Iraq’s sickly economy

Iraq’s faltering economy is likely to take a further turn for the worse as oil prices plummet, writes Salah Nasrawi

When millions of Iraqi pensioners went to banks and cash points to receive their monthly pensions in December they were stunned to find that their regular payments had been drastically slashed.

Some had had their pensions cut by 10 per cent or more. While those who had been given huge pensions by the post-Saddam Hussein regime in Iraq were only slightly affected, the biggest losers were public-sector workers who had retired before Saddam’s ouster. Altogether more than 2.7 million retirees were affected.

The surprise raid on the retirement funds is the latest in a package of austerity measures introduced by the government of Prime Minister Haider Al-Abadi this year as the state budget is hit by lower oil prices and the increasing cost of the war against the Islamic State terror group (IS).

The government had earlier promised that pensions would not be axed after it had withheld the salaries of government officials as part of a package of austerity measures meant to close an enormous budget deficit.

Iraq has entered its worst economic crisis since 2003 after oil prices dropped sharply. The decline in revenues has raised fears of unrest as a wave of protests against government shortfalls are expected to add a new source of instability to the IS insurgency and the country’s fractious sectarian politics.

On 16 December the Iraqi parliament endorsed a tight 2016 government budget of 113.5 trillion Iraqi dinars ($99.65 billion) with a deficit of 29.4 trillion Iraqi dinars ($25.81 billion).

The government’s programme to reduce the budgetary deficit includes, among other financial restructuring measures, plans to cut spending and the resort to loans.

Under the legislation, the government will eliminate jobs, merge some ministries, halt spending on construction and other investment projects, and make cuts in civil servants’ salaries.

The budget also anticipates $13 billion in other income, some to be raised from new taxation on mobile phone SIM cards, cigarettes, alcohol, cars and Internet services.

But fiscal restructuring is what the government hopes will do most to reduce the worsening deficit.

Last week the Iraqi Central Bank (ICB) increased the sale price of US dollars to banks and currency exchange bureaus by 16 dinars, or 1.37 per cent. The government hopes the adjustment will ease pressure on the dinar, the local currency.

Yet, in order to meet the continued shortfalls in the 2016 budget, the government also decided to resort to substantial international borrowing and bond sales.

Iraq has already secured $1.7 billion in loans from the World Bank and a $833 million loan from the International Monetary Fund. It failed to issue international bonds after the rating agency Standard & Poor’s assigned Iraq a B-minus credit rating, six notches below investment grade, saying its security and institutional risks were among the highest in the world.

In addition to the loans, Iraq plans to borrow billions of dollars from the Saudi-based Islamic Development Bank, the Qatar National Bank and the Japanese International Cooperation Agency (JICA) in an attempt to raise an ambitious $6 billion on the international bond market.

A $4 billion loan from domestic commercial banks has also been planned, in addition to the sale of some $4 billion of state bonds on the local market.

But what is most worrying is the government’s intention to finance the budget deficit through indirect loans from the Iraqi Central Bank. The budget law envisages seven trillion dinars worth of ICB-guaranteed bonds that will be offered to the public.

Such a move would require the ICB to use its foreign reserves, crucial in backing the Iraqi dinar and avoiding risks of destabilisation.

Iraq’s escalating financial woes are largely a result of the abysmal performance of the post-Saddam governments. Instead of working to rebuild the economy and sustain growth in basic sectors, they have relied heavily on oil revenues to bankroll the budget.

Though Iraq is the second-largest producer of crude oil in the Organisation of Oil Producing and Exporting Countries (OPEC), the country’s economy is in a shambles due largely to inefficiency and mismanagement.

Some 70 per cent of the budget has been going to pay for food imports, energy subsidies, and funding an inflated bureaucracy and ramshackle armed forces. Government policies are mainly responsible for the decline in the two main productive sectors of the economy, agriculture and industry.

Despite receiving hundreds of billions of dollars in oil revenues and international aid since 2003, Iraq still suffers from poor public services. Households in most parts of the country receive only a few hours of electricity a day. Public health services are in tatters and environmental conditions are abysmal.

Rampant corruption, poor financial management and bad public spending are key factors in Iraq’s economic ills. Billions of dollars have been lost in graft, waste and inefficiency over the last ten years.

Though Al-Abadi has pledged to curb corruption, there has been no sign that his government has taken tangible steps to bring corrupt officials to account or recover stolen money.

With expectations that oil prices will remain low in 2016, the country’s budget deficit will continue to inch downward through next year.

Budget projections envision oil exports of 3.6 million barrels per day (bpd), including a total of 550,000 bpd from Iraqi Kurdistan and the Kirkuk Province at a price forecast of $45 a barrel. But even with oil production raised as planned, the government’s budget will continue to stay in the red.

The scale of the damage to Iraq’s economy by government financial policies could be enormous in both the short and the long terms and the micro and macro levels.

The austerity measures are likely to make a terrible situation worse. The cuts, which have already targeted salaries and pensions, could result in further reductions in employees’ and retirees’ benefits, adding frustration to the mix and causing tempers to veer out of control.

The surge in the dollar’s exchange rate with the dinar will raise prices and thus impact the cost of living, especially for low-income groups.

The Iraqi Society of Pensioners, a pressure group, has threatened that it will call for public protests if the government implements another 3 per cent slash in salaries, as has been widely rumoured. Government employees have made similar threats.

The slash in government spending is likely to impact education, health, and municipal and other social services.

The suspension of construction and other investment projects and the government’s decision to curtail or reduce new jobs in the civil service will most likely cause rising unemployment. It will also make more skilled Iraqis leave the country.

Excessive borrowing, as the government is planning in the 2016 budget, will have long-term consequences. While increasing the public debt, the new borrowing is not intended to generate growth but to cover the spendthrift policies of the government and its budget deficit.

A lot has happened since the 2015 austerity budget was adopted: the economy has stagnated, public spending has come to a halt and public services have worsened, putting more pressure on a population already plagued by violence and endemic corruption.

Street protests over shortages of electricity and other services, which started in August, have turned into calls for an end to the country’s political system which is based on power-sharing between the country’s ethnic and sectarian communities.

With another belt-tightening budget, the Iraqi people’s lives will be made increasingly insecure, raising the spectre of more turbulence as the country wages a costly war against IS which still controls large parts of the country.