Iraq left with little oil money for rebuilding

4.00pm

BAGHDAD - Iraq will struggle to use its oil proceeds to build new roads, power stations and other vital projects because security costs, salaries and subsidies are eating up most of the oil-funded budget.

Planning Minister Mehdi al-Hafidh told Reuters that meant Iraq would need to rely heavily on the international community to finance reconstruction efforts after decades of war and crippling sanctions.

"We spend half the budget on food and oil subsidies," Hafidh said, adding most of the rest went on government salaries and the costs of trying to restore security.

"This is a highly unusual situation. We have to rely on the international community for now," he said in an interview.

He urged donors to fulfil their commitments and said a donors' meeting would be held in Tokyo in October.

Countries ranging from Kuwait to Japan pledged around US$15 billion last year to help rebuild Iraq, but the majority of the money has not yet been allocated to specific projects.

The United States is managing another US$18 billion of rebuilding grants in Iraq.

Iraq has raised around US$11 billion in oil sales since the US-led invasion last year. The country took control of oil revenues -- the mainstay of its budget -- for the first time in a decade on June 28, when the US-led occupation forces handed power formally to an interim government.

Iraq was banned from exporting oil for four years after it invaded Kuwait in 1990. The United Nations allowed the country to sell oil in exchange for food, medicine and other supplies from 1996-2003.

The US-led Coalition Provisional Authority had controlled oil revenues from the end of the war until June 28. A report by accountancy firm KPMG has criticised the way the money was managed, saying there was potential for fraud and error.

The CPA also devised Iraq's budgets. Their instinct was to remove the subsidies, which provided Iraqis with a free food basket and kept petrol prices at around one US cent a litre.

However, fear of a social backlash has kept the policy Saddam Hussein used to placate the population in place. Hafidh said the interim government, due to dissolve itself by January, will not change things.

Iraq is working on presenting projects for international funding in the meantime, Hafidh said, including new schools, a fibre optics communication network, electricity generation and distribution, and rebuilding government offices looted and burned in postwar chaos.

"It is essential that we do all we can to ensure that commitments are transformed into action as quickly as possible," the minister said.

Japan, which pledged US$5 billion in grants, is a key player. Around US$1.1 billion of this has been spent or allocated towards hospitals, power stations, water and other projects.

Although the process of reconstruction has been slow, Hafidh said he believed the economy had improved enough after the war to help Iraqis keep their frustrations bottled.

The dinar has been strengthening after the introduction of new bank notes last year and salaries have risen.

"Much depends on security, but I am encouraged. The numbers show economic stability," said Hafidh.

- REUTERS

Herald Feature: Iraq