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Update No: 056 - (19/12/07)

Less violent but still very messy
Development in December conformed that the level of violence in Iraq was in marked decline. The debate is now on whether the improvement is sustainable or not. Although a number of insurgents and of tribal militias are now cooperating with the Americans, they remain hostile to the Iraq government, which in turns objects to any prospects of them being incorporated into the Iraqi security forces.

In practice, the relative peace has been bought at the price of weakening the central government further and conceding local control to a wide array of militias of various kinds. Some of the remaining insurgents are lying low, waiting for the surge in the presence of US troops to pass.

The government remains unable to make any progress on the political front, with the oil law still stuck and the Sunni Arabs still refusing to join the cabinet. Observers fear that if Baghdad fails to get its act together before by spring, when the Americans will start drawing down their troops level, the window of opportunity created by the improved situation will have been lost.

Others add that any move forward in terms of resolving the many outstanding issues would likely lead to an increase in violence, particularly among Shiites and between Sunnis and Kurds, as a new balance of power settles in. The renewed violence could test the fragile achievements of the last few months. One issue on which a wide majority of Iraqis agrees is that long-term foreign military presence in the country is unacceptable. Recently cabinet members have been re-iterating what was already said before. Where disagreement kicks in is the pace of a withdrawal; at present many Sunnis, including quite a few insurgents, do not consider the Americans their main enemy. The Shiite militias and Al Qaida are seen as greater short term dangers.

Resurgent confidence drives speculative investment
The decrease in violence seems to injecting some confidence in the economy, as witnessed by the strengthening of the Iraqi dinar against the US dollar. The weakening of the dollar on the world markets contributes to the dinar’s strength, as well as rumours that Baghdad wanted to appreciate its currency. The return of refugees might also be pushing the currency up, even if most of them do not seem to be coming back out of a newly found confidence in the country, but mainly because they are being forced back by their hosts! So far the dinar has gained 17% on the dollar since September 2006. The housing market also seem to be benefiting from the new situation: returning refugees started pushing prices up, leading to speculative moves as many Iraqis buy homes in the expectation of prices continuing to grow. The lack of alternative investment opportunities easily turns any prospect of making a profit into frenzy. However, this has not had any impact on the productive economy yet and there is no report of house building booming. As a result the impact in terms of job creation is still insignificant; unemployment is still estimated at 30-60%, depending on the source.

Oil production peaks
Iraqi oil production hit a post-Saddam high in November, when it reached 2.3 million bpd. The increase was due to more steady output from the northern fields, where a lull in sabotage attacks is allowing for more exports to take place. Analysts believe that the higher production rates should be sustainable for at least 2-3 more months. 
Bigger increases are however unlikely, given structural problems and lack of investment in the industry. So far more investment is being channelled into the rebuilding of Iraq’s tanker fleet, which was in a state of disrepair. New Chinese-built tankers are now beginning to be delivered. Talks on oil issues have recently been going on between Baghdad and the Kurdish regional government, but it is not clear whether any advance in ironing out the problems has been made.

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