With a budget languishing in parliament, crucial reforms on the back burner and a hamstrung private sector, prospects for Iraq’s economy after Wednesday’s election hinge heavily on the oil factor.
Iraq has some of the world’s largest deposits of oil and gas and aims to boost energy production dramatically, but a slow-moving bureaucracy and poor infrastructure are holding it back.
Complicating things further is Baghdad’s long-running dispute with the energy-rich autonomous northern Kurdish region, which has sought to sign deals with foreign firms and export without the express permission of the central government.
Any new government formed after Wednesday’s parliamentary election will have its hands full with these and other challenges.
Crude oil accounts for more than 90 percent of exports and government revenues, and 70 percent of gross domestic product, according to the International Monetary Fund.
Despite calls for Iraq to do more to diversify its economy, oil still fuels the country’s attempts to rebuild after decades of conflict.
“What Iraq should be focusing on is actually developing something more diverse as an economy that’s less dependent on oil production,” said Ayham Kamel, Middle East and North Africa Director for Eurasia Group consultancy.
“The challenge here is, given the security environment, it’s very difficult to achieve that.”
Only one percent of Iraq’s workforce is employed in the oil sector but the industry indirectly supports countless others, with revenues in particular helping to pay salaries in the public sector.
Meanwhile private firms, outside the oil sector, often complain they are hamstrung by an ageing banking system, with few loans available and outdated laws that make it hard to set up or maintain a business.
Rampant corruption and soaring costs due to electricity shortages and deteriorating security also complicate running a business in Iraq, which is mired in its worst period of bloodshed in years.
“Iraq’s economy suffers from structural weaknesses,” said a World Bank report.
It noted that although the oil sector was delivering strong growth, overall economic expansion “has not been broad-based enough to make major inroads on poverty and exclusion.”
“Poor governance, an inefficient and easily co-opted judiciary system, inconsistent regulations, and security issues keep Iraq at the bottom of global rankings for doing business,” the report said.
– ‘Ambitious’ oil goals –
That leaves oil at the centre of any discussion about Iraq’s economic challenges.
“The priorities (for a new government) would be dealing with the same problems that are holding the oil sector back,” said Ruba Husari, editor of the website www.iraqoilforum.com.
Husari cited “the bureaucracy, the bottlenecks in infrastructure, the shortages in gas that are forcing the current government to import natural gas from neighbours” as well as disputes with the Kurdish region over energy exports.
She said Iraq’s political parties had few differences on energy policy.
“But it would make a difference if they were to propose technocrats among their candidates to fill the next government’s portfolios.”
Most of Iraq’s oil fields are concentrated in the predominantly-Shiite south of the country, though significant deposits can also be found in the northern Kurdish region as well.
Exports hit 2.8 million barrels per day in February, the highest figure in decades, with production above 3.5 million bpd.
The authorities, however, aim to expand production capacity to nine million bpd by 2017, a target the IMF and International Energy Agency have warned is ambitious.
That would increase the energy sector’s share of the economy even further and, some fear, delay reforms to the broader economy.
“We have not reaped any benefits, or attracted investment, or established industry and there is no real agriculture,” said Issam al-Faili, professor of politics at Baghdad’s Mustansiriyah University.
“Unfortunately, over the years, the political elite were either lazy or did not find solutions, or did not have the ability.”