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Update No: 094 - (24/01/11)

Maliki passes the test
Maliki finally managed to form his government before the constitutional deadline of 90 days. Allawi’s group took the post of parliamentary speaker, the deputy premiership and the finance ministry, among other positions. The predominant character of the new coalition is centralist and Arabophile; the Kurds are part of it, but their federalist views have few allies now, as the other federalist groups have been weakened in the elections and have modest representation within the cabinet. The new Sunni Arab parliamentary speaker, is a vehement enemy of the Kurds and a strong centralist. The powers of the new National Council of Strategic Policies, supposed to be presided over by Allawi, have not been defined yet. Another possible point of contention is the power of Deputy Premier Shahristani, formerly oil minister: the Kurds were glad to see him going, as he had opposed their demands for autonomy, but now are being told that he will have an oil industry supervisory role in his new job. The followers of Muqtada As-Sadr, who are part of the coalition, are resolutely opposed to any American presence in the country and even opposed Vice-president Biden’s visit to Baghdad in January. Sadr has just returned from Iran and has already begun agitating against the Americans and other demons; Maliki has been pretending not to see and not to hear and probably thinks that Sadr’s sermons add to the Prime Minister’s leverage when negotiating with Washington, but the game cannot go on forever without causing some damage. Perhaps the greatest danger we can forsee for the new government, is not disintegration, however, but a permanent deadlock where no serious decision on key issues can be taken.

Positive repercussions (perhaps)
For the difficulties lying ahead, the formation of the new government is however already helping in resolving some problems. The negotiations between Baghdad and the Kurdish autonomous region seem to have broken the deadlock over the export of oil produced in Iraqi Kurdistan. The Kurdish authorities believe that if oil flows were resumed, exports would immediately go up by 100,000 bpd and that another 150,000 bpd could be added by the end of 2011. In reality all the constitutional issues and the status of the oil contracts signed between the Kurdish Autonomous Government and the oil firms remain undecided. If oil exports resume it might not be for long before the sides are fighting a war of words again.

Positive economic expectations
The Iraqi foreign exchange market has been experiencing some foreign interest in 2010, with foreign buyers getting a net US$53 million of shares: a modest amount by any standard considering the total value of floated shares of US$3 billion, but after all this is still a country affected by extreme violence and high levels of political uncertainty. In general the foreign exchange has started 2011 in a very dynamic way, with volumes of trade having gone up by over 50% compared to the 2010 average. A few relatively large companies seem intentioned to float shares on the stock exchange in 2011, a fact which will contribute to attract interest.

Economic growth in 2011 is not expected to have a major impact on the very high unemployment level. In January the new Iraqi government announced that state employment is planned to increase by 171,000 in 2011, a modest amount when it is considered that the armed forces alone will go up by 100,000. That a relatively modest 71,000 jobs will be added to the various ministries is in a sense, good news, given that Iraq’s public sector is one of the most bloated and inefficient of the world. The problem of unemployment however remains, as growth in the oil sector will not necessarily spread wealth around the population, oil not being a labour intensive industry. Yet such is the political and ‘clan’ structure, ‘Jobs for the boys’ must be found.

Forecast 2011
During 2011 Iraq’s new oil export infrastructure will start coming on line, allowing for Iraq’s oil export to rise significantly now that investment in oil production has started. In total projects to raise the oil export capacity by 6.2 million bpd are underway, with 0.9 million bpd expected to be added in 2011. Many observers, having been sceptical this far, are beginning to think that oil export will actually start rising seriously in 2011. Rising oil prices should also contribute to raise the Iraqi GDP growth to 11.5% in 2011 (IMF estimate). Inflation is expected to remain roughly stable at 5%.

What could still spoil the situation, of course, is the precarious political situation. The persistent violence, if not as widespread, is not likely to succeed in igniting a new civil war, because the Shias and the Sunnis are now largely separated. However, the possibility of a revival of the insurgency in the Sunnis Arab lands north of Baghdad cannot be discounted. Inter-factional rivalry within the government adds another factor of uncertainty and instability that could discourage investment, even if as of early 2011 many investors seemed inclined to consider it political theatre more than a serious threat.

The American presence seems now almost certain to draw down to nil in 2011, as far as troops are concerned; now it seems that the State department will maintain a presence through thousands of security contractors, in charge of training the Iraqi security forces. A few hundreds from the military might also stay as part of a NATO mission. More and more the competition for influence in Iraq will be between the Saudis and the Iranians.

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