Country Report Iraq September 2008

Outlook for 2008-09

• The political scene is likely to remain unstable, as conflicts between and within 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 recent crackdowns on some Shia militias and the agreement of the Iraqi Accord Front to rejoin the government, although his position remains weak.
• Although the Iraqi military is expected 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 hinder government efforts to award new oil contracts to international oil companies, but ad hoc agreements are set to be signed during the outlook period.
• Parliament has passed a US$21bn supplementary budget for this year. Nevertheless, we still expect the fiscal account to remain comfortably in surplus in 2008-09.
• We have lowered our forecast for inflation, in line with new Central Bank data showing that average price growth slowed to 2.5%, year on year, between January and July. We now expect inflation to average just 4.8% in 2008-09.

Monthly review

• The US military has handed control of security in Anbar province over to the Iraqi army. Violence in the area has decreased dramatically since late 2006, in large part as a result of the formation of the tribal Anbar Awakening Council.
• Negotiations have continued with the US over the Status of Forces Agreement, but disagreements over a future withdrawal date and the issue of immunity for US troops have hindered a resolution.
• The Iraqi cabinet has approved a US$3bn service contract with China National Petroleum Corporation—the first oil development contract issued since the fall of the Baathist regime.
• Five of six short-term technical support contracts with a host of major international oil companies have been shelved, because of differences over contractual terms and political opposition to the non-competitive tender process.
• Shell has reached a deal with the Ministry of Oil to capture associated natural gas currently being flared in the Basra region.
• Consumer price growth has continued to fall sharply, and prices actually declined in the second quarter of this year. However, core inflation (excluding fuel and transport) has risen to 14.3%, as food costs have increased.

Source: Country Report