The looming Iraq disaster
As Iraq remains bogged down with the war against IS, another catastrophe could be on the horizon, writes Salah Nasrawi
The Iraqi government is considering a set of measures to deal with the crushing financial crisis, which many fear could lead to economic collapse and accelerate the breakup of the divided and war-torn country.
Under the plans to stave off default, the government of Haider Al-Abadi will seek foreign loans, issue bonds and sell parts of Iraq’s huge oil reserves. It also plans to overhaul the economy and get rid of the socialist-era sectors inherited from Saddam Hussein’s era.
But doubts abound that an emergency fund based on international credits or a government bond-selling programme would ease the burden on the Iraqi economy, hard hit by lower oil prices, government inefficiency and rampant corruption.
Selling the country’s national resources could also trigger popular resentment against the government’s oil policies and gives credence to claims that Iraq’s invasion in 2003 was to improve Western access to Iraqi oil.
Falling oil prices since last year has wrecked Iraq’s state finances. Iraq’s 2015 annual budget has projected a deficit of some $25 billion and forced the government to struggle to balance and fund its public spending and stabilize the national currency.
Under the budget law the government is 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. The government also decided to turn to the Central Bank reserves.
Iraq’s government, however, has not disclosed full details about its plans to deal with the financial crisis. Prime Minister Al-Abadi has even been insisting that Iraq is not facing a default but only financial difficulties due to plummeting oil prices.
While Al-Abadi appears to be either in a state of denial or lacking direct experience in financial affairs, his finance minister, Hoshyar Zebari, seems to be the one who is making most of the talking about Iraq’s plans to manage the financial crisis.
Last month Zebari disclosed that Iraq is in discussions with the International Monetary Fund (IMF), and is seeking millions of dollars both in an emergency loan programme and by using Iraq’s Special Drawing Rights at the IMF.
Zebari later said Iraqi is seeking an aid package from the IMF that could total as much as $700 million in emergency assistance, a relatively small amount that indicates the sharp deterioration in Iraq’s financial conditions.
According to Zebari, the Iraqi government has also agreed for the first time to issue $5 billion in international bonds as part of a package to restore fiscal suitability and address its budget deficit. He disclosed that Iraq is negotiating with Citibank and Deutsche Bank.
In addition to the international credits and bond issue and a local-currency bond issue, Iraq is planning other measures, including a drastic shift in its policies.
Zebari said Iraq is planning to change the way it operates exploration and production contracts with oil companies. The switch will move Iraq for the first time to production- sharing contracts, where revenues are divided in a percentage split, from service contracts where oil companies are paid a set fee.
Moreover, one of the steps under consideration is to get rid of hundreds of state-owned enterprises, which employ some half a million workers. In one dramatic statement last month, Zebari described these companies as an “absolute failure.”
In its efforts to lower the deficit and cut spending, Iraq’s parliament approved in January a belt-tightening budget that reduced the lavish spending, such as generous allowances, travel and office expenses.
It also resorted to withdrawals from the country’s reserves, estimated at the time at $75 billion. Reports this week suggested that the national reserve has hit a new low at $60 billion.
But the worst part of the financial crisis is its overall impact on the war against the Islamic State (IS) terror group which has occupied vast swathes of territories in Iraq since June last year.
The campaign against IS has been slammed by cuts in spending, including the government’s inability to buy necessary supplies and pay salaries to tens of thousands of recruits in the Popular Mobilization Force, the Shia paramilitary force set to join the fight.
In March, Al-Abadi made a visit to the White House to make an urgent request of billions of dollars in financial and military aid from President Barack Obama for the ongoing campaign against IS. Abadi argued that the budget shortfall has hampered his government’s ability to mount military challenges to IS strongholds in northern and western Iraq.
Still, Al-Abadi returned empty handed after the Obama administration turned down the request. To make a bad situation worse, the US House Armed Services Committee passed a law last week which imposed preconditions on funding for the Iraqi security forces over the next year.
Shortages of funding is also blocking the government from restoring basic services to those towns that have been reclaimed by Iraqi force from IS. Iraq is now turning to the World Bank for help in financing development projects in these areas that suffer from a lack of infrastructure, education and health services.
Many economists and many Iraqis blame much of the financial crisis on Al-Abadi’s government and that of his predecessor, Nuri Al-Maliki, whom they accuse of mismanagement and widespread corruption.
Even with increasing fear of financial crash, Iraq’s Central Bank is still holding daily auctions through which hard currency is sold to banks, companies and traders in exchange for evidence of import and transaction receipts.
Last week, Abdel Basit Turki, Iraq’s ex-chief auditor and former Central Bank governor, told Al-Baghdadiya Television that most of these banks are phonies set up by corrupt politicians to target the foreign currency sales.
He said during his tenure as Central Bank head from 2011 to 2015 some $12 billion were skimmed from the Iraqi reserve and transferred outside Iraq using false documents.
Writing on his Facebook account, Ahmed Chalabi, the head of the parliamentary Finance Committee, disclosed that one Iraqi trader alone had made such transactions of $1.2 billion to a company in the United Arab Emirates over a one-year period.
Now Zebari’s disclosures are sounding the alarm that the country may be facing a slow-death scenario. The question remains, however, if the intended measures could prevent Iraq going bankrupt and stop the violence-ravaged country from sliding into further instability.
It is also not clear if these plans were reviewed and sanctioned by the government and whether they will be put for debate and endorsement by the parliament.
Some of the measures such as selling Iraq’s oil reserves and introducing production-sharing contracts, seem to be controversial. Many Iraqis believe that they will be conceding sovereign wealth to foreign companies.
There are growing concerns that compliance with the IMF conditions unveiled by Zebari, further cuts in spending and foreign borrowing will result in worse scenarios. Iraqis are already hard hit by high prices, rising inflation and a high rate of currency depreciation.
In the meantime, Iraq’s oil production policy seems in disarray. While Iraq’s oil exports rose in April to a record 3.08 million barrels per day (bpd) from 2.98 million bpd in March, the country is not expected to raise much higher revenues as crude prices remain low.
At the same time, Iraq’s bill for paying foreign companies operating in Iraq under service contracts regime, created by the US occupation authority following the 2003 invasion, based on a fixed dollar fee per unit, has ballooned just as its oil revenues fall.
The Iraqi financial crisis is widely seen as largely the result of the massive corruption and economic mismanagement of its political elite and not the plunge in oil prices.
While Iraq remains mired in sectarian strife, an economic crash will be detrimental to the country’s future. There would likely be ramifications that would significantly impact the war against IS and the country’s unity.