​​Iraq’s economy is in for a bumpy ride

KARACHI, Pakistan — For Iraq, the coronavirus pandemic could not have come at a worse time. After suffering through months of political turmoil, it now has an unprecedented economic crisis to worry about. The double-punch of the coronavirus shock to the global economy paired with plummeting oil prices will cause huge losses for Iraq’s 38.5 million inhabitants — and will likely fuel social and political unrest in the coming months.

“Iraq doesn’t have an economy,” Basra University Professor Ansayif Jassim al Abad went so far as to say. “We are only a renter state – we sell oil and live on its revenues.” Iraq’s riches are so married to its oil reserves that 90 percent of what it plans to spend every year comes from the revenue of the crude oil it exports. But despite being OPEC’s second-biggest crude exporter, economic managers still fail to balance its books, spending more money than the government earns. 

As shutdowns across the world widen, the global demand for crude has plunged, and hopes that a quick rebound was possible have by now dwindled away. This series of events poses a grave threat to Iraq’s economic stability as the country is currently drafting a budget for the coming fiscal year. Every percentage point that drops off the price of a barrel of crude is another hit to the federal budget.

“A low oil price environment exposes the structural faultiness of the budget with projected revenues not covering current spending, which is mostly composed of salaries, pensions and welfare spending,” economist Ahmed Tabaqchali told a panel discussion moved online during the coronavirus lockdown via the American University of Iraq in Sulaimani.

Iraq’s economic woes have been in the making for a long time now. The government’s extreme reliance on oil revenues, bloated workforce on government payroll, an almost-absent private sector, shrinking social safety nets and the lack of political will and fiscal space to implement unpopular economic reforms such as reducing the number of government employees.

Economists have repeatedly criticised the government’s past policies which hinge on spending oil revenues to contain political costs by expanding the public payroll and welfare spending. Such shortsighted policies may appease citizens for a while, but deplete the country’s wealth without building its infrastructure. The result is an economic framework dependent on imports of basic necessities, a visibly ineffective private sector, and a labour market that lacks opportunities for the country’s young population.

Having achieved relative economic stability after following through on the IMF programme that began in 2016, Iraqi government failed to consolidate those gains. After the conclusion of its IMF programme, the Iraqi government went right back to its old habits, raising expenditure on salaries by 21 percent and capital expenditure by 40 percent.

The IMF harshly criticized Iraqi authorities for their fiscal policies. “The 2019 budget implies a sizable fiscal loosening that will reverse the recent reduction in vulnerabilities,” it said.

Those allocations were based on a projected revenue increase of 21 percent on account of rising oil prices. Now that expected profit has evaporated, the fiscal deficit is expected to widen further. 

Even though a shock of such a scale as the COVID-19 pandemic was unforeseeable, several factors of Iraq’s economic health had observers worried. Roughly 8 percent of the country’s total population is on government payroll, with some estimates suggesting the number might be double if contractors and ghost employees are included in the total tally. And more and more of the country’s young people are eyeing government jobs in the absence of a private sector.

Meanwhile, the lack of a truly diverse economy has exposed the country’s ability to withstand external shocks. And the current episode in oil markets – prices falling to record low – will only worsen the country’s key economic indicators more quickly.

With the current trajectory of oil prices, Iraq will have no choice but to cut down on development expenditures and borrow more funds from abroad to pay for salaries and food imports in 2020. 

Unless oil prices miraculously recover their lost ground and surge in the coming months, the semblance of stability that has raised hopes for Iraqis may vanish. 

“Iraq’s oil revenues are dwindling with lower oil prices. In the past couple of years, Iraq needed around $6 billion monthly to fiscally break even. In March revenues were at approximately $2.96 billion. Iraq will have to take fiscal consolidation measures [such as] cutting individual salaries by 25 percent, freezing new public employment, and suspending capital intensive projects,” warns Iraq’s Energy Institute Managing Director Yesar al-Maleki. 

The current state of politics in the country is in no way ready to deal with the crisis that is brewing. The nomination of Mustafa al-Kadhimi may have raised some hopes for a political compromise, but he would need much more than goodwill to sail through the corruption and sectarianism that have rooted themselves in the country’s political parties. On the economic front, he will have to make some extremely unpopular choices like reducing the number of government employees and cutting down planned spending on infrastructure, which will test his political acumen to its limit.

“Once the new government is in place, we will have to monitor the social reaction to any fiscal consolidation measures to be taken, especially those that affect public payroll,” adds Maleki.

Already on a collision course with trouble, parliament has floated a proposal to reverse course on ballooning expenditures by freezing new investments and seeking debt moratorium from foreign lenders. But Iraq’s policymakers have tough days ahead of them as any plans to steer away from disaster will likely spell austerity measures — which will not sit well with the Iraqi street. The protesters may have gained little, but they also have little left to lose.

Fayaz Hussain Mahessar is a Karachi-based writer focusing on economics and politics in the South Asia and Middle East region. He has written for InsideOver and works for Dawn Newspaper. He has a degree in finance.

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