Country Report Iraq Iraq at a glance: 2006-07 OVERVIEW The new Iraqi government will struggle to make much impact on the sectarian conflict being waged for political and territorial advantage by Iraqi militias. The coalition presence is increasingly irrelevant to the struggle of these forces for control on the ground. Furthermore, the interest of provinces in retaining control over oil-related decision-making and in ensuring direct access to oil revenue will make substantive constitutional compromise difficult, although the need to clarify political and revenue arrangements may allow some room for negotiation. Although some points of agreement exist between parts of the Shia coalition and the Sunni Arab and Kurdish politicians represented in parliament, sectarian considerations are likely to prevent any major political realignment. A clear prospect of negotiated compromise will be needed if foreign Sunni insurgents are to be separated from their “host” community and more pragmatic Iraqi Sunnis from the outright rejectionists. On the assumption that some of the factors driving Sunni Arab and wider Iraqi alienation can be addressed, the level of violence should start to decline by the end of the forecast period. Oil production growth will be constrained by security problems and long-standing under-investment, but modest increases in output in 2007 will support real GDP growth. Key changes from last month Political outlook • The Economist Intelligence Unit continues to believe that it will be difficult for either the political process or coalition withdrawals to affect the struggle for control on the ground. Economic policy outlook • We forecast that Iraq will record a fiscal deficit in 2007, as average oil prices ease, although they will remain exceptionally strong. Economic forecast • Our economic forecast is largely unchanged. June 2006 The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ 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. 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Iraq 1 Contents Iraq 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 5 Quarterly indicators 6 Outlook for 2006-07 6 Political outlook 9 Economic policy outlook 11 Economic forecast 13 The political scene 25 Economic policy 29 The domestic economy 29 Economic trends 31 Oil and gas 34 Infrastructure 34 Financial indicators 35 Foreign trade and payments List of tables 11 International assumptions summary 12 Forecast summary 28 Status of congressional appropriation (Iraq Relief and Reconstruction Fund) 30 Consumer price inflation 32 Iraqi crude oil production and exports, 2006 36 National stock levels: refined petroleum products, 2006 List of figures 13 Gross domestic product 13 Consumer price inflation Country Report June 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Iraq 3 Iraq June 2006 Summary Outlook for 2006-07 The Iraqi government will struggle to control the sectarian conflict being waged for political and territorial advantage by Iraqi militias. The interest of provinces in retaining control over oil-related decision-making and in ensuring direct access to oil revenue will make substantive constitutional compromise difficult. The coalition presence is increasingly irrelevant to the struggle of Iraqi militias for control on the ground. However, the prospect of attaining political goals through negotiation could enable foreign Sunni insurgents to be separated from their “host” community and more pragmatic Iraqi Sunni Arab fighters from outright rejectionists. On the assumption that some of the factors driving Sunni Arab and wider Iraqi alienation can be addressed, violence should start to decline by end-2007. Oil production growth will be constrained by security problems and long-standing under-investment, but modest increases in output will support real GDP growth in 2006-07. The political scene Iraq has formed a new government under Nouri al-Maliki. Although Mr Maliki is committed to a number of policy steps that could help to end violence in Iraq and promote support for the political process, the strength of competing interests, even within his own political coalition, will probably limit progress. A new and less partisan figure has been appointed interior minister, and the faction of Moqtada al-Sadr, a radical Shia cleric, holds five important cabinet posts. Tensions persist in Basra, where Shia factions are vying for political authority and control over smuggling interests, and tensions have increased in Kirkuk ahead of political changes expected next year. Economic policy Specific legislation on foreign investment and pensions is being drawn up. Specific steps toward social security provision have been taken and further fuel price subsidy cuts have been considered. The domestic economy Nominal GDP growth approached 30% in 2005, according to US estimates. A new oil minister has been appointed and faces a number of political, infra- structural and personnel challenges. A decision on the mobile-phone licences continues to be stalled. Despite increased electricity projections, supply is likely to fall short of summer demand. Foreign trade and payments Further bilateral debt deals on Paris Club terms have been agreed, and some former Eastern bloc countries have been asked to accept the same arrangements. Editors: Neil Partrick (editor); Hania Farhan (consulting editor) Editorial closing date: June 12th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule Country Report June 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 4 Iraq Political structure The current cabinet was appointed in May 2006, following elections for the Council of Representatives (national assembly) in December 2005. The prime minister and cabinet have executive authority, whereas the positions of president and two vice-presidents, who make up the presidential council, are largely ceremonial Main political parties and The main Shia Arab-led parties are the Supreme Council for the Islamic Revolution in Iraq armed factions (SCIRI); Islamic Dawa; Islamic Dawa-Iraq Organisation; Movement of the Islamic Dawa Party (Martyr Izz al-Din Salim wing); Islamic al-Fadeela (virtue) Party; and (Iraqi) Hizbullah. Moqtada al-Sadr has a loose-knit faction entitled Jamiaat Sadr al-Thani. Kurdish “secular” parties include the Kurdistan Democratic Party (KDP) and the Patriotic Union of Kurdistan (PUK), and there is also a Kurdistan Islamic Union. Among the Sunni Arab Islamist groupings are Tawafuq (the Concordance Front), including the Iraqi Islamic Party (part of the Muslim Brotherhood); Hewar (the National Dialogue Front); and the Iraqi United National Movement. The Sunni clerical bodies, the General Conference (Endowment) and the Association of Muslim Scholars, have a national political function too. Among the representatives of other minorities are the Iraqi Turkman Front and Assyrian Democratic Movement. Parties with a less sectarian identification include the Iraqi National Congress; the Iraqi National Accord; Free Officers; the Iraqi Communist Party; Iraqi Independent Democrats; and the Baath Party. In addition to these more coherent parties, Sunni Arab insurgent groups include the Islamic Army; Jaish Mohammed; Saddam’s Fedayeen; and al-Awdah. Kurdish Islamist militias