Iraq failed to fully invest its allocated oil capital budget, leading to a larger fiscal surplus in the past two years, but plateaued oil production in a sector in need of spending, according to a new IMF report.

The IMF executive board released the report Tuesday following meetings earlier this month with Iraqi officials, all a part of deals the Iraqi government signed to alleviate its debt, incurred by Saddam Hussein.

It said since Aug. 1, 2005, “Economic growth has been slower than expected … mainly because the expected expansion of oil production has not materialized.”

Iraq has produced an average of about 2 million barrels per day of oil over the past three years. Its oil sector was ravaged by war, Saddam Hussein’s mismanagement and U.N. sanctions. Security throughout the country, as well a lack of institutional capacity to spend needed investment, has kept the sector lagging. Iraq’s oil sales -- about 1.6 million bpd last year -- brought in more than $31 billion last year.

Iraq also suffers from a drastic fuel shortage, caused by a lack of refining capacity as well as a strong smuggling racket. The IMF demanded Iraq reduce its subsidies of oil products sales to citizens, much to the dismay of the population suffering from average 60 percent unemployment.

The IMF report called the reduction in subsidies “progress.”

“Official fuel prices have been increased to levels in other oil-exporting countries in the region, and private sector importation of fuel products has been liberalized,” it said.

This is part of the new Iraqi governments move to the free-market system, which the IMF applauded. Iraq is making a bid for World Trade Organization membership.

The report called on the government to approve a law governing the exploration, development and production of Iraq’s oil reserves “as soon as possible,” which it said would help entice investors. The law is stuck in Parliament over disputes that include the limitations and roles of private and foreign investors.

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Ben Lando, UPI Energy Editor