Country Report Iraq June 2008

Outlook for 2008-09

• The political scene is likely to remain unstable, as conflicts between Iraq's various communities persist and fluctuate. However, we do not expect violence to return to the highs of 2006 and early 2007.
• The standing of the prime minister, Nouri al-Maliki, has improved following the recent crackdown on Shia militias and the agreement of the Iraqi Accord Front to rejoin the government, although his position remains weak.
• Although the Iraqi military is likely to continue to take on a greater role in enforcing security, a substantial US military presence is still likely beyond the end of the outlook period.
• The current lack of a federal hydrocarbons law will slow government efforts to agree new oil contracts with international oil companies, but ad hoc agreements are set to be signed during the outlook period.
• We have raised our forecast for Iraqi real GDP growth slightly, to 6.6% and 6.7% in 2008 and 2009 respectively, in line with an upward revision to our oil production projections.
• The strengthening of the dinar will allow inflation to fall, although import costs will rise on the back of higher global commodity prices. As a result, we expect inflation to slow from an average of 30.7% in 2007 to 12.5% in 2009.

Monthly review

• The failure of MPs to agree on the terms of a new electoral law has increased the risk that the provincial elections will be delayed beyond their scheduled date of October 1st.
• Negotiations between the US and Iraqi governments over a long-term Status of Forces Agreement have stalled because of Iraqi concerns that Iraqi sovereignty will be undermined by US demands.
• The CIA has claimed that al-Qaida in Iraq is facing "near strategic defeat", an assertion backed up by the sharp fall in US military and Iraqi civilian casualties in May.
• The second International Compact with Iraq meeting failed to result in an agreement on fresh aid or further debt relief.
• Core inflation surged in April, pushed up by rising foodstuffs costs, reflecting higher global food prices and a poor local harvest this year.
• Oil output reached 2.5m barrels/day in May—a post-invasion peak. However, the stand-off between the Basra council and the government in Baghdad over the replacement of several southern oil officials could affect future supplies.