be distinguished from assets held
abroad legally by other persons or by agencies or instrumentalities of the Iraqi government.
would likely need a government which is broadly recognized by other countries.117
Some believe the occupying powers have the authority to create mechanisms for the
establishment of a new Iraqi regime. Others believe that an international body, be it
the United Nations or another body, must be involved in the process.118 In
Resolution 1483, the U.N. Security Council created a process, involving a Special
Representative appointed by the Secretary General, whereby an interim and a new
sovereign government could be created for Iraq. It is unclear whether the occupying
powers must use this procedure and whether they will avail themselves of it.
The next concern for Iraq would be lifting of sanctions and other restrictions
on its freedom to transfer assets, receive or make foreign investment, and buy and sell
in world markets. The U.N. Security Council moved far in this direction on May 22,
in Resolution 1483, when it rescinded almost all the trade and financial restrictions
embodied in the earlier sanctions regime. (Restrictions on military supplies not
needed for police functions were retained.) Foreign investors and lenders are
unlikely to transfer assets to Iraq so long as the status of its existing debt is not
clarified and its immunity status (see below) remains in effect.
The resolution also approved a mechanism (replacing the OFFP) whereby Iraq
can export oil without legal doubt as to the authenticity of the sale. Under the plan,
SOMO can sell Iraqi petroleum through normal commercial channels. Of the
proceeds of those sales, the Security Council directed, 5% shall be transferred to the
U.N. Compensation Fund, which addresses claims by individuals, firms,
governments and other for direct losses or damage caused by Iraq’s invasion and
occupation of Kuwait. The remaining proceeds of those sales are to be placed —
“until such time as an internationally recognized, representative government of Iraq
is properly constituted” — in a Development Fund for Iraq, an account held by the
Central Bank. The DFI will be audited by independent public accountants reporting
to a special international advisory board.
The Security Council said that the occupation authorities (the “Authority”) can
use the resources in the DFI — in consultation with the Iraqi interim administration
— for specified purposes. These are (1) to meet the humanitarian needs of the Iraqi
people, (2) for economic reconstruction and repair of Iraq’s infrastructure, (3) for the
continued disarmament of Iraq, (4) for the costs of the Iraqi civilian administration,
and (5) for other purposes benefitting the people of Iraq. The leeway the occupation
authorities may have in their interpretation of this last purpose will depend
considerably on the overall scope of their authority in Iraq.
117 Countries may not recognize regimes installed by a foreign power. See Restatement of
the Foreign Relations Law of the United States, 3d ed., 1987, § 203 (2) “A state has an
obligation not to recognize or treat a regime as the government of another state if its control
has been effected by the threat or use of armed force in violation of the United Nations
Charter.” Also “In principle, an unlawful successor should not succeed to rights in property
or to rights under a contract, but the illegality of the succession should not be a defense to
the responsibility of the successor state for the debts of the predecessor.” Id. comment h.
118 For a discussion of this issue, see CRS Report RL31871, Post-War Iraq: Potential Issues
Raised by Previous Occupation and Peacekeeping Experiences, April 24, 2003.
Resolution 1483 seems a careful weaving together of the authorities held
respectively by the Security Council and by the occupying powers. A certain degree
of ambiguity may have been left for resolution in the future. The Council notes (but
did not itself create) the DFI, which was established by the occupying powers. It
underlines (but did not direct) that Iraqi oil revenues shall be used for purposes that
were previously announced by the occupying powers. However, it directs that a
portion of those revenues shall be transferred to the Compensation Fund. It transfers
$1 billion from the OFFP to the DFI and it directs that member states shall transfer
frozen Iraqi assets to the DFI. In that case, its underlining of the purposes of the DFI
seem to be conditions under which that $1 billion and the frozen assets may be used.
The Security Council calls on the occupying powers, consistent with the U.N.
Charter and other relevant international law, “to promote the welfare of the Iraqi
people through the effective administration of the territory.” It may be, but it is not
evident, that the Council conferred new powers on the occupation authorities. It
recognizes the “specific authorities, responsibilities and obligations under
international law which they have as occupying powers.” It calls on them to act in
a manner consistent with the U.N. Charter and international law. It also calls upon
“all concerned” to comply fully with their obligations under international law,
“including in particular the Geneva Convention of 1949 and the Hague Regulations
The Security Council included in Resolution 1483 provisions whereby long-
term changes could be made in Iraq. It said that the Special Representative appointed
by the Secretary General shall promote, in coordination with the occupation
authorities, “economic reconstruction and the conditions for sustainable
development, including through coordination with national and regional
organizations, as appropriate, civil society, donors, and the international financial
institutions.” The syntax of this phrase makes interpretation difficult. However, it
would appear that the Special Representative may promote the implementation of
conditions which are conducive to long-term development in Iraq. The word
“sustainable” would suggest that changes in current procedures and institutions
would be possible, so long as broad consultation occurs. Presumably, those changes
will have validity after the occupation period is concluded.
It is less certain that unilateral actions by the occupation authorities which
exceed their legal mandate under the Hague and Geneva standards would be equally
sustainable. Actions by the occupation authorities to allow the sale or transfer of
Iraqi assets or to changes the laws governing commerce in Iraq — done without the
participation or confirmation of an independent Iraqi government — may have
uncertain long-term prospects. The authorities might believe they have acted for
“purposes benefitting the people of Iraq.” However, their decisions and the economic
activities undertaken by private parties pursuant to those decisions might face
subsequent legal challenges. In the past, courts have ruled in some instances that
questionable actions by occupation authorities were valid at the time they occurred
but may be cause for later action for damages.119 Courts have also ruled, as did the
119 Tesstdorf v. German State, quoted in Felice Morgenstern, “The Validity of Acts of the
U.S. Supreme Court in 1913, that acts by occupation authorities which exceeded
their authority were null and void from the beginning.
The uncertainties in that situation may put the future economic prospects under
a cloud. Investors or purchasers may hold back until the legal situation is clarified.
Those who acted on the basis of questionable decisions by the occupation authorities
in Iraq might find themselves subject later to lawsuits for damages or they may find
that they have paid money for activities whose legal basis was null and void.120
The former sanctions regime and Resolution 1483 are the principal shields
protecting Iraq against lawsuits that would attach its assets or oil revenue to satisfy
the demands of foreign creditors and claimants.121 This immunity was retained in
the new resolution, in the words of the U.S. State Department, “to ensure that the
Iraqi people are not penalized because of Saddam and can receive the benefits of their
national patrimony....” Absent other action by the Security Council or a general
procedure for settling (or in some cases re-adjudicating) these claims, Iraq’s ability
to trade and the ability of the government and Iraqi citizens to hold assets abroad
might be endangered. Whether this immunity from legal action can or should be
continued, as Iraq normalizes its international trade and financial situation is a matter
which may require future examination.
If the prior concerns are addressed satisfactorily, Iraq can begin to normalize
its economic relations with the outside world. Despite the predominant role that oil
exports will likely play in the Iraqi economy, if the necessary conditions occur, Iraq
could become a so-called “normal” diversified economy. Oil investors will probably
go into Iraq even if the economy is a shaky, since they need only focus on a small
portion of the economy. However, other investors may be reluctant act unless the
economic climate in Iraq is conducive.
Belligerent Occupant.” The British Yearbook of International Law, 1951, p. 291 et seq.
Cited by Langenkamp, op. cit., p. 24.
120 Actions to shield investors or purchasers from suit in this situation might themselves be
violation of international law. “Protected persons who are in occupied territory shall not be
deprived, in any case or in any manner whatsoever, of the benefits of the present Convention
by any changes introduced, as the result of the occupation of a territory, into the institutions
or government or the said territory.” LLW 365. “It is especially forbidden...to declare
abolished, suspended, or inadmissible in a court of law the rights and actions of the nationals
of the hostile party.” LLW 372, Hague Regulations art. 23. The Hague reference is to the
law of hostilities, but the reference to courts appears to make it applicable to the occupation
period. The LLW considers it so.
121 U.N. Security Council Resolution 712, September 19, 1991, para. 5. “It decided “that
petroleum and petroleum products subject to resolution 706 (1991) shall while under Iraqi
title be immune from legal proceedings and not be subject to any form of attachment,
garnishment, or execution....” Resolution 1483 says that, until December 31, 2007, unless
the Council decides otherwise, oil and gas “originating in Iraq shall be immune, until title
passes to the initial purchaser from legal proceedings against them and not be subject to any
form of attachment, garnishment, or execution.” The Development Fund for Iraq will have
privileges and immunities “equivalent to those enjoyed by the United Nations” except
respecting legal decisions in connection with a future ecological accident such as an oil spill.
The Arab World Competitiveness Report,122 published by the World Economic
Forum, identifies two sets of institutions: (1) conditions for growth and (2) engines
of growth. On the first score, Iraq will need macroeconomic stability, low levels of
corruption, a stable currency, rule of law, good governance, and improvements in the
education, skill level and health of its people. On the second score, Iraq will need
policies conducive to growth. In particular, it may need to give special attention to
the non-oil sector. Incentives may be necessary to encourage local and foreign
investors and to overcome the intrinsic problems the country will face in this sector
of its economy. (See the section on the non-oil economy and “Dutch Disease”
below.) Broader programs of assistance and encouragement (“industrial policy”)
might be considered, if Iraq decides to emulate the policies pursued by some Asian
countries in recent decades.123
Avoiding Rentier State Authoritarianism124
A major goal of the United States and the international community in Iraq may
be the establishment of a democratic regime which is accountable to its people and
pluralistic in its base of support. This will be a very difficult challenge. With the
exception of Israel, a unique case, there are no democracies in the Middle East. While
there have been substantial reforms in many Middle Eastern countries — including
Egypt and Jordan, plus growing democratic pressure in Iran — those reforms and
pressures have not translated into the emergence of a democratic Arab government.
In Iraq, efforts may need to be made, during the reconstruction process and
through the creation of new political and economic institutions, to counter the
centralizing effects of high levels of oil revenue and its subtle encouragement of
Oil and Authoritarianism. For the foreseeable future, oil exports will be the
principal source of income for Iraq for much of its reconstruction needs and the
principal source of revenue for its government. Academics have observed that
resource abundance (such as oil) can have a negative effect on the emergence of
democracy and stable economic growth. Ross found, in a recent study,125 which
looked at 113 oil-rich countries, that the presence of oil and other mineral-rich
resources impedes the growth of democracy for at least three reasons. First, he said,
a rentier effect enables governments avoid taxation and use high public spending to
consolidate their political control and dampen democratic pressure. Second, a
repression effect lets governments build up their security forces. Third, a
122 Peter K. Cornelius and Klaus Schwab (eds.) The Arab World Competitiveness Report,
123 Marcus Noland and Howard Pack. Industrial Policy in and Era of Globalization: Lessons
from Asia. Institute for International Economics. Washington, D.C. 2003.
124 Prepared by Jonathan E. Sanford, Specialist in International Political Economy, and
Martin A. Weiss, Analyst in International Trade and Finance, Foreign Affairs, Defense and
125 Michael L. Ross. “Does Oil Hinder Democracy?” World Politics 53. April 2001, pp.
modernization effect leads to a situation where the middle class (if any) will be
created by government largess rather than independently through the emergence of
autonomous industrial, manufacturing, and service sectors. The latter was crucial to
the democratization process in Central and Eastern Europe. The problem for Iraq is
how to make an abundance of centralized oil wealth compatible with a pluralistic and
democratic form of government.
Possible Alternatives. First, the proceeds from oil sales or taxes on oil
production could be deposited in special trust funds where the proceeds may be spent
only for certain activities — education, health, economic development, for example
— and are beyond official control. This is the case in Chad. In exchange for the
World Bank helping to develop Chad’s oil industry, the Bank stipulated that 80% of
the revenues be spent on health, education, and rural infrastructure, 5% spent on
people living near the oil fields, and 10% be saved for future generations. Only 5%
of the revenue can go directly to the government. For Iraq, such a program could
promote spending in certain areas and limit government patronage. However, it
would allow the managers of the trust accounts to build their own patronage systems
with limited accountability or control. Second, the proceeds could be distributed
periodically directly to the Iraqi people on a per capita or some other basis. This
would put the funds directly into the hands of the people and encourage private
spending. However, it would starve the government for revenue and require the
imposition of some form of direct taxation on the public. Third, as a variation on the
second option, ownership of the Iraqi petroleum industry could be broadly distributed
among the Iraqi people so that they receive the proceeds not as a government
distribution but rather as capital gains or stock dividends, similar to the Alaska
Permanent Fund.126 Fourth, the government could continue receiving oil revenues
directly (either as profits from state firms or as taxes and royalties on private
producers) but all transactions would be transparent and allocations of those funds
would be determined by open competition among political figures rather than by
quiet consensus within the leadership. According to some experts, Iran is moving in
Reviving the Non-Oil Economy127
When Iraq’s petroleum sector comes fully on line, as discussed above, Iraq will
likely be one of the world’s largest oil exporting countries. As long as it does not
export so much oil as to drive down world prices to its own detriment, Iraq will likely
obtain considerable income from this source. However, the impact this inflow of oil
wealth may have on Iraq’s non-oil economy may be less favorable. A phenomenon
called the “Dutch Disease” often occurs in countries where natural resource exports
comprise a large share of their total exports. The term comes from the experience of
the Netherlands in the 1960s, when large new exports of natural gas brought a major
inflow of foreign currency. This increased the value of the Dutch currency, making
126 Christian Bourge, Alaska Oil Model Could Work For Iraq, United Press International,
127 Prepared by Jonathan E. Sanford, Specialist in International Political Economy, and
Martin A. Weiss, Analyst in International Trade and Finance, Foreign Affairs, Defense and
the country’s non-oil exports less competitive and foreign goods cheaper as potential
imports. This pushes up domestic prices, raising the cost of other potential exports.
Meanwhile, capital and labor shift away from manufacturing and agriculture towards
the booming sector, natural gas in the case of the Netherlands and petroleum in the
case of Iraq. Resources also shift to the domestic sectors producing non-traded goods,
to meet the increasing demand for goods and services from those participating in the
booming sector. As a result, production in the country’s traditional non-oil export
sectors declines and domestic producers are less able to compete with imported
agricultural and manufactured goods.
Some economists believe that the “Dutch Disease” is not really a problem at all
but rather a natural and efficient shift of resources from lesser to more productive
uses within the economy. Many economists believe that steps should be taken to
protect the domestic non-oil sector from this effect. Oil prices fluctuate, they note,
and countries can be very vulnerable to external shocks if they are overly dependant
on the export of only a few products — even ones as potentially lucrative as oil.128
Furthermore, there is no necessary reason why productivity and comparative
efficiency in the non-oil sectors of the economy should be lower in countries that
produce petroleum for export than in those that do not.
Accumulating foreign reserves or — in the case of Iraq — using oil revenue to
pay off foreign debts and claims would be means to this end. This would keep Iraq’s
currency from appreciating excessively but it would also deny the Iraqi people most
of the benefit of their oil wealth. A more popular remedy for “Dutch Disease” would
be efforts to improve productivity in the non-oil sectors through investment,
privatization, restructuring, worker training and limits on taxation. Tariffs that fall
heavier on the non-oil sector than on the oil sector would appear counter productive
in this regard.
Another tactic involves direct effort to encourage diversification in the non-oil
sector in order to develop products that can better meet the test of foreign
competition. Most efforts of this type have tended to emphasize larger enterprises
in order to capture economies of scale. Some authors suggest, however, that more
emphasis might be put on small-scale entrepreneurship in order to achieve possible
gains from flexibility, initiative, and innovation.129
Another concern, if Iraq accrues high levels of oil wealth in the future, will be
the possible negative impact that oil wealth may have on incentives to work and
produce. This is an evident concern in some other countries in the Gulf region. If
living standards are increased, either through direct payments to individuals (through
such mechanisms as the Alaska Permanent Fund) or through less direct means,
128 Paul Cashin, Luis Cespedes, and Ratna Sahay, Commodity Currencies, Finance and
Development, International Monetary Fund, March 2003.
129 Information for this section was drawn from Christine Ebrahim-zadeh, “Back to Basics.”
Finance and Development 40:1, March 2003 and Richard Heeks, “Small Enterprise
Development and the ‘Dutch Disease’ in a Small Economy: the Case of Brunei.” IDPM
Discussion Paper No. 56. Consult [http://idpm.man.ax.uk/wp/dp/dp_wp56.htm].
higher wages may be needed to encourage people to enter the labor market. This
could have serious social and economic effects.
Settling Debt and Overhanging Claims130
A major burden overhanging the future prospects of the Iraqi economy is
uncertainty about the disposition of the foreign debts and claims currently pending
against it. Iraq may have trouble selling oil abroad if unsatisfied creditors are able to
seize or attach the assets. Investors and new lenders may be reluctant to put money
into Iraq if the status of the old credits and claims is unresolved. In August 1990, the
former government of Iraq repudiated its foreign debt. In March 1991, the U.N.
Security Council declared that Iraq’s repudiation of debts was null and void and it
demanded that Iraq accept responsibility and repay all its foreign debts.131
As noted above, Iraq’s foreign debt obligations are considerable. Iraq told the
United Nations in 1991 that it owed $42.1 billion (an amount doubtlessly increased
now through compounded interest) to private banks, suppliers, international agencies,
and foreign governments. The World Bank, IMF, and BIS estimated in 2001 that
debt owed to creditors in OECD countries totaled $26.1 billion, exclusive of debt
which may have already been written off. The Economist Intelligence Unit put the
total at $64.3 billion while the Center for Strategic and International Studies reported
the figure as $108.1 billion. This latter includes $30 billion owed to Gulf states,
which is not included in the other totals. Most of the loans came from Western
sources — Iraq owes the U.S. Government some $4 billion, including accrued
interest, for defaulted agricultural export loans — though a substantial amount also
came via loans from the Soviet Union financing exports of military equipment and
War damage claims are not included in the above. The United Nations has found
that Iraq owes Kuwait $43 billion for individual and family compensation claims in
connection with the 1991 war. A share of Iraq’s export income from the OFFP was
used for this purpose. Some $16.6 billion has been paid to date. Iran is seeking $97
billion for war damage during the 1980s, though the status and likely outcome of this
claim is uncertain.
The issue is whether Iraq has the capacity to service these debts and claims as
they stand or whether it needs some form of debt forgiveness or debt rescheduling.
So long as the immunities provided by the Security Council’s May 22, 2003
resolution (and by the earlier sanctions regime) remain in effect, Iraq will be shielded
from action by claimants and creditors. A framework to resolve outstanding debts
and claims will need to be in place when those immunities are removed by the end
of 2007, to prevent disruption to Iraq’s international trade and financial relations.
It is unclear if Iraq will be able to service its current debts. It seems likely,
however, that Iraq’s debt could be rescheduled for payment over a longer period of
time. As discussed above in the sections on petroleum and trade, Iraq will likely be
130 Prepared by Jonathan E. Sanford, Specialist in International Political Economy, Foreign
Affairs, Defense and Trade Division.
131 U.N. Security Council Resolution 686, March 2, 1991, paragraph 15.
able to export 2.3 million barrels per day (mbd) as soon as the current uncertainties
are resolved. Depending on price, this would yield $18.5 to $23.5 billion in annual
export income. Some analysts believe the volume of Iraqi oil sales could be
increased substantially, to perhaps double the likely rate in the near future, if
restrictions by OPEC or technical factors do not intervene. On this basis, Iraq’s
annual oil revenue might be in the neighborhood of $50 to $60 billion within a
decade. Further study will be necessary to determine the actual size of Iraq’s debts
and debt payments and whether such oil revenues are likely.
Broad agreement among creditors is necessary before a country’s foreign debts
can be forgiven or rescheduled. The London Club (debt to private creditors) and
Paris Club (debt to bilateral official creditors) are the normal venues for such
discussion. In recent years, only debt owed by the poorest countries has been
forgiven outright. Iraq does not meet the economic criteria for debt forgiveness.
Regular Paris Club rescheduling terms would likely apply.132 The Paris Club met on
April 24, 2003 for a preliminary discussion and is ready to “engage on Iraq’s debt.”133
At the Paris Club, debtors must be in a state of imminent default before they can
avail themselves of these bodies. They must also have in place a loan or economic
policy program approved by the IMF. The IMF will likely need many months before
it can reach a satisfactory agreement with Iraq. Iraq will need a recognized regime.
It will need to repay its arrears and subscribe to the recent IMF quota increases.
The IMF normally requires that applicants present credible economic statistics
and a cogent economic plan and program before it will discuss terms and conditions
for a new loan package. For Iraq, this will not likely be a quick process, given the
current dislocations, the scarcity of data, and the recent destruction of records.
Some have proposed that Iraq’s foreign debts should be forgiven, either to allow
more revenue to be available to improve Iraqi living standards or to wipe out
“odious” debt. Action on the former will depend on future calculations showing the
amount that will be left over for Iraqi use after payments for debts and claims are
subtracted from its oil revenues. It will depend also on the amount the creditor
countries value the aspirations of the Iraqi public over the expectations of Iraq’s
creditors and claimants.
Odious debt is a more complex concern. Odious debt is normally considered
to be debt which benefits the ruler (through life style or through graft and corruption)
but has little benefit for the people ruled. The question is whether successor regimes
should be obligated, under international law, to repay money that was stolen, wasted,
or otherwise used in ways having little benefit for them.134
132 For more on the Paris Club, see CRS Report RS21482, The Paris Club, April 3, 2003.
133 The Russian news agency ITAR-TASS reports that the G-8 also agreed on May 19, 2003
to grant a moratorium on Iraq’s foreign debt payments through 2004. See RFE/RL Iraq
Report 6:23, May 23, 2003.
134 See, for example, Michael Kremer and Seema Jayachandran, “Odious Debt.” Finance
and Development 39:2, June 2002. They suggest that an international panel might declare
that future debt incurred by a regime would be “odious” and would not need be repaid by
The concept of odious debt has not been endorsed by any international legal or
financial body. It has been used successfully by a few successor regimes to repudiate
war debt owed by defeated opponents or debt incurred by former colonial regimes.
Some people have suggested that the concept might be relevant to the issue of Iraqi
debt. On April 10, 2003, for example, Treasury Secretary John Snow told Fox news
that “Certainly the people of Iraq shouldn’t be saddled with those debts incurred
through the regime of the dictator who is now gone.”135
Most observers will agree that the regime of Saddam Hussein was odious. It is
less certain, however, that the debt incurred by the regime was also odious. A
portion of Iraq’s debt may have been incurred to support an enhanced lifestyle and
privileges for the regime and its close supporters. Much of these expenditures seem
to have been funded with oil export revenue, however, particularly those after 1990,
when new loans were prohibited by the sanctions regime. Most of Iraq’s debt was
incurred to pay the cost of the Iran-Iraq war, to finance construction of industrial and
transportation facilities, to pay for imports (such as agricultural imports from the
United States), and to support economic policy schemes which proved (given the
centrally-directed nature of the regime) to be wasteful and unsound. Whether these
are the types of debts which ought to be categorized as “odious” will be a matter
requiring future consideration.
Establishing a Currency and Monetary System136
For the foreseeable future, though other currencies will also circulate, the U.S.
dollar may serve in effect as the basic currency for Iraq. Other currencies likely will
be defined in dollar terms. “Dollarization” implies currency credibility, but also
monetary dependence on the United States. From a political and economic
perspective, this will likely not be an acceptable long-term response to Iraqi needs.
Oil will play a dominant role in the economy for the foreseeable future and this has
important implications for Iraq’s choice of an exchange rate regime. If Iraq remains
basically on a dollar standard for its currency, however, its inflation level and
business cycle will be determined by U.S. monetary policy and not by its domestic
successors. This would seriously discourage new lending except at inordinate rates. They
say there are serious problems applying that standard retrospectively to existing debt. By
contrast, Jubilee South argues that “debt is odious and not transferable to a successor
government if the previous regime was any form of dictatorship acting contrary to the needs
and wishes of the subjugated population.” Odious Debt Revisited, October 30, 2002, at
[http://www.jubileesouth.org]. The debate was framed in terms whether the post-apartheid
government of South Africa should have to pay the debt which funded the military and
security services which suppressed the majority population. Ironically, the successor
governments decided to service that debt in order to avoid damage to its creditworthiness.
Under Jubilee South’s definition, almost any government in a non-democratic country could
declare that the bills and debts of its predecessor were “odious” and therefore not its
135 U.S. Treasury Secretary John Snow, interview on Your World With Neil Cavuto. April
136 Prepared by Marc Labonte, Economist, Government and Finance Division.
needs. Levels of economic activity in Iraq may be overly stimulated or depressed and
the non-oil sectors of the economy may suffer. In the long-run, Iraq needs monetary
institutions and exchange rate procedures which are capable of maintaining stability
and credibility for its currency as well as sufficient flexibility in monetary policy to
address adequately its internal needs.
The Dinar Lacks Sufficient Credibility. A new currency may be needed
to enhance the new monetary system’s credibility. The dinar’s credibility and the
stability of Iraq’s monetary system under the Hussein regime were undermined by
high inflation and a black market exchange rate. Due to the economic and fiscal
pressures caused by the first Gulf War and the sanctions regime, Iraq was unable to
finance budget deficits through tax revenues and bond issuances, and was forced to
print money instead, resulting in high inflation. Thus, an early step that may be taken
in reconstructing the economy will be the introduction of a new currency that is not
tainted by the dinar’s unreliability nor by symbolic association with the old regime.
The U.S. Treasury announced on April 21 that a new currency would be introduced137
in 90-180 days.
Interim Dollarization by Default. Three currencies are widely circulating
at present in Iraq: two Iraqi currencies from previous regimes and the U.S. dollar.138
With no new currency in place, de facto dollarization of the economy seems to be
taking place. Individuals avoid holding dinars if possible. Foreign currencies are
now the favored medium of exchange, with the dollar in ascendence. Dollarization
will have a stabilizing effect in the short term. As U.S. aid and economic ties
increase, more dollars will be available for circulation relative to other currencies and
the process of dollarization will continue. For example, American officials recently
made “emergency payments” in dollars to Iraqi civil servants.139 Dollarization
provides Iraq with stable prices but also dependence upon U.S. monetary policy.
A New Currency Requires Key Decisions. Under the current dollarized
system, Iraq has no control over its money supply, interest rates, and the exchange
rate. To change that, Iraq will need to introduce a new currency and authorize a
monetary authority to manage it. Until faith in the new currency is established,
alternative currencies will circulate alongside it. To make the transition to a new
currency occur as quickly as possible, the current trends promoting dollarization will
137 Oxford Analytica, Daily Brief, April 24, 2003.
138 At present, the other main currency circulating is the “old” or “Swiss” dinar, which was
used before a “Saddam” dinar was introduced in 1991 and has been (and still is) widely used
in the Kurdish north since the 1990s. Because the central bank stopped printing the old
dinar when the new one was introduced, the supply is fixed and has maintained its value.
The Bush Administration is reportedly considering using its design for the new currency.
See Michael Phillips, “U.S. Wants Fresh Supply of Iraqi Currency,” Wall Street Journal,
May 19, 2003.
139 Bob Davis, Chip Cummins, and Simeon Kerr, “Dollars Are Sent to Iraq to Replace
Dinars,” Wall St. Journal, April 16, 2003, p. A8. Commenting on this policy, Treasury
Undersecretary John Taylor said “It’s an interim arrangement, and we’re not going to do it
any longer than we have to.” Quoted in Edmund Andrews, “Iraq to Run on Dollars Till It
Gets New Currency,” New York Times, April 17, 2003.
have to be reversed. To this end, the new government and the United States could
make and accept payments in the new currency and not in U.S. dollars. To introduce
the new currency, the government can temporarily allow dinars to be exchanged for
the new currency. If authorities wish to soften the blow on individuals whose wealth
is trapped in dinars, they can make the trade on terms favorable to the dinar’s current
market rate. This will increase the cost of the currency reform, however. The
authorities may also have to decide whether to allow the old dinar to be exchanged
for the new currency even though it was not the official currency of the Hussein
Importance of Monetary Control. The first hurdle a new Iraqi monetary
system must pass is the elimination of high inflation, which depends on the
successful reform of the fiscal system. Once sanctions are completely lifted, at least
some fiscal pressures will be relieved. Iraq may be less vulnerable to fiscal weakness
than most developing countries because of easy access to revenue through state
control of the oil industry — at least when oil prices are high.
Five other steps may be needed to establish an effective monetary regime. First
is renegotiation of the large external debts incurred by the Hussein regime. (See the
discussion of debt below.) Second, Iraq may need a central bank which is able to
operate somewhat independently from the country’s fiscal authorities and cannot be
compelled (as was the case during the former regime) to automatically finance
government budget deficits. Third, Iraq may need to clearly define the goals of its
monetary policy. Some countries, like Canada, set numerical inflation targets for
their central bank to meet; others, like the United States, have looser, multiple goals.
Fourth, the Iraqi monetary authorities may need adequate foreign reserves to
stabilize their operations — particularly if the exchange rate is fixed — and to build
confidence in the currency. Finally, Iraq may need a sound banking system, both
because the economy will need adequate banking services and because it will provide
the monetary authorities with effective means for controlling the money supply and
managing monetary policy.
Choosing an Exchange Rate Regime. The creation of a new monetary
system requires choice of an exchange rate regime. Exchange rate regimes and
monetary policy are best thought of as going hand in hand since one determines the
other. There are a number of monetary/exchange rate regimes that have been
successfully used around the world from which Iraq can choose. The choices fall
under two broad categories: fixed exchanged rates (including dollarization, currency
boards, and exchange rate pegs maintained by a central bank) and floating exchanges.
Philosophically, these systems can be thought to fall on a continuum of less or more
freedom for Iraq to adjust monetary policy at its discretion.
The Iraqi authorities could let the current process of dollarization continue.
Adopted in countries such as Panama and Estonia, dollarization does away with an
independent monetary system entirely. The money supply is instead determined by
the foreign currency inflows that occur through international trade or capital flows.
Since the political symbolism of dollarization would probably be unacceptable in
Iraq, a currency board might be an alternative. A currency board is also very
restrictive since the local currency is 100% backed by foreign currency reserves,
although it can be reversed more easily, as was the case in Argentina.140 But unless
Iraq has large foreign reserves, a currency board could prove to be unstable.
A floating exchange rate, the least restrictive option, allows the market to
determine the exchange rate so that Iraqi authorities would be able to focus on setting
monetary policy to the needs of the domestic economy. In between, a fixed exchange
rate regime would greatly — but not completely — limit Iraqi monetary policy to
maintaining a fixed relationship between the domestic currency and a foreign
currency or basket of foreign currencies (unless capital controls are adopted). Iraq
used this system with the dinar. The huge difference between the black market rate
and the official rate is the strongest sign that the system was abused by authorities.
Short-Run Credibility vs. Long-Run Flexibility. The best monetary
system depends on Iraq’s specific circumstances Politically, the freedom to alter
monetary policy at will in response to changing economic conditions is only valuable
if it is not abused. The Iraqis could adopt a more restrictive exchange rate regime as
a way to “tie their hands” and regain credibility after the previous monetary abuse.
Dollarization and currency boards are a means to achieving instant monetary
credibility, at least in the short run. But if Iraq can establish a strong, independent
central bank and an effective fiscal regime and tax administration, a restrictive
monetary system would serve little purpose. Economically, the value of a floating
exchange rate, and the freedom it provides to adjust monetary policy to domestic
needs, depends upon how closely Iraq’s business cycle will ultimately follow those
of its trading partners. If Iraq is closely tied to a large country through trade, it may
have little to gain from setting a monetary policy that is different from its large
partner. By contrast, if it does not depend heavily on trade with any one partner and
has a unique business cycle, it would find it advantageous to set its monetary policy
independently. What can be said of all countries, including Iraq, is that economic
conditions are never static and the proper monetary policy can help a country adjust
to the changes. A static exchange rate arrangement will only be supportive under
new economic conditions if the country to which Iraq’s exchange rate is tied has
undergone similar changes. Many economic crises of the past two decades have been
precipitated by a country being forced to abandon its exchange rate peg.
Oil and Monetary Policy. Because Iraq’s economy has been stifled for so
long by geopolitical events, it is difficult to envision how it will look in the future.
The one certainty is that oil will play a dominant role in the economy for the
foreseeable future. This has important ramifications for Iraq’s monetary system. On
the one hand, pegging the Iraqi currency to the dollar would be useful since the
international oil market is conducted using the U.S. dollar and many of Iraq’s
neighbors in the Gulf, like Saudi Arabia, have pegged their exchange rate to the
dollar. On the other hand, the business cycles of oil-producing countries widely
differ from oil-consuming countries by their very nature. A rise in oil prices is likely
to cause a boom in oil-producing countries and a slowdown in oil-consuming
countries, and vice versa. If the Iraqi exchange rate were tied to the dollar, its
monetary policy, determined by U.S. monetary policy through the exchange rate peg,
140 For more information, see CRS Report RL31093, A Currency Board as an Alternative
to a Central Bank.
would move in the opposite direction of the economy’s needs every time there was
a large shift in oil prices.
Rebuilding the Financial System141
Rebuilding — or rather, forming for the first time — a market-based financial
system in Iraq may need to accompany the rebuilding of the economy for two
reasons. First and fundamentally, economic activity always has a financial side.
Second and empirically, rebuilding experiences in other countries suggest that it is
important from the beginning of economic reconstruction to have in place a financial
system featuring market-based incentives, risk management and a safety net to insure
confidence. Lessons learned from those experiences are that the system could be
simple initially, but that supervisory and regulatory arrangements also matter.
Whatever form the system takes, its primary function is to allocate capital sufficiently
well to allow the Iraqi economy to operate efficiently. Past experience also shows
that capital is needed quickly to get an economy up and running. Iraq is expected to
face a capital shortage, and foreign capital may be desirable initially. The
Administration has held extensive planning discussions on rebuilding the Iraq
economy and financial system, but details are not yet available.
Change to a Market-Based System. As noted earlier, Iraq has never had
a functioning, market-oriented financial system, although there have been limited
attempts at reform. The basic tasks are daunting. How can Iraq create a functioning
market-oriented financial system when it has never really experienced one? How
should Iraq design its institutions and its system of incentives so that market-based
behavior rather than political influence and/or cronyism are rewarded? Can Iraq use
the networks and expertise built up in the past to help establish its new financial
institutions without creating opportunities for the corrupt practices of the former
system to reemerge anew? To tackle these challenges, lessons from financial sector142
reforms in countries that had similar circumstances are relevant for Iraq:
(1)A priority might be the immediate establishment of a financial system based on
basic market principles. Rebuilding the financial system in Iraq must go hand
in hand with rebuilding the Iraqi economy from the start. The efficient operation
of a financial system is the backbone of any market economy. It links the
suppliers and users of funds in order to support economic activity. It is critical
141 Prepared by Anne Vorce, Economist, Government and Finance Division.
142 For reform of the Iraqi financial system, valuable lessons can be learned from financial
market reform in many state-planned economies and economies affected by war over the
past decade. For example, see Malcolm Knight et al [eds.], IMF, Transforming Financial
Systems in the Baltics, Russia, and other Countries of the Former Soviet Union, 1999;
IMF, Capital Markets and Financial Liberalization in the Baltic States, Country Report No.
03/115, April 2003; UNU/WIDER, Financial Reconstruction in Conflict and Post-Conflict
Economies, Discussion Paper No. 2001/90; R. Barry Johnston and V. Sundararajan (eds.),
IMF, Sequencing Financial Sector Reform, 1999; Alan Roe et al, World Bank, Analyzing
Financial Sectors in Transition: with Special Reference to the Former Soviet Union, 1998.
There is extensive discussion of foreign capital issues in the World Bank’s publication,
Global Development Finance 2002, Chapter 3.
infrastructure but, unlike water and electricity, is largely invisible to the average
citizen when it is working properly.
(2)There is no “one size fits all” system design. The types of private sector
institutions to be chartered by the financial authority vary with the economy.
In Iraq, a case can be made for a very simple system consisting of a single bank
with extensive branching in the early phase of reconstruction. Problems that
might otherwise arise in such a monopoly situation can be addressed with
market-oriented pricing, which matches supply and demand for funds. Other
options for financial institutions range from universal banks, which may provide
the widest range of services, to specialty banks, which may have particular
features important for the smooth functioning of key sectors.
(3)Institutions matter in the efficient conduct of a financial system. In similar
situations elsewhere over the past 15 years, the weakness of the reconstituted
central banks (and, if separately established, other financial supervisory
authorities) have often resulted in financial market crises. Many analysts
believe that, in Russia and other similar situations, powerful interests were
given too many resources and too much regulatory forbearance because their
support was considered politically necessary to build consensus for the new
system. Many also believe that financial sector liberalization was done too
quickly, to foster competition, without adequate legal and prudential safeguards
first being in place. Major crises ensued in several instances which were costly
to resolve and undermined attempts to build depositor and investor confidence.
(4)Strong institutions may require substantial budgetary resources. Iraq may need
to spend money to get the best qualified staff available for its regulatory and
oversight bodies. Most experts believe that the employees of supervisory
agencies should be paid enough to discourage them from private activities or
side deals which conflict with their official duties. Training may also be
necessary. For example, central bankers and financial regulators from the
former Soviet republics were trained in their countries, the United States, or
Europe on best practices of central banking and financial market supervision.
(5)Establishment and enforcement of a sound legal framework, featuring viable
contract, bankruptcy and property law plus judicial review, may be as important
as, if not more important than, the design of new financial institutions in the
transitional phase of reform. A sound legal framework is linked to fundamental
financial considerations related to risk management. For example, enforcement
of an agreed contract is a bedrock of any economic or financial transaction;
collateral-based lending depends on a functioning legal system; bankruptcy law
sets out the framework for redress under certain circumstances.
(6)Private foreign capital may be required to increase the capital base of the
economy, to fund development and to foster competitive conditions in the
longer run. It is widely believed that Iraq does not have sufficient resources to
adequately fund its financial system because: a solid earnings stream from its
oil exports will not resume for awhile; its foreign debt situation needs to be
worked out; and the shift from an economy dominated by state-owned
enterprises to a functioning private sector needs to be funded. Past experience
in rebuilding economies elsewhere suggests that encouraging private foreign
capital inflows can be a quick way to capitalize an economy and create
competitive conditions initially, particularly in the absence of taxpayer-funded
resources from other countries. Opening up the financial system to well-run and
capitalized foreign banks and permitting foreign direct investors to have a stake
in the privatization of state-run enterprises are often seen as the most effective
ways to meet basic needs.143 These experiences do not suggest that domestic
firms are eliminated by foreign firms, despite concerns over basic competitive
inequities between large, deep-pocket institutions and more thinly capitalized
firms. Domestic firms have often had a comparative advantage because of their
ability to exercise judgment on non-economic risk factors in a familiar setting.
Administration Plans. Over the past few months, the Administration has
been developing a blueprint for the rebuilding of the Iraq economy and financial
system. Initial plans are reportedly contained in a document Moving The Iraqi
Economy From Recovery to Sustainable Growth that is being circulated among144
potential private sector U.S. contractors. On the financial side, this document is
said to include plans (1) to reform the central bank and the commercial banking
system; (2) to work out problem loans in the banking system; (3) to set up a “tough”
securities commission to limit abuse; (4) to form a stock market with electronic
trading capability; (5) to privatize state-controlled companies (which would bring
with it associated financial market activity); and (6) to grant loans of as much as $8
billion to small and medium sized enterprises within the first year (which may require
a separate financial facility). The traditional Islamic money transfer system would145
be incorporated into the banking system.
The Administration’s plans are taking concrete shape. Security Council
Resolution 1483, passed May 22, 2003, laid out some basic institutional
arrangements for rebuilding the economy and financial system. The Development
Fund for Iraq — including oil revenues and overseas assets previously frozen — can
be used to rebuild the Iraqi economy. (See the section on pre-conditions for
economic development above.) The Administration has also announced that the
Central Bank will be rebuilt by a team led by Peter McPherson, the Financial
Coordinator of the Office of Reconstruction and Humanitarian Assistance (ORHA)146
with the assistance of Treasury Deputy General Counsel George Wolfe.
143 World Bank, Global Development Finance 2002, pp.61-69.
144 Neil King Jr, “Bush Officials Draft Broad Plan for Free Market Economy in Iraq,” Wall
Street Journal, May 1, 2003, pp.A1,A8.
145 An Islamic banking system is one in which the conduct of financial services conforms
to Islamic principles. Certain activities are prohibited but financial vehicles can be used to
manage this situation. A number of countries are either moving to a full system (Pakistan)
or have an Islamic system operating along side a conventional system. For a more extensive
discussion, see V. Sundararajan and Luca Errico, IMF, Islamic Financial Institutions and
Products in the Global System: Key Issues in Risk Management and Challenges Ahead, IMF
146 U.S. Treasury Department, “McPherson named Financial Coordinator for Office of
Reconstruction and Humanitarian Assistance (ORHA) in Iraq,” press release, April 25,
Export and Border Control Capabilities147
Prior to Operation Iraqi Freedom, the export control problems most observers
worried about were Iraq’s capability to smuggle in material, technology and
equipment related to weapons of mass destruction (nuclear, chemical, biological
weapons and ballistic missiles)and smuggle out oil. In addition, some observers
worried about the export of sensitive materials to other rogue states or terrorist
organizations or individuals. With a change in regime, most of those concerns are
probably diminished from the perspective of state-sanctioned exports. However,
some provisions for controlling exports and patrolling borders may be desirable.
Currently, none of the nonproliferation treaties (Nuclear Nonproliferation
Treaty, Biological Weapons Convention and Chemical Weapons Convention)
requires member states to create export laws and implement them, although they all
contain prohibitions or restrictions on receipt and transfer of sensitive materials,
technology, and equipment. Rather, the control of such goods is administered at the
national level and coordinated multilaterally through the Nuclear Suppliers’ Group,
the Missile Technology Control Regime, and the Australia Group. Iraq is not a
member of any of these groups and does not belong to the Chemical Weapons
Convention, although this may be an opportune time to press for Iraqi membership.
Despite the lack of legal requirements to implement export and border control,
it is likely that Iraqi leaders may want to show goodwill by doing so. The creation
of a legal framework, processes and implementation will have costs. The United
States has helped other countries, including former Soviet states in a variety of areas,
including providing legal advice, detection equipment, and training for border police,
among other things. For several years, the U.S. State Department has provided
global export control and related border security assistance (about $40 million),
which is designed to help other countries prevent an outflow of sensitive items from
their borders. Iraq may be a good candidate for such assistance.
Access to Foreign Resources148
Iraq and the International Financial Institutions. At their fall 2003
meetings, the International Monetary Fund (IMF) and World Bank — the major
international financial institutions (IFIs) — both expressed their willingness and
ability to assist the reconstruction efforts in Iraq. The International Monetary and
Finance Committee (IMFC), the IMF’s ruling body, and the joint IMF/World Bank
2003. He will “work closely with the Iraqis in rebuilding the finance ministry, the
central bank and the banking system.” U.S. Treasury Department, “Wolfe Named Deputy
Financial Coordinator for Office of Reconstruction and Humanitarian Assistance (ORHA)
in Iraq, press release, April 25, 2003.
147 Prepared by Sharon Squassoni, Specialist in Weapons of Mass Destruction-
Nonproliferation, Foreign Affairs, Defense and Trade Division.
148 Prepared by Martin A. Weiss, Analyst in International Trade and Finance, Foreign
Affairs, Defense and Trade Division.
Development Committee stated that “The World Bank and the IMF stand ready to
play their normal role in Iraq’s re-development at the appropriate time.” On April
29, the Bank announced that its management had the authority to decide what the
appropriate time would be. The IMF and World Bank cannot lend to Iraq until
several major steps have been taken to normalize its relations with them. However,
now that the former restrictions on their activities have been lifted, the Bank and
Fund will be able to send staff missions to Iraq, for technical and policy
consultations, as soon as their assistance is requested and the physical security of the
persons involved can be assured.
Iraq has been a member of both the IMF and the World Bank since these
institutions were founded in 1945. However, neither institution has had official
contact with Iraq for twenty years. The last IMF Article IV consultation (an official
assessment of an economy) for Iraq was in 1980. In 1983, the next consultation was
begun, but never completed. Iraq owes the IMF 52.31 million special drawing rights
(SDRs) or approximately $72 million for prior loans.149 Its current IMF quota is SDR
504 million or $695 million. The last World Bank loan to Iraq was a grain storage
project in 1973. Between 1945 and 1973, the World Bank made six loans to Iraq
(totaling $106.5 million) mainly for education and infrastructure. In 1990, Iraq’s
loans were put on a “non-accrual status,” when it failed to make loan payments.
Including interest, Iraq owes the World Bank $82 million in payment arrears.
On May 22, 2003, the U.N. Security Council rescinded the restrictions in the
earlier sanctions regime barring international agencies from operating in or providing
assistance to Iraq. Instead, Resolution 1483 calls on the international financial
institutions “to assist the people of Iraq in the reconstruction and development of
their economy and to facilitate assistance by the broader donor community.”
The IMF and World Bank will not lend new money to Iraq until it clears its
existing arrears. To borrow from the IMF, Iraq would also need to subscribe to the
last two IMF quota increases. It would need to pay to the IMF money sufficient to
raise its IMF quota from SDR 504 million ($695 million) to SDR 1188 million
($1.64 billion). One-quarter of the amount would need to be paid in hard currency.
(Iraq would then be able to borrow back the hard currency. The IMF has a fund for
immediate post-conflict lending, up to 50% of a member’s quota, but since Iraq has
not subscribed to the last two quota increases, and is in arrears to the IMF, it is
unlikely they would be able to receive IMF emergency assistance. Iraq “graduated”
from the World Bank in 1973 due to the oil boom, making it ineligible to borrow
Bank funds. It might be able to borrow during the reconstruction period, once a
government takes power which has authority to sign long-term contracts that are
binding on Iraq. However, this would depend on a variety of conditions which
cannot be assessed at this time and would likely be a temporary situation pending
restoration of Iraq’s oil export capacity.
The Bank and Fund can move more quickly to provide technical assistance and
policy advice. This is the “normal role” mentioned earlier. The World Bank and
149 IMF loans are formal lending arrangements; arrears are unmade payments on prior loans
or quota increases.
IMF are both authorized to send full “needs assessment” teams to Iraq and will do so
as soon as personal security can be guaranteed. Until that time arrives, Nicholas
Crafft, formerly the World Bank’s point person for West Bank and Gaza, is
accompanying Sergio Viera de Mello, the UN special representative in Iraq.
Moreover, the World Bank has also approved the appointment of a Bank official to
the International Advisory and Monitoring Board of the Development Fund for Iraq.
(It is not clear, however, whether occupation authorities are authorized to make that
request or whether an interim government is required.) Normally, the Bank and Fund
identify experts who might help address the problems identified by the mission and
procedure for coordinating and evaluating their activity. The Bank and Fund team
may also identify broader projects or programs which may be needed. The cost of
the technical assistance program is normally borne by foreign aid donors rather than
by the Bank and Fund themselves.
The IMF expressed a willingness, at the fall meetings, to help Iraq reconstitute
its monetary and financial sector. It is unclear whether the occupation authorities will
pursue this offer. The Bank and Fund have been actively involved in post-conflict
situations in many countries, including Kosovo, Afghanistan and East Timor. They
have also helped post-Soviet and East European governments make the transition
from Soviet-style command economies to market-based systems. The Bank and
Fund have also advised post-conflict and transition countries on ways they can
rebuild their statistical and administrative capabilities and improve monetary, fiscal,
and exchange rate policy. The World Bank has also served as the lead agency on
foreign assistance donor coordination committees in many countries.
In summary, like all other international institutions planning to operate in Iraq
once an internationally recognized government is in place, the IMF and World Bank
are currently trying to acquire as much information as possible from second-hand
sources, basically a “watching brief.” Initially, IMF/World Bank activity will most
likely be limited to a technical assistance and advisory role. Once Iraq’s arrears,
which are small compared to its possible future GDP, are resolved and Iraq is in good
standing, formal lending arrangements could be discussed.
The United Nations Development Programme. Since 1976, the United
Nations Development Programme (UNDP) has been operating in Iraq. UNDP had
over 500 staff in Iraq and offices in Baghdad, Dohuk, Erbil, and Sulaimaniyah before
the recent war. According to its mandate, UNDP’s involvement in post-war Iraq
will focus on humanitarian needs. They have proposed a three-fold agenda for their
operations in Iraq: (1) emergency infrastructure rehabilitation focusing on the
electricity sector; (2) generate income by providing short-term immediate
employment; and (3) coordinate de-mining activities by creating an Iraq Mine Action
Centre (IMAC).150 Like IFI involvement, any long-term UNDP activity in Iraq
requires UN Security Council authorization. Some humanitarian aid can be
administered immediately and requires no international authorization.
150 For more information, see UNDP’s Iraq website See [http://www.iq.undp.org/].