Tag Archives: budget

Iraq’s sickly economy

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.

Iraq tightens its belt

Iraq tightens its belt

The people of Iraq will face severe hardships under the country’s new austerity budget, writes Salah Nasrawi

With oil prices plummeting and the economy squeezed by inefficiency and corruption, Iraq’s parliament has approved a belt-tightening budget. The step is widely seen as having significant ramifications for the country’s volatile domestic politics and the war against the Islamic State (IS) terror group.

Iraq’s 328-member House of Representatives endorsed the country’s 2015 budget last week. The budget approval followed weeks of squabbles over cuts, allocations and what oil price the government should base the budget’s projected revenues on.

The lawmakers approved a cut of nearly three per cent in spending, bringing the total expenditure in the budget to $99.6 billion, down from the $102.5 billion the cabinet had initially proposed in the draft.

Before sending the bill to parliament for ratification, ministers warned that this would be an austerity budget, slashing the country’s bloated public sector and freeing up funds for military spending as Iraqi forces battle IS.

Iraq’s government had originally forecast a $125 billion budget for 2105, but faced with still-falling prices for its oil exports it was forced to slash this by some 20 per cent.

The new budget is based on a price of $56 for a barrel of crude, lowered from $70 and then $60 a barrel in earlier drafts. The expected budget deficit will still be around $19.1 to $21.1 billion, however.

One of the main hurdles that delayed the budget’s endorsement were objections from some Shia members to an oil-export deal struck in December between Baghdad and the Kurdistan Regional Government.The Shia MPs said the deal would unfairly benefit the Kurdistan Region at the expense of the Shia-populated oil-producing provinces in the south.

Sunni lawmakers also threatened to boycott the vote because the budget did not include funding provisions for a national guard, a new security force to be set up to fight IS and police Sunni-populated provinces.

Many lawmakers also objected to the oil price assumption in the budget, saying it was unrealistic as market prices had slipped below $50 a barrel with no concrete indications that they would rebound in the foreseeable future.

The reduction in oil prices is expected to strangle Iraq’s economy at a time when the country needs a boost in resources to cement its fractured national unity and sustain the war against terrorism.

While the government said it would not cut salaries or pensions, other reductions in the lavish spending of oil money, such as generous allowances, travel and office expenses, were announced.

But the bulk of the funds to cover the deficit will come from taxation, borrowing and withdrawals from the country’s reserves, estimated at $75 billion. While the Central Bank is expected to provide funds from its reserves, the government said it would also issue bonds in foreign currencies.

Under the provisions of the budget the government will be able to meet part of the deficit by introducing new taxes, levies and duties. Obligatory saving accounts are also to be opened for senior government officials to deposit part of their salaries.

Since the fall of the regime of former Iraqi president Saddam Hussein in the US-led invasion in 2003 Iraq’s parliament has had difficulty passing annual budgets in regular order. Wrangling over budgetary allotments are routine, and last-minute deals usually come at the expense of a solid fiscal plan.

Worse still, Iraqi governments throughout this period have failed to present their final revenue and expenditure accounts for review and endorsement before passing the next annual budget.

Last year, parliament was unable to approve the state budget because of a dispute between the central government and the autonomous Kurdistan Region over independent oil exports from the region.

The crisis allowed former prime ministerNuri Al-Maliki to use budget advances and emergency provisions, circumventing the checks and balances enshrined in the constitution to ensure limits imposed by parliament are respected.

As a result, billions of dollars in unchecked spending are now unaccounted for. Lawmakers have said that Iraq’s state coffers were nearly empty when the government of Prime Minister HaidarAl-Abadi took office in August. Iraq’s economy has been hard hit by decades of war, international sanctions and inefficiency.

But the country’s current economic ills are largely due to the abysmal economic policies of post-Saddam governments. Instead of working to rebuild the economy and sustain growth in basic sectors, they relied heavily on oil revenues to bankroll the budget.

Though Iraq is the second-largest producer of crude oil in OPEC, the oilproducers’ organisation, the country’s economy is in a shambles due largely to mismanagement, poor public spending and rampant corruption.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 productive sectors.Agriculture has been neglected, and less than 15 per cent of the country’s total area is now being cultivated. The agricultural sector, which used to employ one third of the work force, now accounts for less than four per cent of the country’s GDP.

The manufacturing, construction and electricity industries are in tatters and account for only eight per cent of national wealth. Thousands of state-owned industries andsubsidised factories have shut down because of a lack of electricity and poor maintenance.

Iraq’s banking system is largely dysfunctional, and without an overhaul, analysts say, the economy has little hope of competing with its oil-rich neighbours. Iraq has failed to invest in sovereign wealth funds, unlike oil-exporting countries in the Gulf, whose investments are now being used to cover budget deficits and public spending.

Corruption comes at the top of the reasons behind the depletion of Iraq’s coffers. According to some lawmakers, some $750 billion has been lost in corruption, waste and inefficiencies over the last ten years.Though Al-Abadi promised to combat corruption in his policy statement to parliament when he took office, there have been no signs that his government has taken concrete steps to bring corrupt officials to account or recover stolen money.

One day before the parliament passed the 2015 budget, a report by the World Bank warned that Iraq faces “a crisis which will have important implications for the welfare of its people.”The report said that about 20 per cent of Iraq’s population lived below the poverty line in 2012 and a significant portion of the Iraqi people was vulnerable to falling into poverty.

It said “poverty declined only modestly” since 2012 and “deep deprivations in non-monetary dimensions persisted.”The report painted a grim picture of Iraq before the current crisis. It said close to half the population had less than primary level education and almost a third of children aged up to five years old were stunted.

The report said over 90 per cent of households in Baghdad and the central and southern provinces received less than eight hours of electricity a day, a third of men and 90 per cent of women aged 15 to 64 were neither employed nor looking for work, and more than 60 per cent of the calories consumed by the poor came from a nationwide food subsidy programme.

“Addressing this crisis will take time and concerted effort,” the report said.

Looking forward, there are real concerns that the new belt-tightening budget will have serious impacts on the lives of most Iraqis. Moreover, there are concerns that the combination of falling oil prices and the austerity measures will have adverse implications for the country’s stability and hurt efforts to fight IS extremists.

This article appeared first in Al Ahram Weekly on Feb.5, 2015