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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006
IRAQ STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
Iraq is expected to remain fundamentally
unstable for the foreseeable future, although
there should be sufficient common interest to
prevent the formal break-up of the country or
a full-blown civil war. A political process
centered on Baghdad will remain important to
the political representatives of the Shia, the
Kurds and the Sunni Arabs, despite the
weakness of the Iraqi state and the de facto
power of local factional, clerical and tribal
leaderships on the ground, often underpinned
by their respective militias rather than the Iraqi
army.
Iraq's primary economic objective will be to
increase oil output on a sustainable basis
from the 2005 average of around 1.8 million
barrels/day (b/d) to the claimed capacity level
of 2.5 million b/d. This target is looking
increasingly unrealistic. Output in May 2006
was 1.9 million b/d, and exports are estimated
to have been around 1.4 million b/d. Although
output has improved compared with the first
quarter, when average production was
1.7 million b/d, it is constantly subject to
sabotage and practical problems, not least
capacity constraints. Oil production should
gradually increase, although the pick-up is
likely to be much slower than the government
hopes, given ongoing security problems.
Continued instability will also deter the capital
spending necessary to boost productive
capacity over the longer term. The liquidation
of some loss-making state-owned (non-oil)
enterprises and the full privatization of
profitable companies, together with a
comprehensive reduction of price subsidies,
are unlikely until 2007 at the earliest.*
Economic Performance
In 2005 and 2006, Iraq has continued to
maintain a stable exchange rate of the Iraqi
Dinar through auctions conducted daily by the
Central Bank of Iraq. On December 23, 2005
Iraq secured a Stand By Agreement (SBA)
with the International Monetary Fund (IMF),
in the amount of SDR 475.4 million, as a
precautionary measure. This Stand By
Arrangement also unlocked the second stage
of the Paris Club debt reduction, which
reduced Iraq’s total debt by an additional
20%. In August of 2006, the IMF conducted
the first and second reviews of the Stand By
Agreement and assessed that Iraq had not
withdrawn any of the funds allocated by the
SBA program. The IMF has also assessed
that the net international financial reserves of
Iraq has exceeded the floor expectations, set
by the SBA.
Economic growth in 2005 is estimated to have
slowed to 4%, from nearly 50% the previous
year. The expected growth, for the remainder
of 2006, is estimated to remain at 4%.
The same factors that influence Iraq’s
economic growth also influence the exchange
markets.
The economy in 2005 performed well due to
higher than expected oil revenues. The fiscal
balance at the end of 2005 recorded a
surplus of 10% of GDP, against a projected
deficit of 10% of GDP. The fiscal balance
remained in surplus at the end of the first
quarter of 2006.
Inflation has recently begun to accelerate.
The 12-month inflation rate at the end of 2005
was at 31.7% and was unchanged from 2004
(higher than the projected 20% as stipulated
by the IMF). In July 2006, inflation soared by
70% and the Central Bank of Iraq issued new
182-day bonds as part of measures to
withdraw money from circulation and lower
the inflation rate. The high inflation rate is
largely due to gross shortages of necessary
goods and oil, which are a result of the
on-going security situation. The impact of the
high inflation rate has kept domestic investors
at bay. As the price of goods and fuel begin
to increase, the motivation for investing in the
market is decreased.
Instability within the country has played a
negative role in the economy as a whole.
This type of instability has been known to
deter investors for fear of loss of funds.
Current security improvements and the
implementation of the electronic trading and
depository system will encourage domestic
investment in the market.
The Foreign Investment Law is now under
review in Parliament. The ratification of the
investment law will have a positive impact on
the exchange by allowing an influx of foreign
capital that is needed for the exchange and
the overall economic climate within Iraq.
The economy overall has shown slowed but
continued growth in the face of increasing
challenges.*
* Iraq Stock Exchange
* Economic Intelligence Unit Ltd., July 2006
Key Information Contacts
Iraq Association of Securities Dealers: www.iasd-iq.org
Iraq Central Bank: www.cbiraq.org
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