POLITICAL As of 2009, the US will begin to decrease its presence in Iraq. The number of troops should be reduced to 35-50,000 by 2010. Iraq’s foreign policy will concentrate on developing an independent role for itself. Based on the preferences of the current Prime Minister, there may be a fundamental realignment to Iraq’s government. Should this happen, Iraq will enter into a nationalistic alliance using secular and tribal forces. The government will continue its efforts to award oilfield development contracts to international companies. In 2009 Iraq’s Ministry of Oil added nine new companies to its list of companies approved to participate in its oil development. The contract terms for international oil companies operating in Iraq have now been changed. One of the major outcomes is the increase of allowed foreign ownership from 49% to 75%, in the case of joint-venture projects. ECONOMICAL The fiscal outlook appears to be negative, mainly due to the expected decrease in oil production. It is unlikely that Iraq will be able to return to OPEC’s production target for several years. As a further result of decreased oil production, real GDP is anticipated to drop to 5.5% in 2009. Additionally, both the current and fiscal accounts are predicted to return to a deficit in 2009. However, this deficit, under current policies, is expected to be a surplus by 2012. The Central Bank of Iraq has cut interest rates to 11% and has slowed the pace of appreciation for the Iraqi Dinar since headline and core inflation have remained low levels. The decreasing insurgent attacks in many parts of Iraq have sparked economic activity. Government revenues which are tied mainly to oil prices have been significantly reduced due to the falling price of oil. However, Iraq is beginning to create institutions which will draft and implement economic policy. Furthermore, Iraq has entered a Stand-By Agreement with the International Monetary Fund which allows it to reduce its debt owed to Paris Club creditors by up to 80%. Even with the reduction, Iraq’s external debt is still vulnerable to oil shocks. The financial audits of Iraq’s Rafidain and Rasheed banks have been completed and the next step is the restructuring of the banks. The World Bank along with other international financial institutions has been asked to develop restructuring plans for these banks. The economic situation in Iraq is still fragile. If the security situation declines and political instability reoccurs, the economic growth in the region could be reduced. This would add to the current inflationary pressures and could slow the development of economic policy institutions and structural reform.