A new threat in Iraq: recession

The financial crisis that has sent economies reeling the world over is finally seeping into Iraq, with potentially grave implications for the stability of the country.

Car sales have plummeted. The once-booming property market has skidded to a halt. Electronic goods that were flying off the shelves a few months back are staying put. And in a country still threatened by an insurgency, more than a quarter of men ages 18 to 29 are unemployed.

The economic crisis took its time getting here, in part because Iraq received a revenue bonanza from high oil prices last year and its unsophisticated banking sector has little exposure to the outside world. But optimistic projections made as recently as February that Iraq would remain immune to the global downturn have proved horribly wrong.

“Some people said Iraq wouldn’t be affected,” said Bassem Jamil Anton, an economist who sits on the board of the Iraqi Federation of Industries. “Those people were stupid.”

It’s easy to see why Iraq was never going to escape unscathed. The collapse in the price of oil from a peak of $147 a barrel last summer to about $50 today has gutted revenues in a country that depends on oil for 90% of its income. U.S. reconstruction funding has dried up, and no new resources are likely to be forthcoming from the Obama administration, which has vowed to unwind U.S. involvement in Iraq.

In 2009, Iraq will be cushioned by surpluses from previous years. But by next year, there is a real danger that the government will be in a position “where they basically run out of money,” said a senior U.S. official here, who spoke on condition of anonymity.

Forced to curtail spending because of a budget deficit this year of at least $18 billion, Iraq has launched a major drive for foreign investment. But private investors have shown little inclination to commit resources to a country where bombings and shootings, though greatly reduced, are still a regular occurrence.

“The No. 1 reason is security. And what happened in these past weeks didn’t help,” Finance Minister Bayan Jabr said in an interview, referring to a sharp increase in high-profile bombings in April.

Iraqi and U.S. officials have frequently drawn a link between the need for economic development and the potential for Iraqis to take up arms against their government.

“Security and economic prosperity are interconnected,” Prime Minister Nouri Maliki said at an investment conference in London last month. “We cannot talk about stable security without economic progress.”

Most immediately, the shortfall in revenues has forced the government to impose a freeze on new hires; at least 30,000 planned recruits to the police and army are on hold.

It also puts in jeopardy the government jobs promised to about 90,000 members of the Sons of Iraq, with potentially worrying implications for their support for the government. The Sunni paramilitary fighters who switched sides and fought the insurgents were instrumental in turning the tide of the war, but it remains unclear how they will be absorbed into a postwar society.

More generally, Iraq needs to create jobs for the estimated 28% of young Iraqi men who are unemployed, and for the 825,000 new entrants to the job market every year, if it is to deter them from turning to the insurgency for funds to support their families.

The government also needs to provide water, electricity and housing if it wants Iraqis to keep faith in the leaders they elected.

But instead of expanding expenditures on job-creating projects, Iraq is cutting the amount it will spend this year on reconstruction, from $18 billion to $12 billion. Projected oil revenues of $36.5 billion won’t even cover the government’s day-to-day expenses of $46 billion. Most of that comprises salaries, massively inflated by a 75% raise given to the country’s 2.5 million state employees last year when oil prices were soaring.

And even that revenue target is unlikely to be met, because oil exports are lagging behind projections so far this year, said Finance Minister Jabr, who predicts that the deficit could grow to $25 billion and possibly more. He’s talking to the International Monetary Fund and other global institutions about securing loans to bridge the gap.

It’s all a far cry from the situation envisaged back in 2003, when the Bush administration confidently predicted that oil revenues would pay for all of Iraq’s reconstruction needs.

Instead, Iraq’s damaged oil infrastructure has been unable to match prewar output levels of about 3 million barrels a day, and production continues to fall. Iraq is exporting 1.8 million barrels a day, below the 2-million level on which the 2009 budget was based.

The outlook is not all bleak. Indications that an economic recovery could be on the horizon in the United States and elsewhere may boost oil prices and help put Iraq back in the black, Jabr said.

The urgent need for investment is propelling the government to unravel the strangling red tape that has deterred many foreign companies. The continued absence of an oil law discourages much needed investment in the oil sector, but a new investment law awaiting parliamentary approval aims to streamline procedures in other fields.

The economy is essentially sound, said Jabr, who blames psychology for the slump in consumer spending in the last two months. The International Monetary Fund projects growth at 6.8% this year, down from nearly 10% in 2008, but still a brisk pace.

But as the U.S. experience has demonstrated, crises of confidence in one market can have a ripple effect on others. Car salesman Hassan Yusuf Najem, who owns a lot in the Baghdad’s Mansour neighborhood, sold 32 cars in February, when business still was booming. In April, he sold four.

Real estate agent Maher Jamal has more than 300 properties on his books and hasn’t sold one in the last two months, an indicator of what he says are serious problems in the property market. Sellers are dropping prices by 20% to 25%, but “even with a low price, nobody’s buying,” he said.

Anton, the economist, believes the economy is in worse shape than the government realizes. Much of what passed for growth last year, he said, was a consumer spending spree on imports fueled by the injection of billions of dollars into the economy in the form of the raises to government workers.

Iraq’s factories and industries are idle, agriculture is in the grip of a severe drought, and the slowdown in government investment is reducing the amount of cash circulating in the market. Anton strongly suspects the economy may fall into recession this year.

“If we achieve [even] zero growth,” he said, raising his hands in supplication, “I will say, ‘Thank God!’ ”

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liz.sly@latimes.com

Times staff writer Caesar Ahmed contributed to this report.