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Mixed Outlook Middle East

Iraq: Security, Political, and Economic Trends

Kurdistan

The positive security trends in Iraq over the past year have endured and overall violence remains at its lowest level since 2003. Although there have been periodic spikes in attacks, terrorist and insurgent groups have not been able to achieve their objectives of reigniting ethnosectarian tensions or paralyzing the Iraqi Government and we assess they will unlikely be able to do so in the future for three primary reasons:

• First, al-Qa’ida in Iraq’s financial struggles, difficulty recruiting new members, and continued Sunni rejection of the group will limit AQI’s capacity to undermine the Government of Iraq or gain widespread Sunni Arab support to establish an Islamic Caliphate. Despite its setbacks, we judge that AQI in Iraq will remain committed to conducting attacks into the foreseeable future. Meanwhile, Sunni Arab insurgents lack the cohesion to threaten the Iraqi central government, and we judge the Sunni Arab insurgency will weaken without the US presence as a common motivating factor.

• Second, the Iraqi Government and society have shown great resilience in the face of AQI attacks. Despite high-profile bombings of government buildings in 2009, we did not see any indications of impending communal conflict––such as retaliatory violence, the reappearance of neighborhood militias, or hardened sectarian rhetoric––that followed mass-casualty bombings in 2006.

• Finally, the Iraqi Security Forces (ISF) continue to improve tactical proficiency and operational effectiveness and have maintained security in most urban areas following the 30 June repositioning of US forces out of Iraq’s cities.

Although we judge Iraq will be able to maintain a generally secure path, this forecast is dependent on the next government’s effective management of Arab-Kurd tensions, continued progress in integrating the Sunni Arabs into the political process, and the ability of the ISF to combat threats to the state. Two key events in 2010––the March 2010 parliamentary elections and the August 2010 withdrawal of US combat forces––will be important indicators of the new government’s ability to adapt, as well as manage and contain, conflict.

Arab-Kurd tensions have potential to derail Iraq’s generally positive security trajectory, including triggering conflict among Iraq’s ethno-sectarian groups. Many of the drivers of Arab-Kurd tensions—disputed territories, revenue sharing and control of oil resources, and integration of peshmerga forces––still need to be worked out, and miscalculations or misperceptions on either side risk an inadvertent escalation of violence. US involvement—both diplomatic and military—will remain critical in defusing crises in this sphere.

The pace of the insurgency’s decline will depend largely on Sunni Arab reconciliation with the government, economic opportunities, and whether Sunni expectations for national elections are met. An emboldened, Shia-dominated government that is perceived to back oppressive policies against Sunni Arabs would lead Sunni Arabs to reconsider violence as an effective means to achieve their goals.

Iran continues to train, equip, and fund select Iraqi Shia militant groups to maintain pressure on US forces. The most dangerous of these groups will likely continue attacks on Coalition forces until withdrawal from Iraq is complete.

While the ISF remain in the lead for security operations in urban areas following the 30 June US forces’ repositioning out of Iraq’s cities and are conducting the majority of counterinsurgency operations independently, they are still developing enabler capabilities including logistics, intelligence, surveillance and reconnaissance.

On the political front, Iraqi politicians are actively engaged in campaigning and coalition building ahead of the national legislative election slated for March. In a positive development, politicians from all Iraqi parties responded to the perceived message of the January 2009 provincial returns by working to form cross-sectarian coalitions, but several outstanding issues in the electoral process remain. Recent attempts to disqualify candidates and parties intending to compete in the March elections along with ongoing ethno-sectarian tensions may end up complicating the prospects for a transparent and broadly accepted electoral process. Difficulties in ratifying the election law last fall signal the potential for post-election challenges to its legitimacy by disgruntled or disenfranchised parties.

Iraqi parties and coalitions after the elections are likely to face protracted negotiations to form a government, complicated by constitutionally mandated institutional changes. After the election, Iraqi leaders also will have to address the Constitution’s mandate to replace the current presidency structure of one president and two vice presidents, each bearing veto power, with a single president.

Iraq’s overall economic performance is likely to remain mixed. Iraq has finalized one oil contract and is set to conclude nine others with international consortiums to expand the development of some of its largest oilfields. These contracts hold the potential to create many thousands of new jobs in Iraqi oil and non-oil sectors and to stimulate economic growth. The oil companies’ proposed production increase to 12 million bpd in roughly a decade from the present 2.4 million bpd will be difficult to achieve, however, because of infrastructure and institutional
constraints.

• Iraq’s 2010 budget proposes to raise capital spending by 60 percent, with increases for the ministries of oil, electricity, water, minerals, health and education. However, Iraq is likely to continue struggling in the near term to attract the foreign investment it needs for re-building infrastructure and economic growth in the non-oil sector. Job creation will remain a significant challenge for the foreseeable future given the country’s heavy reliance on the oil sector, which is a source of a limited number of jobs.

The IMF’s most recent estimates project real GDP growth for 2010 to be in the 5 to 6 percent range. Inflation continues to subside, declining to roughly 5 percent as of November 2009 from roughly 13 percent in November 2008.

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