The withdrawal of US troops from Iraqi towns and cities at the end of June was widely expected to spark an increase in violence across the country. In the weeks leading up to the move, there had been a significant spike in the number of attacks attributed to terrorist group Al-Qaeda.

Since the June handover of responsibility for security in Iraqi towns to government forces, the scale of the attacks has intensified, culminating in a series of truck bomb and mortar attacks that killed at least 95 people on 19 August. Four co-ordinated bombings in Baghdad and Mosul on 10 August left scores of people dead.

Baghdad recognises that the attacks are a direct challenge to its ability to rule the country without US military assistance. Public confidence is understandably fragile, despite government assurances that it can quell the unrest.

“Al-Qaeda is now in splinters across Iraq, there is no substantial organisation as such,” says Mowaffak al-Rubaie, Iraq’s national security adviser. “These attacks are the work of splinter cells. It is not the same as we saw in the past. They do not have wide grassroots support. We hope this is the last gasp of Al-Qaeda, but attacks like this will continue from time to time.”

Rising tensions

Security in Iraq is nothing like it was in 2005-7, when the country was consumed by sectarian strife. However, the failure to halt the August wave of bombings will not only damage the credibility of the government ahead of national elections scheduled for December, but could also jeopardise recent initiatives to revive the country’s beleaguered economy. Tensions are certain to increase in the run-up to the poll.

The economy is still absorbing the collapse in oil prices in the second half of last year. The national budget for 2009, originally set at $80bn in November 2008, was slashed to $58bn by the time it was approved in March this year.

The fall in oil prices is hampering government efforts to capitalise on the drop in violence by advancing the reconstruction effort and attracting fresh foreign investment. Rather than accelerating development during the relative calm, the economic crisis has forced the government to make deep cuts in public spending.

Facing a deficit of up to $20bn this year, Baghdad has launched a series of initiatives to kickstart the reconstruction effort and attract overseas investment. Key among these is the $66bn national investment strategy, announced in May, to use future oil revenues as collateral against short-term bank loans for a host of infrastructure projects across the country.

“We want to fund these projects in three ways: through foreign direct investment, public-private partnerships, and deferred-payment schemes with international and local banks,” says Sami al-Araji, chairman of the National Investment Commission (NIC).

“The shortfall in the budget this year has meant that we have had to look at a new strategy. We promised the people of Iraq that we would rebuild the country, and we must fulfil that promise. The people need to see progress. We need to take advantage of the improvement in the security situation to attract new foreign investment to the country.”

The new strategy will focus on housing, water projects and construction of hospitals and schools, but Iraq requires massive investment across every sector. The International Monetary Fund (IMF) estimates that oil and gas will constitute almost 90 per cent of government revenues this year. The country urgently needs to diversify, hence the government’s willingness to bank on future oil revenues to pump funding into new sectors.

At the same time, Baghdad needs to boost oil production to fund development in other areas. The fiasco of July’s licensing round, when the Oil Ministry failed to reach deals with international bidders on all but one of seven fields made available, reflects poorly on its ability to open up to foreign investors.

Balancing act

However, the government has a delicate balance to strike. Baghdad is already in dispute with local governments in the main oil-producing regions over distribution of revenues from hydrocarbons, and with an election looming, it is conscious that it must not be seen to be giving away the nation’s wealth too cheaply.

The NIC is steadily taking over from a US taskforce as the intermediary between the Iraqi government and potential foreign investors, and is the driving force behind this initiative. Amend-ments have been proposed to the national Investment Law, which has long been seen as an obstacle to foreign investors, who complain that it contains too many loopholes and does not guarantee the security of an investment.

Under the proposed amendments, overseas investors will be allowed to buy land dedicated to a pre-approved project, and permitted to trade on the Iraq Stock Exchange. They will also be able to create joint ventures with public and private Iraqi companies.

The NIC has followed this up by launching a survey of all state-owned land that could be sold off. Under the pending legislative changes, the NIC and provincial investment councils will be given greater authority to allocate land to investors without constant referral to the government, slashing the time taken to get projects under way. State agencies will submit a catalogue of available land in the third quarter of 2009.

We need to take advantage of the improvement in the security situation to attract investment

Sami al-Araji, chairman, NIC

Putting this strategy in place over the coming months will be difficult with a general election due in December. Iraqi MPs went on holiday in August without approving a $3bn government bond that was intended to subsidise the reconstruction of the national grid. Iraq signed multi-billion-dollar contracts with the US’ GE and Germany’s Siemens in December last year to rebuild the national grid, adding 10,000MW of capacity over the next few years.

The bond was intended to be the first issue of government paper since the fall of Saddam Hussein. But Prime Minister Nouri al-Maliki has blamed electioneering from opposition factions within parliament for failing to push the matter through. The government’s response to this failure has been to claim it cannot afford to pay GE’s contract.

Addressing faults

Al-Maliki has enjoyed an upswing in authority and popularity – albeit from a very low base in Sunni and Kurdish areas – since launching a military campaign against Sadrist militias in Basra last year. However, the approaching election and the spike in violence that has accompanied it serves as a reminder that deep fault lines within Iraqi society have yet to be addressed.

The government has set out a plan to incorporate 20 per cent of the Sunni Awakening militias into the national security forces, and says it will provide jobs or vocational training for the rest. However, the cost of this programme will be huge and Al-Maliki is yet to convince the Iraqi people that he is prepared to cross sectarian lines to forge these alliances.

With the projects market still stagnant elsewhere in the region, Iraq’s potential remains huge, but investors are understandably nervous. Baghdad is doing its best to improve the conditions for foreign investors to enter the Iraqi market. The measures put forward in its national investment strategy show a new flexibility and an assured grasp of the economy. Devolving some authority for attracting new business away from ministries to the NIC will end some of the corruption that remains endemic in many parts of government.

Maintaining this improvement is contingent on the government proving that it can take control of the security situation without US help and eradicate the attacks, however sporadic.

Both government and insurgents are acutely aware that US President Barack Obama intends to pull combat troops out of Iraq entirely by the end of 2011. That deadline will arrive quickly and, as Al-Araji observes, the Iraqi people need proof that the government is capable of generating the jobs and economic development that will persuade the marginal elements in society to turn away from violence.

The swing away from religious parties in January’s regional elections suggests Iraqis are maintaining faith with the government for now. Al-Rubaie hopes that despite the recent attacks, the December poll can prove a similar catalyst for healing wounds and advancing the country’s recovery on all fronts.

“We hope next the election will rebuild bridges across the sectarian divide and a greater national cohesion will emerge,” he says. “Iraq is much better equipped to fight this fight than foreign troops. Now it is our turn to protect our democracy and our country.”