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Last Updated: Friday, 10 October, 2003, 15:02 GMT 16:02 UK
Iraq's economy declines by half

By Steve Schifferes
BBC News Online economics reporter

US soldier in Iraq
The security situation is still critical
The scale of the task facing the United States and the international community in Iraq has been highlighted by the first detailed figures since the conflict ended on the state of the Arab country's economy.

Iraq's economy will shrink 22% this year, having fallen 21% in 2002 and 12% in 2001, the United Nations and the World Bank have estimated.

The figures, which have been published ahead of a major meeting of donor nations, suggest that reconstruction work in Iraq will be slower to take effect than originally hoped.

Average income in Iraq fell from $3,600 per person in 1980 to between $770 and $1,020 by 2001 and will be just $450-610 by the end of 2003, the UN and World Bank said.

Even by the end of 2004, the two organisations estimate that average income could be lower than in 2001.

Ceyhan oil terminal used to export Iraqi oil
Plans to restore oil and gas production, refining, and pipeline capacity remain unclear
World Bank
The figures are contained in the latest version of the World Bank's Joint Iraq Needs Assessment which is to be presented to international donors on 23 October.

The wide range of estimates reflects the uncertainty over the effects of the war and international sanctions, and the lack of records in Baghdad.

Mass unemployment

The biggest problem facing the Iraqi economy is mass unemployment, with an estimated 50% of the population either unemployed or under-employed.

The government employs 30% of the workforce, and many of those work for the inefficient state-owned enterprises, who employ 500,000 (with an additional one million working directly for the government)

2001: $19bn - $25bn
2002: $15bn - $20bn
2003: $12bn - $16bn
2004: $15bn - $20bn
Source: World Bank
But the World Bank warns against immediate action in closing down the 192 state enterprises, and says they should be kept going to "preserve employment and social stability" before being prepared for possible privatisation in four or five years time.

And more than half the population remains dependent on government food aid, which costs the country $2bn each year, to prevent malnutrition and starvation.

"Food aid will need to continue in the short-term until critical pre-conditions are satisfied, including safety net plans to ensure to avoid uncompensated price impacts on income and negative impacts on the vulnerable (particularly women and children)", the report says.

Oil revenues

The key to the Iraqi economy remains the output of the oil sector, which makes up more than half of the total economy.

The Bank points out that its growth estimates for 2004 "will depend critically on the restoration of adequate security, the normal functioning of basic utilities, and the expansion of oil production".

The oil sector is also the main source of government revenue, with the new Iraqi budget assuming that oil production more than doubles from its current level of 1.3m barrels per day to 2.7m barrels per day by 2004, producing an export income of $12bn.

But nearly all that income will be absorbed in the costs of paying salaries and subsidies, with only $1.4bn available for reconstruction investment.

The World Bank warns of the "non-negligible downside risk" that a fall in oil prices will lead to a big budget deficit, and urges the government to diversify its tax base.

And there is widespread concern over the lack of plans to restore and develop the oilfields, which contain the world's second largest oil reserves.

"Plans to restore oil and gas production, refining, and pipeline capacity remain unclear," the World Bank says.

Oil is the one sector that the Iraqi government made clear it would not be opening up immediately to foreign investment.

Slow reconstruction

There could also be problems in absorbing any funds that the international community provides for reconstruction.

The report says that even if the international community pledges the full amount of $35bn it says is needed to rebuild Iraq over the next four years, only around $5bn could be spent in the first year, 2004, due to the lack of institutional capability.

It estimates that spending would rise to $8bn to $9bn in subsequent years, based on its experience in other post-conflict situations.

That estimate does not include security or oil sector needs, estimated at an additional $20bn.

Paradoxically, this figure could make negotiations easier among potential donors.

Later this month, governments and international agencies meet in Madrid to discuss financial contributions to rebuilding Iraq.

Early indications had suggested that few governments other than the United States will make substantial pledges - but a target figure of $5bn in 2004 will seem far less daunting than the overall medium-term estimate of $55bn.

The BBC's Jeremy Howells
"The slow and costly process of rebuilding Iraq is losing the Presidents support in the opinion polls"

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