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Sun 22 Feb 2009 11:59 PM

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Iraq at risk due to oil dependence

Minister says Iraq could face severe economic crisis if oil dependence isn't reduced and prices stay low.

Iraq must curb its dependence on oil revenues and promote investment in agriculture and industry or it will face a severe economic crisis if oil prices remain low, the planning minister said on Sunday.Private investment, both from Iraqis at home or abroad and from foreigners, is becoming increasingly crucial to ensuring that the security gains of the past year are not undermined by economic collapse, Minister Ali Baban told Reuters.

"There are many risks, there are many threats unfortunately to the Iraqi situation. But the threat of economic collapse is among the most dangerous and severe threats," Baban said.

"It is not urgent now for this year. But I think if the decline in oil revenues continues, the threat will be serious. We will face a very critical situation in 2010."

Iraq, sitting on the world's third-largest proven oil reserves, gets 95 percent of its income from oil exports.

The sectarian warfare unleashed by the 2003 U.S. invasion and in which tens of thousands of majority Shi'ite Muslims and previously dominant Sunni Muslims died has begun to fade.

But the spreading calm is fragile, and car and suicide bombings remain common. Iraq is desperate to milk its largely underexploited oil wealth to rebuild.

Yet oil prices have tumbled over $100 since peaking at $147 per barrel last summer, forcing Iraq to cut its 2009 budget twice, from an original $80 billion to $62 billion now.

The latest figure still has to be approved by parliament and may be slashed further as it depends on average oil revenues of $50 per barrel, higher than current prices.

Furthermore, Iraq will spend 80 percent of its proposed 2009 budget on operational costs -- largely payroll and subsidies to a war-battered public. Only 20 percent of its money will be available for investment in services like electricity, the oil sector and public works such as housing, said Baban.

It would be political suicide for the Iraqi government to slash government payrolls when a considerable proportion of the labour force depends on public sector salaries. The government has in fact committed itself to a pay increase this year.

That means nobody knows if any money at all will be available in 2010 for investment, said Baban.

"The government now reaches a point where it cannot offer more and now the engagement of the private sector is very important," Baban said.

The minister acknowledged there was very little private capital inside Iraq for investment in areas such as agriculture.

Billions of dollars were smuggled out of the country during Saddam's iron-fisted rule and many billions more were carried abroad after the invasion led to open borders.

"We must try very hard to bring the capital and the rich and creative businessmen that fled abroad back to Iraq to lead the march of development," Baban said.

Baban also stressed the need for foreign capital and said he was not satisfied with efforts to date to lure investors.

"I send a message to the world that Iraq, which was a source of concern to the international community in recent years, needs stability. We need to make up what we lost," he said.

"Iraq paid a high price and now needs economic prosperity to establish political stability. I believe that despite the current international financial crisis, Iraq needs the help of its friends and allies abroad ..." (Reuters)

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