# Iraq's Economy: Past, Present, Future

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URL: https://www.frixlaw.com/law-library/documents/crs%3ARL31944

## Record

- **Collection:** Congressional research report
- **Document type:** CRS Report
- **Published:** June 3, 2003
- **Citation:** RL31944

## Text

Order Code RL31944

Report for Congress
Received through the CRS Web

Iraq's Economy: Past, Present, Future

June 3, 2003

Jonathan E. Sanford
Coordinator
Foreign Affairs, Defense, and Trade Division

Congressional Research Service ˜ The Library of Congress

Iraq's Economy: Past, Present, Future
Summary
For most of its history, the government of Iraq has played an active role
stimulating and directing the Iraqi economy. This pattern was most pronounced
during the recent regime of Saddam Hussein, which was at root a centrally-directed
command economy with some trappings of market economics and crony capitalism.
Iraq’s industrial sector was created, in large part, as a result of government efforts to
diversify the economy through economic development projects using the proceeds
from Iraq’s oil wealth and borrowed funds. Many of these initiatives were not viable
without government subsidies. Much of the industrial base has now been destroyed,
either by direct attack in the Iran-Iraq or the two Gulf wars or through atrophy caused
by neglect. Iraq has suffered absolute declines in gross domestic product (GDP),
chronic inflation, wholesale depreciation of its currency, virtually non-existent
foreign investment and the accumulation of a crushing debt burden.
This report, which will be updated periodically, identifies issues to be addressed
before Iraq can participate normally in the world economy. It will need civil peace
and a new legitimate government – Hague and Geneva conventions place limits on
the capacity of an occupying power to restructure or develop the economy of an
occupied state by its own decisions alone. It will need a sound monetary system and
a market-oriented banking and finance system. It will need to recast its industrial
sector on sounder principles with attention to productivity and relative prices. It will
also need to ensure that the government cannot use the massive oil revenues passing
through its hands to establish once again a new authoritarian regime.
Should Iraq’s oil fields be restored to their pre-war conditions, Iraq could reenter the world oil market as one of the largest suppliers, generating up to $24 billion
in annual revenues. It has large undeveloped potential. Long term, it may be the
world’s largest oil producer, generating even larger export revenues – perhaps
doubling or more its income within a decade. How Iraq uses this prospective oil
wealth – and its effect on the rest of the economy – will be a concern. At present,
its oil revenue will go into the internationally-audited Development Fund for Iraq.
Iraq’s agricultural sector is small. Output during the 1980s was stimulated by
incentives and subsidies, but production lagged and imports supplied most of the
country’s agricultural needs. During the 1990s, through poor practices, Iraq’s
farmland was heavily damaged by salinization. Years will be required to rebuild
Iraq’s agricultural productivity. In the meantime, Iraq will rely on imports to meet
its agricultural needs. As a result, among other things, urbanization will increase.
Iraq has large foreign debts, with estimates ranging from $42 billion (plus
unpaid interest since 1991) to $64 billion and $78 billion. This does not include
1980s war-loans from Gulf or other Arab states or war damage claims. Most of the
debt stems from the Iran-Iraq war or from loans incurred before 1990 to fund
consumer needs and industrial or infrastructure projects. The earlier U.N. sanctions
regime and the Security Council resolution of May 22, 2003 shield Iraq against action
by its creditors and claimants to settle claims. The issue will need to be resolved
before normalization of Iraq’s international trade and financial relations can occur.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Government and the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Constitutional Monarchy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Economic Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Military Regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Economic Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Baathist Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Economic Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Demographic and Social Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Role of Women in the Government and Economy of Iraq . . . . . . . . . . . . . . 7
Iraq’s Economy in Recent Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Macroeconomic Policy and Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Economic Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Gross Domestic Product (GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Currency and the Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . 12
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Foreign Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Foreign Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Compensation Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Pending Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Oil for Food Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Petroleum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Oil Resources – Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Oil Production – History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Current Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Iraq’s Oil Industry – Current Status . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Iraq and OPEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Potential Iraqi Oil Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Agro-climatic setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Pre-U.N. Sanctions (1980-89) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
U.N. Sanctions period (1990 to 2003) . . . . . . . . . . . . . . . . . . . . . . . . . 25
Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Banking and Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Transportation and Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Railways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Air Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Roadways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Power Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Industrial Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
War and Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Illicit Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Fiscal Levies on Foreign Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
The Post-War Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Assessing the Damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Critical Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Transportation Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Humanitarian Assistance and Post-War Relief . . . . . . . . . . . . . . . . . . . . . . 39
Provision of Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Medical Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Food Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
U.S. Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Major Issues Affecting Iraq’s Economic Future . . . . . . . . . . . . . . . . . . . . . . . . . 41
Preconditions for Economic Development . . . . . . . . . . . . . . . . . . . . . . . . . 41
Avoiding Rentier State Authoritarianism . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Oil and Authoritarianism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Possible Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Reviving the Non-Oil Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Settling Debt and Overhanging Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Establishing a Currency and Monetary System . . . . . . . . . . . . . . . . . . . . . . 53
The Dinar Lacks Sufficient Credibility . . . . . . . . . . . . . . . . . . . . . . . . 54
Interim Dollarization by Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
A New Currency Requires Key Decisions . . . . . . . . . . . . . . . . . . . . . . 54
Importance of Monetary Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Choosing an Exchange Rate Regime . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Short-run Credibility vs. Long-run Flexibility . . . . . . . . . . . . . . . . . . . 56
Oil and Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Rebuilding the Financial System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Change to a Market-Based System . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Administration Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Export and Border Control Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Access to Foreign Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Iraq and the International Financial Institutions . . . . . . . . . . . . . . . . . 60
The United Nations Development Programme . . . . . . . . . . . . . . . . . . 62

List of Figures
Figure 1. Iraq’s Gross Domestic Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Figure 2. Sectoral Composition of GDP, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Figure 3. Iraq’s Oil Production and Consumption, 1980-2002 (Est.) . . . . . . . . . 19

List of Tables
Table 1. Iraqi Oil Production, Current and Potential . . . . . . . . . . . . . . . . . . . . . . 22
Table 2. Iraq’s Top Exports, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Table 3. Iraq’s Top 10 Imports, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Table 4. Iraq’s Imports under OFFP, 1997-2003 . . . . . . . . . . . . . . . . . . . . . . . . 35

This report was originally prepared at the request of the Senate Committee on
Foreign Relations. With the Committee's permission, it is being made generally
available for the use of Members.

Iraq's Economy: Past, Present, Future
Introduction1
This report provides information on the economy of Iraq in the recent past and
on current post-war conditions. It also discusses issues and factors which will likely
influence Iraq’s future economic prospects. In the 1980s, Iraq had one of the Arab
world’s most advanced economies. Though buffeted by the strains of the Iran-Iraq
war, it had – besides petroleum -- a considerable industrial sector, a relatively welldeveloped transport system, and comparatively good infrastructure. Iraq had a
relatively large middle class, per capita income levels comparable to Venezuela,
Trinidad or Korea, one of the best educational systems in the Arab world, a well
educated population and generally good standards of medical care. Nevertheless,
Iraq was a centrally directed command economy that was heavily dependant on oil
revenue to fund its key institutions and its development program. Iraq experimented
in the late 1980s with privatization, functional autonomy for some elements of the
economy, and limited use of market forces. This initiative ended, however, with the
advent of the first Gulf war.
In the dozen years since 1991, Iraq’s industrial and agricultural capacity has
decayed, its transportation and infrastructure systems have deteriorated, and the
education levels and standard of living for its population have declined. Oil exports
resumed under the U.N. Oil for Food Program (OFFP) after 1995, albeit at a lower
rate. However, its production capacity deteriorated from lack of inputs. Some
economic facilities were damaged in the recent war and its chaotic aftermath. In
effect, Iraq must start over as it rebuilds its economy. Its massive oil resources can
serve as an engine of future growth and development. It does not start, though, with
a blank slate. The experience, expectations, and aspirations of the past will have
important – if unknown – effects on Iraq’s future economy. What Iraq learns from
its past and how it adapts itself for the future will be important considerations.
An important feature of centrally planned economies, such as Iraq under
Saddam Hussein, is the absence of the legal, political, economic, and regulatory
institutions that are the necessary underpinning of successful market economies.
According to Dani Rodrik, a prominent development economist, "in the long run, the
main thing that ensures convergence with the living standards of advanced countries
is the acquisition of high-quality institutions."2 Institutions are the "rules of the
game," the sets of rules and norms that organize society and allow a market economy

1

Prepared by Jonathan E. Sanford, Specialist in International Political Economy, and Martin
A. Weiss, Analyst in International Trade and Finance, Foreign Affairs, Defense and Trade
Division.

2

Dani Rodr i k. “Gr owt h St r ategies.”
[http://www.ksg.harvard.edu/rodrick.]

April

2003.

Availabl e

at

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to function. Thus, the focus of the Iraqi reconstruction efforts must be the creation
of institutions that not only stabilize the economy, but can serve as an engine for
sustained long-term growth. Iraq will need to learn how to build and maintain good
institutions and how to use them effectively to rebuild its economy.
This report provides background on the different sectors and institutions of the
Iraqi economy. It also identifies some questions and issues which may have
significant bearing on Iraq’s future prospects and may need to be addressed as Iraq,
the United States, and the international community seek to put the economy of Iraq
on a sounder long-term foundation.

Government and the Economy 3
The history of Iraq during the 20th century falls into three fairly distinct periods:
1921-1958: A constitutional monarchy under direct British control
at first and later under significant British influence.
! 1958-1968: A series of nominally republican regimes headed by
military officers who assumed power in most cases through a
military coup d’etat.
! 1968-2003: A government controlled by the socialist, pan-Arab
Baath Party, which quickly developed into a vehicle for one-man
rule by leading party official Saddam Hussein.
!

The Constitutional Monarchy
Government. During the first period, Britain established a monarchy in Iraq
under King Faysal I, a leading member of the prestigious Hashemite family (of which
a collateral branch continues to govern Jordan). In 1932, Iraq became an independent
country, but the bilateral treaties replacing the British mandate provided for a
continued British role in Iraq, particularly in defense and foreign affairs. Rising
opposition to Iraq’s western ties and mounting nationalist sentiment among younger
Iraqis including the armed forces created growing disaffection from the regime. In
July 1958, a group of army officers led a coup in which the King and leading officials
were killed, many other officials imprisoned, and a republic was proclaimed.
Economic Policies. Economic institutions developed slowly during the early
years of the Iraqi monarchy as the nascent government sought to establish itself and
deal with internal tensions and ripple effects of World War II. With the advent of
mounting oil revenues in the 1950s, Iraqi were able to concentrate to a greater degree
on the nation’s economy. At this time, Iraq’s economy was largely market-oriented,
but based more on feudal and traditional rather than on modern principles. A
development board, established in 1950, promulgated multi-year plans that
emphasized three priorities: agriculture (including irrigation and flood control),
transportation and communications, and construction. Commentators have praised
the board for using most of the country’s oil income for capital investment and
3

Prepared by Alfred Prados, Specialist in Middle East Affairs, Foreign Affairs, Defense and
Trade Division.

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infrastructure development. Some fault it, however, for over-emphasizing agriculture
and under-emphasizing industry and human resources, which would have appealed
to two increasingly important constituents: the educated elite and the workers.4 By
neglecting these groups, the government may have contributed toward the climate of
disaffection that helped bring on the revolution in 1958, although political opposition
appears to have been a more important factor in the demise of the old regime.

The Military Regimes
Governments. Three military leaders governed Iraq in succession during the
decade that followed the overthrow of the Iraqi monarchy by left-wing nationalist
army officers. The somewhat eccentric General Abd al-Karim Qasim, who led the
coup of 1958, terminated Iraq’s ties with the West, withdrew Iraq from the Baghdad
Pact, and aligned Iraqi policies to a considerable degree with those of the Soviet
Union. Steady erosion of his power base, sapped by growing domestic unrest
(including the beginning of a Kurdish insurgency) and regional quarrels, led to a
second coup in which Qasim was overthrown and killed in February 1963. Qasim’s
successors, Generals Abd al-Salam Arif and Abd al-Rahman Arif,5 took somewhat
more moderate positions on regional and international affairs, established better
relations with other Middle Eastern states (particularly Egypt under then President
Gamal Abd al-Nasser), and adopted a more friendly stance toward the West, while
retaining ties to the Soviet Union. However, the Arif regimes faced further domestic
instability, the Kurdish insurgency continued to simmer, and the government lost
much of its credibility–as did other Arab regimes–after Israel quickly defeated Arab
armed forces during the “six-day war” in June 1967. A year later, on July 17, 1968,
the Arif regime was overthrown by the Baath Party.
Economic Policies. The revolutionary regimes of 1958-1968 reversed many
of the economic policies of the old regime, although like the monarchy they
continued to devote major resources to transportation and communications, as well
as military modernization. General Qasim, the first of the military rulers, and his key
advisors were influenced by socialist models and emphasized several themes which
bore this stamp: a planned economy, elimination of foreign economic influences
(notably in the oil sector), and land reform. The Development Board, associated by
Iraq’s new leaders with the old regime, was abolished and replaced by a ministry of
planning, together with a planning board. In 1961, Qasim moved against one of the
principal vehicles for foreign involvement in Iraq’s oil sector, the partly Britishowned Iraq Petroleum Company (IPC). Law Number 80 expropriated 99.5% of
IPC’s concessionary area, leaving the company only those areas currently in
production. (Iraq subsequently nationalized the company itself, in June 1972.) Land
reform, perhaps the most significant of Qasim’s economic measures, was an
ambitious undertaking designed to break up the old feudal system of land ownership
4

See, for example, Phebe Marr, The Modern History of Iraq, Boulder, Colorado, Westview
Press, 1985, pp. 134-135.

5

General Abd al-Salam Arif came to power in conjunction with the Baath Party but ousted
his erstwhile Baathist collaborators in a third military coup nine months later. President Arif
was killed in a helicopter crash in April 1966 and succeeded by his brother, General Abd
al-Rahman Arif, who was serving as chief of staff of the armed forces.

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and redistribute land to peasants; however, implementation was slow as the
government sought to put in place the necessary machinery to administer the
program. One commentator has said the early reform measures “did more to destroy
the edifice of the old regime than to construct the foundations of the new.”6
Basic economic policies inaugurated by Qasim continued under his two
successors, although at a somewhat slower pace. The Arif governments adopted
additional measures to increase the role of the public sector in the economy; in July
1964 it nationalized all banks and insurance companies and in the same month it
nationalized the 27 largest privately owned industrial firms. The government also
reorganized other companies, required profit sharing with workers, and participation
by workers in management. These and similar measures contributed toward capital
flight and departure of trained management, with an accompanying decline in
industrial development during the 1960s.

The Baathist Regime
Government. Baathist leaders quickly established one party rule. By the early
1970s, Saddam Hussein, a dynamic but ruthless party official, had consolidated his
control over the party leadership and government apparatus. In 1979, Saddam
Hussein replaced the aging President Ahmad Hasan al-Bakr as president of the
republic and in several ancillary positions. Saddam’s position as president was
endorsed in 1995 and 2002 by ritual majorities of 99.6% and 100%, respectively.
Parliamentary life, suspended after the overthrow of the monarchy in 1958, was
nominally restored in 1980, when a new law established an elected 250-member
National Assembly; however, most observers have characterized Iraq’s post-1980
assemblies largely as rubber stamps.
After a period of international strain in the early 1970s, Saddam mended fences
with most Middle East countries in the later 1970s and 1980s and reestablished
relations with the United States in 1984. Trade relations flourished with the United
States, which–like the conservative Arabian Peninsula monarchies–regarded
Saddam’s secular regime as a bulwark against the militant clerical regime that came
to power in Iran in 1979. U.S. concerns over Iran in the 1980s tended to obscure
Saddam’s poor human rights record (illustrated by a brutal campaign of repression
and forced resettlement of his Kurdish population) and his efforts to develop
weapons of mass destruction. Meanwhile, the inconclusive Iraq-Iran war, which
lasted eight years and resulted in a total of perhaps a million casualties, left Iraq
significantly weakened and encumbered with an $80 million debt to oil-rich Gulf
states who had helped finance Iraq’s war. The occupation of Kuwait, which Saddam
may have thought would elicit no U.S. action beyond verbal condemnation, resulted
in a major military defeat by a U.S.-led coalition, widespread damage to Iraq, and
stringent economic sanctions, while relegating Iraq to the status of a pariah state.
Economic Policies. During the early years of his rule and in line with the
socialist principles of the Baath Party, Saddam followed economic policies similar
to those of the preceding military regimes. The government employed central

6

Phebe Marr, The Modern History of Iraq, p. 169.

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economic planning to manage its resources. Expenditures were divided into three
categories: a government operations budget, an investment budget, and an annual
import budget. Flush with mounting oil revenues, Iraq was able for some years to
pursue its socialist model without having to make hard choices between solvency and
other priorities such as welfare benefits, infrastructure development, and even armed
forces modernization. One commentator observes that in the early years of the
Baathist regime, “[t]he responsibility of the state was not so much to allocate scarce
resources as to distribute the wealth, and economic planning was concerned more
with social welfare and subsidization than with economic efficiency.”7
Growing economic burdens resulting from the protracted Iraq-Iran war led
Saddam to change course in the mid-to-latter 1980s. Abandoning to some degree the
socialist ideology that had dominated Baathist thinking in the past, he embarked on
a more pragmatic course of economic reform. In June 1987, a speech by Saddam
exhorted provincial governors that “[f]rom now on the state should not embark on
uneconomic activity.” That year, the government abolished a labor law that had
guaranteed full employment; laid off thousands of government workers (many of
whom were foreign nationals); transferred other civil service workers to factory jobs;
and took steps to privatize government-owned enterprises, including: bus companies,
gas stations, agricultural enterprises, department stores, and factories. In an even
more profound departure from the three previous decades, Iraqi officials announced
in late 1987 that the government would offer inducements for foreign companies to
operate in Iraq by easing former restrictions on foreign direct investment.
Iraq’s invasion of Kuwait and its aftermath dramatically altered the economic
scene in Iraq. Henceforth, Iraqi efforts were concentrated on circumventing the
international sanctions imposed as a consequent of the invasion, taking advantage of
the Oil for Food Program, and obtaining additional assistance through humanitarian
donations, illicit trade, and private barter arrangements. This “twilight” economy
might well have lasted for some time to come had not the Bush Administration
decided that the current situation was no longer tenable and required another
application of military force.

Demographic and Social Conditions
Overview 8
Before 1990, Iraq was one of the more prosperous and advanced countries of the
Arab world. It was an upper middle income country with a substantial middle class,
considerable technical capacity, high (by regional standards) female participation in
education and the economy, and relatively high standards overall of education and
health care. Since 1990, economic conditions in Iraq have deteriorated and

7

Helen Chapin Metz (ed.), Iraq: A Country Study, 4th ed. Washington, Federal Research
Division, Library of Congress, 1990, p. 127.
8

Prepared by Martin Weiss, Analyst in International Trade and Finance, Amy Thayer,
Research Associate, and Jonathan Sanford, Specialist in International Political Economy,
Foreign Affairs, Defense and Trade Division.

CRS-6
education, health and living standards have declined. A new generation has grown
up having had little participation in or memory of the earlier years. Social, religious,
and ethnic differences have become more pronounced and perhaps more significant.
Iraq’s population has grown steadily in recent decades, from 9.4 million in 1970
and 13 million in 1980 to 22.3 million in 2000, a rate of increase comparable to most
other countries in the region.9 This is despite population losses due to war, civil
conflict, and emigration. In 1965, 51% of the population lived in urban centers. The
urban share rate reached 73% in 1988 and 77% in 2000. Baghdad held 35% of the
population in 1960 and 55% in 1980. Its share has since declined to 27% as the other
major population centers grew in size. This broadened pattern of urbanization is
typical for most advanced developing countries. In 1989, Iraq had life expectancy
and mortality rates comparable to those for Saudi Arabia, Libya, and other high
income Arab countries.10 By 2000, life expectancy in Iraq had fallen to 61 years
while it had grown in the Middle East as a whole to over 67 years. Likewise, the
Iraqi mortality rate for children under 5 rose from 95 per thousand in 1980 to 121 in
2000. Primary school enrollment rates fell from 100% of the relevant age group in
1980 to 88% in 1998, while secondary enrollment rates declined from 57% to 20%.
In the late 1980s, Iraq’s middle class was a highly urbanized, secular, welleducated group, consisting mainly of state employees and civil servants. According
to one estimate, the middle class rose from 28% of Iraq’s urban population in 1958,
to 54% in 1988.11 The middle class benefitted greatly from the expansion of
educational and government employment opportunities and from increased levels of
government revenue. Since 1991, however, the lower ranks of state employees
suffered greatly from years of war, economic sanctions, and the general decline of
government revenues. Salaries did not keep up with hyperinflation. Many families
were obliged to sell household items and other assets. The flow of population to
cities also swelled the ranks of the urban poor. Unemployment or underemployment
among former rural residents was a problem and has become more so in the past
dozen years. In recent years, Iraqis have come to rely increasingly on kinship
networks and religious charities for support the government no longer provides.
Iraq’s population comprises a wide diversity of religious and ethnic groups.
Some 95% of the people are Muslim, Islam being the officially recognized religion.
Most of the Arabs in Northern Iraq, the Bedouins, the Kurds, the Turkomans and
some inhabitants of Baghdad and Basra are Sunni, while most Arabs in the South are
Shiite. There are also small Christian communities, particularly near Mosul, as well
as other small groups such as the Sabian and Yazidis.12 While the majority of Iraqi
Muslims are Shiite, Sunnis are disproportionately represented among Iraq’s wealthy

9

Unless otherwise stated, data in this section were taken from the World Bank’s World
Development Indicators, 2002, and its World Development Reports for 1990 and 1992.

10

Life expectancy (years) in 1989: Iraq 63; Libya 62; Saudia Arabia 64/ Crude death rate
(per 1,000): Iraq 8; Libya 9; Saudi Arabia 8.
11

War in Iraq: Political Challenges After the Conflict, International Crisis Group Middle
East Report No. 11, March 25, 2003.

12

The Middle East and North Africa, 2003, Europa Publications, 2002, pp.477-78.

CRS-7
Muslims. The predominance of Sunnis in Iraqi political, economic, and defense
institutions goes back to the Ottoman period and continues to be a major grievance
of the Shiite community. The government of Saddam Hussein sought to mold from
these disparate groups a common sense of Iraq nationality. It was successful in part
during the Iran-Iraq war, as few Shiites went over to support the Iranian side despite
commonalities in religion. Whether that identity is strong enough to weather the
current difficulties remains to be seen. The answer to that question will have
considerable bearing on Iraq’s future economic and political prospects.

Role of Women in the Government and Economy of Iraq13
Iraq has a mixed record in its treatment of women. Under the relatively secular
Baathist regime, women enjoyed significantly more privileges and opportunities (at
least in theory) than they did under some traditional regimes that enforce Islamic
tenets more strictly. Article 19(a) of the Provisional Constitution of 1970 specifies
that “Citizens are equal before the law, without discrimination because of sex, blood,
language, social origin or religion.” Under the Baathist regime, women could vote,
serve in the Peoples’ Assembly (Iraq’s rubber stamp legislature), and serve in the
police. Though not subject to conscription, women holding university degrees in
health care could serve in the armed forces, mainly in health care fields, and
manpower shortages during the Iraq-Iran war of 1980-1988 led the government to
allow women in other branches of the military service as well. According to the most
recent U.S. State Department report on human rights practices, the government
enacted laws to equalize women’s rights in divorce, landownership, taxation, and
suffrage. Women made strides in education; for example, female attendance in
primary schools rose from 34% to 95% between 1970 and 1980. Government
programs to improve the status of women helped increased job opportunities for
women; in 2002, women comprised 20% of the labor force, and some were
represented in medicine, engineering, academia, and the civil service.
In practice, women faced various forms of discrimination and mistreatment
under Saddam Hussein’s regime, despite legal protections. For example, Iraqi police
and security officers frequently raped female detainees despite laws to the contrary.
Furthermore, as the Iraqi regime sought to polish its Islamic credentials and appeal
to tribal groups in the aftermath of the 1990-1991 Gulf war, the government became
more lax in implementing official guarantees of equality. “Honor killings” of women
by male relatives increasingly went unpunished. Despite greater access to the labor
force, most female employees tended to work in fields where they had little contact
with men and no authority over male employees. Even legal guarantees of women’s
rights had loopholes; women under age 45 are not allowed to travel outside of Iraq
unless accompanied by a male relative. Finally, many women from more traditional
segments of Iraqi society did not benefit to a significant degree by the progress
achieved in women’s status over the past 30 years.
The status of women in a post-Saddam era is open to conjecture. Some groups,
particularly more fundamentalist elements within the Shi’ite Muslim community,

13

Prepared by Alfred Prados, Specialist in Middle East Affairs, with the assistance of Amy
Thayer, Research Associate, Foreign Affairs, Defense and Trade Division.

CRS-8
probably look askance at an expanding role for women. Should such groups find
themselves in a position to influence or dominate a post-Saddam government, they
might seek to dismantle the legal protections women have gradually gained in recent
years. Already, press reports indicate that many Iraqi women are feeling “sidelined”
and have become fearful of moving about freely as they did before.14 Should Iraq
move toward a less centralized system of government or even toward fragmentation,
some of the resulting mini-states or entities might pursue widely differing gender
policies. The issue of women’s roles in the months ahead will be an important one
for those who seek to shape the future of Iraq.

Iraq’s Economy in Recent Years
Macroeconomic Policy and Conditions15
The structure of the Iraqi economy has been characterized by heavy state control
and involvement since the time of the Ottoman empire. According to one source,
different governments from the British mandate and the monarchy, to Baathist rule
and Saddam Hussein have all had the common goal: to fix prices and to stabilize
consumption.16 Government control of the economy tightened from one regime to
the next. Nevertheless, an underlying goal was to satisfy the large sector of the
population that was employed by, and dependent on, the state. During the 1970s, hard
choices were avoided as oil revenues financed development projects and obscured
economic mismanagement resulting from state control of the economy. The eight
year war with Iran drained the economy of its surplus oil revenue and forced the
regime into debt. The first Gulf war and economic sanctions imposed new constraints
on an already crippled economy. Economic statistics were considered state secrets
during the Baathist regime and were suppressed or not kept at all. Such fragmentary
data that do exist indicate that the Iraqi economy since 1980 has suffered absolute
declines in gross domestic product (GDP), chronic inflation, wholesale depreciation
of its currency, virtually non-existent foreign investment, and the accumulation of a
crushing debt burden.
Economic Policy. As noted above, the predominance of the state in the
economic affairs of the nation was confirmed by a series of expropriations and
nationalizations in the 1950s and 1960s. In agriculture, expropriation of land
occurred faster than redistribution to the detriment of that sector. The petroleum
industry was nationalized in stages from 1961 to 1973. Large-scale industry,
banking, insurance and services were nationalized in 1964. These nationalizations
also enabled the government to weaken rival power centers, whether landlords, the
Shia business community or foreign oil companies.

14

“Iraqi Women Out of the Picture,” Washington Post, May 17, 2003.

15

Prepared by Ian Fergusson, Analyst in International Trade and Finance, Foreign Affairs,
Defense and Trade Division.
16

Kirin Aziz Chaudhry, “Consuming Interests: Market Failure and Social Foundations of
Iraqi Etatisme,”in Iraq’s Economic Predicament, ed. Kamil Mahdi, (Reading UK: Ithaca
Press, 2002), p.234.

CRS-9
From 1968, the Baathist regime placed greater emphasis on the industrialization
of the economy. The government embarked on two five-year development plans
between 1970-1980. The first plan was primarily concerned with “economic
independence”– the final nationalizations in the oil sector and investment in that
sector. The modesty of the goals reflected a consolidation period for the regime, and
in part, the lack of money to achieve more far reaching development goals.17 This
changed with the oil boom following the first Arab oil embargo. The second five-year
plan (1976-80) reflected an Iraq that was flush with cash and ready to spend money,
nearly $14.2 billion on economic development, often indiscriminately. Heavy
industrial complexes such as the petrochemical complex at Basra, the iron and steel
mill at Khor al-Zubair, the development of sulphur and phosphate extraction and
processing, and the fertilizer industries were developed during this period.
Much of this industrial structure was not effectively utilized after the outbreak
of the war with Iran in 1980, due largely to the shortcoming of Iraq’s administrative
apparatus. Direct attacks on Iraqi industry around Basra were less significant than
the Iraqis’ inability to obtain inputs, spare parts or to export oil or other products due
to damaged ports. Iraqi economic management during the war was predicated on a
belief that Iraq could fight a quick and limited border war without disrupting the
home front or its economic development plans.18 To pull this off, the regime
borrowed to finance its continued spending.
As the war drained away funds that could have been utilized for economic
development, weak points in the economic development strategy became apparent.
Despite the pervasiveness of the state sector in the management and planning of the
economy, there seemed to be very little actual planning. An industrial infrastructure
was developed seemingly without regard for transportation or supply bottlenecks.
There were no clear priorities for development. Workers often did not possess the
technical capabilities that were required to operate the plants and there existed a
shortage of managerial and administrative skills to run the public and private sector.
Many of these shortcomings reflected problems in the state sector itself. Officials
were often unwilling to assume authority or accountability, and rigid (and
ideologically driven) economic policies were common.19
As noted, the government embarked on a series of economic reforms designed
to make the economy more flexible and more market-driven in 1987. It removed
price controls on commodities. It privatized several sectors of the economy either
by selling assets directly to domestic investors, through public offerings on the newly
constituted Baghdad stock exchange, or through long-term leases of state assets. The
most prominent of these divestments was Iraqi Airways, in which a majority of the
enterprise was sold off to the public. It also lowered or removed state subsidies to
enterprises remaining in government hands and for agriculture. The country’s labor

17

Anthony A. Cordesman and Ahmed S. Hashim, Iraq: Sanctions and Beyond, (Boulder
CO: Westview Press, 1997), p. 128.
18
19

ibid 133.

Mahdi, “Rehabilitation Prospects...”, p. 42; Cordesman and Hashim, Iraq: Sanctions and
Beyond, p.129

CRS-10
law, which largely guaranteed lifetime employment, was abolished and thousands of
white collar officials of state enterprises were laid off. The government also eased
direct investment restrictions, allowing limited foreign ownership of investment
projects. This last reform reflected the increasing unwillingness of western creditors
to loan money directly to the Iraqi government for development projects.20
These economic reforms did not long survive the end of the Iran-Iraq war. By
1989, the economic crisis deepened and exacerbated the decline in living standards
for most Iraqis, creating a threat to the viability of the regime.21 In addition, the
success of the privatization program was disappointing with many enterprises sold
for under either book or replacement value. With the economy facing dire straits, the
government reimposed price controls, re-nationalized some state enterprises, and
raised industrial and agricultural subsidies.
The first Gulf war and the subsequent sanctions wreaked havoc on an already
distressed economy. The bombing campaign of 1990-1991 severely damaged or
destroyed much of the petroleum, transportation, power and industrial infrastructure.
The government initially channeled its efforts to repairing the oil infrastructure,
communications, and the state security apparatus. It instituted a rationing program
to spread available food and consumption items. However, government policy
essentially has been reactive, because the sanctions regime (and the regime’s
priorities) left little for reconstruction and development of the economy. Because Iraq
relied on international trade in oil for the functioning of its economy, the sanctions
regime had an immediate deleterious effect. The Oil for Food Program ameliorated
this situation somewhat, but shortages, rationing, hyperinflation, and the absence of
international trade characterized the Iraqi economy in the 1990s.
Gross Domestic Product (GDP). Economic data were considered state
secrets during the Hussein era, thus no reliable data are available for much of the
period. The figures available for the sanctions era are based on extrapolations from
oil production and anecdotal evidence. According to one source who estimated GDP
for the period 1950-2000 on constant 1980 dollar prices22, the gross domestic product
peaked at $53.9 billion in 1980 because of the oil boom, and fell by about one-half
to $26.9 billion in 1989. GDP reached its low point in 1994 falling to $6.5 billion
under the weight of economic sanctions. Since the resumption of oil shipments under
the Oil for Food Program, this source estimates GDP has recovered to $46 billion.
However, these figures may be suspect. It seems optimistic to report that the Iraqi
economy in the late 1990s could nearly recover to its 1980 level in constant dollars
in the presence of sanctions, a heavily depreciated currency, and chronic inflation.
However, the figures may reflect the use of the fixed exchange rate of 1ID=$3.11,
although the usefulness of such figures is limited.

20

Metz. Iraq: A Country Study, p. 128-9.

21

Chaudhry, p. 233.

22

See Abbas Al-Nasrawi , Iraq’s Burdens: Oil, Sanctions, and Underdevelopment,
(Westport CT: Greenwood Press, 2002), p. 103.

CRS-11
According to the Economist
Intelligence Unit (EIU),23 Iraq’s GDP
stood at $66.2 billion 1989, measured in
nominal dollars. In the 1996-2002
period (see figure 1), the EIU data also
showed a gradual recovery as GDP (in
nominal dollars) increased from $10.8
billion in 1996 to $31.8 billion in 2000,
before falling back to $26.1 billion in
2002.24 These figures are subject to a
wide margin of error, given the limited
data on which they are based. Another
source, quoted by GAO,25 estimates
nominal GDP, in purchasing power
parity terms, to have risen from $9.2
billion to $14.8 billion from 1996-2002.

Figure 1. Iraq’s Gross Domestic
Product

Per capita GDP figures have also experienced wide swings. According to AlNasrawi, GDP per capita reached $4,083 (in 1980 constant dollars) at the height of
the oil boom in 1980. By the end of the Iran war, he says, it had plummeted to
$1,537 and reached a nadir of $343 in 1996. Again, the Oil for Food Program
boosted per capita GDP in the late 1990s to reach $1,941 in 2000. In nominal
dollars, EIU figures indicate per capita GDP was $3,675 in 1987. From 1997-2000,
EIU reported per capita GDP increased from $503 to $1,385, before falling to $1,184
in 2001. Per capita GDP, in nominal terms was estimated to have risen from $448
to $644 from 1996-2002.26 Such per capita figures, as they are derived from the GDP
data above, are also highly speculative. Income inequality probably grew during this
period. With wealth being concentrated increasingly in the hands of regime
adherents, most Iraqis probably subsisted on a much smaller figure than the average
would suggest.27

23

Economist Intelligence Unit, Country Profile Iraq, 2002/2003, July 24, 2002. Obtained
from [http://www.fggm.osis.gov/EIU/CP/CPCIQD00.htm].
24

Using purchasing power parity, the CIA estimates 2001 GDP to be $59 billion.

25

GAO-03-792R (GAO), Rebuilding Iraq, May 15, 2003, Enclosure 1, p.6. Source, Global
Insight.
26
27

Ibid.

The figures from EIU and Global Insight do not appear to be directly comparable. The
EIU data seem to use the exchange rate conversion method for calculating GDP. In other
words, it takes the local currency value of the economy and converts it to dollars using the
prevailing exchange rate. By contrast, the PPP method looks at what local people can buy
from a common international marketbasket of goods using their local income and then states
the U.S. dollar value of those goods as though they were purchased in the United States. In
effect, it shows what standard of living those people would have if they lived in the United
States on their dollar-equivalent local income. The two methodologies often produce widely
different results, both of which are accurate in their own way but are not interchangeable.

CRS-12
Attempts to disaggregate Iraq’s GDP into its sectoral components are also
hampered by the lack of hard economic data. Figure 2 shows one source’s effort in
1989.28 According to this source, oil comprised about 60% of the economy during the
1980s. Its share declined as the economy shrank with the imposition of sanctions, but
later recovered as oil became the sole source of export earnings during the 1996-2003
U.N. Oil for Food Program. Agriculture’s share of GDP had been declining since
the 1960s. However, since the 1991 war, its
share of GDP reportedly expanded as the
economic pie shrank and food imports were Figure 2. Sectoral Composition of
GDP, 1989
cut off.29 The resumption of agricultural
imports (under the OFFP) has caused a
decline of domestic production and probably
shrank the sector’s share of GDP once again.
Although the industrial sector accounted for
an increased share of GDP in the 1970s and
1980s due to extensive economic
development programs, later war damage and
diminished operability probably lowered its
contribution to GDP. Both industry and
agriculture’s true share of GDP, after
accounting for subsidized raw materials and
inputs, may have been overstated during the
1970s and 1980s.
Currency and the Balance of Payments. The Iraqi dinar was long
considered a strong currency aided by oil revenues and rising foreign exchange
reserves. Some of this reputation may be attributable to the decision, by the National
Bank of Iraq in the 1950s, to maintain 100% reserves behind outstanding domestic
currency.30 The official rate was variously set between $3 per dinar to $3.38 per
dinar in the 1970s, the last official rate of $3.11 per dinar was set in 1982. During
the 1970s, the official and markets rates generally corresponded and by 1980 the
country had $35 billion in foreign exchange reserves. By 1987, that figure had fallen
to $2 billion.31 The currency depreciated steadily during the Iran-Iraq war, and the
pace of descent quickened after the first Gulf war. One estimate had the currency
depreciate from 4 to 8 dinars per dollar in 1990-91.32 The advent of sanctions
paradoxically stabilized the currency for a brief time as foreign exchange transactions
virtually ceased. However, the onset of limited food and medicine trade under
sanctions renewed the downward slide. The dinar reached an all-time low of 2,660
per dollar in December 1995. It has slowly appreciated from that low, yet has
fluctuated widely from 1,000 to 2,300 dinars per dollar in the period 1997-2001 on
28

Economist Intelligence Unit, Country Profile: Iraq, 1995-1996, p. 13.

29

One source, Ahmad, p. 179 reports agriculture share of GDP expanding during the 1980s.
However, these figures are hard to interpret as they are based on current dinars during a
period when GDP in dollar terms was declining.
30

Metz. Iraq, a Country Study, p. 131.

31

Middle East and North Africa Yearbook, 2003 p. 599.

32

Mahdi, “Rehabilitation Prospects...”, p. 48.

CRS-13
the black market. Although the regime did not alter the official exchange rate, it
acknowledged the rate differential in 1999 by allowing state banks to exchange hard
currency at the rate of 2000 per dollar. The depreciation of the exchange rate in the
1990s was enhanced by capital flight and emigration, the restrictions of the sanctions
regime on exchange transactions, and the progressive dollarization of the economy.
Up to the 1980s, the country ran consistent balance of payments surpluses with
oil sales producing increasing foreign exchange reserves. While the earnings of the
oil fields allowed the government to implement development plans without becoming
indebted, the dependence on oil revenue also had less salutary effects on other sectors
of the economy. With increased income from oil exports, the value of the dinar
appreciated. This made the country’s non-oil tradable goods less competitive with
imports and depressed those sectors of the economy. (See the discussion of “Dutch
Disease” in the concluding discussion of factors affecting the non-oil.) Falling oil
prices in the 1980s put heavy pressure on Iraq’s balance of payments. Iraq responded
by increasing its oil production and by borrowing heavily from abroad. The problem
was acute by the end of the Iran war. Relatively low oil prices, the exhaustion of its
foreign exchange, growing import bills, and debt service payments all strained Iraq’s
balance of payments.
Ironically, in the 1990s, Iraq regained a trade surplus position with sanctions and
the Oil for Food Program in place. Imports were tightly controlled and income from
oil exports exceeded outlays for imports – even after 25% to 30% of OFFP revenue
was diverted for war compensation. As of May 2003, the OFFP reported it had an
unencumbered balance from oil sales of $3.2 billion maintained in escrow accounts.33
It should be noted, however, that Iraq made no payments on its foreign debt after
1990.
Inflation. As with other indicators, data on inflation are spotty and, during the
1990s, price data have a highly anecdotal quality. Before the oil boom, the Iraqi
economy was characterized by price stability with an inflation rate at 5-6% during
the period 1960-73.34 This source calculates inflation increasing from 18% to 68%
between 1975-79 as a consequence of substantial currency inflows related to the oil
boom.35 Prices continued to rise during the Iran-Iraq war as resources were diverted
toward the military and government borrowing from the central bank expanded the
monetary base. Inflation was recorded at 95% in 1980 and had increased to 400%
by 1989. During the 1990s, a period of hyperinflation occurred. The government
continued to print money to meet expenditures while economic sanctions shut off the
supply of imported goods leading to a classical monetary overhang. A yearly inflation
rate of upwards of 2,000% per cent was reported in open market food prices between
1990-1991.36 Another source estimated that inflation increased 5,000% between 1990

33

United Nations, Office of the Iraq Program, Oil for Food Program site,
[http://www.un.org/Depts/oip/]
34

Abbas Al-Nasrawi, The Economy of Iraq, (Westport CT: Greenwood Press, 1994), p. 164

35

ibid.

36

Mahdi “Rehabilitation Prospects...”, p. 48.

CRS-14
and 1995.37 In the period 1996-2001, however, another source estimated that
consumer price inflation gradually declined from about 200% to about 60% due to
the reappearance of goods as a result of the Oil for Food Program.38
The deepening inflationary spiral had many consequences. Most importantly,
it led to a decline in living standards and the impoverishment of the great majority
of the population, especially of state sector employees whose salaries did not keep
up with inflation. Two decades of high inflation – at times, hyper inflation – also led
to the loss of confidence in the dinar as a store of value. This led to the widespread
dollarization of the economy. Many Iraqis also sought to convert their liquid assets
into other assets, real estate and gold. Goods were purchased and hoarded when
available and then bartered for other goods.39 Another consequence of inflation was
capital flight, as money left the country to avoid further erosion in its value.
Declining confidence in the currency and capital flight further weakened the
economy and led to new rounds of inflation, deteriorating confidence and capital
flight. These patterns of behavior will need to be changed if the economy is to
recover. (See the concluding discussion of monetary policy below.)
Foreign Investment. Foreign direct investment (FDI) was discouraged in the
Baathist era for reasons of economic nationalism. During the 1970s oil boom, Iraq
paid directly for economic development projects (plants, industry, and infrastructure)
without resorting to credit or foreign ownership. During the Iran-Iraq war, Iraq
continued to contract for economic development projects, but it borrowed from
overseas creditors to pay for them. The regime attempts at economic reform in the
late 1980s provided for some limited venues for foreign investment. However, such
reforms provided little incentive for foreign investors, and the UN sanctions regime
specifically prohibited foreign investment. Thus, Iraq has little experience with
foreign direct investment and will require extensive capacity and institution building
in order to attract and facilitate such investment.
Foreign Debt. Iraq’s indebtedness primarily has been the result of the war
with Iran. Iraq traditionally had been free of foreign debt and had accumulated
foreign reserves that reached $35 billion by 1980. These reserves were exhausted in
the early stages of the war. One source cites estimates of Iraqi arms purchases alone
during the 1980s as between $52 - $102 billion.40 Borrowing was heightened by the
government borrowed increasingly to pursue its economic development strategy.
Foreign creditors initially were willing to provide loans to Iraq in order to preserve
access to the Iraqi economy, but as oil prices slumped in the mid-1980s investor
enthusiasm waned.41 After the war with Iran ended, Iraq faced a particular concern
with its short-term debts, estimated at $35 to $45 billion, from western creditors.
However, the regime was resistant to western attempts to reschedule the debt on

37

Cordesman and Hashim, Iraq: Sanctions and Beyond, p. 141.

38

Economist Intelligence Unit, Country Profile: Iraq, 2002-3

39

Al-Nasrawi , The Economy of Iraq, p. 165.

40

Mahdi,“Rehabilitation Prospects...”, p. 60

41

Iraq Country Study, p. 129.

CRS-15
terms more favorable to Iraq. This stance was, in part, due to its reluctance to
engage in greater transparency with regard to its economy.42 Based on the
calculations of one source, Iraq has the highest debt burden in the world in terms of
debt to GDP or debt to exports.43
Figures vary widely as to the extent and composition of the debt. In 1991, at the
end of the first Gulf war, Iraq told the United Nations that its debt totaled $42.1
billion. This submission stated that this debt had a maturity of five years at 8%
interest.44 This figure excluded interest and funds from the Gulf Cooperation Council
(see below). OECD figures indicate that Iraq’s outstanding total debt was $18.4
billion at the end of 2001. However, these figures only include OECD country
bilateral loans and export credits.
The joint Bank of International
Settlements/International Monetary Fund/ World Bank debt tables list the debt as
$26.6 billion at the end of 2001. This likely does not include accrued interest. The
Economist Intelligence Unit estimated total debt in 2002 to be $64.3 billion. Of this,
EIU estimates $35 billion is long-term principal, $8.5 is short-term principal and
$21.7 billion is interest arrears.45 Another estimate placed accrued interest at
between $23.6 billion to $30.1 billion depending on the whether the interest is
capitalized.46 A survey of the debt conducted by the Center for Strategic and
International Studies breaks down public and private debt at more than $108.1
billion, $47 billion of which is calculated as interest. The CSIS figures include an
estimate of $30 billion payable to the Gulf states.47
Iraq’s foreign debt originated from several sources. Western credit provided
military assistance, development finance and export guarantees. This assistance has
been estimated at $35 billion in principal. In the 1980s, the Soviet Union and other
eastern European states provided loans for military assistance and development
projects estimated at $7-8 billion. The Gulf states of Saudi Arabia, Kuwait, and the
United Arab Emirates provided between $30-40 billion to fight Iran. One source
suggests much of this latter figure represents oil sold on behalf of Iraq from the two
shared neutral zones between Iraq and Kuwait and Saudi Arabia, respectively.48 The
Gulf states consider these funds to be loans, but Iraq considered these to be grants in
a common endeavor to curb the spread of Iranian fundamentalism.
Compensation Claims. Claims have been made on Iraq based on damage
inflicted on Kuwait as a consequence of the war with Kuwait. The United Nations

42

Cordesman and Hashim, Iraq: Sanctions and Beyond, p. 134.

43

Al-Nasrawi, Iraq’s Burdens: Oil, Sanctions, and Underdevelopment, p. 145.

44

Mahdi, “Rehabilitation Prospects...”, p. 60.

45

Economist Intelligence Unit, Country Profile: Iraq, 2002-3, Table 16.

46

Ahmed M. Jiyad, “The Development of Iraq’s Foreign Debt,” in Iraq’s Economic
Predicament, p, 115.
47

Center for Strategic and International Studies, A Wiser Peace: An Action Strategy for
Post-Conflict Iraq, Supplement One, “Background Information on Iraq’s Financial
Obligations”, January 23, 2003.
48

Mahdi, “Rehabilitation Prospects...”, p. 61.

CRS-16
Compensation Commission (UNCC) has received and processed such claims since
its establishment in 1991, pursuant to U.N. Security Council Resolution 692. The Oil
for Food Program provided that 30% of oil sales would be used to settle
compensation claims authorized by UNCC. During the operation of this process,
individual and family claims of $148 billion were received, and from that $43 billion
has been awarded. Oil sales had netted $16 billion for this fund by the end of 2002.
Additional claims of $172 billion from companies, governments, and international
organizations have been received, though not resolved, by the UNCC.49 This figure
does not include potential reparations claims by Iran, estimated by one source at $97
billion, for damaged inflicted during the Iran-Iraq war. 50
Pending Contracts. This category of claims represents contracts signed with
public and private foreign companies. According to CSIS, the overwhelming
majority of these contracts have been with Russia, although companies from the
Netherlands, Egypt, the United Arab Emirates, China, and France have also been
identified. These contracts have been estimated at $57.2 billion primarily in the
energy and telecommunications sectors. Many of these contracts have not been
executed due to the sanctions regime, and it is unclear whether they will be honored.

The Oil for Food Program51
In August 1990, the United Nations Security Council imposed on Iraq
(Resolution 661) a comprehensive international trade embargo as a consequence of
its invasion of Kuwait. Following the first Gulf war, the Security Council resolved
in April 1991 (Resolution 687) that the embargo on oil exports established in 1990
would remain in effect until Iraq fully complied with U.N. efforts to end its weapons
of mass destruction (WMD) programs.
The first version of the OFFP was approved by the Security Council on August
15, 1991 (Resolution 706). It allowed Iraq to export $1.6 billion in oil every six
months. Iraq rejected it as too limited in scope and an infringement on Iraq’s
sovereignty. Without oil revenues, Iraq was not in a position to import sufficient
quantities of food and medical supplies, and living conditions in the country
deteriorated sharply.
In April 1995, the Security Council adopted a new plan (Resolution 986) which
allowed Iraq to export $2 billion in oil every six months. A memorandum of
agreement between Iraq and the United Nations went into effect in May 1996 and the
first oil exports occurred in December 1996. When the Secretary General determined
that the program was not meeting the food and medical needs of the Iraqi people, the
Security Council raised the oil export ceiling in February 1998 (Resolution 1153) to
$5.256 billion every six months. The Council abolished the export limit in December

49

Ibid.

50

Al-Nasrawi, Iraq’s Burdens: Oil, Sanctions, and Underdevelopment, p. 158.

51

Prepared by Kenneth Katzman, Specialist in Middle East and African Affairs, Foreign
Affairs, Defense and Trade Division. For more on the Oil for Food Program, see CRS
Report RL30472, Iraq: Oil-For-Food Program, International Sanctions, and Illicit Trade.

CRS-17
1999 (Resolution 1284) to encourage Iraqi cooperation with the effort to eliminate
its weapons of mass destruction.
Under the OFFP, Iraq’s State Owned Marketing Organization (SOMO) sold oil
(under the supervision of the U.N. Sanctions Committee) to international oil
companies. The oil was exported through an Iraq-Turkey pipeline and from Iraq’s
terminals in the Persian Gulf. The purchasers deposited their payments directly into
a U.N.-monitored escrow account held at the New York branch of France’s Banque
Nationale de Paris (BNP). Recently, U.S. firms purchased a third to half (often the
latter) of the 2.1 million barrels Iraq exported daily under the OFFP program.
The revenues from OFFP exports were allocated by the Sanctions Committee.
Most recently, 25% of the total was transferred to the U.N. Compensation
Commission to pay reparations to the victims of Iraq’s invasion of Kuwait. Another
59% was allocated for purchases of humanitarian items for Baghdad-controlled Iraq
and 13% was used for purchases by the Kurdish-controlled areas in northern Iraq.
The U.N. took the remaining 3% to fund the costs of administering OFFP and the
UNMOVIC weapons inspection program.
Under the OFFP, Iraq purchased goods and services directly from supplier firms.
The OFFP program specified what share of the oil revenues could be spent for
various categories of goods. The Sanctions Committee reviewed all contracts for
such purchases. Any member of the Committee could place a “hold” on a contract
for goods to be imported by Iraq. The United States often placed holds on exports
of dual use items (civilian items that could have military applications).

Petroleum52
Oil Resources – Overview. Iraq has 112 billion barrels of proven oil
reserves, the world’s second largest endowment. The U.S. Department of Energy
(DOE) also notes that “probable” and “possible” reserves may be as high as 220
billion barrels.53 Saudi Arabia, with 260 billion barrels, holds the largest proven
reserves. While Iraq’s reserves are smaller than those of Saudi Arabia, they rank well
ahead of other important oil producers, including the United States.
The United States – which by contrast has high output from relatively small
reserves – produces 5.6 million barrels per day (mbd) from 24 billion barrels of
proven reserves. Iraq was able recently to produce 2.8 mbd of output from an
estimated 1,500 to 1,700 operational wells. Compared with U.S. production, which
comes from over 150,000 wells in Texas alone, Iraqi oil can be produced easily and
at low cost. The ease of production in these fields has permitted Iraq to remain in
production since 1980, when its war with Iran began, without a steady supply of
spare parts, state-of-the-art technology, or the ability to drill many new wells.

52

Prepared by Larry Kumins, Specialist in Energy Policy, Resources, Science and Industry
Division.
53

Energy Information Administration (EIA). Iraq Country Analysis Brief, February 2003.
p. 10.

CRS-18
Adding to the appeal of Iraq’s resources are possibilities of much greater output
from the country’s 73 known fields – of which only a fraction are in production.
Greater reserves could result from re-evaluation of known fields using the advances
in geophysical science made during the past 25 years. And there is a likelihood of
even further new field discoveries – especially in the unexplored Western Desert
region54 – which could boost reserves and possibly raise production even further.
Iraq certainly holds the potential to become the world’s largest oil producer. For
this to become a reality, however, the Iraqi oil industry would require large financial
investments for all manner of technical services, capital equipment, and
infrastructure. As a recent Council on Foreign Relations report notes, Iraq’s oil
sector is being held together by “Band-aids.” “War, sanctions and political
manipulation have all seriously challenged Iraq’s highly skilled oil industrialists.”55
The fact that Iraq’s oil output has been so resilient speaks to the quality and size
of the underlying resource as well as the abilities of those keeping the oil fields
operating. With sufficient technology, spare parts, and infrastructure reconstruction,
Iraq’s oil fields should be able to return to output levels of the recent past and reach
higher levels in a few years.
Oil Production – History. Iraq’s all-time peak oil production was 3.5 mbd56
in 1979, just prior to the war with Iran. Output dropped sharply as the war began and
gradually recovered to 2.9 million barrels per day by 1989. The Gulf Crisis sharply
cut production again in 1990. U.N. sanctions imposed after the war prohibited oil
exports, so post-war production was limited to the amount needed to meet internal
demand plus small amounts that may have been illegally exported. Domestic
demand was estimated at 450,000 barrels per day before the recent war began.
Figure 3 shows Iraq’s annual oil output and domestic consumption since 1980.
Iraqi oil exports resumed under the Oil for Food Program in May 1995.
Production rose accordingly, peaking at 2.6 mbd in 2000. During 2001 and 2002,
frequent disputes with the United Nations over pricing and other aspects of program
administration led Iraq to halt exports sporadically. Despite approaching 3.0 mbd on
a monthly basis several times, annual output trended down, with a brief spurt above
2.5 mbd during January and February 2003. This spurt suggests that, despite a
shortage of parts, production techniques that allowed water intrusion into oil-bearing
geologic zones, isolation from increasingly powerful geophysical technology,
inability to work-over production wells, and generally deteriorating infrastructure,
Iraq’s oilfield workers were able to sustain relatively high production capability.
Current Situation. Iraq’s oil deposits lie in two general regions: the north,
in and around Kirkuk, and in the south, in and around Basra and Umm Qasr, near the

54

EIA, Iraq Country Analysis Brief, February 2003. p. 2.

55

Guiding Principles for U.S. Post-Conflict Policy in Iraq, Report of an independent
Working Group Cosponsored by the Council on Foreign Relation and the James A. Baker
III Institute for Public Policy of Rice University. January 2003. See Addendum, page 17.
56

Energy Information Administration, Monthly Energy Review, Table 11.1.

CRS-19
Persian Gulf port of Mina al-Bakr. Production is centered on the Rumaila field – the
largest producing field in the south, with 663 producing wells. Together with
adjacent fields, it has produced more than half of Iraq’s output. In the north,
production from Kirkuk (the largest northern deposit) and satellite fields has
accounted for about 40% of Iraq’s production since it restarted under the OFFP.
Port facilities for southern oil were severely damaged during the first Gulf war
but were sufficiently repaired to handle the amounts of oil – exceeding 1 mbd –
exported under the Oil for Food Program. Oil from Kirkuk and nearby fields was
exported via the 600-mile pipeline to Ceyhan, Turkey, a port on the Mediterranean.
This 40-inch pipeline – which appears operable – has a capacity of 1.1 mbd, although
it is not clear that it can be run at that throughput level in its current condition. A
second, parallel pipeline with 500,000 barrels per day of nominal capacity exists, but
it is reportedly inoperable.57 Potentially, the two pipelines could have a combined
capacity of 1.6 mbd, although extensive rehabilitation of the unused pipeline and
some repair to the operable pipeline would likely be needed.
Figure 3. Iraq’s Oil Production
and Consumption, 1980-2002 (Est.)

In February 2003, DOE characterized Iraq’s near-term production capacity “at
no higher than about 2.8-3.0 million barrels per day, with net export potential of
around 2.3 to 2.5 million barrels per day....”58 It appears possible that this level of
production could be reached in less than a year were oil production facilities,
pipelines, ports, and other infrastructure in operation before the current conflict to be
restored and deferred maintenance performed.
Iraq’s Oil Industry – Current Status. While oil field security is in the
process of being established, oil to meet domestic needs is beginning to flow. Platts

57

EIA. Iraq , Country Analysis Brief. p. 6.

58

Iraq, More Details, A supplement to EIA, Iraq, Country Analysis Brief. p. 2.

CRS-20
Oilgram News reports that production has reached 700,000 barrels per day,59
500,000 from northern fields and 200,000 from the south. This is more than current
daily needs, although refineries are unable to turn this oil barrel-for-barrel into the
products desired, chiefly gasoline and propane. These fuels remain in short supply.
An interim oil minister, Thamer Abbas Ghadhban, has been appointed, and is
soliciting new bids for contracts of Iraqi crude. Brig. Gen. Robert Crear heads the
U.S. Army Corps of Engineers team that is helping rebuild the oil industry and
infrastructure. He is aided by Phillip Carroll, a former head of Royal Dutch/Shell’s
U.S. operations. The Halliburton subsidiary KBR is performing the work using local
oilfield workers. The Washington Post reported the Minister’s goal is to increase
production to 1.5 mbd “within weeks.” More recently, Platts reports a June 1 goal
of 1.13 mbd, although this goal may be difficult to achieve.
Several barriers must be overcome for Iraqi oil to be successfully marketed in
international commerce. First, needed production increases must be achieved. It is
unclear that Halliburton and the U.S. Corps of Engineers are successfully engaging
the Iraqi oil workers. Exportable output seems much further off than expected.
Next, clear title to the crude must be established, so that a would-be purchaser
can be assured that he is buying oil from its rightful owners. Until very recently, this
was a problem. Under the old regime – exporting oil under U.N. auspices – title was
granted by the Iraqi Ministry of Oil. In April 2003, it was unclear who had the
authority to certify that oil had been properly sold. The U.N. Security Council
resolved this issue May 22, 2003, in lifting the U.N. sanctions on Iraq. The U.N.
resolution allows essentially free trade in non-military goods, authorizes procedures
whereby Iraq can legally export oil, and specified that the proceeds from oil sales
must be put into the Development Fund for Iraq (DFI). (See the discussion of this
below.) The resolution also shields Iraq’s oil revenues(until December 31, 2007)
from seizure, attachment, or garnishment by creditors and claimants. Platts quotes
Ghadhban: “We are now free.... The sanctions are out. We are free to go back to the
market and also an open market so we can maximize the return....We want to get the
maximum price for the Iraqi barrel...No more discounts, etc, etc.”
Iraq and OPEC. Iraq was a founding member of the Organization of
Petroleum Exporting Countries (OPEC). It has always participated in its
deliberations, even after 1991. There are too many unresolved issues to attempt a
reliable analysis of a future Iraq-OPEC relationship, although many factors point
toward Iraq’s continuing OPEC participation. In addition to OPEC membership being
an accustomed situation, there is the fact that Iraq’s geographic neighbors are all
participants, and its stake in the world oil market will grow as exports expand, and
that OPEC offers an oil price security blanket as well as a voice – most recently
effectual – in price determination. Looking further forward in time, OPEC could be
useful to any efforts by Iraq to reach the pre-Iran war’s production levels of 3.5 mbd,
an amount that OPEC would most likely act to accommodate. However, the length

59

Iraq to begin exports in two weeks: oil minister: US, Platts Oilgram Price Report, May
28, 2003. P. 1.

CRS-21
of time it might take to get production up to that level is a matter of speculation,
given current difficulties in Iraq’s oilfields.
From a U.S. perspective, Iraq’s return to OPEC as a full-fledged cartel member
would not dovetail with stated policy of encouraging non-OPEC supply sources. If
the United States establishes broad control over Iraq’s oil industry during its
rebuilding phase, it seems unlikely that Iraq will be able to participate in OPEC
strategy and decision making during that period. But if Iraq’s Ministry of Oil is
reconstituted, it is more likely that OPEC will be seen as a help in getting exports
flowing, since it may take some time for Iraqi production to ramp to 3.5 mbd.
In the first months of 2003, most OPEC members increased production to offset
lost Iraqi supplies as well as coincident (but unrelated) losses from other members.
In June 2003, new OPEC quota figures rolled back most of the 2003 Saudi Arabian
increase (up nearly 1.5 mbd60) as well as significant increases by Algeria and Kuwait.
Presumably, this would make room in world markets for Iraqi exports (initially about
1.0 mbd, according to Oil Minister Ghadban’s recovery plan discussed above)
without adverse impact on OPEC pricing goals. OPEC has set a target price band for
the weighted average price of members’ crudes (the so-called OPEC basket) of $22
to $28 per barrel, FOB at export facilities.
The target price band was likely chosen to fall within OPEC’s market power to
influence prices. In order to exert market power, an entity must have control over
supply or demand, or some combination of the two. OPEC has scant influence on
demand, and limited influence over supply. But that limited influence over
incremental amounts of supply appears to give the cartel some price leverage, given
current demand and supply from non-OPEC producers. To the extent that OPEC can
control supply from its own members, it can influence prices given current market
conditions, as evidenced by its ability during the past two years to keep prices mostly
within its target range.
Compared to prices during the post-war crisis period –1992 to 2001 – prices
have been quite stable since OPEC started implementing the price band in December
2000. Prices have remained in the band except for a brief spike early in 2003 – which
has now corrected – and a brief drop below the band in late 2001/early 2002. In
contrast, prices previously fluctuated more significantly, touching a low of $10 per
barrel in February 1999 and reaching a top of $35 in September 2000.
Potential Iraqi Oil Revenues. Were production, development and export
issues to be fully resolved, Iraq could generate great wealth from oil exports. Much
depends on world oil prices, which have fluctuated between $10 and $35 during the
past decade. Given its pre-2003 production capacity of 2.8 mbd, Iraq could export
2.3 mbd (after subtracting 500,000 barrels per day for domestic consumption.)
Annual gross revenues would be $18.5 billion at an assumed $22 price, and $23.5
billion at an assumed $28 per barrel price. Each million barrels per day amounts to
$8.0 billion per year at the lower end and $10.2 billion at the upper end of that range.

60

CRS Report RL31676, Middle East Oil Disruption: Potential Severity and Policy Options.
Updated April 29, 2003. See Table 1.

CRS-22

Table 2. Iraqi Oil Production, Current and Potential
Time Period

May
2003

Near Term
(12 to 24 months)

Within a Decade

Production
Capacity

700,000
barrels per day

2.3 to 2.8 million
barrels per day

up to 6 million barrels
per day or more

Annual
Revenue

Domestic Use

$19 to $25 billion

$50 to $60 billion

Prepared by Jonathan E. Sanford, CRS, based on discussion in text.
Sources: DOE, Iraq, More Details, A supplement to EIA, Iraq, Country Analysis
Brief. Platts Oilgram Price Report, May 28, 2003. Energy Intelligence Group, in
Petroleum Intelligence Weekly, March 12, 2003.

How much revenue could Iraqi oil exports generate? That depends on such
variables as how much total production can be achieved, domestic consumption,
world market prices, and to what extent Iraq can participate in international oil
markets without driving down market prices. The last variable depends at least in part
on how and if OPEC makes room for Iraqi exports.
The volatile history of oil prices is an important part of Iraq’s revenue equation.
This parameter has fluctuated almost as much as the volume of Iraqi exports since
the Iran-Iraq war. For Iraq’s economy, the combination of price and quantity – and
its unpredictability – provide some real uncertainty about monies that might be
available for reconstruction and development. These imponderables weigh on the
monetary contribution of oil to Iraq’s economy. Oil can be a potent revenue
generator, and Iraq has the potential to produce and export more oil than it ever has
in the recent past.
What might the future hold for Iraqi crude production? While there are many
imponderables, were these unknowns to be resolved over time in a manner favorable
to developments supporting greater exploitation of already known proven reserves,
future crude output could be far greater than the highest levels of production realized
at any time in the past.61

61

Some analysts estimate that Iraqi oil exports could reach 6 mbd within a decade. See
Energy Intelligence Group, Inc. “Iraq is well primed for big oil opening.” Petroleum
Intelligence Weekly, March 12, 2003. Estimates differ from the various sources, but all
agree that future output could be very much greater than that likely in the near future.

CRS-23

Agriculture62
Overview. Before the first Gulf war, Iraq imported a large share of its
agricultural needs and was a major agricultural export market for the United States.
During the prior regime, due to drought, lack of inputs, poor methods and weak
administration, Iraq had been unable to achieve agricultural production levels near
its potential. After 1991, the irrigation system fell into disrepair and much of the
irrigated cropland in central and southern Iraq was severely damaged by salinization.
Several years will be needed to remedy the situation. In the meantime, Iraq will rely
on imports once again for most of its agricultural needs. Absent a strong agricultural
sector, population movements from rural to urban areas will continue, adding to the
country’s social problems and further worsening unemployment. Absent positive
incentives (see the section on the non-oil economy and “Dutch Disease” below), Iraq
may have problems restoring productivity in the agricultural sector.
Agriculture comprises a relatively small share of the Iraqi economy. In the past
two decades, the sector has been injured by the pressures of military conflict
(particularly the 1980-88 Iran-Iraq War and the 1991 Gulf war) and by varying
degrees of government efforts to promote and/or control agricultural production. In
the mid-1980s, agriculture accounted for only about 14% of the national GDP. After
the imposition of U.N. sanctions and the Iraqi government’s initial refusal in 1991
to participate in the proposed U.N. Oil-for-Food Program, oil production fell and
agriculture’s share of GDP rose to an estimated 35% by 1992 63.
Rapid population growth during the past three decades, coupled with limited
arable land and a general stagnation in agricultural productivity, has steadily
increased dependence on imports to meet domestic food needs since the mid-1960s.
In 1980, Iraq imported about half of its food supply. By 2002, under the OFFP,
between 80% and 100% of many basic food staples were imported.
In the early stages of the post-2003 Iraq War period, the country’s agricultural
sector remains beset by the legacy of past mismanagement and the lingering effects
of a severe drought during 1999-2001. Iraq’s irrigation infrastructure is only partially
functional; salinization of prime cropland is widespread throughout the irrigation
system; and the fertility of cropland and rangeland has been badly depleted from over
exploitation due to poor soil management practices. The poultry and livestock
sectors have been devastated by a general lack of feedstuffs and pasture, as well as
from a lack of veterinary medicines used to control common parasites and diseases.
Agro-climatic setting. Iraq has a total surface area of 43.7 million hectares
(about the size of Wyoming and South Dakota combined) of which 34.0 million
(78%) is not viable for agricultural use. Less than 0.4% is in forest and woodlands

62

Prepared by Randy Schnepf, Analyst in Agricultural Policy, Resources, Science and
Industry Division.
63

Mahmood Ahmad. “Agricultural Policy Issues and Challenges in Iraq” Short- and
Medium-term Options,” in Mahdi, Iraq’s Economic Predicament, pp. 179-180.

CRS-24
situated along the extreme northern border with Turkey and Iran.64 The remaining
22% (about 9.5 million hectares) are involved in agricultural activities, although
almost half of this is very marginal and used only for seasonal grazing (mainly goats
and sheep).65 An estimated 340,000 hectares are in tree crops (mostly dates, but also
some figs, grapes, and olives).66
Area cultivated annually to field crops such as cereals, pulses, fruit, and
vegetables varies with weather and market conditions, but generally averages
between 3.5 to 4 million hectares.67 Between 75% and 85% of crop area is generally
planted to grains (mostly wheat and barley). Iraq is divided into a rain-fed northern
winter-grain producing zone and a center-south irrigated zone that produces
vegetables and fruit, as well as cereal crops. According to the U.N. Food and
Agriculture Organization (FAO), 2.55 million hectares were irrigated in 1989.
Pre-U.N. Sanctions (1980-89). During Saddam Hussein’s early years in
power (1979-1990) the state attempted to foster private sector control and investment
in Iraq’s agriculture. Surging oil revenues were used to acquire Western technology
and to lavish extensive government subsidies on the sector. Area and production
expanded through the 1980s for cereals, vegetables, and fruit.
However, cereal yields stagnated due to poor production practices and limited
varietal development. The Iran-Iraq War also diverted labor and other resources
away from agriculture. Population growth continued to outpace agricultural
production, increasing the importance of trade. Despite government efforts at
stimulating agricultural output, cereal and poultry imports nearly doubled as a share
of domestic consumption, 69% and 48 %, respectively, during the 1980s. By 1989
Iraq was importing over $2.5 billion in agricultural commodities annually including
78% of its cereals and nearly 100% of its vegetable oils and sugar.
Cereals, mostly wheat and rice, comprised 60% of calories consumed by the
average Iraqi in the 1980s. Meat – the principal source of dietary protein – provided
an estimated average132 calories per day per capita between 1985 and 1989. Poultry
production made strong gains during the 1970s and 1980s. By 1989 poultry had
surpassed beef as the main source of calories from meat in the Iraqi diet.68
In the 1980's, U.S.-Iraqi agricultural trade expanded rapidly on the strength of
large USDA export credits to Iraq to buy U.S. agricultural products. From 1983
through mid-1990, Iraq received nearly $5 billion in U.S. export credit guarantees to

64

FAOSTAT, FAO, United Nations. (A hectare equals about 2.47 acres.)

65

PECAD, FAS, USDA. “Iraq Crop Production.” January 16, 2003.
http://www.fas.usda.gov/pecad/highlights/2003/01/iraq_update/index.htm
66

FAOSTAT, FAO, United Nations.

67

In the early 1990s, cultivated area temporarily expanded to nearly 5.5 million hectares
before returning to under 4 million.
68

FAOSTAT, FAO, United Nations.

CRS-25
purchase significant quantities of U.S. agricultural commodities.69 By the mid1980s Iraq was the major destination for U.S. rice exports and also an important
purchaser of U.S. wheat, feed grains, oilseed products, cotton, sugar, dairy products,
poultry, and tobacco. In addition, Iraq also participated in other U.S. agricultural
export programs including the Export Enhancement Program, the Targeted Export
Assistance Program, and the Cooperator Foreign Market Development Program.
U.N. Sanctions period (1990 to 2003). Under the U.N. sanctions regime
adopted in 1990, the importation of agricultural products was not banned; however,
foreign companies were prohibited from investing directly in Iraq.70 In addition,
because the Iraqi government was unwilling in 1991 to participate in the Oil for Food
Program, the country could not legally export oil and so had no revenues it could use
to buy food and agricultural inputs on the international market. From 1990 to 1994,
Iraq’s agricultural imports averaged slightly above $1 billion or less than half of the
pre-war level. USDA’s export credit offers to Iraq were stopped, and USDA’s
Commodity Credit Corporation had to pay over $2 billion in unpaid Iraqi export
credit guarantees. U.S. agricultural trade with Iraq fell to nearly zero.
After 1991, the northern portion of Iraq fell under de facto local Kurdish control
while the fifteen governorates in central and southern Iraq remained under central
government control. This corresponds roughly to the rain-fed northern agricultural
zone and the irrigated center-south zone. The central government took steps to
increase both production and control of domestic food within its zone of control.
These changes included Government monopoly control over most grain production
and the introduction of a state-managed system of rationing of basic foodstuffs.
Government incentives coupled with rising internal food prices encouraged Iraqi
farmers to expand crop area by planting on marginal pastureland and fragile hillsides.
Record cropped area was attained in 1992 and again in 1993. However, agricultural
productivity suffered for lack of fertilizers, agricultural machinery and the means of
spraying planted areas with pesticides.
Anecdotal evidence suggests that the 1991 Gulf war resulted in significant
damage to the irrigation and transportation infrastructure vital to Iraq’s agricultural
sector, but it is difficult to evaluate the extent or severity of the damage. Iraq’s
irrigation infrastructure fell into disrepair and salinity has spread across much of the
irrigated fields of central and southern Iraq. Once severe salinization has occurred
in soil, the rehabilitation process may take several years according to FAO officials.71
In addition, rural areas were left with a severe labor shortage further hurting
agricultural productivity. According to the U.S. Census Bureau, in 1991 Iraq
experienced a 3.7% decline in population as an estimated 663,000 persons died or

69

U.S. General Accounting Office. Iraq’s Participation in U.S. Agricultural Export
Programs, NSIAD-91-76, Nov. 1990, p. 2. [http://161.203.16.4/d22t8/142766.pdf]
70

Country Factsheet, The Economist
[http://www.economist.com/countries/Iraq].
71

Intelligence

Unit,

The

Economist.

The Economist, “Digging for defeat: Iraq,” May 2, 1998, Vol. 348, No. 8066, p.44.

CRS-26
left the country following the first Gulf war.72 Much of this exodus included foreign
guest workers from the agricultural sector.
Iraq’s poultry and livestock populations were devastated by the loss of rangeland
to grain crops and the drop off of feed grain imports and veterinary medicines needed
for routine control of parasites and diseases. A 1997 screw worm epidemic and a
1998 outbreak of foot-and-mouth disease resulted in further losses of animals.
By the mid-1990s severe macroeconomic problems related to the international
sanctions led the government to end most support to the sector and instead to
implement austerity measures that further curtailed agricultural investment.
Declining food availability resulted in a significant rise in malnutrition in Iraq,
particularly in the center and south of the country.73
By 1996, Iraq agreed to U.N. terms for establishing the OFFP. Once started,
however, OFFP food imports made Iraq’s trade dependence nearly complete for
many basic foodstuffs. According to the World Food Program, by early 2003 nearly
60% of Iraq’s population was totally dependent on imports via the OFFP. The Iraqi
population’s failing nutritional status and growing trade dependence was further
aggravated by a severe drought that persisted throughout much of the Middle East
from 1999 through 2001 and devastated crop output in Iraq.
Prospects. Some progress has been made at restoring lost agricultural
productivity; however, a return to normal weather patterns is critical for domestic
cereal production in Iraq. With the action of the U.N. Security Council on May 22,
2003, lifting trade and financial sanctions on all non-military goods, Iraq will be able
to import food and needed agricultural inputs. However, political stability and
increased internal security will also be necessary before Iraq’s agricultural sector
witnesses significant investment and growth. Restoration of the irrigation
infrastructure (including a long-term de-salinization program), as well as the grain
marketing infrastructure for handling, storing, and distributing agricultural inputs and
outputs will be vital. In addition, the development of a viable agricultural research
and extension service to develop and disseminate improved varieties and successful
production practices are needed to restore agricultural productivity.
Clearly, Iraq will be dependent on imports for meeting domestic food demand
for several years to come. In the long term, after the economy has regained its
viability and vibrancy, market forces and international competition will likely be the
driving forces behind Iraq’s agricultural trade patterns. Historical trade and food
consumption patterns suggest that food grains such as wheat and rice, feedstuffs
including corn, barley, and protein meals, vegetable oil, sugar, meat, and dairy
products are all likely to be important imports into Iraq.

72

U.S. Bureau of the Census, International Data Base (IDB), Iraq, Oct. 10, 2002;
[http://www.census.gov/ipc/www/idbacc.html]
73

UNDP, Iraq Country Office, 1999-2000 Report, June 2000.

CRS-27

Banking and Financial Institutions74
Iraq has never had what most Western analysts would call a market-oriented
banking system. Nevertheless, before 1991, it had one of the most modern financial
systems in the Arab world. The government created most of the country’s financial
institutions, with the exception of some private banks established after 1988. Iraqi
banks seem to have gotten most of their funds, not through borrowing in the market
or from deposits, but from allocations from the national treasury. Access to capital
and financial services seems to have been determined more by political factors than
by independent considerations of creditworthiness, profit and risk. Between 1991
and 2003, government control over the Iraqi financial system tightened further.75
Iraq’s banking system was limited, until the 1930s, by the size of its economy
and the small level of savings. In 1936, the government created an agricultural and
industrial bank which split in 1940 into two separate institutions. Other specialized
banks, for real estate, mortgages, and cooperatives, were created in the 1940s and
early 1950s. A commercial bank, the Rafidain Bank, was created in 1941. It also
served for a few years as the central bank. A state-owned institution, the National
Bank of Iraq, was founded in 1947. It became the Central Bank of Iraq in 1956, one
of the earliest Arab monetary authorities. The Rafidain Bank was, for many years,
the only commercial bank in the country.76 Its original ownership is unclear. In
1964, all Iraqi banks and insurance firms were nationalized. The government’s
specialized banks were consolidated at that time into separate institutions for
agriculture, industry, and real estate. The industrial bank made loans to both public
and private sector firms and held equity positions in several public/private joint-stock
companies. Government policy evidently played a major role in its decisions and
those of the other specialty banks. In the early 1980s, for example, the industrial
bank was instructed to expand its lending to private and state-owned firms in order
to promote development. The real estate bank meanwhile was instructed to increase
its lending in order to promote the construction of housing and to encourage more
people to build their own houses.

74

Prepared by Jonathan E. Sanford, Specialist in International Political Economy, Foreign
Affairs, Defense and Trade Division.
75

Much of the factual and descriptive information presented here on Iraq’s financial system
is drawn from the Europa Middle East and North Africa yearbook for 2003 and from Metz.
Iraq, a Country Study.
76

The Rafidain Bank was the only commercial bank in the country until 1988 and it
remained the predominant institution thereafter. Some analysts have questioned whether
it was truly independent of the central bank. For most of their history, both were owned and
controlled by the government. With assets of more that US$17 billion in 1983, the Rafidain
Bank was reportedly the largest Arab commercial bank. In 1982, according to one report,
the American Banker newspaper named Rafidain the world’s fastest growing bank. In early
1989, Rafidain ranked number 83 in the world, with $54.5 billion in assets. In 1996, it had
152 local branches and nine branches abroad. Given the strength of the Iraqi economy
during this period, it seems likely that much of the capital to fund the bank’s operations
came from government or from regime sources.

CRS-28
Until the late 1980s, Iraq had one of the most modern financial systems in the
Arab world. It reportedly helped Jordan (and perhaps others) establish their own
central banks. The Rafidain Bank was a shareholder in several European-Arab
consortia banks and one of the seven founding shareholders of the Gulf International
Bank, a regional commercial bank founded in 1977. In 1981, Rafidain created a joint
venture bank with Banco do Brasil, with a capitalization of US$17.5 million. In
1987, its own capital base was doubled (to ID 100 million) as the first stage in a plan
to expand the national banking system. In 1988, the Iraqi government announced
that another commercial institution, the Rashid Bank, would be created (also at a
capitalization of ID 100 million) to compete with the Rafidain Bank. Some sources
report that Rafidain emphasized foreign connections while Rashid focused more on
the domestic economy. The government seems to have been the source of the new
capitalization for both banks. The government also encouraged more competition
among the three state-owned insurance firms. The banks and insurance firms were
encouraged to expand and given administrative and financial autonomy, bound
officially only by the Government’s fiscal policy.
In May 1991, the government rescinded the 1964 decree nationalizing all
financial institutions. According to recent reports, there were 17 privately owned
banks in Iraq in 2002. The role of the private banks is unclear. Given the legal
restrictions on access to foreign capital and the weakness of the Iraqi economy, most
of their resources likely came from official or regime sources. No information is
available as to where or for what purpose they invested their funds. In June 1991, the
government created a state-owned Socialist Bank, with a capitalization of ID 500
million, to make interest-free loans to civil servants and decorated war veterans.
Events since 1991 have substantially limited the capacity of Iraq’s financial
institutions. Much of the flexibility and autonomy implicit in the legalization of
private banking, in 1988 seems to have been overtaken by events. Most of the
country’s overseas assets were impounded (“frozen”) in October 1992 or shifted to
escrow accounts. This made it very difficult for Iraqi financial institutions to operate
internationally. The post-1991 sanctions regime and the Oil for Food program also
centralized financial control within Iraq in the hands of the government and the
international bodies administering the system. Iraqi banks had little access to capital
other than through official channels. Much of the lending by these institutions in the
past decade seems to have been based more on personal or political connections than
on normal banking principles. In many cases, it is not clear that these were in fact
loans which the borrowers were expected to repay.
Since the end of the recent war, most of Iraq’s banks have been severely battered
by looting. The Central Bank and other banks have been thoroughly looted, by
officials of the former regime as well as by post-war thieves.77 The financial capacity
of Iraq’s banks and their ability to continue operations may be in serious doubt. For
its part, the Rafidain Bank served during the 1970s and 1980s as the government’s
principal agent for borrowing funds abroad. After 1990 it became the principal venue
through which Saddam’s government defaulted on its foreign debts. The bank was

77

Some money has been recovered, however, and turned over to occupation authorities but
its source and ownership are unknown.

CRS-29
sued by most of the country’s creditors for collection of those debts. It is, in effect,
bankrupt. In April 1993, British liquidation experts informed creditors meeting in
London that the liquidation of the Rafidain Bank’s international operations would
yield only a minimal recovery.

Transportation and Infrastructure78
Iraq’s transportation and infrastructure systems have deteriorated substantially
in the past dozen years. The government invested heavily in them, during the1970s,
thanks to the inflow of oil revenues and, in the 1980s, as a matter of strategic
necessity due to the Iran-Iraq war. Much of this infrastructure was destroyed during
the first Gulf war, and rebuilding efforts were hobbled by the sanctions regime. The
telecommunications network was subsequently targeted in the 2003 hostilities.
Shipping. Iraq’s main port is at Basra, about 50 miles inland from the Persian
Gulf along the Shatt-al-Arab waterway. Before the oil boom of the 1970s, it was a
relatively small port, most trade being oriented overland through Syria and Jordan.
The port was damaged by Iranian shelling during the Iran-Iraq war and by coalition
bombing during the first Gulf war. The Shatt-al-Arab also was blocked by sunken
ships until cleared and dredged in 1993. Ports were built at Umm Qasr and Khor alZubair in the 1980s, connected to the Gulf by the Khor Abd-Allah waterway. Limited
shipping was resumed at Umm Qasr in November 1993, although the condition of
the port prevented intensive use. The port at Khor al-Zubair was designed to handle
cargo destined to and from the large industrial and petrochemicals industries there,
most of which remain idle. Certain contracts for forklifts and dredging equipment
were allowed by the UN sanctions commission in order to improve the ports for food
and medical shipments. The regime dredged stretches of the Tigris between Baghad
and Basra to facilitate barge traffic, and it commissioned navigation studies for other
areas along Tigris and Euphrates. A barge canal between Al-Nasiriyah on the
Euphrates and Baghdad was completed in December 1992.
Railways. The Iraqi railway system has five major routes. A northwest route
links Baghdad with Mosul and the Turkish border. A second runs north from
Baghdad to Kirkuk and Arbil. The third runs south from Baghdad to Basra and Umm
Qasr. A fourth line stretches from Baghdad west to Qusaybah at the Syrian border
and continues west to link the industrial complex at al-Qaim with the phosphates
mines at Akashat. A fifth line connects this route at al-Hadithat with Kirkuk, thus
linking the minerals processing complex at al-Qaim with sulphur mines in the
country’s northern region. Due to the dilapidated condition of the rails and
equipment, service is reportedly infrequent and unreliable. The U.N. sanctions
committee allowed the importation of 30 new mainline locomotives in 2000. The
Hussein regime commissioned studies to improve and expand the railways, but lack
of funds prevented the execution of these projects. In 1994, Iraq possessed 1,259
miles of operating track. No new construction has occurred since.

78

Prepared by Ian Fergusson, Analyst in International Trade and Finance, Foreign Affairs,
Defense and Trade Division.

CRS-30
Air Transportation. Iraq has international airports at Baghdad and Basra.
Civil international air traffic was prohibited under UN sanctions, but several Middle
Eastern states and France and Russia operated flights sporadically into Baghdad.
Iraqi airways was effectively grounded by sanction, not only due to the prohibition
on flights, but also due to the lack of access to spare parts. In 1989, the last full year
of ‘normal’ operations, the airline carried approximately 1.2 million passengers to 42
destinations within Iraq and abroad. In 1987, the fleet contained 14 Boeing passenger
aircraft and 35 Russian-built Antonov and Ilyushin cargo planes. Iraqi airways was
divided into its aviation and ground services components in 1987 and the two entities
were partially privatized a year later. However, its virtual disappearance from the air
after the imposition of sanctions did not bode well for investors.
Roadways. In 1994, Iraq had an estimated 27,410 miles of paved roads and
highways. The road network received priority during the 1980s due to its strategic
value in the war against Iran. Consequently, the roads connecting the central
population centers with the Iranian frontier received the most attention. The
International Expressway #1, a six-lane highway linking Safwan on the Kuwaiti
border north to Baghdad and west to the Jordan border, was completed in 1989. It
was designed to link the Gulf states with the Mediterranean. Iraq’s roads and bridges
were heavily damaged during the first Gulf war, but they reportedly received priority
in the regime’s later reconstruction efforts. In 1994, approximately 765,000
passenger vehicles and 265,000 trucks were registered in Iraq.
Communications. Iraq’s telecommunications infrastructure was severely
damaged by the first Gulf war, the 1998 allied airstrikes, and the 2003 hostilities.
Before 1991, there were approximately 37 land-lines per thousand residents,
declining to 30 lines per thousand in 2001. The earlier figure indicates that the system
was not particularly widespread before the destruction of the central switching
facilities and trunk lines. The U.N. Sanctions Committee (UNSC) blocked most
contracts to replace damaged infrastructure on grounds that such equipment could be
utilized for military purposes. In 2001-2002, the UNSC approved several upgrades
to improve international connectivity and the domestic trunk networks. A wireless
phone network in the northern Kurdish-controlled operates with the Europeanoriginated GSM standards.
Power Generation.79 Iraq’s government invested heavily in electric power
generation in the 1980s, contracting with Britain, West Germany, France, Italy, South
Korea, the Soviet Union, and Yugoslavia to build or expand thermal and gas
generating plants, hydroelectric facilities, and transmission wires. A great majority
of these installations are oil or gas fired, although hydro power accounts for about 2%
of capacity. A nuclear reactor at Osirik was destroyed in an Israeli attack in 1981.
Iraq’s transmission grid was linked with that of Turkey in 1987, and Iraq became the
first Middle Eastern state to export power. In 1990, capacity was reported to be 9,000
MW. Bombing during the first Gulf war reportedly destroyed about 90% of its
electronic generation and transmission facilities and electricity generation capacity

79

In addition to other sources cited in this section, information on Iraqi power generation
was also obtained here from the Energy Information Administration, Country Analysis
Brief: Iraq, February 2003 (http://www.eia.doe.gov/emeu/cabs/iraq.html#elec).

CRS-31
fell precipitously to 340 MW by March 1991. Although the regime declared that 75%
of generating capacity had been restored by early 1992, subsequently in 1998 an Iraqi
energy official claimed that the system was operating at 50% of capacity due to lack
of spare parts. Recently in 2002, the U.N. Iraq Program declared that operating
capacity to be 4,300-4,400 MW. Contracts for spare and maintenance equipment
were approved in 2001-2 to aid in boosting production, but chronic shortages of
power remained. Power was available only 12 hours per day in many areas. The
power supply deficit was estimated at 1,100 MW overall, with a peak load deficit of
2,500 MW estimated in 2001.

Industry80
For the most part, the industrial sector of Iraq was created during the 1970s and
1980s as a result of government attempts to diversify the economy through economic
development projects using proceeds from Iraq’s oil wealth. While some projects
were undertaken to exploit available economic resources, others were developed to
foster national identity or to enhance the prestige of the regime. Industrial enterprises
sustained heavy damage in the 1991 Gulf war. Such facilities that were not destroyed
were degraded or rendered inoperable during the remaining years of the Baathist
regime due to the shortage of spare parts and technical know-how. The age and
debilitation of the infrastructure, and the presence of a technically competent
workforce, may determine the economic viability of the industrial sector.
Industrial Development. Since the days of the monarchy, Iraq’s economic
development programs have emphasized the development of industry as a means to
modernize the nation. In the 1950s, the monarchy used oil revenues to undertake
large infrastructure projects, but most manufacturing industry remained in private
hands. After the overthrow of the monarchy and extensive nationalizations of
industry in 1964, industrial development was characterized by extensive state
planning and public sector control of industry. Generally, however industrial
development programs sought to advance common goals, namely, (1) to diversify the
economy and to lessen reliance on oil revenue, (2) to provide employment
opportunities for the labor force, (3) to develop and exploit local resources, and (4)
to encourage import substitution industries.81
Large scale industrialization expanded during the oil boom in the late 1970s.
With more money in hand, the government was able to purchase heavy industrial
plants from foreign contractors on a turn-key, ready-to-operate, basis. Several
industrial zones sprang up in this fashion, notably at al-Qaim (minerals processing),
Khor al-Zubair (including a large French-contracted iron and steel plant) and a
petrochemical complex near Basra. Light manufacturing, including textiles, food
processing, and household goods, was centered around Baghdad.

80

Prepared by Ian Fergusson, Analyst in International Trade and Finance, Foreign Affairs,
Defense and Trade Division.
81

Tariq al-Khudayri, “Iraq’s Manufacturing Industry: Status and Prospects for
Rehabilitation and Reform,”in Mahdi, Iraq’s Economic Predicament, p. 202;

CRS-32
The Soviet Union and other eastern bloc countries also contracted for the
construction of several projects in the 1980s. Among these were steel works and an
electrical equipment manufacturing plant in Baghdad, a tractor works in Musayib,
and a pharmaceutical plant in Samara. Romania provided two cement plants, in alQaim and Sinjar. They reportedly produced 7.5 million tons of cement in 1987, of
which 4.5 million tons were exported. Iraq purchased these facilities through
Economic Cooperation Agreements signed with various eastern-bloc countries
beginning in 1985, which provided credits arrangements considered to be more
favorable to Iraq than those offered by western creditors at that time.82
To diversify away from petroleum dependency, Iraq sought to develop its
mineral resource industry. Sulphur mining and processing has been conducted in
northern Iraq near Mosul since 1972. Proven sulphur reserves in 1988 were
reportedly 515 million tons. At its peak in 1989, production was estimated at 1.4
million tons, of which 1.2 million tons were exported. Sulphur production was
enhanced by the opening of a sulphur recovery and sulphuric acid plant built by
Japanese firms in 1988. Phosphate extraction and processing is located in the
northwest region of the country in mines around Akashat. The reserves of the
Akashat mine, opened in 1981, have been estimated at 3.5 billion tons. Phosphate
is processed in al-Qaim, in a plant built by a Belgian firm in 1984. Production was
estimated at 1.2 million tons in 1989, of which 766 thousand tons were exported.
Before the first Gulf war, Iraq was self-sufficient in fertilizers.
Several problems have been identified in the manner of industrialization
undertaken in the 1970s and 1980s. Due to the large influx of petrodollars, these
projects were often ill-conceived and unproductive. They were often undertaken for
symbolic reasons, were grandiose in scale and did not reflect the absorptive capacity
of the economy. Plans for needed technical expertise, sources of supply input, and
transportation needs were often inadequate.83 One source estimated that at the peak
of its operations, the manufacturing sector imported 80% of its inputs. Hence it was
highly vulnerable to supply disruptions and currency volatility.
War and Sanctions. Aside from the internal weaknesses in the sector, war
and sanctions also crippled Iraqi manufacturing. During the Iran-Iraq war, most
industry escaped direct damage from Iranian attacks. However, much of the industrial
infrastructure was sidelined by the inability to obtain intermediate inputs and spare
parts due to interference with shipping and damage to ports. As the conflict dragged,
the government concentrated its resources on military industrialization projects and
this emphasis contributed to the decision to privatize some state industries in 1988.
In the manufacturing sector, approximately 50 state operations were sold to the
private sector or listed on the Baghdad stock exchange. Many of these entities were
sold at well below what was considered market cost.84

82

Ahmed M. Jiyad, “The Development of Iraq’s Foreign Debt,” in Mahdi, Iraq’s Economic
Predicament, p. 98
83

Cordesman and Hashim, Iraq: Sanctions and Beyond, p.129.

84

al-Nasrawi, Iraq’s Burdens: Oil, Sanctions, and Underdevelopment, p.99.

CRS-33
Much of the industrial infrastructure that survived the Iran-Iraq war was
destroyed or severely damaged by bombing during the first Gulf war. The Khor alZubair heavy industry complex was heavily hit, and although some reconstruction
work has occurred, it has not operated since. For industries not destroyed, the
sanctions regime in effect between 1990 and 2003 closed off the possibilities of
obtaining inputs or spare parts or exporting manufactured products legitimately.
Reconstruction efforts did not concentrate on the revitalization of the manufacturing
sector, but rather focused on the more lucrative oil industry and on instruments of the
regime’s power.85
Prospects. The future outlook for the manufacturing sector is clouded. Most
facilities have been destroyed by war or degraded by sanctions. Few new inputs have
been put into the sector sine 1990. Iraqi manufacturing is saddled with aging, if not
damaged, equipment and infrastructure. The capacity and skills of the labor force
have deteriorated over time. In addition, much of the economic rationale for Iraqi
industry has evaporated, since much of the capacity built in the 1970s and 1980s was
based on national prestige, import substitution, or other non-market considerations.
New policies to facilitate and encourage the growth of industry on better and more
sound foundations will be needed. Given the large size of the urban population and
the limited growth prospects for agriculture, new employment opportunities in
industry likely will be needed. Iraq will need to take care (see the section on the nonoil economy and “Dutch Disease” below) not to allow its currency to appreciate so
much in value (due to large oil exports) that the incentives and prospects for industry
and other sectors are unnecessarily diminished.

International Trade86
Exports. Oil has been Iraq’s main export since the 1930s. By 1953, oil
exports accounted for 49.3% of national income.87 In the 1980s, crude oil made up
83% of all Iraqi exports.88 The figure in 2001, under the Oil for Food Program, was
over 95%. Non-petroleum export products included portland cement, fruit (mainly
dates), fertilizers, and reaction engines. Table 2 illustrates Iraq’s top exports in 1989.
In 2001, Iraq’s exports totaled $12.6 billion. Its largest export markets were the
United States ($6.3 billion), Canada ($1.1 billion), France ($887 million), the
Netherlands ($791 million), and Jordan ($736 billion).
International sanctions were imposed by the United Nations in August 199089
following Iraq’s invasion of Kuwait. (See the section on the Oil for Food Program
above.) The U.N. Security Council created the OFFP in 1995, allowing Iraq to

85

Cordesman and Hashim, Iraq: Sanctions and Beyond, p.149.

86

Except for the portion on customs duties, this section was prepared by Cathi Jones,
Analyst in International Trade and Finance, Foreign Affairs, Defense and Trade Division.
87

Slugett, M. & Slugett, P. Iraq since 1958: from revolution to dictatorship. New York:
KPI Limited, 1987, p. 35.
88

Economist Intelligence Unit (EIU) calculations.

89

United Nations Security Council Resolution 661, August 9, 1990.

CRS-34
export $2 billion worth of oil every six
months. The first Iraqi oil exports began
on December 10, 1996, after it agreed in
May to implement the program.90 The first
shipments of food under the OFFP arrived
in March 1997, followed by imports of
medicines in May 1997.
From the
implementation date to March 2003,
approximately $26.8 billion worth of food,
humanitarian supplies, and equipment was
delivered to Iraq under the program.91

Table 2. Iraq’s Top Exports,
1989

SITC Rev3 Commodity

Millions
of U.S.$

3330-Crude oil from
bituminous minerals

$11,545.4

3344-Fuel oils, not
elsewhere specified

$211.3

3343-Gas oils

$119.8

The six-month ceilings on oil sales
3341–Gasoline (motor
$78.8
were raised from $2 billion to $5.3 billion
spirit) and other light
oils
in 1998 and abolished altogether in 1999.
This allowed Iraq to export and import
2741- Sulfur of all kinds
$39.2
without limit so long as it complied with
(except sblmd, prcpt, or
coll)
the U.N. screening process. Despite this,
Iraq’s oil exports ran significantly below
6612-Portland cement
$35.7
aluminous, slag,
capacity in 2001 and much of 2002, due, in
supersulfate, etc.
part, to disputes between Iraq and the U.N.
over the formula for pricing Iraq’s oil. Iraq
0579-Fruit, fresh or
$30.8
dried, not elsewhere
imposed surcharges of about 30-50 cents
specified
per barrel on its oil buyers, resulting in
illicit kickbacks that the government
5629-Fertilizers, not
$29.6
elsewhere specified
allegedly used to buy unapproved goods. In
September 2001 the UN Sanctions
7144-Reaction engines
$29.2
Committee changed the

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/crs%3ARL31944. Public record. Not legal advice.