Iraq - Education Project

'*ii R ESTRICTED Cl CIRCULATING Copy Report No. P-1082 TO BE RETURNED TO REPORTS DESK FILE 0 y This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF IRAQ FOR AN EDUCATION PROJECT May 31, 1972   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF IRAQ FOR AN EDUCATION PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Iraq for the equivalent of US $12.9 million to finance the foreign exchange cost of an education project designed to help meet the country's needs for skilled workers and technicians and to initiate, on a pilot basis, the reform of the secondary and vocational educational system. The loan would have a term of 25 years, including 10 years of grace, with interest at 7-1/4 percent per annum. PART I - THE ECONOMY 2. A report entitled "Current Economic Pbsition and Prospects of Iraq" (EMA-35a) dated August 20, 1971 was distributed to the Executive Directors on August 26, 1971 (R 71-213). More recent information on the economy was obtained by a mission to Iraq in April, and has been incor- porated in the following paragraphs. Country data is at Annex II. 3. The l958 revolution established a republican form of govern- ment and initiated a decade of fundamental social and political change. The landowner and entrepreneurial classes steadily lost their political and economic influence as successive governments introduced a comprehen- sive land reform and gradually assumed control of the larger commercial and industrial enterprises. This gradual but fundamental transition to a socialist economic system, together with frequent changes of govern- ment and key officials, has for several years resulted in a lower rate of growth than Iraq's economic potential would permit. However, the present military Ba'athist Government has been in power for four years and has consolidated its position. A number of measures taken since late 1970, reflect a growing sense of confidence and concentration on domestic economic and social problems. 4. The economy is dependent on oil which provides 35 percent of national output, over 90 percent of exports and over 50 percent of govern- ment revenues. However, the growth of crude oil production has averaged less than 5 percent per year during the 1960's compared to 10 percent for all Middle Eastern producers. This has been due to the low level of investment by the Iraq Petroleum Company (IPC), as a result of the pro- tracted and continuing dispute with the Government going back to 1961,  -2- mainly over oil exploitation rights and the treatment of royalty payments for taxation purposes. The latter issue has been partially resolved by a series of agreements reached since October 1970, which provide for, inter alia, increased production and higher posted prices for oil delivered at Gulf and Mediterranean ports. Agreement was also reached in January 1972 on compensation for losses resulting from the realignment of exchange rates. 5. While the dispute with western petroleum interests over exploi- tation rights continues, the government-owned Iraq National Oil Company (INOC), established in 1964, made its first oil shipment from the North Rumali'a field to the Soviet Union in April 1972. Although this is in itself significant, INOC is not expected to produce and export much more than 5 million tons per annum in 1972 and 1973, which would represent about 7 to 8 percent of Iraq's total oil exports. This figure is expected to rise to about 15 million tons a year by the late 1970's. Before'INOC can become a major exporting company it will have to develop further production capacity, solve a number of marketing problems and develop new terminals and possibly a pipeline to the Mediterranean, since the Gulf ports are not suitable for super tankers. In December 1971, the Government announced that a ten-year petroleum development program, aimed at a 10 percent per year. growth rate in total oil production, was being prepared. 6. The recent oil agreements have substantially strengthened Iraq's' financial position; in 1972, for example, they are expected to provide revenues to the Government of about $1 billion. However, they do not- materially alter the basic problems of the economy. Per capita GNP (around $330 in 1970); is still relatively low and income disparities between rural and urban areas, as well as between various regions, are large. Population is growing at a high rate (more than 3 percent a year) leading to unemployment particularly in urban areas, where employment opportunities have increased less than economic growth in recent years. The growing urban population also demands better housing, public utilities and transport. There is a serious shortage of public economic and social services throughout the country. Substantial investment in agriculture is needod. The Govern- ment is faced with the task of channelling increased resources into produc- tive use, in order to diversify the economy and to create additional income and employment. 7. Agriculture, although employing more than half of Iraq's'labour force, developed very slowly over the last ten years. Dependence on rain rather than irrigated water in nearly 50 percent of the cultivated acreage, and soil salinity in-irrigated areas due to inadequate drainage, are major constraints. They are aggravated by traditional farming methods and the consequent limited use of improved seeds, fertilizers and machinery, and by inadequate credit and poor extension services. The study of Iraq's land and water resources, which the Government is mounting with the Bank's assistance, should provide a basis for assessing the priorities to be accorded to proposals to extend irrigation and drainage and to bring new lands under cultivation, as well as for measures to make better use of present resources. The Government is also keen on developing the agricul- tural potential of Northern Iraq, following the settlement of the dispute with the Kurds, including exploiting the potential of this and other regions of Iraq for livestock production.  -3- 8. Iraq has a small and unsophisticated manufacturing sector which contributed around 10 percent of GDP in 1970 and employed less than 5 per- cent of the total labour force. The major industries are foodstuffs, beverages, textiles, clothing, petroleum refining and building materials. Other industries include soaps and detergents, furniture, assembly and repair work. Most industries rely on imported materials, produce for the home market and receive protection through tariffs and import quotas. The shortage of trained manpower is probably the most serious impediment to industrial growth. The sector is largely nationalized, with centrally- directed policies determined according to the national plan. The petroleum- based and other chemical industries have considerable potential for further development. 9. The transport system consists of river transport on the Tigris and Euphrates, about 2,300 km of railways whose efficiency is reduced by the two- gauge system and a heavy backlog of replacement needs, and about 10,000 km of roads, of which less than half are paved for all-weather use. Traffic demands on the rail and road systems are increasing. Further investment is required to help increase the capacity of the present networks and extend them into the more remote parts of the country. A transport study being prepared under the 1966 road project is expected to identify priorities for the road system. Meanwhile, the Government proposes to complete the system of main trunk roads linking the major economic centers of North and South Iraq. 10. Largely due to increased oil revenues, current revenues which rose by 10 percent per year during fiscal years 1965-69, rose by over 18 percent per year during fiscal years 1969-70. In the same period, growth of current expenditures averaged 12 percent per annum, not signi- ficantly above the 11.4 percent per annum growth achieved in the previous four years. As a result, government savings which were negative in 1967 increased to about 4 percent of GNP in 1969-70. The budgeted increases in development expenditures for these two years were 40 percent and 50 percent respectively, compared to the average annual increase of 8.3 percent between fiscal years 1965-69. Implementation rates have however been comparatively low. Increased oil revenues also accounted for a surplus in the current account of the balance of payments amounting to US $109 million in 1970, and an estimated US $150 million in 1971. Foreign reserves rose by US $123 million during the two years, equivalent of eight months of imports and a rise in gross reserves of US $98 million. Growth of money supply, which rose to 14 percent in fiscal 1969, has declined to 5 percent in fiscal 1970 and the first three-quarters of fiscal 1971. Consequently, the rate of inflation has declined from 9.7 percent in fiscal 1969 to 7.3 percent in fiscal 1970. Recent government measures liberalizing imports should alleviate further pressure on prices. 11. The current Development Plan (1970-74) represents an important departure from the priorities adopted under previous plans, in that the highest priority has been given to the development of agriculture and human  -4 - resources, while the building up of import substituting and extractive industries has been given second priority. The Plan foresees an annual growth rate of 6.8 percent in GDP,with agriculture expanding at an annual average rate of 7 percent and industry at 12 percent. It foresees a total investment of $3 billion, to be financed mostly from oil revenues, together with modest external assistance. Because of the additional resources that will accrue to Iraq under the new oil agreements, Plan expenditures have recently been significantly increased. Public investment allocated for the major productive sectors has been increased from $1,350 million to $2,310 million. Although sector priorities have been retained, there seems to be a shortage of well-prepared projects for which these new' resources can be readily used. 12. In the last few years, Iraq's reliance on external financing for public investment has been modest. The total amount of external public debt stood at approximately $290 million at the end of 1970, most of it in the form of long-term loans at relatively low interest. Of this, 26 per- cent was owed to USSR and another 33 percent to Kuwait. As a result, the debt service ratio is still low (2.8 percent in 1970). In the last decade, in the absence of assistance from western sources, Iraq has been relying increasingly on suppliers' credits and on bilateral assistance from East European countries. In March 1971, for instance, Iraq obtained a 200-million rouble credit from the USSR to be repaid by oil exports. The credit will be utilized primarily for exploiting oil and mineral resources, and for industrial development. Similarly in June 1971 ,Iraq obtained a $39 million loan from the People's Republic of China, to be repaid in the same manner. This pattern of financing can be expected to continue for oil and industrial investments. There are little or no prospects for foreign private capital except suppliers' credits and any necessary investments by oil companies under recent oil agreements. Long-term finance for agricultural development, training of human resources and expansion of basic infrastructure has not been available from Eastern Europe or through suppliers' credits, and thus is likely to be sought from sources such as the Bank and the UNDP. PART II - BANK GROUP OPERATIONS IN IRAQ 13. The Bank has made three loans to Iraq over a period of 25 years totalling $52.8 million, net of cancellations. These were for a project for flood control in 1950, one for roads in 1966 and most recently, for telecommunications in 1971. $4.5 million-of the 1966 Roads loan - (US $19 million) remains undisbursed. Disbursements under the 1971 loan have not yet started. While the execution of the roads project has faced many difficulties, the Government is giving greater attention to project implementation than was the case some years ago. Annex I contains a summary statement of Bank loans as of April 30, 1972, and notes on the execution of the two on-going projects, with particular reference to the problems encountered with the roads project. There have been no IFC investments in Iraq so far and none are expected.  14. After the first loan in 1950, Iraq did not seek further assistance from the Bank for a long time, partly because foreign exchange requirements for public investment were being met from oil revenues. An increase in public investment in the mid-1960's was largely responsible for a brief revival of interest in Bank lending, which resulted in the 1966 roads project. Over the past two years, the Government has again expressed considerable interest in Bank assistance in several key sectors and a number of projects have been prepared. The telecommunications loan was the first of these. 15. As mentioned in Part I, while Iraq will continue to earn substantial oil revenues, most parts of the country are still at an early stage of development and have a low per capita income. Substantial resources are required to gradually build up adequate public services and create additional sources of income and employment. However, progress under the current Development Plan has been constrained by limited capacity in project iden- tification, preparation and management. Conscious of these shortcomings, Iraq recognizes the need to make greater use of the assistance of organizations such as the Bank and is pursuing a more open policy of welcoming technical assistance and foreign contractors and consultants from whatever source, to help make the best use of its resources. 16. Notwithstanding Iraq's increasing oil revenues, Bank lending to Iraq is justified,not only because of Iraq's continued low per capita income, buat also because of the need to provide the Government with the experience required to use its financial resources more effectively. The Government is interested in obtaining from the Bank expertise on sector planning and particularly on project preparation and implementation, including institution building, which it believes it cannot obtain so well from other sources. It is hoped that the demonstration effects of the projects in which the Bank is likely to participate over the coming years will spread throughout the economy. Since this involvement in Iraq's development can be obtained only through direct participation