SIGIR Report…Special Inspector General for Iraq Reconstruction
MESSAGE FROM THE SPECIAL INSPECTOR GENERAL FOR IRAQ RECONSTRUCTION
2530 Crystal Drive • Arlington Virginia 22202
I am pleased to present this 33rd Quarterly Report to the U.S. Congress and the Secretaries of State and Defense.
There were signs of progress in Iraq this quarter, with events in March particularly noteworthy. At er a sanguinary start to the year, March saw relatively few mass-casualty attacks. March also set a new post-2003 monthly
record for oil exports: 2.32 million barrels per day. At month’s end, the Government of Iraq (GOI) successfully hosted a summit of the League of Arab States, with the Iraqi Security Forces (ISF) ef ectively protecting thousands of foreign guests and keeping violence to a minimum.
In the shadows of this good news, familiar challenges continued. Tensions simmered between the GOI and the Kurdistan Regional Government, especially over oil rights. Fractious political rhetoric rent Prime Minister Nuri al-Maliki’s coalition government, with the Prime Minister’s Shia-led State of Law coalition at ever-worsening odds with the mostly Sunni al-Iraqiya bloc. Vice President Tariq al-Hashimi, a member of al-Iraqiya, was still the subject of a GOI arrest warrant and remained under the protective hand of Kurdish authorities for most of the quarter. Shortly before this Quarterly Report went to press, a series of bombings across northern Iraq (on April 19) killed more than 30.
SIGIR issued two notable new reports this quarter: our seventh lessons learned study, entitled Iraq Reconstruction: Lessons Learned from Investigations, 2004–2012; and our first special report, entitled Reconstruction Leaders’ Perceptions of the Commander’s Emergency Response Program in Iraq. The lessons learned report includes a series of best practices derived from eight years of investigating crimes arising out of the Iraq program. h e special report is based on a wide-ranging survey conducted by SIGIR of senior military
and civilian reconstruction leaders, which obtained their views on the reconstruction program, focusing on the Commander’s Emergency Response Program. These reports are available at www.sigir.mil.
In addition to these reports, SIGIR issued four new audits:
• Development Fund for Iraq (DFI) Electronic Fund Transfer (EFT) Payments. h is is SIGIR’s i t h
major review of the DFI; it found that the documents needed to support EFTs authorized by the Coalition
Provisional Authority were ot en missing for transfers made in 2004.
• DoS Progress in Implementing SIGIR Recommendations Addressing Quick Response Fund (QRF)
Management Controls. h is follow-up to an April 2011 audit found that, while DoS claims to have taken
action on SIGIR recommendations regarding improved internal controls, it could not document the implementation of those recommendations.
• Iraq Security Forces Fund (ISFF) Spend Plans for Fiscal Years 2011 and 2012. h is report examined the
status of the $1.5 billion appropriated to the ISFF, i nding that the challenges faced by the Department of
Defense (DoD) in obligating funds make it likely that some money will be let unobligated when the funds
expire on September 30, 2012.
• U.S. Army Corps of Engineers Contract Terminations. SIGIR determined that no unliquidated obligations remained on the 55 terminated contracts reviewed in the audit.
Economy (page 83)
On the surface, Iraq’s economy looks robust. The International Monetary Fund (IMF) and the Central Bank of Iraq (CBI) both project GDP to grow by more than 12% in 2012. In March, the Minister of Oil reported that crude oil production briefly topped 3 million barrels per day (MBPD) for the first time in more than two decades. In 2011, foreign commercial activity jumped 40% to nearly $56 billion, and the CoR recently approved the largest single-year budget in the country’s history—$100.4 billion, with nearly $32 billion of that earmarked for infrastructure investment.
But significant challenges persist. Political tensions cloud the investment climate and block agreement on legislation crucial for economic development, while bureaucratic delays continue to slow key oilfield projects. Despite the addition of new crude oil export capacity this quarter, infrastructure bottlenecks still constrain the shipment of Iraq’s most vital resource to world markets. The rapid increase in foreign commercial activity of recent years is projected to plateau in 2012, and there are concerns that an overheating economy could spark inflation.
Inﬂation (page 83)
Year-on-year core inflation rose slightly in February to reach 6.30%, but still remained below both December’s 6.97% and the IMF’s most recent 2012 projection of 7.7% for oil-exporting nations in the Middle East and North Africa (MENA) region. However, the significant growth of Iraq’s money supply, which in recent months reached an annual rate of around 20%—roughly twice GDP growth—has generated concerns about a potential spike in inflation.
The high volume of petrodollars flowing into Iraq’s economy could push up the price of goods and services, a dynamic exacerbated by continued growth in public-sector wages. The CBI’s base policy rate held steady at 6% for the eighth consecutive quarter, and the official exchange rate for Iraqi dinar strengthened marginally against the U.S. dollar, selling at 1,166 per dollar through much of the quarter. That rate is down slightly from 1,170—a level that had held constant for the past three years. However, a spike in demand for dollars generated by merchants from neighboring Iran and Syria—suddenly unable to procure suffi cient amounts of the U.S. currency at home because of international sanctions—helped drive the unoffi cial street exchange rate above 1,320 dinar in mid-April.
In April 2012, the CoM postponed indefinitely plans for a currency reform that would have removed three zeros from the Iraqi dinar in 2013 and required the issuance of new currency notes. The reform would have made the dinar’s value slightly less than $1. It is currently worth less than one tenth of a cent.
Debt (page 85)
The CBI estimated Iraq’s external debt at $87.7 billion in early April 2012. About $45 billion of this amount is eligible for a negotiated reduction of up to 80%, according to the terms of the 2004 Paris Club settlement. This quarter, the GOI approved payment of $408 million owed to Egyptian workers who l ed Iraq in the wake of Saddam Hussein’s 1990 invasion of Kuwait and the Persian Gulf War.
In addition, Iraq still owes war reparations, mainly to the Kuwaiti petroleum industry for damage caused during the invasion and subsequent Persian Gulf War. In January 2012, the GOI made a payment of $1.02 billion to Kuwait, reducing the balance still owed to just over $17 billion. Payment of the outstanding reparations constitutes one of several UN-mandated conditions stemming from the invasion and that remain binding on Iraq under Chapter VII of the UN Charter.
Iraq Stock Exchange (page 84)
Iraq’s stock exchange (ISX) performed below that of a composite index of 11 other equity markets in the MENA region this quarter, although its growth over the past two years remains well above the regional average (see Figure 4.13).
The ISX is small relative to other markets in the region, and its performance is seen more as an indicator of relative confidence in, and longer term potential of, Iraq’s economy than an actual comparison of equity market strength. Initial public offerings of shares in the country’s major mobile telephone carriers would provide a signifcant boost to ISX volume if they take place as anticipated later this year.
Unemployment (page 84)
This quarter, the MoPDC reported an official unemployment rate of 12%, down from the previous official rate of 15.3% that dates from March 2008.
More recent non-GOI estimates have ranged from 8% to 30%. The 2011 Iraq Knowledge Network survey placed the percentage of jobless youth at 30%.
At the same time, those emigrating from Iraq tend to be gainfully employed professionals seeking opportunities elsewhere.
Results of a public attitudes survey released this quarter showed Iraqis believe unemployment is the most pressing single social issue facing the country. By a wide margin, those questioned put unemployment at the top of nine listed challenges facing the government—including security, corruption, and the supply of basic services, such as electricity and water. More than 8 in 10 questioned believed that the job situation is getting worse, and about half blamed either Prime Minister Nuri al-Maliki or “government ministers” for the problem.
Finance (page 90-91)
Nearly nine months after a June 2011 CBI deadline, 4 of 22 private banks listed on the ISX were still unable to meet the central bank’s minimum reserve requirement of 100 billion Iraqi dinar ($85.8 million). The CBI reportedly placed one of those banks, Warka, under closer control to supervise it through bankruptcy. The CBI’s next reserve requirement deadline is June 2013, when all private banks are supposed to have minimum reserves of 250 billion dinar ($213.7 million).
A 2011 World Bank review of Iraq’s financial sector envisioned a greater role for privately owned banks; however, it was the state-owned banking Finance. Nearly nine months after a June 2011 CBI deadline, 4 of 22 private banks listed on the ISX were still unable to meet the central bank’s minimum reserve requirement of 100 billion Iraqi dinar ($85.8 million). The CBI reportedly placed one of those banks, Warka, under closer control to supervise it through bankruptcy. The CBI’s next reserve requirement deadline is June 2013, when all private banks are supposed to have minimum reserves of 250 billion dinar ($213.7 million).
A 2011 World Bank review of Iraq’s financial sector envisioned a greater role for privately owned banks; however, it was the state-owned banking announced that staff at all educational institutions in the country would eventually be paid in a similar manner.The GOI is in discussions with the Canadian company FreeBalance to build a successor to the earlier Iraq Financial Management Information System (IFMIS), a tool that was intended to provide the GOI with efficient, transparent management of its financial accounts. The IFMIS was financed by $37.4 million from the Economic Support Fund (as part of USAID’s Economic Governance I and Economic Governance II programs) plus DoS funds. However, the project was terminated in 2009 following a series of technical and management difficulties. FreeBalance, a subcontractor on the original project, is working with the Ministry of Finance to finalize the terms of reference for a new prototype system that would use much of the data from the IFMIS. For information on a recent audit of USAID information technology systems, including IFMIS, see Section 3 of this Report.
Special Inspector General for Iraq Reconstruction