Iraqi leaders are under pressure to re-assess their reconstruction plans after the collapse in oil prices slashed the country's main source of revenue. U.S. officials say Iraq also may have to scale back its military modernization program due to a lack of funds. The oil price plunge is challenging Iraq's efforts to further stabilize itself as U.S. forces gradually withdraw.
Iraqi lawmakers cut billions of dollars from the government's 2009 budget this month in response to a dramatic fall in oil prices.
Iraq relies on oil exports for 90 percent of its revenue. The price of crude has fallen from a record high $147 a barrel last July, to around $50 in recent weeks due to a slump in global energy demand.
A report by U.S. congressional auditors says Iraq's cumulative budget surplus for the four years ending last December was a smaller-than-expected $47 billion. The U.S. Government Accountability Office originally projected a surplus for the period of $67 billion to $79 billion.
The U.S. auditors say Iraq plans to spend $15 billion this year on post-war reconstruction and will pay for that using some of the accumulated surpluses.
Michael O'Hanlon, a senior fellow at the Brookings Institution in Washington, warns that next year, Iraq could run out of cash needed to rebuild infrastructure for electricity, water and schools. "Over the last few months Iraq is certainly, on balance, losing money. In other words, they are spending faster than they are earning. They are gobbling up those cash reserves that they once had to the point where the reserves may only be adequate to get them through this calendar year, more or less, unless oil prices go way up again," he said.
Any instability in the Iraqi economy could complicate U.S. plans to withdraw American forces from Iraq by the end of 2011.
O'Hanlon says it is natural for Iraq's government to prepare for potential cash shortfalls by re-assessing future rebuilding projects. "I actually tend to think when Iraq goes a little more slowly in some cases, when it reassesses its plans in some cases, this can actually be a healthy indicator that they are not just throwing money at problems or wasting their resources," he said.
A former Iraqi Cabinet member says another major challenge to Iraqi reconstruction is the country's lack of an efficient bureaucracy.
Mishkat al-Moumin, who served as Iraq's environment minister from 2004 to 2005 and now is a scholar at the Middle East Institute in Washington, says Iraq does not provide government workers with modern tools to do their jobs.
"All financial matters in Iraq are not computerized, so you do all work by hand. It is almost like we are in the dark ages. If you do not keep computer... electronic documents of your financial records, if you don't have a system that functions for all governmental agencies, then how can you evaluate, how can you monitor?," she said.
Al-Moumin says Iraq also does not have laws to ensure that civil servants properly implement reconstruction projects, a situation that encourages corruption.
The plunge in oil prices also is making it harder for Iraq to pay for building up its military - another factor that may complicate a U.S. troop withdrawal.
Iraq wants to buy $3.8 billion worth of U.S. military equipment. Iraq-based U.S. Air Force Colonel Lawrence Avery says Iraqi authorities may have to delay some orders and buy less equipment - a move that would impact Iraq's military development. "It would certainly slow it down - they will not be able to modernize as fast as they want to, unless they are able to secure additional funds," he said.
It usually takes one or two years for the U.S. military to deliver equipment to another country after a payment is made.
Some experts say Iraq's loss of oil revenue may benefit the country in the long term, by pushing it to reduce dependence on oil and diversify into agriculture and other sectors.
Iraqi Prime Minister Nouri al-Maliki said last month he wants to pay for that diversification by boosting Iraqi oil production with the help of foreign oil companies.
Charles Ries, a senior fellow at the RAND Corporation in Arlington, Virginia, says Iraq has the potential to become a net exporter of food by developing fertile agricultural lands between its two great rivers. "In order to improve irrigation canals you need billions of dollars, and what they have is unexplored oil fields with a very high potential of production, and they need to bring those into production to get more current income in order to invest. That is a very sensible strategy," he said.
Ries, a former diplomat at the U.S. embassy in Baghdad, says Iraq also has other natural resources such as hard rock minerals that could support manufacturing industries.