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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 IRAQ STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Economic and Political Environment The Iraqi government has worked aggressively to disengage sectarian violence being waged by Iraqi militias for political and territorial advantages. Although there have been challenges in the overall reconciliation process there are still many outstanding issues that would need to be addressed before a formal reconciliation is rendered. It is the increasing belief that there will be a reduction in the violence if the reconciliation efforts are taken seriously. Local territory conflicts are expected to continue, as opposed to larger scale secessionist movements. As long as there is continued commitment to the political process, there will continue to be strides made to assure the country does not fracture. Oil production growth will be dependant upon security, investment and new refining capabilities. The new oil investment law, scheduled to be passed in December, is expected to have a positive influence on additional fund allocations for the petroleum industry. Modest increases in output are expected for 2007. The efforts of the Iraq government to maintain a political process are of continued importance to the overall climate of Iraq. Despite difficulties on domestic issues, all sects continue to work together to debate differences and negotiate through obstacles as well as participate in national reconciliation. The national reconciliation is one main obstacle in diminishing the ongoing violence. Kurdistan has been in negotiations with the government to have Kirkuk merge into their autonomous region. These negotiations have been continuous with no finalized results to date. Disputes over territories remained a focal point for political and sectarian parties. While some territorial disputes are more drastic than others, these disputes will not be enough to initiate a clear division of the country. Iraq's primary economic objective has been to increase oil output on a sustainable basis from the 2005 average of 1.8m barrels per day (b/d) to the current capacity level of 2.2m b/d. The overall target range for the next 3-5 years is expected to be 3-3.5m b/d and is considered not to be overly optimistic. The year to date output evaluation shows a marked improvement considering disruptions such as sabotage, low investment and logistical issues in both capacity and export supply. Currently, all oil extracted within Iraq has not been accounted for, due to the poor accounting of production and lack of an oil metering system, which has been suggested by the International Advisory and Monitoring Board for Iraq. While Iraq has a plentiful oil reserves, price controls have resulted in shortages of refined products and have fueled the black market supply. Continuing to meet production targets will be essential to gain much needed funding necessary to achieve the politically vital goal of ensuring the stable provision and expansion of basic services. Economic Performance Given the ongoing security problems in 2006, oil output is expected to rise modestly. Additionally, government spending on development will be constrained by security costs corruption, and the non-oil sector will continue to be blighted by the lack of security and the slow pace of construction and fund disbursement. As a result, real GDP growth in 2006 will be around 3%. In 2007 this will pick up only slightly, rising to 4%, as oil output increases remain modest and inherent constraints on the non-oil economy remain. It is of note that foreign direct investment amounts to less than 1% of the country's GDP while 70% of Iraq's GDP is derived from oil revenues. Average inflation for 2006 was up to 60%. This is mainly due to the recent availability of data for the second quarter of this year indicating a sharp rise in the inflation, in addition to anecdotal accounts of strong rises in much of the country. These have partly reflected the recent easing of fuel subsidies. However, with the expectation that the fuel subsides will remain in place, for the short term, and given the rise in value of the dinar, inflation should be constrained from rising more sharply. Although the cost of imported goods have risen strongly in 2006, these rises are expected to decline markedly in 2007, helping to ease Iraqi inflation to a forecast 45%. The Central Bank of Iraq (CBI) is committed to maintaining what has become a de facto peg to the US dollar. With the apparent resort to foreign-exchange "rationing" (under other guises) in some instances in the CBI's daily currency auctions, the average official rate has not fluctuated much below NID1,475:US$1 since the third quarter of 2005. However, in December 2006 the Central Bank began raising the value of the dinar to offset the rising inflation. The Central Bank appears reluctant to use its large accumulated gross foreign-exchange reserves (of US$ 12.2 billion at end-2005) to satisfy dollar demand, although it is prepared to raise local-currency interest rates to stem the pressure on the dinar and lower inflation, there are likely to be limitations on its willingness and ability to use this as a monetary policy tool.* * The Economic Intelligence Unit Ltd., October 2006 and the Iraq Stock Exchange Key Information Contacts Iraq Association of Securities Dealers: www.iasd-iq.org Iraq Central Bank: www.cbiraq.org PAGE 76
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 IRAQ STOCK EXCHANGE IRAQ ECONOMIC CHARTS AND TABLES 2001 (a) 2002 (a) 2003 (a) 2004 (a) 2005 (a) GDP (US$ billions) 18.9 19.0 12.7 25.5 30.6 Real GDP growth (%) -8.2 -14.2 -35.3 46.5 1.5 Consumer price inflation (av; %) 16.4 26.3 36.3 31.7 31.6 Population (millions) 25.8 26.6 27.3 28.1 28.8 Exports of goods (FOB) (US$ millions) 16,457.0 12,218.8 (b) 9,711.1 (b) 16,863.0 (b) 23,032.0 Imports of goods (FOB) (US$ millions) 11,152.0 9,817.3 (b) 9,933.5 (b) 19,731.0 (b) 20,154.0 Current-account balance (US$ millions) 1,786.1 -2,173.0 (b) -2,635.6 (b) -20,285.0 (b) -7,451.0 Total external debt (US$ billions) 111.8 112.5 111.1 109.1 96.4 Debt-service ratio, paid (%) 0.0 (b) 0.0 (b) 0.0 (b) 1.0 0.0 Exchange rate (av) NID:US$ 0.310 (c) 0.310 (c) 0.310 (c) 1,469.0 (c) 1,487.0 (c) (a) Economist Intelligence Unit estimates. (b) Actual. (c) International Financial Statistics, December 2006. ECONOMIC FORECAST SUMMARY 2006 2007 2008 2009 Real GDP growth (%) 46.5 -3.0 2.1 5.5 Consumer prices (% change) 31.7 33.0 30.0 25.0 Merchandise exports (US$ billions) 16.86 24.03 27.14 25.69 Merchandise imports (US$ billions) 21.30 23.43 24.14 24.98 Exchange rate (NID:US$1) 1,453 1,469 1,477 1,470 2005-MAIN DESTINATION OF EXPORTS (%) (a) 2005-MAIN ORIGINS OF IMPORTS (%) (a) USA EU Canada Syrian Turkey EU Brazil Korea Other USA Jordan Other 50.7 23.1 5.7 3.7 3.5 21.5 17.2 11.9 13.3 23.5 5.3 20.6 2005-MAIN TRADING PARTNERS (%) USA Turkey EU Syria Canada Other 20.6 11.6 10.5 34.2 3.5 19.6 The Economic Intelligence Unit Ltd., October 2006 Euro stat (Statistical Office of the European Communities) PAGE 77
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