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Proposed economic aid to Iraq dependent on security

WASHINGTON—President Bush's plan for salvaging the war in Iraq acknowledges failure so far in efforts to reconstruct the country's moribund economy. His proposed fixes depend largely on achieving security and stability there.

Bush pledged on Wednesday night another $1.2 billion in economic aid, announced the appointment of a reconstruction coordinator and promised to channel economic aid quickly to areas that Iraqi and U.S. troops cleared and secured.

He said the Iraqi government would spend $10 billion on a jobs program, and he supported creating an "International Compact for Iraq" to forgive the country's debt and encourage foreign assistance.

Iraq's economic picture isn't pretty. Unemployment is estimated to range from 20 to 60 percent. Inflation in November, the last estimate available, was running at 51.9 percent on a year-over-year basis.

"Nobody knows for sure what is the rate of unemployment. I suspect it's pretty high, like 40 percent or higher," said Nimrod Raphaeli, an Iraqi-born economist at the Middle East Media Research Institute in Washington. "There is really no evidence of resurgence of economic life in Iraq."

The Bush administration is trying to create jobs in the hope that that might ease one factor that's driving young Iraqi men into insurgency.

U.S. military officials said this week that they wanted to steer 25 percent, or about $1 billion, of the government contracting now done in Iraq to support Iraqi factories and companies. Pentagon officials won't identify the factories for fear that insurgents will target them and their employees, underscoring how security challenges hamper efforts at economic revival.

Still, fueled by high oil prices and construction, Iraq's roughly $30 billion economy grew 4 percent last year, according to unofficial estimates from the World Bank, the International Monetary Fund and other global institutions.

But gauging the country's economy remains a guessing game. Years of dictatorship and isolation from the global economy mean that Iraq's economy and institutions must be rebuilt from scratch.

"A lot of the systems have collapsed, and they need to build a better system," said Kathryn Funk, the World Bank's lead country officer for Iraq. "It's a matter of rebuilding a relationship, and rebuilding their knowledge on how to deal with financial institutions."

International organizations, including the World Bank and IMF, removed most of their personnel from Iraq after the deadly August 2003 bombing of Baghdad's U.N. headquarters and a spate of beheadings of foreigners.

Regaining security is key.

"It's a very difficult situation in Iraq because of the security situation. It does hinder the implementation of the investment program—the inability of officials simply to get to work and carry out their instructions," said a top IMF official who's involved in creating standby loans for the Iraqi government.

The official, demanding anonymity because of an IMF security policy that protects the identities of its officials who are working with Iraq, said insurgents clearly were hurting oil production.

Oil accounts for as much as 70 percent of the country's economy and more than 90 percent of its foreign-exchange earnings. Insurgent attacks on oil installations and rampant corruption rob Iraq of financial resources that could be used to develop the economy.

"We are obviously disappointed that the security situation has not improved," the high-ranking IMF official said.

Before the war started in March 2003, Iraq produced more than 2.5 million barrels of oil per day. Last year, it averaged 2 million barrels per day, about the same as 2005.

Four years after the U.S.-led invasion, Iraq still lacks the metering equipment that would provide firm production data. There's ample evidence that large volumes of oil are being smuggled into neighboring Iran, where they're purchased on the black market and sold on the global market for a higher return.

An audit of oil revenues by global accountant Ernst & Young, made public in November, found discrepancies of $940 million and $1 billion in the two six-month audit periods from July 2005 through June 2006. The audit also noted that there were no efforts to reconcile the differences between U.S. and Iraqi accounting. Proceeds from Iraqi oil exports are deposited with the Federal Reserve Bank of New York, which sends the money back to Iraq for administration by the Finance Ministry and central bank.

"We can't send our accounting staff into Iraq," said Calvin A. Mitchell III, a spokesman for the Fed's New York branch, who thinks that Iraqi banking officials will address the matter eventually. "Our books are reconciled according to the records we have. How they reconcile their books, and whether they are reconciled, we can't speak to."

Despite such daunting problems, some experts salute Bush's new economic plans.

"I think they are very good ideas," said Michael O'Hanlon, an Iraq expert and usually a critic of Bush's policy at the Brookings Institution, a center-left research center. "We don't have the luxury of getting the security environment right first. ... You've got to try on multiple fronts. ... I think all this makes good sense."

Previous economic initiatives for Iraq failed in part because the Bush administration wanted private enterprise, not government, to create the badly needed jobs, O'Hanlon said.

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(c) 2007, McClatchy-Tribune Information Services.

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