and other appliances have increased dramatically. New businesses are
opening, and construction is moving forward in secure areas. Because
of Iraq's ample oil reserves, water resources, and fertile lands,
significant growth is possible if violence is reduced and the capacity
of government improves. For example, wheat yields increased more than
40 percent in Kurdistan during this past year.

The Iraqi government has also made progress in meeting benchmarks set
by the International Monetary Fund. Most prominently, subsidies have
been reduced--for instance, the price per liter of gas has increased
from roughly 1.7 cents to 23 cents (a figure far closer to regional
prices). However, energy and food subsidies generally remain a burden,
costing Iraq $11 billion per year.

Despite the positive signs, many leading economic indicators are
negative. Instead of meeting a target of 10 percent, growth in Iraq is
at roughly 4 percent this year. Inflation is above 50 percent.
Unemployment estimates range widely from 20 to 60 percent. The
investment climate is bleak, with foreign direct investment under 1
percent of GDP. Too many Iraqis do not see tangible improvements in
their daily economic situation.

Oil Sector

Oil production and sales account for nearly 70 percent of Iraq's GDP,
and more than 95 percent of government revenues. Iraq produces around
2.2 million barrels per day, and exports about 1.5 million barrels per
day. This is below both prewar production levels and the Iraqi
government's target of 2.5 million barrels per day, and far short of
the vast potential of the Iraqi oil sector. Fortunately for the
government, global energy prices have been higher than projected,
making it possible for Iraq to meet its budget revenue targets.

Problems with oil production are caused by lack of security, lack of
investment, and lack of technical capacity. Insurgents with a detailed
knowledge of Iraq's infrastructure target pipelines and oil
facilities. There is no metering system for the oil. There is poor
maintenance at pumping stations, pipelines, and port facilities, as
well as inadequate investment in modern technology. Iraq had a cadre
of experts in the oil sector, but intimidation and an extended
migration of experts to other countries have eroded technical
capacity. Foreign companies have been reluctant to invest, and Iraq's
Ministry of Oil has been unable to spend more than 15 percent of its
capital budget.

Corrupti