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Iraq Business Forecast Report Q2 2011
Business Monitor International, March 2011, Pages: 38
Government Formation and Oil Output Gains Bode Well For The Economy Iraq continues to face significant challenges, but the country has made some significant strides in recent months. Most importantly, the country finally has a coalition government, after nine months of political gridlock, which will set the stage for passing key legislation. Another remarkable success is the 10% rise in oil output reported by several international energy companies at their respective fields in recent months, which bodes well for the fiscal budget and the economy overall. That said, the country continues to face major obstacles, including political wrangling within the cabinet, ongoing disagreements between Baghdad and Arbil (the capital of the Kurdistan region), and security concerns.
Overall, though, our outlook on the country for 2011 has brightened since our last quarterly report, and we expect the economy to expand at a healthy rate in the medium term. Iraq achieved a major political milestone in December 2010 with the formation of a cabinet led by incumbent Prime Minister Nouri al-Maliki, though we expect political progress to remain slow and stability to remain fragile. Disagreements within the coalition were so great that candidates for three of the most important ministerial portfolios – interior, defence, and national security, could not be agreed upon. The premier decided to hold the positions temporarily until compromise candidates could be found.
Furthermore, security risks have returned to the fore, as attacks on Iraqi security and police forces, religious groups, and politicians have become more prevalent in 2011. We expect Iraq’s economy to post healthy rates of growth over the medium term, expanding an average 6.3% per year through 2015. Returns on energy investment, healthy oil prices, and the promotion of non-hydrocarbon sectors of the economy are the primary factors underpinning our view. The telecommunications, industrial, construction, and power sectors are set to outperform, although for the time being we stress that the primary driver of growth will remain the hydrocarbon sector.
Disputes between Baghdad and the Kurdistan Regional Government (KRG) are far from over, which bodes poorly for foreign investment. The main differences surround the oil industry, as there is not yet a hydrocarbons law or revenue-sharing legislation that dictate how oil contracts and revenues should be dealt with. A disagreement regarding border demarcation of the Kurdistan region is also creating tensions, and a planned census, which was to resolve the border issue, appears to have been postponed indefinitely. A further issue involves disputes regarding the allocation of electricity between the northern provinces and the rest of Iraq, which led to Kirkuk’s refusal to send electricity to the national grid for a few days in January 2011.
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