After nine months of political stalemate following inconclusive elections, December 2010 saw the formation of a new coalition government in Iraq. Headed by Nouri al-Maliki, the establishment of a coalition representing the country’s different factions initially gave a new sense of stability to Iraq.

The rise in state spending will be funded by the anticipation of higher oil prices and increased exports

But the young government has struggled with internal disputes and growing pressure for reform. The wave of political unrest in the Arab world has also touched Iraq, with about 10,000 protesters taking to the streets in the country’s biggest cities on 25 February 2011.

The demonstrators demanded better public services and an end to state corruption. Basic amenities are still lacking in war-ravaged Iraq, with electricity outages and disruptions to water supply a daily occurrence. Al-Maliki responded on 27 February, issuing a 100-day ultimatum for his ministers to improve.

While Iraqis have not called specifically for regime change, the rising tensions, along with increased insurgent activity, threaten to hold back the country’s reconstruction.

Addressing the concerns of the people has become critical for Al-Maliki’s government, which risks a national revolt if conditions do not improve.

Iraq’s spending plan

Iraq’s budget for 2011 was revised several times to take into consideration the rising tensions across the region. The budget was set at $82.6bn and is 30 per cent higher than last year. The spending plan is focused on improving infrastructure, with some $25.7bn allocated to construction, including housing schemes and power projects. The rise in state spending will be funded by anticipated higher oil prices and increased exports.

Iraq GDP by sector, 2009
(Percentage)
Oil 55
Manufacturing 2
Financial services 8
Transport and communications 8
Trade, retail, hotels 7
Construction 4
Agriculture 4
Power and water 1
Social services 11
GDP=Gross domestic product. Source: Iraqi Institute for Economic Reform

The 2011 budget is based on an assumed oil price of $76.5 a barrel and 2.2 million barrels a day (b/d) of exports. Last year, higher-than-budgeted oil prices offset lower-than-expected exports. Baghdad had been targeting exports of 2.1 million b/d in 2010, but sales averaged just 1.9 million b/d due to a combination of bad weather, attacks on pipelines and disagreements with the Kurdistan Regional Government over raising output.

The oil industry’s performance is expected to be better in 2011. Already, production has increased since the end of last year, rising from 2.5 million b/d in December, to 2.7 million b/d in February. The budget plans for a deficit of $13.4bn, but if Iraq can sustain these production levels and oil prices remain high this shortfall would be eliminated.

Iraq’s gross domestic product (GDP) increased by 7 per cent in 2010 and is expected to grow by 12 per cent this year, with the rise in oil production.

Hydrocarbon reserves and production in Iraq
Oil production (thousand barrels a day) 2,482
Oil reserves* (billion barrels) 115
Oil proven reserves* (share of world total) 8.6
Gas proven reserves* (trillion cubic metres) 3.17
Gas proven reserves* (share of world total) 1.7
*At end of 2009. Source: BP Statistical Review of World Energy

But if Baghdad is to make any headway in rebuilding its economy and clearing its massive debt pile, a continued expansion of production will be needed. With 143 billion barrels of oil, Iraq has the world’s second largest oil reserves. In April, Oil Minister Abdel Karim al-Luaibi said Iraq was aiming to produce 5 million b/d in 2012. Baghdad has set a production target of 12 million b/d by 2017. Total government debt was estimated at $92.3bn in 2010, of which $87.7bn is external debt. Discussions are under way with several countries, which could see nearly 50 per cent of this eliminated.

Investment programme for Iraq

The Planning Ministry has drawn up a five-year National Development Plan that sets out a $186bn investment programme to rebuild the country. The plan includes spending on the energy, agriculture and transport industries, health, housing and education, as well as developing the role of the private sector. While $100bn will be provided from the federal budget, $86bn is to come from Iraq’s private sector and foreign investment.

Foreign direct investment increased by 48.7 per cent in 2010 to $42.6bn, but investment is falling short of its potential due to ongoing political instability and security problems. Attacks have been rising since the beginning of the year, with more than 225 incidents in May, the deadliest in the past six months.

With international troops steadily being withdrawn, a further deterioration in security is a distinct possibility and this would undermine efforts to move the country forward.

Iraq’s new government has huge challenges ahead. It has a restive population and insurgents on the one hand, destabilising the country, while on the other, it has to rebuild the country’s entire infrastructure, wrecked by years of war damage and neglect. Despite having vast hydrocarbons wealth locked underground, progress on extracting it is frustratingly proving much slower than expected.

The long-term prospects are positive for Iraq, GDP is expected to grow at an annual rate of 9.38 per cent until 2014. The biggest challenge for government will be putting all distractions aside and getting vital projects off the ground.