Economy

Iraq's economy is dominated by the petroleum sector, which has traditionally provided about 95% of foreign exchange earnings. In the 1980s, financial problems caused by massive expenditures in the eight-year war with Iran and damage to oil export facilities by Iran led the government to implement austerity measures, borrow heavily, and later reschedule foreign debt payments; Iraq suffered economic losses of at least $100 billion from the war. After the end of hostilities in 1988, oil exports gradually increased with the construction of new pipelines and restoration of damaged facilities. Current GDP per capita of Iraq grew 56% in the Sixties reaching a peak growth of 57% in the Seventies. But this proved unsustainable and current GDP per capita consequently shrank by 23% in the Eighties.

Primary Sectors

Agriculture

Historically, only 50 to 60% of Iraq's arable land has been under cultivation. Because of ethnic politics, valuable farmland in Kurdish territory has not contributed to the national economy, and inconsistent agricultural policies under Saddam Hussein's discouraged domestic market production. Despite its abundant land and water resources, Iraq is a net food importer. Under the UN Oil for Food program, Iraq imported large quantities of grains, meat, poultry and dairy products. The government abolished its farm collectivization program in 1981, allowing a greater role for private enterprise in agriculture.

The international Oil-for-Food program (1997-2003) further reduced farm production by supplying artificially priced foreign foodstuffs. The military action of 2003 did little damage to Iraqi agriculture; because of favourable weather conditions, in that year grain production was 22% higher than in 2002. Although growth continued in 2004, experts predicted that Iraq will be an importer of agricultural products for the foreseeable future. Long-term plans call for investment in agricultural machinery and materials and more prolific crop varieties-improvements that did not reach Iraq's farmers under the Hussein regime. In 2004, the main agricultural crops were wheat, barley, corn, rice, vegetables, dates, and cotton, and the main livestock outputs were cattle and sheep.

The Agricultural Cooperative Bank targets its low-interest, low-collateral loans to private farmers for mechanization, poultry projects and orchard development. Large modern cattle, dairy and poultry farms are under construction. Obstacles to agricultural development include labour shortages, inadequate management and maintenance, salinisation, urban migration, and dislocations resulting from previous land reform and collectivization programs.

Importation of foreign workers and increased entry of women into traditionally male labour roles have helped compensate for agricultural and industrial labour shortages exacerbated by the war. A disastrous attempt to drain the southern marshes and introduce irrigated farming to this region merely destroyed a natural food producing area, while concentration of salts and minerals in the soil due to the draining left the land unsuitable for agriculture.

Energy

As one of the three most oil-rich countries in the world, Iraq has the resources for complete energy independence. By world standards, production costs for Iraqi oil are relatively low. However, long-term neglect and mismanagement of the petroleum industry by the Ba'athist regimes left the industry's infrastructure in poor condition. The lifting of sanctions in 2003 allowed repairs to begin. However, since 2003, oil pipelines and installations have been sabotaged persistently.

In 2004, Iraq had eight oil refineries, the largest of which were at Baiji, Basra and Daura. Sabotage and technical problems at the refineries forced Iraq to import fuels, liquid petroleum gas and other refined products from nearby countries. In October 2004, for example, Iraq spent US$60 million for imported gasoline. In late 2004 and early 2005, regular sabotage of plants and pipelines reduced export and domestic distribution of oil, particularly to Baghdad. Nationwide fuel shortages and power outages resulted.

In 2004, plans called for increased domestic utilization of natural gas to replace oil and for use in the petrochemical industry. However, because most of Iraq's gas output is associated with oil, output growth depends on developments in the oil industry. As much as 90% of Iraq's power generating and distribution systems were destroyed in the Persian Gulf War of 1991, and full recovery never occurred. In mid-2004, Iraq had an estimated 5,000 megawatts of power-generating capacity, compared with 7,500 megawatts of demand. At that time, the transmission system included 17,700 kilometres of line. In 2004, plans called for construction of two new power plants and restoration of existing plants and transmission lines to ease the blackouts and economic hardship caused by this shortfall, but sabotage and looting held capacity below 6,000 megawatts.

In 2004 the World Bank estimated that US$12 billion would be needed for near-term restoration, and the Ministry of Electricity estimated that US$35 billion would be necessary to rebuild the system fully.

Forestry

Throughout the twentieth century, human exploitation, shifting agriculture, forest fires and uncontrolled grazing denuded large areas of Iraq's natural forests, which in 2005 are almost exclusively confined to the northeastern highlands. Most of the trees found in that region are not suitable for lumbering. In 2002, a total of 112,000 cubic metres of wood were harvested, nearly half of which was used as fuel.

Fishing

Despite its many rivers, Iraq's fishing industry has remained relatively small and based largely on marine species in the Persian Gulf. In 2001, the catch was 22,800 tons.

Industry

Traditionally, Iraq's manufacturing activity has been closely connected to the oil industry. The major industries in that category have been petroleum refining and the manufacture of chemicals and fertilizers. Before 2003, diversification was hindered by limitations on privatisation and the effects of the international sanctions of the 1990s. Since 2003, security problems have blocked efforts to establish new enterprises. The construction industry is an exception; in 2000 cement was the only major industrial product not based on hydrocarbons. The construction industry has profited from the need to rebuild after Iraq's several wars. In the 1990s, the industry benefited from government funding of extensive infrastructure and housing projects and elaborate palace complexes.

Mining

Aside from hydrocarbons, Iraq's mining industry has been confined to extraction of relatively small amounts of phosphates (at Akashat), salt and sulphur (near Mosul). Since a relatively productive period in the 1970s, the mining industry has been hampered by the Iran-Iraq War (1980-88), the sanctions of the 1990s, and the economic collapse of 2003.

Services

Iraq's financial services have been the subject of post-Hussein reforms. The 17 private banks established during the 1990s were limited to domestic transactions and attracted few private depositors. Those banks and two main state banks were badly damaged by the international embargo of the 1990s. To further privatise and expand the system, in 2003 the Coalition Provisional Authority removed restrictions on international bank transactions and freed the Central Bank of Iraq (CBI) from government control. In its first year of independent operation, the CBI received credit for limiting Iraq's inflation. In 2004, three foreign banks received licenses to do business in Iraq.

Because of the danger posed by Iraq's ongoing insurgency, the security industry has been a uniquely prosperous part of the services sector. Often run by former US military personnel, at least 26 companies offer personal and institutional protection, surveillance, and other forms of security.

In the early post-Hussein period, a freewheeling retail trade in all types of commodities straddled the line between legitimate and illegitimate commerce, taking advantage of the lack of income tax and import controls. The Iraqi tourism industry, which in peaceful times has profited from Iraq's many places of cultural interest (earning US$14 million in 2001), has been completely dormant since 2003. Despite conditions, in 2005 the Iraqi Tourism Board maintained a staff of 2,500 and 14 regional offices.

Labour Force

In 2002, Iraq's labour force was estimated at 6.8 million people. Recent figures on labour participation by sector are not available. In 1996 some 66.4% of the labour force worked in services, 17.5% in industry and 16.1% in agriculture. 2004 estimates of Iraq's unemployment ranged from 30% to 60%. The actual figure is problematic because of high participation in black-market activities and poor security conditions in many populous areas.

In central Iraq, security concerns discouraged the hiring of new workers and the resumption of regular work schedules. At the same time, the return of Iraqis from other countries increased the number of job seekers. In late 2004, most legitimate jobs were in the government, the army, the oil industry and security-related enterprises. Under Saddam Hussein, many of the highest-paid workers were employed by the greatly overstaffed government, whose overthrow disrupted the input of these people to the economy.

In 2004, the US Agency for International Development committed US$1 billion for a worker-training program. In early 2004, the minimum wage was US$70 per month.

Trade

From the 1990s until 2003, the international trade embargo restricted Iraq's export activity almost exclusively to oil. In 2003, oil accounted for about US$7.4 billion of Iraq's total US$7.6 billion of export value, and statistics for earlier years showed similar proportions. After the end of the trade embargo expanded the range of exports, oil continued to occupy the dominant position: in 2006 Iraq's export income had quadrupled (to US$32.19 billion), with oil accounting for 84% of the total. In late 2004, sabotage significantly reduced oil output, and experts forecast that output, hence exports, would be below capacity in 2005 as well.

In 2006, the chief export markets were the United States (which accounted for nearly half), Italy, Spain and Canada. The value of Iraq's imports in that year was US$20.67 billion, with the main sources of imports being Turkey, Syria, the United States and Jordan. Because of Iraq's inactive manufacturing sector, the range of imports was quite large, including food, fuels, medicines and manufactured goods.

Foreign Investment

Generally, in 2005 foreign investors awaited a quieting of insurgent activities before making large commitments. Although foreign banks received permission to do business in Iraq, security conditions limited their activity. Standard Chartered, HSBC, and the National Bank of Kuwait received licenses to conduct banking transactions in Iraq, but a limit of six such banks was set until 2008. Iraq's Foreign Investment Law allows foreign banks to hold a 50% interest in Iraqi private banks. In 2005 the World Bank's International Finance Corporation joined the National Bank of Kuwait in buying a share of the Credit Bank of Iraq, a major infusion of money into the Iraqi financial system.

In early 2005, there was much discussion of US and European firms gradually privatising Iraq's state-owned oil industry, despite Iraqi resistance to such a foreign presence. Shell Oil, British Petroleum, and Exxon Mobil have signed agreements to study Iraq's reserves, and in December 2004, an international consortium signed a small-scale oilfield development agreement with the Ministry of Oil.

Balance of Payments

At the time it was deposed, the Hussein regime had an estimated US$120 billion of external debt. In late 2004, the Paris Club of international creditors agreed to cancel 80% of the debt owed by Iraq to member nations, an amount estimated in 2004 at US$42 billion. As of early 2005, the restructuring of Iraq's remaining debt and war compensation obligations, which the United Nations was to carry out, had not begun.

Currency

In October 2003, the new Iraqi dinar replaced the old Iraqi dinar as the official currency. In March 2005, its value, originally 1,950 to the US dollar, had appreciated to 1,460 to the US dollar. From October 2006 to March 2007, the dinar value increased to approximately 1,277 IQD per dollar as the Central Bank enacted policies to combat inflation and increase purchasing power by raising the official exchange rate.