Iraq's Economy Looking Up for a Change

BAGHDAD, Jan. 19, 2008— -- Iraqis received a rare piece of good news this week, when the International Monetary Fund predicted that the country would see an overall growth rate of 7 percent in the coming year.

The country will benefit from oil prices reaching record highs and the forecast that Iraq's own oil production would go up by 200,000 barrels a day, to a daily output of 2.2 million barrels, the IMF predicted.

Watch for Hilary Brown's report on an upcoming edition of "World News."

The optimism is visible everywhere on the streets of Baghdad. The shops are full of produce and electronics and clothes and dry goods. People are out with their families, and they have a little money to spend.

"There's a big difference from last year," says Ali Shayal, who owns a men's clothing store in the up-market district of Corrada. "There's much more demand now from our customers."

Nearby Shayal's clothing store is the Mish-Misha juice bar, full of fresh fruit, equipped with high-speed blenders kept spanking clean, and doing a roaring trade. It's a family business that has expanded to three branches in Baghdad this year. The dream of the owners is to turn it into a chain all across Iraq.

"When it's safe outside, business is better," owner Ahmed Salah said with a smile.

As Salah suggests, security is the key to the brighter economic forecast here. Since June, violent attacks in the country have dropped 60 percent, according to Gen. David Petraeus, the top U.S. military commander in Iraq. This is the big dividend of the so-called "surge" of U.S. troops last spring -- 30,000 reinforcements deployed primarily on the streets of the capital.

American troops are now working closely with teams of disaffected former Sunni insurgents they call CLCs or Concerned Local Citizens, who are paid $300 a month to patrol their neighborhoods and tip off their new U.S. friends when they see something suspicious. The plan is eventually to train the CLCs for non-military jobs in mainstream civilian life.

One of the best measures of Iraq's economic performance may be the Baghdad Stock Exchange, a small, crowded room inside a heavily guarded three-story office block that looks like an off-track betting shop.

Investors stand behind a low barrier while share-prices are hand-written on big white boards with a magic marker. A simple buzzer signals the close of trading. When the exchange opened after the war, only 15 companies were traded. Now there are 94 and the market is about to go electronic, and exchange manager Taha Ahmed Salaam is full of optimism about his country's future.

"I believe there are many projects that can be carried out to improve development in the country," he said. "The terrorists did bad things here. You must fight them. I don't know how to use a gun but I can fight them from my position here as manager of the Stock Exchange."

Despite his claim of ignorance about firearms, at the end of his interview with ABC News he picked up a pistol along with his hat, ready to go home for the day. In Baghdad, a lot of peace-loving people pack heat.

But with the good news about Iraq's economy also came some bad news from the Government Accountability Office in Washington, which said that the Iraqi government had spent less than 5 percent of its own reconstruction budget by August last year. The rate of spending was even lower than the previous year, the GAO said, adding that the Iraqi government was failing to spend billions of dollars of its oil revenues to rebuild the country.

This is one reason for the high unemployment rate, which is currently estimated at 40 percent.

"Iraq has an appalling level of implementation," Robert Powell of the Economist Intelligence Unit said. "They have increasing oil revenues but they don't spend it because of bureaucracy and an acknowledged high level of corruption."

There are also chronic shortages of water in most of Iraq, and electricity is often only provided a few hours a day, both of which put severe limits on economic growth.

"The potential is jaw-dropping. The country could produce Saudi levels of production," Powell said, referring to Saudi Arabia's capacity of 8 million barrels a day. "But it's very difficult to set up a company when you have only six hours of electricity and the water is limited."

The country's water and electricity problems are a result of the government's failure to invest in its own infrastructure or to adequately protect its power stations from theft and sabotage.

But there are other problems standing in the way of growth for the Iraqi economy. The country has lost 2 million of its best educated people to emigration since the war, creating a severe shortage of skilled workers. Those who are left face the considerable challenge of carrying out construction projects in a highly dangerous environment.

Which takes you back to the question of security. Most of Iraq's 18 provinces are now relatively peaceful, with the exception of Diyala, northwest of Baghdad and now the scene of a major military operation by U.S. and Iraqi forces to drive out al Qaeda militants and confiscate their weapons and explosives. Some analysts predict that if Diyala is pacified, Iraq's violence may soon be reduced to a few isolated pockets.

That is not lost on a lot of Iraqis, including Wisam ali Kadhum, the young owner of a women's clothing shop in Corrada.

"Every month is getting better than the one before," he said as he carefully folded and stacked brightly colored blouses on his shelves. "Before, it was the other way round."