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Last Updated: Tuesday, 4 November, 2003, 13:51 GMT
Paying the price of peace in Iraq

By Steve Schifferes
BBC News Online economics reporter

The US government will spend $18.6bn on rebuilding Iraq. But will it be enough?

Following a week of increasing violence in Iraq, the US Congress has given final approval for an $87bn spending bill to fund US military and reconstruction operations in Iraq and Afghanistan.

The bulk of the money - some $51bn - is going to fund the US military presence in Iraq, whose cost is running at nearly $4bn per month.

A US soldier distributes pencils in a girls' school
Security: $4.6bn
Restoring oil fields: $1.9bn
Electricity: $5.5bn
Water and sanitation: $3.5bn
Irrigation: $775m
CPA running costs: $980m
Transport and telecoms: $500m
Roads and bridges: $370m
Hospitals: $793m
source: Office of Management and Budget, US Congress
That is little changed from the $5bn per month ($61bn per year) that was the average cost of US military operations in Iraq, during the active combat phase of the operation.

Earlier hopes by US officials that there would be substantial reductions in US forces on the ground have not been realised, with the 180,000 US personnel likely to remain in the region for some time to come.

And the non-partisan Congressional Budget Office (CBO) estimates that the total cost of the US military occupation of Iraq could range from $85bn to $200bn over the next ten years, depending how quickly US forces are withdrawn.

The CBO has also estimated that a "steady-state" US occupying force of between 60,000 and 100,000 could be sustained indefinitely at a cost of $14bn-$19bn per year.

Keeping a larger force in Iraq indefinitely, given the need to rotate troops back home after a year's service, might require the expansion of the US army by the creation of two new divisions - which would take five years to accomplish at a cost of $19bn.

Deploying one of these new divisions in Iraq would boost the military costs of occupation to $23bn to $29bn annually, the CBO estimates.

Rebuilding the Iraqi army

The costs of a continuing occupation, and the deteriorating security situation, have led the Bush administration to give high priority to rebuilding the Iraqi Army and police forces.

One of the largest single elements of the $18.6bn for Iraqi reconstruction - $4.6bn - is allocated to security, including training and equipping border guards, police, fire and customs officials, creating a new Iraqi army and civil defence corps, and rebuilding the courts and criminal justice system.

The Coalition Provisional Authority dissolved the Iraqi Army soon after taking power, leaving 400,000 unemployed men on the streets and, according to some critics, contributing to the cycle of looting and violence.

The other top priority for the CPA is restoring the Iraq oilfields to full production, which will eventually (it is hoped) help to fund further reconstruction.

Oil wealth

The CPA wants to spend $1.8bn in 2004 on investment in the oil infrastructure - and it has already estimated that another $6bn will be needed over the next three years.

Instead of asking Iraq to borrow against its bountiful oil reserves, we are asking our children and grandchildren to continue to borrow to build Iraq
Senator Richard Durbin
Contract tenders for the first $1bn ($500m each for the Northern and Southern oilfields) have already been sent out, and a decision on appointing a contractor is imminent - with a joint bid by the UK's Amec and the US Fluor Corporation the front-runner.

The Iraqi interim government estimates its oil revenues at 2004 at $12bn, increasing in 2005 and 2006 to $18.5bn and $19.3bn respectively.

Next year's oil revenues barely cover the continuing cost of the Iraqi government's current spending which includes civil service salaries for 1.5 million people, nearly a third of the employed workforce.

But ideally the surplus of $6bn in the next two years could be used for reconstruction, so long as the security situation which has led to the disruption and sabotage of oil supplies and pipelines can be brought under control.

In the longer-term, much bigger investments - as much as $30-$50bn - would be needed to open up new, untapped oil fields in Southern Iraq.

Neither of these costs is likely to be funded by the international community, which has pledged an additional $13bn to rebuild Iraq over the next four years.

That is about the same amount the US government plans to spend on rebuilding Iraq's infrastructure next year alone.

Speeding up rebuilding

The World Bank has estimated that cost of rebuilding the non-oil sectors in Iraq at $35.5bn, with $9.2bn needed in the first year.

World Bank/UN estimate - $36bn: Covers administration, health, education, employment, infrastructure, water agriculture
US estimate - $19bn: Covers security, oil industry, foreign affairs, culture and religious affairs, environment
Total needs $55bn
However, the coalition spending plans suggest that the US government wants to accelerate the pace of rebuilding beyond what the World Bank thinks is feasible.

For example, the CPA plans to allocate $5.7bn to rebuilding the electricity generating system, repairing power lines and increasing capacity, twice the amount recommended by the Bank in the first year.

In total, however, Bank estimates suggest that more than $12bn will be needed to bring the Iraqi electricity system up to Middle East standards - suggesting that more supplemental appropriations might be needed.

And the Coalition wants to spend $3.7bn on improving drinking water and sanitation - more than twice the $1.8bn suggested by the Bank, and half the total requirement of $6.8bn.

The Bank had already warned that "initial disbursement rates are likely to be low" due to the lack of capacity in Iraq, with spending only ramping up in the later years of reconstruction.

This suggests that much of the US government may not be planning to spend all the money it has requested this year, saving up some for later years.

By then it may become clear whether the funding gap (between the $25bn pledged for non-oil reconstruction and the estimated needs of $35bn) can be met by increased oil revenues.

Much of that extra money, according to the World Bank, should go to improving the run-down health and education system, with long-term benefits for the economy.

Budget deficit

Meanwhile, the Iraqi spending bill is contributing to the largest US Federal budget deficit in history.

In the last fiscal year which ended on 1 October, the US budget deficit was a record $375bn, and the 2004 budget deficit was projected at nearly $500bn even before the supplemental spending bill was unveiled.

"Instead of asking Iraq to borrow against its bountiful oil reserves, we are asking our children and grandchildren to continue to borrow to build Iraq," said Democratic Senator Richard Durbin in the budget debate.

The Bush administration says that the budget deficit will decline sharply in the future, as economic growth boosts tax revenues.

But Democrats charge that the big tax cuts will lead to a permanent budget deficit that will cripple the economy in years to come.

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