IRAQ: RECONSTRUCTION AND THE POLITICAL PROCESS
At the last Strategy Group Meeting I was commissioned to produce a note for
discussion tomorrow. This is attached. It benefits from input from Hilary Synnott,
Andy Bearpark and colleagues in FCO and Treasury. I plan to show it to my
Secretary of State over the weekend. Please could you arrange distribution to the
Strategy Group.
2.
Copies of this go to
, David Richmond, Andy Bearpark,
Suma Chakrabarti,
and the Iraq Team
here.
Jim Drummond
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set. This note assesses the prospects for the economy, employment and
service provision and identifies some action points (in bold).
Economy
2.
Iraq's economy shrank by 31% in 2003, but is expected to rebound by
about 33% in 2004. The main drivers will be reconstruction funded by donors
and, potentially, oil sector recovery. Per capita GDP in 2004 will be in the
range $620-$810 (compared to $500 in 2003 and $3,600 in the early 1980's).
3.
Some of the foundations of a market economy have been laid:
liberalisation of all prices except energy and some food items; simplification of
taxes; abolition of licensing requirements for trade; abolition of tariffs but a 5%
reconstruction levy placed on all imports. There is a new, though far from
perfect, budget process and an independent Central Bank with an anti
inflation mandate, and a new currency. The policy of no recourse to domestic
financing by the Government should keep inflation under control though there
will be pressures from foreign inflows and further price liberalisation.
4.
Major structural reforms including the State Owned Enterprises
(SOEs), the ending of the Public Distribution System for food, and changes to
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politicians to the decisions they should make and why. If they make
these reforms, security improves and the IFs and investors return, the second
half of the year could lay the foundations for real economic recovery. Iraq's
debts should be rescheduled around the end of 2004, but progress towards
debt rescheduling during the year will improve investor confidence.
Employment
6.
Unemployment is a potential flashpoint. CJTF7 estimate that 90% of
demonstrations are about unemploment or salaries. So far most have been
peaceful, but they could get out of control, particularly in the run up to the
transition.
7. There is no reliable estimate for unemployment, but the best guesses
range from 20-50% of the labour force. The oil sector is very capital intensive.
While it provides around 60% of GDP it probably accounts for about 3% of
jobs. SOEs employ about 500,000 people. Liberalising imports has brought
an increase in trading, but donor reconstruction programmes apart, there is
little sian of increased investment and output from Iraqi private and state
owned enterprises. Securitv is a maior constraint. and some foreign investors
will hold back until the occupation ends.
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programmes in the south.
Provide finance to small businesses. The recently approved
IFC programme, which the US, UK and Japan will support, is the main
vehicle for this.
•
Fund Employment Creation Schemes. USAID has recently
increased its programmes with the aim of creating 100,000 jobs. Thev
should be taraeted on the hiaher risk places. DFID will consider the
options for the South with CPAS during its mid February mission.
•
Make sure that pension payments are up to date, and give
priority to training the Iraqis to police demonstrations effectively.
9.
But the big gains will come later from liberalising the economy. Better
security and handing over power to an Iraqi sovereign government will give
investors confidence.
Oil Exports and Fuel Supplies
10. Current oil production is about 2.4 million barrels per day, of which 1.6
mbpd is exported. This may rise to 3 mbpd by the end of 2004, but exports
(potentially 2.5mbpd) will not rise until the northern pipeline is made secure or
additional export routes are agreed. Production levels will only be sustainable
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CPA/US may have to provide more money to finance imports.
Services
Electricity
12.
Current estimate of power demand is 5,700 MW, but demand is
increasing rapidly and will probably exceed 6,000 MW by June 2004. About
4,000 MW are currently being generated, down from a peak of 4,500 MW in
October 2003. The current plan is to hit 6,000 MW by June 2004, which
requires almost 1,000 MW of new generating capacity, 1,380 MW of
rehabilitated existing capacity and 300 MW of imports. Existing contracts will
provide 2,300 MW of the required extra capacity. Work is underway to rebuild
downed transmission lines and new ones to link the Kurdish region to the
national grid.
13.
The US plans are ambitious and the south apart there is not much we
can do to help them. The likely outcome is that they will not meet their target
So Iraq will go through the summer with substantiall more nower than in
2003 but insufficient to meet the full demand increasing the risk of public
discontent at a sensitive time. The Emergency Infrastructure Programme in
the South will help to ensure there is sufficient power to meet demand there.
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in the expectation that little will have been delivered from this by the middle of
the year. We will consider whether anv further UK investment is reauired
in the south. A DFID team visits in mid-Februarv to take this forward
Water
15. There has been a steady improvement in the quantity and to a lesser
extent quality of water supplies since the conflict. Most parts of Iraq, including
Baghdad and Basra, should have 24 hour water supply through the summer,
if the power supply hold up. But most people will remain dependent on bottled
water for drinking. Baghdad's three main sewage treatment plants should be
operating at full capacity by October 2004 improving the quality of water in the
Tigris.
Education and Health
16.
Iraq's schools and hospitals are functioning. There have been
significant improvements in the supply of medicines and new textbooks for
schools since the conflict. There are refurbishment programmes for health
and education facilities, which are gradually bringing improvements. But there
remain serious problems and under funding. We should not expect step
changes between now and June. Both will be addressed through the Trust
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heavy a donor presence breeds dependence, but withdrawing too fast could
risk a decline in services and popular discontent. We should aive priority to
improvina Iragi economic policy making and make decisions on the
structure to succeed CPAS urgently. We should be prepared for 3 or 4
months of government inaction in the hot months after 30 June, which may
produce rising levels of discontent.
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