Regime Finance and Procurement - Annex D
Under the rule of Saddam, economic data were considered state secrets; thus, reliable data for the era was limited. According to the Economist Intelligence Unit data (see Figure 6), Iraq’s GDP stood at roughly $38 billion in 1989, measured in constant 2003 dollars. From 1990 until Saddam accepted the terms and conditions of UN Resolution 986 in 1996 the GDP in Iraq remained at less than 30 percent of the 1989 value. In the 1996 to 2002 period, the data shows a gradual recovery as GDP increased from $10.6 billion in 1996 to $33 billion in 2000 before dropping back to $29 billion in 2001.
Per capita GDP during the period followed the downward trend seen in overall GDP. GDP per capita went from approximately $2304 in 1989 to $938 in 1990. From 1991 until 1996 per capita GDP never rose above $507. During this period income inequality was a problem as the wealth was concentrated in the hands of Regime loyalists and traders while most Iraqis subsisted on much less income.
In comparison to the estimates in Figure 6, the CBI published a statistical bulletin with GDP data in current prices (Figure 7). The data used in figure 7 were acquired in 2004 at the CBI. It should be noted that the validity or reliability of the data is unknown.
Because of the lack of specific economic data, it is difficult to disaggregate the Iraq GDP into sectors. It is estimated that in 1989 (Figure 8) oil comprised approximately 61 percent of the economy. However, following the invasion of Kuwait and sanctions on the oil exports, this steadily declined until 1996 when the UN OFF program allowed Iraq to resume controlled export of oil using UN approved contracts. The Agricultural sector of the GDP, although larger than some neighboring states, was quite small when compared to oil and services. Iraq’s fertile agricultural land covers about one-fifth of its territory and has allowed Iraq to sustain a noteworthy agricultural system that is based mostly on barley and dates.
Sources of Revenue
Iraq’s oil development began in 1901. The Iraq National Oil Company (INOC) was formed in 1964, and with Iraqi oil nationalization between 1972 and 1975, INOC took over from the international oil companies previously running the country’s oil industry. In 1987, INOC was dissolved and merged with the MoO. Before the Gulf War, oil accounted for more than 60 percent of the country’s GDP and 95 percent of foreign currency earnings. Following Iraq’s invasion of Kuwait in 1990 and the embargo on Iraqi oil exports, Iraqi oil production fell to 10 percent of its prewar level from 3.5 million barrels per day in July 1990 (Figure 9) to around 350,000 barrels per day in July 1991. UN-approved oil exports began in December 1996 after Iraq finally accepted UNSCR 986 (passed in April 1995). However, Iraq’s oil sector continued to suffer from years of poor oil reservoir management; corrosion problems at various oil facilities; deterioration of water injection facilities; lack of spare parts, materials, equipment, and damage to oil storage and pumping facilities.
Unlike most Gulf States, Iraq has considerable agricultural potential. About 12 percent of its land is arable, of which 4 percent is irrigated. Another 9 percent is suitable for grazing and 3 percent is forested. However, during Saddam’s reign, Iraq did not effectively use its agricultural potential. Under the Ba’ath party, activity in the food and agriculture sectors of the economy continued to decline. Government expenditures on agriculture dropped from 18 percent of total government expenditures in 1976 to less than 10 percent in 1980 and continued to decline during the Iran-Iraq war. Under Saddam, as a result of drought, lack of inputs, poor methods and weak administration, Iraq was unable to achieve agricultural production levels near its potential. Following the first Gulf war, the irrigation systems fell into disrepair and much of the irrigated cropland in central and southern Iraq was badly damaged by salinization. Rapid population growth during the past three decades, coupled with limited arable land and an overall stagnation in agricultural production has steadily increased Iraq’s dependence on imports to meet domestic food needs. By 2002, under the UN OFF program, between 80 percent and 100 percent of Iraq’s food staples were imported. However, Iraq remained self-sufficient in fruits and vegetables.
Industrial Diversification and Manufacturing
Industrial development, diversification and manufacturing have gone through numerous phases in Iraq. In the mid-1970s a strong emphasis was placed on import substitution and the government established food-processing industries in smaller towns throughout the country. However, the main focus of development was on the petroleum sector, and refining, natural gas processing and some part of supplies for the industry developed in Basra and Kirkuk. The cement and building supplies industry also expanded rapidly. By the late 1970s the emphasis in development planning shifted toward heavy industry and diversification away from oil. Iron and steel production was set up with French assistance at Khor al-Zubair and the defense industrial sector received a high priority. However, objectives were ill defined and the economy’s concentration on oil was never challenged. Inevitably, as with all other segments of the economy, manufacturing and industrial diversification was scaled down when the Iran-Iraq war began and never recovered.
Iraq’s indebtedness has been the result primarily 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 with Iran. It is estimated that from 1980 to 1989 Iraq’s arms purchases alone totaled $54.7 billion. Following the war, Iraq was faced with the dilemma of paying off short-term debts to western creditors estimated between $35 to 45 billion at high interest rates. However, the Regime resisted western attempts through the International Monetary Fund (IMF) and World Bank to reschedule the debt primarily because Baghdad believed it could negotiate more favorable terms dealing with countries bilaterally.
Iraq’s foreign debt was comprised of western credit provided for military assistance, development finance and export guarantees. This assistance has been estimated at $35 billion in principal. The former Soviet Union and Russia also provided loans to Iraq via the Paris Club during the 1980s and 1990s for the development and production of military programs (Figure 10). Gulf States such as Saudi Arabia, Kuwait and the United Arab Emirates provided an additional $30 to 40 billion in financing to fight Iran (Figure 11). Although the Gulf States considered the financial support provided to Iraq to be a loan, Iraq believed that the Gulf States were required to provide help to Iraq in its fight to prevent the spread of radical Iranian fundamentalism.
In addition to the money borrowed by Iraq during the 1980s, Iraq has had compensation claims made for reparations of damage inflicted during the invasion and occupation of Kuwait during 1990 and 1991. The United Nations Compensation Commission (UNCC) was responsible for processing and collecting such claims as authorized by UNSCR 692. The OFF program provided that 30 percent of Iraq’s oil sales would be used to settle compensation claims authorized by the UNCC. This figure was reduced to 25 percent in December 2000 and was set at 5 percent when oil exports resumed after OIF. As of 7 May 2004, claims totaling $266 billion have been adjudicated and claims worth $48 billion have been awarded by the UNCC. Additional claims worth $83 billion need to be resolved.
Another source of potential financial obligations accrued by Iraq since 1990 were contracts signed with countries such as Russia, UAE, Egypt, China, France, and the Netherlands mainly in the energy and telecommunications sectors. Because of UN Sanctions during the period, the contracts were not executed. It is uncertain if these contracts will be honored in the future.
Iraq’s total foreign debt compared to GDP from 1989 until 2003 was not sustainable (Figure 12). Iraq was borrowing much faster than it was producing for over a decade (see Figure 13).
Balance of Payments/Exchange Rates
The Balance of Payments (BoP) is an account of all transactions between one country and all other countries—transactions that are measured in terms of receipts and payments. From the US perspective, a receipt represents any dollars flowing into the country or any transaction that require the exchange of foreign currency into dollars. A payment represents dollars flowing out of the country or any transaction that requires the conversion of dollars into some other currency. The CBI Department of Research and Statistics provided statistics on Iraq’s Balance of Payments, which are summarized (Figures 14 and 15).
Exchange rates are important during these transactions because they represent the linkage between one country and its partners in the global economy. Exchange rates affect the relative price of goods being traded (exports and imports), the valuation of assets, and the yield on those assets. The CBI pegged its official rate between $3 to 3.38 per dinar in the 1970s. The last official exchange rate of $3.11 per dinar was set in 1982. During the 1970s the official and market rates generally corresponded and by 1980 the country had $35 billion in foreign exchange reserves. Because of the war with Iran that figure had fallen to $2 billion by 1987. The currency depreciated rapidly in the unofficial market during the Iraq-Iran war and after the first Gulf War the pace of depreciation increased further. During 1997 to 2003, the exchange rate fluctuated between 1500 -2000ID per $1 and was fairly steady at about 1950 ID to $1 in recent years. Although the Regime did not alter the official exchange rate after 1983, it acknowledged the rate differential in 1999 by allowing state run banks to exchange hard currency at the rate of 2000 ID to $1.According to the statistical bulletin published by CBI (Figure 16) the numbers projected by sources in the US are consistent, with numbers reported internally. It is important to note that the validity and reliability of the data provided by CBI has not yet been evaluated.
Iraq’s economy suffered from under-employment, an economic affliction that was typical of oil-based economies. Iraq’s oil sector historically generated about 60 percent of Iraq’s GDP, but only employed two to three percent of Iraq’s labor force. Unemployment has risen significantly during the period of 1988-2003. Unemployment in Iraq during 2003 was estimated to be around 28 percent of the labor force. Some 40 percent of the employed are estimated to work in the public sector, many in marginalized economic activities, in difficult conditions, and for minimal pay. Women represent about 52 percent of Iraq’s population, but constitute only 23 percent of the formal workforce, mostly as middle level professionals in the public and service sectors and in rural areas as seasonal agricultural workers.
Over the long run, labor markets are affected by demographics, changes in productivity and the rate of growth in potential output. In the short run, these markets will reflect volatility in the level of economic activity. The unemployment rate in Iraq represents the ratio of those actively seeking work and the total number of people in the labor force. Iraq’s economy was powered mainly by state run centrally controlled government entities. Although Saddam did encourage privatization during the 1980s, this was not successful because of the continuing conflicts and lack of financing and support for private business owners in Iraq.
Social Conditions and Indicators
Following the war with Iran in 1988, Iraq was ranked 50th out of 130 countries on the 1990 UNDP Human Development Index (HDI). This index measures national achievements in health, education, and per capita GDP. Iraq was close to the top of the “medium human development” category, a reflection of the Government’s continued investment in basic social services. By 1995, Iraq had declined to 106th out of 174 countries and by 2000 it had plummeted to 126th, falling behind Bolivia, Egypt, Mongolia and Gabon and close to the bottom of the “medium human development” category.
According to the HDI, an Iraqi born in 1987 could expect to live 65 years while citizens in bordering Jordan had a life expectancy of 67 years. By 1998 an Iraqi was expected to live only 63.8 years while a Jordanian saw an increase in life expectancy 70.4 years in 1998. Compared to Jordan, where the literacy rate rose from 75 percent in 1985 to 88.6 percent in 1998, Iraq’s had dropped from 89 percent to 73.5 percent. In 1990, Iraq ranked three places above Jordan on the HDI. In 2000, Iraq placed 34 below Jordan.