IRAQ - The Iraqi Economy - Source Of Friction With USA.

Iraq's financial problems and American concerns over corruption and uncontrolled spending on reconstruction are adding to tensions between the two governments. While the economy is seen as the third pillar of the joint strategy to stabilise Iraq - alongside security and political development - Iraqi leaders are frustrated that international donors have been slow in making good their pledges and Bush administration advisers are concerned at the Iraqis' lack of progress on economic reform.

These issues will be tackled on July 18-19 in Amman at a meeting of the US-Iraq Joint Commission on Reconstruction and Economic Development. US Deputy Secretary of State Robert Zoellick will lead a US inter-agency delegation. Iraqi officials will include the finance minister, a deputy prime minister and the governor of the Central Bank. The agenda would include economic and agricultural reform, and continued development of the oil and electricity sectors.

The Financial Times on July 7 quoted US officials as describing friction over Iraqi requests for more financial aid to fund a larger-than-planned budget deficit. The FT said the US was under pressure to make up the shortfall, as donors had not released most of the aid promised at last year's Madrid conference. The FT quoted Zoellick as saying the Iraqi government had "big budgetary issues". He said Baghdad had a "pre-agreed deficit" with the IMF, and the question was whether the government could go beyond that.

Iraq signed a "letter of intent" with the IMF last September laying out the economic policies it intended to follow with regard to its request for support under the fund's post-conflict assistance programme. With such support, Iraq said it would carry out more ambitious restructuring. Baghdad's then provisional government committed itself to limit its budget deficit to $6.7 bn or 28% of GDP which it said would be fully financed externally.

Iraq has fallen well short of its 2005 target of producing 2.4m b/d of crude oil. Production in June was 2.17m b/d, about 5% down on a year earlier, while exports were 1.38m b/d, less than the 2004 monthly average. However, higher-than-planned world crude oil prices have helped fill the gap.

Zoellick said Iraq's huge subsidies on food and fuel, including electricity and gasoline, were important issues. Changes to the subsidy structure were required to qualify for IMF stand-by facilities, he said. At the meeting the US expected to complete a Trade and Investment Framework Agreement, said Zoellick, the former US chief trade negotiator. Such an agreement is seen as the first necessary step towards a trade agreement with the US. He said the two sides were working on an investment risk insurance accord.

Zoellick said of the $21 bn in aid to Iraq approved by Congress, $16.1 bn had been obligated and $8.7 bn distributed. Actual spending on economic reconstruction moved slowly in the first year of occupation, but US officials say the rate has climbed to $200m a week. Yet there is growing concern over the lack of oversight, corruption within the Iraqi system and among US government contractors, and spending on security which reaches upwards of 30%.