Dr. Henry Azzam
Gulf News, United Arab Emirates
June 7, 2003

Dubai — While there is going to be ample development and reconstruction projects in Iraq in the years to come, nevertheless the Iraqi people are likely to have to wait until the end of this decade before they start to feel any considerable improvement in their standard of living.

Assuming Iraq opens the door for international oil firms to help boost the country’s oil production capacity from 2.6 million bpd in 2004 to 6 million bpd by 2010 and using realistic assumptions for future oil prices, Iraq’s budget is forecast to continue to be in deficit in the range of $3 billion to $9 billion over the coming six years.

Iraq’s private sector is still in its infancy and given the country’s underdeveloped financial and capital markets, economic growth will be mainly driven in the coming few years by government expenditure financed by oil revenues. The private sector is unlikely to account for more than 30 per cent of GDP until 2007, rising to 50 per cent by the end of the decade.

The basic assumption here is that Iraq will be able to increase considerably its oil production capacity by signing production sharing agreements with the international oil companies. Crude oil production is forecast to rise from the pre-war level of 2.5 million bpd to 6 million bpd by 2010.

With domestic consumption at 0.5 million bpd in 2003, rising to 0.8 million bpd by the end of the decade, this leaves oil exports at 5.3 million bpd, up from 2 million bpd in 2004.

A flat oil price of $22 a barrel for Brent crude is assumed for the period 2004-2010, which corresponds to $18 a barrel for Iraqi export basket price. Given this oil price and production scenario, oil export revenues are seen rising from $13.8 billion in 2004 to $34.8 billion in 2010.

Subtracting operating costs and capital costs due to the international oil companies who invested in the expansion of Iraq’s production capacity, yields government oil revenue figures.

Non-oil revenues will be on the rise because any future Iraqi government is likely to impose tariffs on imports, as well as other forms of duties and taxes to generate the much needed additional revenues. Total government revenues are forecast to almost double from $13.8 billion in 2004 to $36 billion by the end of the decade.

Government expenditures are seen rising from $22.5 billion in 2004 to $32.7 billion in 2010. Under current expenditures we have wages and salaries for public sector employees, where 2.5 million people work for an assumed average monthly salary of $70.

This item of the budget is expected to increase over the forecast period at an annual rate of 25 per cent. Government expenditure on goods and services is put at $8.2 billion in 2004 (based on Iraq’s last budget and UN oil for food data), rising to $10.2 billion in 2010.

The market view is that Iraq will be able to negotiate the write-off of up to 80 per cent of its $ 116 billion debt outstanding ($ 71 billion in principal and $ 45 billion in accrued interest) to say $23.2 billion, to be repaid over a 10-year period at the rate of $2.3 billion annually.

According to the new UN resolution, the per centage of oil export revenues that goes for the repayment of around $200 billion of war reparations will drop from 25 per cent to 5 per cent. Interest on outstanding debt will, accordingly, be on the decline, dropping from $2.5 billion in 2004 to $1 billion in 2010.

Who gets repaid, and how much, depends on which creditors a new Iraqi government will need most to help rebuild its economy. The creditors fall into three groups – the IMF and World Bank; governments that provided trade credits and bilateral loans; and private banks and companies.

Iraq owes only $1.1 billion to the first group which is likely to be repaid to guarantee future soft loans. Official creditors, known as the Paris Club, are likely to offer Iraq debt relief. However, to return to the international capital markets, Iraq will have to show that it is at least willing to pay something towards its properly documented commercial debt.

That will include bank loans, especially the two big ones totalling $1 billion, syndicated in the 1980s, which have become a benchmark for Iraq’s future creditworthiness. Although the price is only 19 cents on the dollar, a final repayment, including back interest, could see Iraq paying up to 75 cents on the dollar.

With current expenditures accounting for 70 per cent of the annual budget, as is the case in other countries of the region, capital expenditure to rebuild Iraq’s infrastructure (excluding oil) is forecast to rise from $6.7 billion in 2004 to $9.8 billion by the turn of the decade.

Iraq needs to repair its existing oil export installations, its electric power, its telecom sector, its education and health sectors, rebuild its army and many other basic infrastructure projects.

Iraq is likely to have a budget deficit for most of the period, albeit on a declining trend. This will be difficult to finance unless Iraq is given generous international support. The various potential sources of capital include international institutions, regional development funds, export credit agencies and Arab governments, especially those of the Gulf countries.

Private sector money may also be forthcoming, especially from companies in the neighbouring Arab countries who are interested in establishing joint venture operations with the Iraqi private sector and those multinational companies willing to invest in Iraq’s infrastructure through BOT and other privatisation structures.

However, what is needed to attract private sector capital is a stable government in Iraq, not an interim U.S. administration, peace and clear rules and regulations. The private sectors in countries like Jordan, Saudi Arabia, Kuwait, Lebanon, UAE, among others, have the experience and the willingness to invest in Iraq, what could perhaps greatly facilitate the process is the availability of political risk insurance until conditions in Iraq stabilise.

The estimates for oil production given above may be overly optimistic since the time lead for investment in the oil sector is likely to be slow due to political and legal considerations.

Furthermore, Iraq’s vulnerability to oil prices will be acute in the short to medium term. A downturn below the assumed $22 a barrel will hit the country’s revenues hard. Finally, aid, debt forgiveness and reduction in reparations are likely to be difficult issues and time consuming that may not materialise as projected above.

The author is Jordan-based CEO of Jordinvest.