An Iraqi man works at the Baghdad Soft Drinks Company in 2005
© Wathiq Khuzaie
An Iraqi man works at the Baghdad Soft Drinks Company in 2005
Last updated: May 19, 2013

Iraq finds new ways to spur growth

Banner Icon After a decade of instability, seemingly incessant military skirmishes, and a generally paralyzed economy, Iraqi authorities are getting settled into their new roles in the recently elected post-invasion government.

Minimal growth rates, even the occasional backtracking for a few disparate years, were characteristic of Iraq’s economy throughout the story of its ongoing recovery. Recently, however, murmurs of a rebound have begun to circulate in media circles.

Earlier this month, so as to further fuel this rebound and maintain the market’s current momentum, several channels for business financing were introduced by the government to the entrepreneurial and industrial sector. The Iraqi Industrial Bank, a state-owned institution, announced a lenient loan program aimed at aiding the private industrial sector by spurring capital investments. The initiative, which will be implemented under the supervision of the Ministry of Finance, will provide loans up to 20 million Iraqi Dinars (IQD), or just over $17,000, with a repayment period of 25 years. Mohammed Abdul Wahab, the bank’s general manager, clarified that these will be available to firms and individuals in the sector, and is hopeful that the funds will spur growth.

A couple of days later, the Iraqi Ministry of Labour and Social Affairs, via joint committees with state-owned banks, followed suit by announcing its own economic stimulus project. A sum of IQD 150 billion, or $130 million, was allocated this year as funding for a loan program directed towards small and medium-sized businesses (SMEs). More specifically, these interest-free loans are geared at the unemployed, with the hopes of incentivizing them to become entrepreneurs. Borrowers will be able to repay the loans after the successful completion of the projects. In general, the initiative strikes a similar tone to a loan program that was recently implemented in Oman – not only is it fairly soft on its conditionality factor, but also offers fairly forgiving terms of repayment.

The heavy focus on investment spending in the budget is mirrored in the government-subsidized loan programs

These programs, though considered a laudable step in the right direction by numerous concerned parties, will most likely not be the main force powering the Iraqi economy. Petrochemicals, the oil sector in particular, will carry most of the weight when it comes to gross domestic output. This was heavily evidenced by the budget that was passed by the Iraqi parliament in early March.

The Iraqi budget plan for 2013 also revealed how policymakers in the country were intending on allocating public spending so as to ensure a sustainable economic path. Government revenues for the year, of which 93% stem from the oil sector, are projected to total just below IQD 120 trillion, or approximately $103 billion. Non-oil revenues, i.e. various forms of taxes, come out to a fractional IQD 8.2 trillion. Expenditures, on the other hand, were gauged at an estimated IQD 138.4 trillion, or $118.3 billion. This constitutes an 18% increase over 2012 expenditures and highlights the impending anticipation by the Iraqi government of a budgetary deficit, even with projected oil exports of 2.9 million bpd sold at $90 per barrel. The gap will be financed by leftover funds from the 2012 budget, borrowing from multilateral lending agencies, namely the International Monetary Fund and World Bank, the Development Fund for Iraq, and a few other minor sources.

The budget is divided between investment expenditures and operating expenditures that, under this year’s plan, come out to IQD 55.1 trillion and IQD 83.3 trillion, respectively. As a portion of total budgeted expenditure, investment is currently at a record high 40%; a steady rise in government revenues due to generally increasing oil sales has allowed officials to spend more on investments, particularly in the energy sector. The authorities have heralded the oil industry as the engine of growth for the economy, thus justifying the allocation of 33% of budgeted investment expenditures to be used for expanding production, storage, transportation, and export capacity. Additional major headings in the budget plan are Security/Defense and Social Services, both of which are essentially assigned as operating expenditures.

Nevertheless, in light of all this liquidity and projected growth, studies have shown that Iraq still faces an excess of socio-economic challenges. A quarter of Iraqi households receive less than 12 hours of electricity from government networks, and a staggering 18% of the labor force is unemployed. The public outcry is generally directed towards the lackluster distribution of funds and benefits detailed in the country’s budget, which if improved, could alleviate several of the aforementioned hardships.

The heavy focus on investment spending in the budget is mirrored in the government-subsidized loan programs – the efforts to buttress the SME industry’s growth is not only for the purpose of mitigating unemployment, but also serves as an outlet for economic diversification.

In a nation where 60% of the gross domestic product is derived from a sector that only provides 1% of the labor market’s jobs, reducing dependence on the oil industry will be crucial for sustaining Iraq’s development.

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Bassam Aoun
Bassam Aoun is a Business Editor at Your Middle East. He is currently based in Abu Dhabi and holds a BA in Economics from the American University of Beirut and an MPP (Master of Public Policy) from the University of Chicago. He has written for the Chicago Policy Review and is interested in economic and fiscal policy in the Middle East.
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