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Military

Measuring Stability and Security in Iraq


March 2008
Report to Congress
In accordance with the
Department of Defense Appropriations Act 2008
(Section 9010, Public Law 109-289)


Section 1-Stability and Security

1.2 Economic Activity

The GoI’s ability to spend its resources, provide essential services and promote economic development progressed only slightly during this reporting period. While Iraq’s national and provincial governments doubled the rate at which they executed their capital budgets, they still only executed approximately 55% of the 2007 budget by the end of November 2007. This low budget execution rate limited Iraq’s ability to increase economic development and deliver essential services. In addition, electricity demand continued to outpace supply. Although electricity generation produced record levels through December 2007, the system underwent a sharp decline in mid-January 2008. Toward the end of January, generation stabilized to an amount comparable to the same period last year and is currently showing some signs of recovery. Although oil production remained static, oil exports increased slightly and the high price of oil provided additional revenue to the Iraqi Government.

Budget Execution

Iraq’s ministries and provincial governments have been increasingly successful in using the nation’s considerable resources to meet the needs of the Iraqi people by developing and spending their budgets. Nonetheless, significant impediments remain. A difficult security environment, fear among Iraqi officials of corruption charges and a lack of technical expertise prevented full execution of the budget in 2007 (resulting in lower total capital investment, particularly in oil and electricity infrastructure), limited economic growth and hindered delivery of essential services.

The GoI’s increased focus on budget execution has produced higher levels of actual capital spending in 2007 than in 2006. According to preliminary Iraqi budget execution data, total capital spending was 45% through October 2007. Furthermore, GoI ministries have executed 47% of their capital budgets through October 2007, more than two and a half times the rate through the same date in 2006. Most provinces are making significant progress in capital projects as well. These improvements are due in part to capacity-building efforts, including Procurement Assistance Centers, training activities and capacity development programs in the ministries and in the provinces. The provinces executed only a very small portion of their budgets in 2006. They spent most of their US$2.0 billion allocation for 2006 in 2007. Non-Kurdish provinces are estimated to have spent roughly 18% of their 2007 allocations through September.

The CoR passed the 2008 Iraqi Budget on February 13, 2008. It currently awaits publication in the Official Gazette. The US$49.9 billion budget for 2008 includes US$8.9 billion for security and US$13.2 billion for capital investment.

IMF Stand-By Arrangement and Debt Relief

The International Monetary Fund (IMF) Executive Board approved a new, 15-month Stand-By Arrangement (SBA) for Iraq on December 19, 2007. The IMF cited several positive areas of progress in Iraq. Inflation continued its downward path, the Central Bank of Iraq continued to gradually appreciate the exchange rate of the dinar, oil exports have increased in recent months and preliminary fiscal data through September 2007 indicate a surplus of more than US$2 billion. If Iraq maintains satisfactory SBA performance, it will receive the final 20% tranche of debt relief from Paris Club members. On February 11, 2008, the Russian Government signed an agreement forgiving nearly US$12 billion in Iraqi debt and became the last Paris Club member to fulfill its 2004 Paris Club commitment to sign agreements forgiving Iraqi sovereign debt.

Some non-Paris Club creditors are also reducing or eliminating their Iraqi debt. Bulgaria agreed to cancel US$3.5 billion in Iraqi debt in return for a cash payment of US$360 million. Iraq also signed an agreement that effectively cancels US$2.5 billion in Iraqi sovereign debt owed to Serbia, Bosnia and Slovenia in exchange for a cash payment of US$250 million. Debt negotiations with Saudi Arabia and other Gulf countries, Iraq’s largest outstanding creditors, have stalled while negotiations with China continue to slowly progress. Recent bilateral developments include the decisions by the Italian and Kuwaiti Governments to provide additional soft loans and humanitarian assistance to Iraq totaling US$240 million.

Indicators of Economic Activity

Economic Growth

The Iraqi economy is projected to grow 7% in 2008 and reach an estimated nominal gross domestic product (GDP) of US$60.9 billion. Oil production increases of 9%-10% are expected to drive growth. The non-oil sector (which accounts for 1/3 of GDP) is projected to grow at 3%.

Inflation

Core inflation in 2007 was 12.28%, compared to 2006 core inflation of 31.92%.3 This significant reduction in inflation is largely due to the Central Bank of Iraq’s restrictive monetary policy, including continued appreciation of the Iraqi dinar from 1,475 dinars per U.S. dollar at the end of 2006 to 1,215 dinars per U.S. dollar at the end of 2007. These lower rates of inflation have helped create a more favorable climate for long-term economic growth and job creation. Sustained rates of low inflation lead to greater price stability, which benefits both consumers and business-owners, as well as positively affecting overall productivity. The consistent reduction in the rate of inflation has begun to exert downward pressure on real interest rates and has helped to maintain relatively consistent purchasing power for the average Iraqi citizen.

Unemployment

Unemployment and underemployment continue to be major challenges. The GoI’s Central Statistical Organization has not updated its official estimates of unemployment and underemployment of 17.6% and 38.1% respectively. Attempts to measure unemployment by other means at the provincial levels suggest that the rate could be as high as 50% in some areas. Without a reliable collection method, it is difficult to determine the actual level of unemployment; however, there is a clear lack of employment opportunity for skilled and unskilled labor throughout the country.

The Coalition continues to mitigate security risks associated with unemployment by its introduction of short to medium-term employment and technical training programs. The USAID Community Stabilization Program (CSP) currently employs over 48,000 military age Iraqis in short-term jobs and over 14,500 in longer-term jobs such as apprenticeships. The CSP is transitioning its focus to training and business development in the more secure areas of Iraq by using micro-small-medium enterprise in-kind grants to stimulate business development.

Access to capital loan programs managed by the Ministry of Labor and Social Affairs (MoLSA) and the Ministry of Industry and Minerals (MoIM) has improved in Baghdad, delivering US$30 million in loans to new and existing businesses. To date, loss and repayment rates have met or exceeded expectations. As of November 2007, nearly 6,200 loans were approved at an average value of approximately US$4,600. These loans created over 17,700 jobs through the development of new businesses and the expansion of existing businesses.

The Coalition is teaming with the GoI to implement a new technical training and employment program entitled the Joint Technical Education and Reintegration Program (JTERP). This program consists of vocational training, on-thejob training and job placement for Iraqis with priority going to former Sons of Iraq members and recently released detainees. JTERP is a collaboration of efforts among multiple ministries to include the MoLSA, the MoIM, and the Ministries of Higher Education and Education, as well as the Disarmament, Demobilization and Reintegration (DDR) Committee. The program is currently funded within the US$155.5 million in U.S. Iraq Security Forces Funds (ISFF) allocated for DDR. The 2008 Iraqi Budget allocates US$70 million for DDR programs and provides an additional US$417 million for various public works programs.

Through 2007, the USAID Izdihar program approved and disbursed 26,170 loans totaling US$58.7 million. Microfinance loans put credit, savings, insurance and other basic financial services within the reach of Iraqis. Through microfinance institutions such as credit unions and some non-governmental organizations, Iraqis can obtain small loans (US$500 - US$3,000), receive remittances from relatives working abroad and safeguard their savings. Accessing small amounts of credit at reasonable interest rates gives people an opportunity to set up a small business. Records show that Iraqis are a good risk, with higher repayment rates compared to other nations’ borrowers.

The Department of Defense Task Force to Improve Business and Stability Operations-Iraq (TF-BSO) continues to drive toward solutions to business and economic development challenges in Iraq. In January 2008, the first private investments in Iraqi state-owned factories were approved by the GoI. Three state-owned cement factories finalized joint investment partnerships with international investor consortiums. A team from the TFBSO supported the office of the Prime Minister and the Minister of Industry and Minerals by developing processes to evaluate the proposals and facilitate negotiations with bidders for these factories. The three partnerships will be shareholders with the GoI in the privatized factories. The long-term intention is to fully privatize these factories. These deals are the first steps in privatizing Iraq’s state-owned enterprises and marks the beginning of a shift to a market economy while opening opportunities for future private investment in all sectors of Iraq’s economy.

The Procurement Assistance Center (PAC) continues to help the GoI establish transparent and effective contracting and budget execution processes. The PAC has processed and issued over 400 requests for guidance or policy interpretation (freeing up contract actions), issued standardized bidding documents for all procurement categories and helped generate a simplified policy to accelerate procurement actions in 2008.

Oil Infrastructure Integrity

The recent quarter’s oil production averaged over 2.3 million barrels per day, of which exports averaged 1.8 million barrels per day. The price per barrel during December 2007 was US$84, significantly above the 2007 GoI budget assumption of US$50 per barrel. For the year, Iraqi oil revenues were US$64.52 per barrel. Oil revenue at the end of the year exceeded budget estimates by US$6.4 billion primarily due to higher than budgeted oil prices.

Crude oil production for the first part of February 2008 reached over 2.4 million barrels per day (mbbl/d), representing the highest monthly average since 2003. The IMF SBA, agreed to by the GoI, includes an average crude oil production goal of 2.2 mbbl/d and an average export goal of 1.7mbbl/d for 2008. The ICI target for 2010 is 3.4 mbbl/d. If the uncertain legal environment and the lack of a hydrocarbon legislation package continue to stifle foreign investment in production, refinery and transport infrastructure, meeting the ICI goal for 2010 will be in jeopardy.

Interdiction of export pipelines in the North shut down exports for several months in the first half of 2007. Increased security efforts, such as the construction of pipeline exclusion zones and the use of the oil protection force (many of whose elements have been incorporated into the Iraqi Army), reduced the number of interdictions and facilitated an increase in exports later in the year. This enabled an increase in total exports for the year by 10% over 2006.

Iraq’s shortage of refined oil products stems from the fact that it is operating at approximately 45% of capacity, has outdated refining facilities and has inadequate distribution of crude oil. Unreliable electricity supply, security issues and heavy fuel storage shortfalls exacerbate these problems. For example, electrical blackouts and industrial accidents (gas fire) at the Bayji Refinery and rocket attacks by insurgents at both the Basrah and Doura Refineries during this reporting period led to lower production after strong results last fall. Projects to address these problems include constructing secondary processing and distillation units at the Doura Refinery, restoring operation of the hydrocracker at the Bayji Refinery, repairing distribution pipelines, using rail for transport and increasing fuel imports. If completed, these efforts could enable achievement of the ICI target of 700,000 barrels per day of refined products by 2010.


Agriculture

An efficient and productive agricultural and agribusiness sector is vital to Iraq’s economic, political and social stability. Agriculture already accounts for about 10% of GDP and 25% of the Iraqi labor force making it the single largest source of employment and the second largest contributor to the overall GDP in the country. Inma, a major USAID project launched in June 2007, works with the GoI to support the development of agribusinesses and agricultural markets to improve the livelihoods of farmers while energizing Iraq's agriculture industry.4

Helping Iraqis transform local economies, Inma worked with PRTs on the development of agribusinesses and value-added processing. Specifically, Inma improved agricultural quality and productivity by training farmers on modern technical practices to achieve better yields for their crops and more productive livestock. This program helps farmers restore poorly functioning drainage facilities and improve irrigation practices. It also focuses on growing improved seeds, sheep dipping and fertilizer distribution to improve competitiveness and efficiency of Iraqi farmers. Inma is also assisting Iraqis to improve food grades Inma successes are: over 20 Iraqi agribusinesses modernized and operating efficiently with sales revenue up by 150%, perennial horticulture sales up by 50%, meat sales up by 100% in five urban markets, fresh fruit and vegetable sales up by 100%, ten commercial feed lots producing 1,000 heads per week, 12- 14 feed mills each producing 25,000 metric tons per year and Iraqi participation in international agricultural conferences and workshops.

Inma is building meaningful linkages between farmers, agribusinesses, financial services and domestic and international markets. Technical advisors support national and local government agencies as they adapt to the rapidly evolving legal, regulatory and public service needs of a free market economy. By promoting publicprivate partnerships and dialogue, Inma stimulates local and national policy-making opportunities. Inma predicts employment could potentially grow by nearly 800,000 jobs from increased efficiencies in value chain agribusiness over a five-year period.

Essential Services

Despite many projects to improve the delivery of essential services and increased emphasis by government leaders, Iraqis have seen uneven progress in the delivery of essential services such as electricity, water, sanitation and healthcare. Since the U.S. has transitioned out of large-scale infrastructure reconstruction, and Iraq must now fund the bulk of future reconstruction projects, further improvements are at risk.

Electricity Infrastructure Integrity

The electrical sector continues to suffer from a variety of problems. Fuel shortages, reduced water levels at hydroelectric plants, interdictions, equipment failures, damage to key power line segments, reliance on foreign sources of power and years of system neglect exemplify these challenges. Despite these challenges, there were four consecutive months of record post-2003 electrical output in 2007. However, the challenges eventually overwhelmed the system and electrical production fell in January 2008. Monthly state-provided electricity output for 2007 averaged 99,000 megawatt hours (MWh), which is a slight increase over 2006 output.

The GoI is working to alleviate these problems. The 46 electrical towers from Baghdad to Diwaniyah and the 85 electrical towers from Baghdad to Mussayib are now hardened. Actions such as these will make these critical distribution lines less vulnerable to attack.

The GoI began importing diesel from Kuwait on December 12, 2007, to help increase electrical generation. As the flow of diesel increases to full contract levels, generated power will increase. Primary fuel delivery will be to the Qudas power plant in order to commission the system generators and initiate operation. Subsequent fuel deliveries will be sent to the Mussayib power plant to complete its commissioning. Additionally, the GoI has authorized the Ministry of Electricity (MoE) to obtain fuel for power generation by procuring it directly (rather than using a cumbersome contracting vehicle) and has allocated US$400 million for these purchases.

Although electricity production from November 2007 through January 2008 was greater than production from the same period last year, it was less than production in August through October 2007. This fact, coupled with increased winter demand, allowed the gap between supply and demand to grow by 18% from October 2007 to January 2008 and decreased the hours of power available throughout Iraq. With the exception of Baghdad and Irbil, all provinces averaged over 12 hours of power in December 2007. In January 2008, only seven of the 18 provinces averaged over 12 hours of power. Imports of electricity continue to contribute to national supply. Iran currently exports approximately 3,960 MWh per day and plans to increase that amount once Iraq has upgraded its transmission capacity between the Baghdad Ring and southern Iraq. Turkey had also been exporting to Iraq over 2,400 MWh per day through much of 2007. Iraq’s failure to make the final payment of its 2007 contract, and its failure to deliver fuel as contracted resulted in the shutdown of exports on January 2, 2008. This issue has been resolved and Turkey resumed exporting electricity on February 15, 2008.

Development of domestic fuel sources for electrical generation, such as the capture of natural gas flared during oil production, coupled with existing plans for power plant expansion, would help achieve the ICI goal of meeting demand plus 10% by 2015. Significant capital investment in a new pipeline network and the infrastructure to capture and treat the flared gas is required. Maintenance and operating procedures must also improve to maintain and develop gradual gains in electrical generation expansion. The Minister of Electricity estimates it will cost approximately US$27 billion over six to ten years to develop the capacity to provide 24 hours of power nationwide.




Water and Sewer

As of January 2008, Iraq Relief and Reconstruction Fund (IRRF)-funded projects have added or restored 2.1 million cubic meters per day of potable water treatment capacity— enough to serve approximately 7.4 million Iraqis. The goal for remaining U.S.-funded projects is to add or restore a total of 2.37 million cubic meters per day of treatment capacity to produce potable water. This improvement would serve 8.4 million Iraqis, assuming that pipes and pumps to support water delivery are installed and operational. During this reporting period, the Baghdad Water Authority coordinated and executed a large chlorine shipment without Coalition assistance that resulted in Baghdad having approximately 130 days of chlorine supply available. This is the largest amount of chlorine that Baghdad has had on-hand in over a year.

Healthcare

The GoI remains committed to increasing the coverage and quality of healthcare, but pre-existing medical infrastructure problems and the security situation continue to limit progress. The GoI and the international community have undertaken significant efforts to rebuild and expand Iraq’s healthcare infrastructure. However, the unpredictable security situation, a large population of IDPs and refugees, failing building integrity, sporadic availability of water and electricity and shortages of physicians continue to plague the quality, capacity and progression of the country’s healthcare system.

On November 26, 2007, Dr. Salih M. Al Hasnawi was formally confirmed as the new Minister of Health. Dr. Salih is refocusing the Ministry of Health (MoH) toward improving the medical supply system, enhancing the quality and number of available medical staff, establishing food and drug quality control systems and further improving the healthcare facilities infrastructure. Dr. Salih is also working to re-build the image of the MoH, which lacked equitable administration of healthcare and accountability when under Sadrist control.

Efforts to enhance the healthcare facility infrastructure include completed construction of 92 of 137 planned Primary Healthcare Centers (PHCs).5 The MoH now controls 50 of the completed 92 PHCs and all 50 are open. Another 28 PHCs have been turned over but are not yet open due to a shortage of trained medical staff and security concerns. Seventeen of 25 planned hospital rehabilitation projects have been completed and the PHC program is expected to be complete by September 2008.

Healthcare capability and capacity enhancements suffer from corruption and inefficiencies in the Iraqi medical supply distribution system. Furthermore, the lack of healthcare providers— as nearly half of the 34,000 registered physicians left the country in the wake of sectarian threats and violence—impedes healthcare delivery. With an improved security environment and the appointment of a new Minister, the Iraqi healthcare system has the potential to improve.

The Iraqi Ministries of Defense (MoD) and Health are working on details of an agreement to hand over the Al-Karkh Al-Jamhuri General Hospital to the military. MoD use of a general hospital dedicated to the Iraqi forces will improve the level of healthcare available to soldiers by focusing on activities to enhance the readiness of military forces and the medical assets that support them. The MoD will continue to rely on the MoH for medical staff until the nationwide demand for medical staff decreases.

Conclusion

The GoI must continue to implement economic reforms and improve its government ministries in order to support continued economic growth, improve delivery of essential services and stimulate investments in its oil and electrical sectors. Local economies are benefiting from the improved security situation, although growth remains largely tied to central government funding and supply of services. Rejuvenating Iraq’s agriculture and agribusiness sectors is one of several promising means of diversifying Iraq’s economy. The volume of oil production and oil exports increased slightly this reporting period. The economy has benefited from higher world prices and continuous oil exports from the North. Iraq’s continued IMF SBA compliance and its efforts to reduce its Saddam-era debt are also solid achievements. However, the lack of a fully formed legal structure, security instability and endemic corruption discourage substantial foreign investment and private sector development. Reforms will prove essential to attracting foreign investment and developing a robust private sector—both keys to a self-sustaining economy.



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