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Iraq's economy shows signs of growth

BAGHDAD – Businessman Issam al-Assadi reclines in a chair in his spacious villa with sweeping views of the Tigris River, as a servant pads over to serve tea.

Iraq is finally open for business, says al-Assadi, a powerful entrepreneur whose network of construction and other companies has won millions of dollars in Iraqi government contracts. "International companies are starting to come to Iraq," he says.

Buoyed by an increase in oil production and declining violence, Iraq's economy is showing signs of life.

Iraq has boosted oil production to 3 million barrels a day with the help of international oil companies. That's up from the 2.5 million barrels before the 2003 U.S.-led invasion. The government expects to expand capability to 10 million barrels a day in six years, which would put it at the top of world oil producers.

Baghdad streets are jammed with late-model cars, and restaurants and cafes are open well into the night. People have more disposable income and can buy an infinite array of consumer goods. "There is a sense money is percolating," says Kevin Carey, a senior economist at the World Bank.

The International Monetary Fund forecasts Iraq's economy will grow 11.1% this year to about $144 billion.

Foreign investment

Foreign business activity in Iraq in 2011.
Amt. (in billions)
% total
South Korea
Source: Dunia Consulting

But there's no shortage of reasons to be wary. Iraq's government is not fully formed, two years after elections. Bitter political and sectarian fights have threatened to bring the government to a standstill. The government still struggles to provide basic services, such as electricity. Al-Qaeda remains a threat and is trying to trigger a civil war by targeting Shiites with bombings.

"The security situation is getting better, but they know that any day, it can implode," says Subhi Khudairi, an Iraqi-American who does business in Iraq.

Encouraging U.S. investment

One of the encouraging signs of Iraq's economic recovery is foreign investment.

Last year, Iraq attracted $55.67 billion in foreign investment and other commercial activity, a 40% increase from the previous year, according to Dunia Frontier Consultants.

That means investors are looking past the perceptions of Iraq as a violent place, analysts say. "If you can get some foreign investors interested, you're doing something right," Carey of the World Bank says.

American companies were initially hesitant to enter Iraq. "We always encourage American companies to come here, but they hesitate," says Shaker al-Zamily, director of the Baghdad Investment Commission. "We ask them to not miss the opportunities."

He said Chinese firms have shown no hesitation. "If you go to Wasit, it's like Beijing," he said referring to an oil-rich province in the south. China's Shanghai Electric has a $1 billion deal to expand a power plant there.

Last year, China's investment and other business activity in Iraq was valued at more than $3 billion, according to Dunia. South Korea ranked No. 1, with about $12 billion in Iraq, according to the report. A South Korean real estate developer is in negotiations on a deal potentially worth $35 billion to build 500,000 housing units and related infrastructure, according to Dunia.

The real estate business is expected to expand rapidly as Iraq's government attempts to close an acute housing shortage. Iraq estimates it needs to build more than 800,000 homes or apartments, al-Zamily says.

Lately, U.S. firms have been showing more interest in Iraq. ExxonMobil is among a number of large oil companies working to help develop Iraq's oil fields, and Iraq has agreed to a $2.3 billion contract to purchase 36 U.S. F-16 fighter jets.

American firms have also started making inroads into real estate, tourism and agriculture, the Dunia report said.

The improvements in the oil industry and security have begun to build confidence.

"People know that, barring disaster, there is going to be this steadily increasing oil income year after year," said Jared Levy, senior Middle East analyst at Dunia. "Most people don't think there is going to be a relapse into civil war."

Outmoded regulations

Still, Iraq has made only limited progress in diversifying its economy.

With a population of more than 30 million, Iraq is not a small principality that can employ all its citizens with oil revenues, analysts say.

"They know this themselves," Carey says.

"The dominance of oil in the economy carries risks shared by all oil exporters, namely, the concern that the revenue will be dissipated without any long-term benefits to the Iraqi people," he says.

Iraq's economy remains heavily dependent on the government. More than 30% of its $100 billion budget goes toward salaries and pensions, according to the World Bank, draining money that could go toward building infrastructure.

Most Iraqis still look to the government for employment. "The system has not changed," says Zuhair Humadi, who heads a program that helps young Iraqis study abroad.

The economy is slowed by a creaky regulatory system formed under former dictator Saddam Hussein.

Humadi says his father has tried to sell a building in Nasiriyah, a town in southern Iraq. The permit process has taken two years and is not completed yet, he says.

"This system is so cumbersome," he says.

Yet, consumers are ready to spend. Stores are jammed with microwaves, computers, air conditioners and wide-screen televisions.

"In one day, we might sell 75 cars in this showroom," says Ali Alrobaiy, a marketing official for a large car dealer in Baghdad. "It's a huge market."

Consumerism alone will not drive the economy, analysts say. "This is consumption," Humadi says. "This is not production."

Crony capitalism?

Many investors are still taking a short-term view, looking for guaranteed government contracts rather than risking capital in expensive investments that might not pay off for years.

That dependence on the government for contracts inevitably raises questions of crony capitalism.

Al-Assadi, the Iraqi contractor, says he has done well with U.S. and Iraqi government deals through the years. He says his company currently is helping to build a massive water treatment plant. He says his contracts are awarded on merit, but says some of his competitors receive favorable treatment regardless of ability.

Not that Al-Assadi is without connections. He interrupts an interview to take a call on his cellphone from Prime Minister Nouri al-Maliki.

"I'm the friend of all politicians," he says, putting down his phone.

Despite drawbacks, economists and business people see enormous potential in Iraq.

"Things are going in the right direction," says Khudairi, whose company operates a range of businesses, including oil support contracts.

"It could be faster and bigger if there was more political stability," Khudairi says. "Everybody can win here."

Iraq's economy shows signs of growth - Source

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