Country Report December 2002 Iraq Iraq at a glance: 2003-04 OVERVIEW A military invasion by US and UK forces, leading to the demise of the regime of President Saddam Hussein, is highly likely to begin before the end of 2003, and probably before May. The US’s desire to maintain international support for such an operation, and the time required to be able to move sufficient military assets in theatre, are likely to ensure that the inspection process continues through to next year. However, Iraq’s ability to conceal some weapons of mass destruction (WMD) capability, and given the exacting standards of co-operation required by the latest UN resolution, make it likely that the process will be interrupted. This will probably occur within the first few months of 2003, when the UN, or failing this the US and the UK, will conclude that Iraq is in material breach of its commitments and that military action is needed. Until the regime is replaced and complete WMD disarmament secured, sanctions will continue to constrain the economy. The UN’s retroactive oil pricing policy and war fears are likely to ensure that oil production, and therefore real GDP, will be down in 2003 compared with 2002. However, by the second half of 2004 the likely end of sanctions and strengthening oil production should lift real GDP growth to around 15%. Key changes from last month Political outlook • Iraq is likely to make a declaration of its WMD capabilities under UN Security Council Resolution 1441, but is unlikely to fully co-operate with the first UN weapons inspections for four years. Economic policy outlook • Iraq continues to try to maximise its legal oil exports under the UN’s oil-for- food scheme and will continue to oppose the UN’s retrospective pricing scheme, which deters some oil lifters. Iraq’s illicit oil trade continues, despite fluctuations in sales in the Gulf owing to successful maritime interdiction. Economic forecast • The Economist Intelligence Unit has amended its forecast for real GDP growth in 2003, and now expects it to contract by 1.5%, as war fears on the part of lifters and the war itself are likely to reduce production from 2002 levels. By 2004 an end to sanctions and the beginning of renewed invest- ment should see growth recover to around 15%. December 2002 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent St The Economist Building 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7830 1007 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7830 1023 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] Website: www.eiu.com Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office Copyright © 2002 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 0269-5502 Symbols for tables “n/a” means not available; “–” means not applicable Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. Iraq 1 Contents 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 5 Quarterly indicators 6 Outlook for 2003-04 6 Political outlook 7 Economic policy outlook 8 Economic forecast 11 The political scene 26 Economic policy 28 The domestic economy 28 Economic trends 31 Oil and gas 33 Foreign trade and payments List of tables 8 International assumptions summary 11 Forecast summary 32 Oil production Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002 Iraq 3 Summary December 2002 Outlook for 2003-04 There is a strong chance that the regime of President Saddam Hussein will be overthrown in a US-led military campaign by end-2003. Once the regime of Mr Hussein has been removed it is likely that UN sanctions will be lifted quite quickly, and Iraq can look forward to substantial aid and investment once a new regime is installed. However, the military campaign may not happen until the second half of next year, and it will take a number of months for foreign investment to invigorate the economy. Therefore, the Economist Intelligence Unit’s forecast for real GDP in 2003 is a contraction of 1.5%, following the estimated fall of 3% this year. In both instances this reflects falls in expected oil production. However, we expect a substantial recovery in 2004 as reconstruction, foreign investment and aid flows start to revive the economy. The political scene The passing of UN Security Council Resolution (UNSCR) 1441 has begun both the process of UN weapons inspections in Iraq and, if their work is frustrated, the countdown to war. Iraq is expected to make some declaration of residual weapons of mass destruction (WMD) capabilities to forestall any imminent prospect of invasion by US-led forces. However, the thoroughness of the in- spection process demanded by the UN resolution, and the expected impatience of the US with any prevarication on the part of the Iraqi authorities, is likely to lead to war. Iraq will continue to hope that the discomfort of the US’s Arab allies will complicate the military and political preparations by the US and the UK. However, Iraq has few regional cards left to play, especially now that Syria, the only Arab member of the UN Security Council, has effectively delivered the Arab governments’ acquiescence in war if inspections fail by voting for UNSCR 1441. While wanting to retain some residual WMD capability in the event of war, Iraq will also hope that the maintenance of loyalty among its elite military forces will undermine the US/UK war effort, and that the deception of its elite intelligence agencies will complicate the work of the inspectors without precipitating armed conflict. Economic policy Iraq’s legal oil earnings continue to fluctuate as the UN’s retroactive pricing policy deters some lifters. The Central Bank has introduced a ID10,000 note. The illegal surcharge previously extracted by the regime from oil lifters has ended. The domestic economy Despite the recovery in official oil earnings, the oil-for-food escrow account has a US$3bn shortfall to fund key purchases. Significant boosts to oil production are unlikely until at least the second half of 2004 owing to the shortage of spare parts. Foreign trade and payments Saudi Arabia continues to prevaricate over prospects of strengthening trade with Iraq via a planned trading post, while Iran’s poor trading relations with Iraq have not prevented a showpiece agreement being forged. Editors: Neil Partrick (editor); Hania Farhan (consulting editor) Editorial closing date: November 21st 2002 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002 4 Iraq Political structure Official name Republic of Iraq Form of state Arab socialist republic based on provisional constitution of 1968 Legislature National Assembly of 250 members, elected from 56 constituencies; last election March 27th 2000 Head of state President, currently Saddam Hussein, elected by the Revolutionary Command Council (RCC), the highest national authority. The vice-president is Taha Yasin Ramadan Executive Cabinet chosen by the president, who regularly replaces individual ministers. Last reshuffle: April 18th 2001 Main political parties Arab Baath Socialist Party; Democratic Party of Kurdistan; Kurdistan Revolutionary Party. Opposition parties (illegal): Supreme Council for the Islamic Revolution in Iraq (SCIRI), comprising six Shia parties; seven Kurdish parties, including the Kurdish Democratic Party (KDP) and the Patriotic Union of Kurdistan (PUK); Iraqi Communist Party; Democratic Gathering; Iraqi Socialist Party; independent nationals Prime minister Saddam Hussein Deputy prime ministers Tari q Aziz Mohammed Hamza al-Zubaidi Hikmat al-Azzawi Ministers Agriculture Abdullah Mohammed Saleh Culture Hamed Yousif Hammadi