By Ahmed Tabaqchali (pictured), CIO of Asia Frontier Capital (AFC) Iraq Fund.

This article was originally published in the Marsh to Mountain blog. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

“Forget the Donations, Stupid”: New dynamics in funding the reconstruction of Iraq

Key Takeaways

In the months following the Kuwait Conference a sea change has taken place in Iraq’s financial health that has yet to be reflected in perceptions.

Higher oil prices, as a result of the changed dynamics of the oil market and the robust health of the global economy, has had a transformative effect on Iraq’s finances.

By end of 2018, based on realized oil prices of 2018 and average year-to-date for 2018, Iraq is on its way to have a cumulative two-year budget surplus of $18.8bn instead of the initially projected cumulative deficit of $19.4bn.  

This would allow it to start the reconstruction process on its own resources. Coupled with a potential surplus of $9.3bn in 2019 would give the country a great deal of flexibility to fund further reconstruction over the near-term. 

The surplus of $18.8bn by end of 2018 would equal a stimulus of 14.5% of non-oil GDP once reconstruction projects are underway, which would further accelerate economic activity. 

However, this three-year window of opportunity faces the twin headwinds of Iraq’s corrosive corruption and all of prior governments’ failures to spend oil wealth on  rebuilding the country’s infrastructure, spending it instead on expanding the state’s role in the economy.

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A great deal has changed since the Kuwait Conference on the reconstruction of Iraq, which was marred by misconceptions of international observers who bemoaned that it failed to achieve its objective in raising enough donations. These were not helped by an Iraqi side that went to the conference looking for donations (investments in Iraqi speak) by focusing its efforts solely on presenting a shopping list of projects that needed $88bn in funding over five years.

These misconceptions were addressed in a prior article[1] which highlighted that over five years, Iraq should be able to fund $77bn out of this $88bn through a combination of $50bn from its oil revenues and $27bn in borrowings. Crucially, this level of direct funding and borrowing would be consistent with maintaining macroeconomic stability, which means that funding the reconstruction would not distract from the government fulfilling its traditional role in the economy, and so the reconstruction will contribute to sustainable economic growth.

This ability to fund the $77bn was derived from the IMF estimates for Iraq’s budget for 2018-2022 based on updated market-implied future Iraq oil prices, i.e. the implicit price of oil from the futures markets. In February, the implied price for Iraqi oil was $60/bbl for 2018, declining to $51 by 2022. These are in sharp contrast to the IMF’s estimates in August 2017 which used Iraqi oil prices of $45.5 in 2018, increasing to $47.2 by 2022. The 2018-2022 estimates made in 2017 would have made it impossible for Iraq to fund any portion of the needed funding as it would have needed to borrow to balance its budget during these years[2].

Iraq’s high dependence[3] on oil means that its budget and GDP are highly sensitive to the volume of oil it exports and to oil prices. The massive change in oil prices over the last few years, as seen from the five-year Brent crude price chart below, played havoc with Iraq’s budget during the ISIS conflict 2014-2017. They forced the government into a sharp fiscal retrenchment by cutting costs and cancelling all investment spending, while increasing military spending which had substantial negative knock-on effects on the economy[4]. The significant effects of oil price changes extend to planning for funding the reconstruction directly by Iraq, and indirectly by its stakeholders who need to take into account these effects in relation to their level of contributions and expected investment returns.

Brent Crude Jun 2013-Jun 2018, Source: Financial Times[5]

The fundamentals of the oil market went through major changes over the last four years, from expectations of supply scarcity versus increasing demand up to mid-2014; fears of increasing supply overwhelming decreasing demand from mid-2014 into late-2016; easing somewhat to hopes for a rebalance by mid 2017; and finally, into growing demand exceeding declining supply. Overlay the robust health of the global economy and it is expected the oil market will continue to tighten in the immediate future. This outlook is complicated by disruptive technologies such as those behind the Shale oil boom in the US, and by geopolitics affecting major suppliers such as Iran and Venezuela. These are balanced somewhat by OPEC’s actions and shifting perceptions of either its increasing dominance or increasing irrelevance. These perceptions came into sharp focus with the OPEC & non-OPEC supply cut agreement in late 2016 that started the recovery process. Recently there is news that talks have been underway to increase supply as prices have risen too high in response to threats to Iranian and Venezuelan supplies.

These would make budget planning, let alone long-term reconstruction planning, for Iraq an exercise in folly if it were to use the latest market implied future prices or to accept the prevailing wisdom at any given time as a basis for planning. This pretty much explains the conservative assumptions used by the IMF -which the world financial community depends on in assessing Iraq’s financial soundness and its credit worthiness. These assumptions served as the basis on which Iraq and the IMF identified creditors and donors for Iraq to cover its estimated budget deficits for 2017-2022 as part of the IMF’s 2016 Standby agreement.  Moreover, the IMF updated these assumptions with new estimates for forward oil prices as part of its Kuwait Conference presentation.

A recent article[6] noted “using realized prices of Iraqi oil of $49.1/bbl for 2017, and assuming Iraqi oil prices of $60/bbl for 2018, then declining to $51/bbl in 2022, would produce a cumulative surplus of $47.4bn for 2017-2022 instead of the earlier assumed cumulative deficit of $17.6bn”[7].  While using higher estimates for oil prices would result in a cumulative surplus of $78.2bn. In the first scenario Iraq could fund the reconstruction by a combination of $50bn from its oil revenues and $27bn from borrowings, and the final $11bn from aid/donations, which is in-line with the assumptions made by the IMF at the Kuwait conference.  While, in the second scenario Iraq could fund the reconstruction by a combination of $80bn from its oil revenues and $8bn from borrowings which is a vastly different proposition.

Given the impossibility of forecasting future oil prices, especially up to 2022, this article will consider the data for 2017-2019 given the higher degree of predictability in this short timeframe.

The IMF updated its global growth projections to +3.9% for both 2018 & 2019, up from its previous projections of 3.7% for both which was made in late 2017 as part of its World Economic Outlook (WEO) in April[8]. It believes that the upswing that began in 2016 has accelerated since then but it expects that it will taper off afterword’s. These coupled with changed dynamics in the oil supply/demand imply higher oil price assumptions for the period, which for the short-term has positive implications for oil exporting nations in MENA as outlined in its Regional Economic Outlook (ROE) May[9].

For Iraq, these would have huge implications for its economic profile for 2017-2019 and thus to its ability to start funding the huge reconstruction demands. The table below looks at the original IMF estimates for Iraq’s budget 2017-2019[10] versus updated estimates for 2017-2019 based on the latest actual data for 2017 and updated estimates for oil prices.

For sources & assumptions see endnote[11]

The updated assumptions for 2017-2019 imply a cumulative surplus of $28.1bn vs earlier assumptions of a cumulative deficit of $22.8. Although Iraq has identified funding sources for each year during the budget planning stages, it is likely that it would have not utilized them due to the higher revenues as a result of the higher than planned oil prices. These unused funding sources could be as high as $14.3bn[12].

Irrespective of the above, the upcoming government should have a cumulative surplus of $18.8bn by the end of 2018 which can be used to start the reconstruction process, which coupled with the likely surplus of $9.3bn in 2019 would give the country a great deal of flexibility to fund further reconstruction over the near-term. This flexibility would be augmented by $30bn, over five years, in investments and trade credit guarantees that Iraq received during the Kuwait Conference in February[13].

The effect of this spending flexibility on economic activity is enormous, in that should the surpluses be spent on reconstruction from 2019 over a two-year period, this would be equivalent to an economic stimulus of 14.5%[14] of 2019’s non-oil GDP over this period. This is a major economic stimulus by any account that would be magnified over the next five-years should the $30bn in pledges that Iraq received materialize.

However, the risk, and the likelihood, is that the upcoming government would succumb to public pressures to use some of this extra fiscal flexibility on populist measures. Such pressures have already been applied by parliament as it amended the budget by removing the 3.8% tax on salaries and pensions to appease an angry electorate in an election year. The elections marked by the continued pro-reform demonstrations since 2015, and the large active non-participation movement imply that the upcoming government would increase spending on populist measures to pacify the electorate and provide a visible peace divided.  In fact, the updated estimates for 2018 & 2109 in the table above reflect the expectations of higher expenditures, which would narrow the surplus for these two years, which in turn would detract from the funds available for infrastructure investment.

A further risk is the country’s corrosive corruption which would find breathing space as a result of higher oil revenues, especially if they are spent on populist measures, in the process relieving public pressures on the government to reform and to expose corruption. Moreover, the practice post-2003 of using state contracts as a means of reinforcing political influence on selected players in the private sector could continue, further entrenching corruption, with the government ability to fund the reconstruction and ability to award contracts.

Even, if the government would not succumb to populist measures, it would still need to resort to borrowing to continue funding the reconstruction. This is especially true given the high level of government expenditures, especially its public-sector payroll and social security spending. Moreover, higher oil prices for 2017-2019 will likely lead to the government to slow the pace of fiscal consolidation in response to public demands. This therefore means that budget surpluses will decline in time, especially as oil prices are likely to moderate in the coming years[15].

Borrowing, especially from the commercial debt markets, imposes a much-needed discipline on the government to adhere to sound fiscal policy and to continue the path of reducing its role in the economy and encouraging the development of the private sector[16]. Combined with the IMF’s 2016 Stand-By Agreement (SBA) this should help ensure sustainable macroeconomic stability.

Iraq’s ability to assume debt that is sustainable and within the confines of maintaining macroeconomic stability is much higher than assumed by many who merely look at the headline figure. An upcoming report by the author looks into the composition and background of Iraq’s debt[17]. The IMF estimates the total debt to be $122.9bn by end of 2017[18], made up of external debt of $73.7bn and domestic debt of $49.2bn.

However, $41bn out the external debt is to non-Paris Club creditors, mostly the GCC nations, that date back to the pre-2003 regime which are under negotiations to reduce them on the same terms as applied by the Paris Club of creditors. Should this happen they would likely be reduced by 90% to $4.1bn[19]. Therefore, including the unused borrowing for the 2017 deficit, this means that actual debt by end of 2017 is more likely to be $71.7bn[20] than the headline figure of $122.9bn. This would imply debt/GDP ratios of 37.3% for 2017 and 32.1% for 2018[21], giving Iraq plenty of scope to assume debts of up to $40bn and still keep debt/GDP ratio under 50% for 2018[22].

A sea change in Iraq’s position has taken place since the months leading up to the Kuwait Conference, but perceptions have not. Iraq’s position was that of a country with a debt/GDP ratio of 63.8%/65.3% for 2017/18, that needs to borrow to fund its budget deficit for the next few years and thus needs aid/donations to fund an urgent and massive reconstruction. The sea change, based on the IMF’s May REO, is that Iraq now has a debt/GDP ratio of 58%/54.7% for 2017/18, a budget surplus and can start to fund its reconstruction. This article further shows that Iraq can start funding its reconstruction in 2018 with $18.8bn in cumulative surpluses based on current oil prices. If the argument above on the underlying nature of its debt were to unfold then Iraq can add to this by accessing $40bn in the debt markets- which is far more than its immediate needs for reconstruction.

The underlying positive for Iraq that is fortunately to a large extent free from any government planning, or mismanagement, is that the reconstruction along the lines described by the joint study of the World Bank Group (WBG) and Iraq’s Ministry of Planning (MoP), on its own, will generate substitutional non-oil economic activity[23]. This activity can over the course of the next five years provide the non-oil economy with sufficient momentum for Iraq to escape its high oil dependence, which no government has attempted before. The silver lining of the trauma caused by the ISIS conflict, coupled with collapsing oil prices was that Iraq, in spite of all the improbable odds, united and climbed its way out of the abyss and of total disintegration. Given Iraq’s ability to start self-funding the reconstruction, a similar silver lining is that the recovery from the same trauma, in the form of reconstruction, could lead the country’s evolution away from pure oil dependence.

Disclaimer

Ahmed Tabaqchali’s comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

 

[1] http://www.iraq-businessnews.com/2018/02/22/its-not-the-donations-stupid-key-points-from-kuwait-conf/ – _edn3

 

[2] IMF’s estimates and presentation in the Kuwait conference are at:  Session 3 after clicking on the pdf icon of the presentation. Presentation starts at minute 8.20 on the youtube link on the link below: –

https://view.publitas.com/1692ac51-faf7-464f-a9c2-1784ed1da647/iraq-reconstruction-and-investment-part-3-investment-opportunities-and-reforms/page/1

IMF’s earlier estimates are from Country Report No. 17/251

 

[3] 2017 estimates: Oil exports accounted for 99% of all exports, Oil revenues accounted for 87% of government revenues which in turn accounted for 32% of total GDP. Moreover, Oil GDP accounted for 38% of total GDP and indirectly accounts for the bulk on non-Oil GDP as the government’s orders drives non-Oil GDP (source: Country Report No. 17/251).

 

[4] A report by the author discusses this dynamic and the government response http://www.iraq-businessnews.com/2017/07/17/economic-consequences-post-mosul/. Some highlights of which are “The government maintained overall spending on salaries and pensions, but it introduced new and increased existing consumption taxes on a large number of consumables while it also increased utility prices, Non-oil investments bore the brunt of the cuts as the government sharply curtailed all capital spending and investments.”

 

[5] https://markets.ft.com/data/commodities/tearsheet/summary?c=Brent+Crude+Oil

Iraqi oil sells for about $5/bbl discount to Brent.

 

[6] http://www.iraq-businessnews.com/2018/05/23/market-review-elections-the-economy-and-the-stock-market/

 

[7] The deficit of $17.6bn was based on IMF estimates made in 2017 (Country Report No. 17/251). The IMF has since then updated its revenue estimates higher based on higher oil prices which imply a much lower cumulative deficit than the one used here, but these estimates were only up to 2019 and hence old estimates are still used. Updated data is at: World Economic Outlook April 2018 & Regional Economic Outlook May 2018 in the two footnotes below.

 

The estimates depend on IMF projections which assume that the government spending would continue to be constrained but this is unlikely given public demands for an ease as a result of higher oil prices. This will be balanced in this report’s higher oil price assumptions such that the surpluses would be the similar as will be seen later in this report and in the author’s other recent publications.

 

[8] https://www.imf.org/en/Publications/WEO/Issues/2018/03/20/world-economic-outlook-april-2018

 

[9] http://www.imf.org/en/Publications/REO/MECA/Issues/2018/04/24/mreo0518 (data only until 2019)

 

[10] IMF Iraq Country Report No. 17/251 (http://www.imf.org/~/media/Files/Publications/CR/2017/cr17251.ashx). The IMF assumptions are used throughout for assumptions made in 2017, instead of available Iraq budget figures for 2017 & 2018, to ensure consistency with other estimates used throughout. Moreover, the data from the IMF country report 17/251 are used instead of the IMF updated data (footnotes above) as the updated figures provide only headline numbers without specific details that are needed for a full analysis.

Note: figures are rounded, and so total figures might not add up fully.

 

Below are the main differences between IMF projections and those of Iraq’s budgets for 2017 & 2018, and Iraq’s actual 2017 budget spending.

 

Iraq’s budget vs IMF projections for 2017

  • Iraq’s budget
    • Total revenues of $66.8bn made up of oil revenues of $57.5bn based on oil price of $42/bbl, and total exports of 3.75mbbl/d. These exports include the KRG’s exports of 0.55mbbl/d.
      • The agreement with the Kurdistan Regional Government (KRG) was for it to export 0.55mbbl/d through Iraq’s State Oil Marketing Organization (SOMO). In return the KRG would receive 17%, less sovereign expenses, of the federal budget. However, neither have fulfilled their obligations, yet, both of Iraq’s budget and the IMF budget assumptions include the KRG’s oil exports and its share of expenditure.
    • Expenditures of $82.2bn, creating a deficit of $18.3bn.
  • IMF projections:
    • Total revenues of $69.2bn made up from oil revenues of $61.3bn based on oil price of $45.3/bbl and total exports 3.8mbbl/d, and non-oil revenues of $7.5bn
    • Expenditures of $79bn, creating a deficit of $9.8bn

 

Iraq’s preliminary budget vs IMF projections for 2018

  • Iraq’s budget
    • Total revenues of $77.5bn made up from oil revenues of $65.2bn based on oil price of $46/bbl, and total exports of 3.888mbbl/d. These exports include the KRG’s exports of 0.55mbbl/d.
    • Expenditures of $88.1bn creating a deficit of $10.6bn
  • IMF Projections
    • Total revenues of $73.9bn made up from oil revenues of $64.3bn based on oil price of $45.5/bbl, and total exports 3.9mbbl/d and non-oil revenues of $9.3bn
    • Expenditures of $83.4bn creating a deficit of $9.5bn

 

Iraq’s actual 2017 budget revenues and expenditures based on Ministry of Finance (MoF) data

  • Oil revenues of $55.3bn, which exclude the revenues from the KRG’s direct exports of 0.55mbbl/d (included in the IMF projections in the table used and in Iraq’s budget planning). These revenues would have been higher than planned by the government which assumed an oil price of $42/bbl total, including KRG, exports of 3.75mbbl/d vs the realized price estimated at $49.2. They are also higher than the IMF est.’s which assumed a $45.5/bbl on total exports of 3.8mbbl/d.
    • If the KRG’s exports of 0.55mbbl/d were sold at the same price, then total revenues would have been $73.6bn vs the Iraq budget plans of $57.5bn or the IMF’s estimate of $61.3bn. This reflects the budgets sensitivity of $1.4n to every $1 change in oil prices.
  • Non-oil revenues of $9.9bn for total revenues of $65.4bn (ex-KRG oil revenues).
  • Expenditures, which excluded the KRG’s share of the budget, were $63.8bn or showing a surplus of $1.6bn.
    • If the KRG’s planned $6.4bn expenditures were to be included, total expenditure would have been $70.2bn vs the planned $82.2bn, which would have resulted in a surplus of $3.4bn.

 

 

Note:  Revenues for 2017, and likely for 2018, benefited from higher than planned oil prices. But, expenditures in 2017, and likely in 2018, were lower than planned. The under execution of the budget expenditure, especially on capital spending, is an ongoing feature of Iraqi governments due to the country’s weak institutional capacity and which possess a risk to the reconstructing effort.

 

Sources for this footnote:

http://www.mof.gov.iq/obs/_layouts/obsServices/DownloadObs.aspx?SourceUrl=%2fobs%2fObsDocuments%2fYear-End+Report+Folder+-+مجلد+تقارير+نهاية+السنة%2fEnd-Year+Report+2017.xlsx

http://www.bayancenter.org/en/2018/03/1461/

(http://www.imf.org/~/media/Files/Publications/CR/2017/cr17251.ashx).

http://www.mof.gov.iq/obs/_layouts/obsServices/DownloadObs.aspx?SourceUrl=%2fobs%2fObsDocuments%2fYear-End+Report+Folder+-+مجلد+تقارير+نهاية+السنة%2fEnd-Year+Report+2017.xlsx

 

 

 

[11] Sources: IMF Iraq Country Report No. 17/251, IMF World Economic Outlook (WEO) April 2018 database, IMF Regional Economic Outlook (REO) statistical appendix, Iraqi Ministry of Finance (MoF).

Assumptions:

  • Updated figures for 2017 are from MoF which show revenues and expenditures for 2017 excluding those for the KRG. However, MoF and IMF estimates and planed budget include those of the KRG (see details in footnote 9).
  • Iraqi oil price averaged $63.5 for Jan-Jun, while Jun’s average was $69.9. The YTD average is used as an estimate for the full year.
  • Total updated revenues for 2018 & 2019 include higher non-oil revenues as the IMF in May’s REO increased its growth rate for non-oil GDP to +4.4%/+5% for 2018/2019 up from 2.4%/3.7%
  • Revenues are estimates based on updated oil price assumptions while expenditures are the updated IMF’s estimates.
  • Updated Expenditures reflect expectations that the government will ease back on its tight fiscal consolidation, however, they might very well be off-set by the historic tendency for lower budget executions.

 

[12] The IMF (Country Report No. 17/251 P: 28) notes “The program is fully financed through the next twelve months, but there is a financing gap of $7.1bn in late 2018 and 2019. The authorities have contacted one donor to fill the 2018–19 financing gap, for which there is good prospect”. The financing gap is made up of $5bn and $2.1bn respectively 2018 & 2019. Which implies that Iraq has achieved full financing for 2017’s $9.8bn deficit, $4.5bn out of 2018’s $9.5bn deficit., and $1.3bn out of 2019’s $3.4bn deficit.

 

Since the actual budget achieved a surplus for 2017 and would likely achieve a surplus in 2018, then Iraq has borrowed $14.3bn ($9.8bn + $4.5bn see above) to fund a deficit that did not materialize and so the funds could either not be drawn which would lower overall debit or used to fund reconstruction projects.

 

However, it should be noted that “fully financed” does not imply that the all of the funds were delivered to Iraq but that funding agreements were made.

 

[13] https://uk.reuters.com/article/mideast-crisis-iraq-reconstruction/factbox-pledges-made-for-iraqs-reconstruction-in-kuwait-idUKL8N1Q55RY

 

[14] This would be about 8.4% of 2019’s updated GDP estimate, but as it would be spent on reconstruction it would be a stimulus of about 14.5% of non-oil GDP. It would have an added significance in that the planned for deficits would have been accompanied by restricted capital spending and continued fiscal consolidation by the government, the reversal of which alone would have expansionary effects.

 

[15] The major shortcoming of the successive governments since 2003, was to use most of the oil revenues on expanding the public payroll and social security spending as main vehicle for transfer of oil wealth. As a result very little of oil revenues went towards reconstructing and building the country’s physical capital that would contribute towards diversification away from oil and to economic sustainability. The upshot is high oil dependence with the resultant vulnerability to external forces, import dependence, weak/small private sector and a skewed labor market.

 

Without a fundamental change of track, such as that agreed by the IMF’s 2016 SBA, the fruits of the country’s expanding energy production profile as a result will perpetuate this process. However, this is unsustainable given Iraq’s large rapidly growing population whose needs for public sector jobs cannot be met under any optimistic scenarios for increased oil production or prices.

 

The upshot, is the fundamental change of track along the SBA guidance will take a number of years to unfold, and as such the public-sector payroll and social security spending will continue to account for the bulk of government expenditure and thus the need for accessing the debt markets to fund reconstruction down the road.

 

[16] As can be seen from the author’s report on Iraq’s debt (link on next footnote) that Iraq’s only debt on truly commercial terms are two Eurobonds worth $3.7bn: A $2.7bn bond issued in 2006, due in 2028 with a 5.8% interest rate; and a $1.0bn bond issued in 2017, due in 2023 with a 6.5% interest rate. However, the third $1bn bond issued in 2017, due in 2022, is guaranteed 100% by the U.S. government, with a 2.1% interest rate, and as such does not constitute debt on commercial terms.

 

Therefore, should Iraq access the commercial debt markets these would require fiscal discipline to assure the markets that debt would be serviced. Some of the requirements would take into account, debt repayments as a percentage of exports, currency stability and the level of foreign reserves in relations to months of imports, balance of payments, budget balance as a percentage of GDP. They would also take into account other liabilities and contingent liabilities such as the state guarantees discussed in footnote #22 below. All of these requirements will affect the amount of debt raised and the interest rate it would carry, which would place a much-needed significant fiscal discipline on the government. Coupled with the huge demands for reconstruction they should help ensure that Iraq’s governments pursue sound fiscal policies while following sustainable macroeconomic stability.

 

[17] Link to be provided in an updated version of this report.

 

[18] Updated figures in REO show that the updated figure for 2017 is $114.6bn of which foreign debt is $68bn. However, the older assumptions of 2017 are used as they are part of longer term projections, and crucially they served as the basis for Iraq securing finding for the expected deficits as explained in an earlier footnote.

 

[19] The IMF notes: “These arrears can be tolerated under the Fund’s policy on Arrears to Official Bilateral Creditors because the Paris Club Agreement was found to be adequately representative (i.e., Paris Club creditors provided most of the financing contributions required from official bilateral creditors in the context of that agreement) and the authorities have since been making best efforts to conclude agreements with non-Paris Club creditors on Paris Club comparable terms. Negotiations to implement debt relief on the same terms as with the Paris Club creditors, i.e. an 89.75 percent net present value reduction, are ongoing.”.

 

In the current environment of the rebuilding of the relationship between Iraq and the GCC it is very likely that these negotiations will lead to a grand bargain in which both sides agree to the same 90% debt reduction in exchange for investment opportunities and long-term agreements.

 

[20] $122.9bn less: (1) 90% of $41 or $36.9bn, (2) Unused deficit funding of $14.3

 

[21] The IMF’s updated GDP figures for 2017/2018 are $197.76bn/ $223.3 and GDP/Debt ratios of 58%/54.4%

 

[22] It should be noted that the government has issued 11 state guarantees that affect the total amount of debt that it can take as these are contingent liabilities. These are a total of $36bn made of which the largest is $32.4bn in guarantees of service payments to independent power producers (IPPs) in the electricity sector for the 14 years of the contacts.  This makes it essential for the government to continue with the electricity sector reform and ensure the collection of tariffs-the failure of which will make the state liable to fulfil its guarantees to the IPP’s which would add to the debt.

 

Separately, the IMF aware of all of the above liabilities, in its presentation in the Kuwait Conference, had argued that Iraq should be able to borrow up to $36bn over the next five-years while its debt to GDP would be around 50% by 2022-23. These were made under lower oil price assumptions, with more fiscal discipline in expenditures, over a longer time frame, but without the benefit of the 90% haircut to the $41bn in debt.

http://www.iraq-businessnews.com/2018/02/22/its-not-the-donations-stupid-key-points-from-kuwait-conf/ – _edn4

 

[23] The IMF has attributed reconstruction for increasing its non-oil GDP growth rates to +4.4%/+5% for 2018/2019 up from prior +2.4%/+3.7%.

 

These figures could be higher should the full $88bn in reconstruction spending be embarked upon over the next five years as that would be a stimulus equivalent to about 14% of non-oil GDP in each year over the five-year period. While, it is ambitious to assume that all of that amount would be properly spent, yet even half that amount would create the conditions for self-sustaining economic activity for the non-oil sector.

Please click here to download Ahmed Tabaqchali’s full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets. He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS). He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

By John Lee.

Nationalist cleric Moqtada al-Sadr and Hadi al-Amiri have reportedly announced an alliance between their political blocs.

The groups who won first and second places respectively in last month’s parliamentary election.

While Sadr’s Sairoon Alliance is opposed to Iranian involvement in Iraq, Amiri’s Fatah (Conquest) Coalition is head of an Iranian-backed militia.

At a joint press conference in Najaf, Sadr said “our meeting was a very positive one, we met to end the suffering of this nation and of the people. Our new alliance is a nationalist one.

(Sources: Reuters, Al Jazeera, Moqtada al-Sadr website)

By Ali Mamouri for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

The fate of Iraq’s latest elections has become fraught following a deliberate arson attack on the ballot boxes storage center in the Rusafa district of Baghdad on June 10.

The facility exposed to the fire contained some 1.1 million of the overall 1.8 million votes from the Baghdad constituency. Baghdad is crucial to forming power in Iraq’s parliament as the district holds 71 of the total 329 seats. Votes from the Rusafa district alone account for around 40 seats and could alter the course of the future government.

The extent of the ballot losses remains unknown, but the head of the Independent High Electoral Commission, Riyadh al-Badran, claimed June 11 that 95% of the boxes had escaped the flames. The commission also announced in a statement that it “possesses backup copies of the results in the national office in Baghdad.”

Meanwhile, Iraq’s interior minister stated, “We have taken control of the situation.” He added that there was “no burning of any ballots,” and that only electronic counting and sorting devices were affected by the fire, not the ballots themselves. However, political forces have cast doubt on the credibility of these disparate claims, demanding that a full re-election be staged and warning that the country faces the risk of igniting civil war.

Following the fire, the speaker of the outgoing parliament, Salim al-Jabouri, called for “a redo of the elections that have been proved rigged, distorting the results and the will of the Iraqi people in a deliberate and dangerous manner. Those who contributed to this act of fraud and vandalism must be prosecuted.” Jabouri claimed that the incident was “planned [and] deliberately intended to conceal cases of fraud and falsification of votes and to deceive the Iraqi people, manipulating their choices and their will.”

However, Shiite leader Muqtada al-Sadr, whose Sairoon Alliance won the first tier in the election, expressed his opposition to restaging elections in a June 11 article, “Iraq in danger,” calling on all political parties to unite and advance toward forming a government.

“Is it time we stand together for reconstruction or for us to burn the ballot boxes and restage elections for the sake of a seat or two?” he asked. Warning of attempts by some parties to ignite a civil war, he said that Iraq would not fall into what some who “sold two-thirds of Iraq want, which is a civil war” — a clear reference to a prior statement by former Prime Minister Nouri al-Maliki, who is accused of failing to prevent the country from falling into the hands of the Islamic State in 2014, that “civil wars usually occur after elections if results are challenged.”

Sadr’s top aide also accused both winning and losing parties in the elections of participating in the arson attack, claiming, “The ballot boxes storage center fire was either aimed at forcing the restaging of elections or covering up fraud.”

The beneficiary of redoing the election would be the losing parties, which would attempt to recoup their losses in another opportunity to win votes, while any who won votes through rigging would benefit from a cover-up of electoral fraud.

In this complex situation, the Iraqi government faces no easy choices and only four options. It can completely cancel the election and restage it in conjunction with municipal elections in December. It can restage the vote only in the Rusafa district, where votes were affected by the fire, or nullify results from this district and count only the results from the rest of Iraq. Or it can proceed with the declared results, incorporating any slight changes that may occur after manual sorting and counting.

The first option appears unfeasible in light of official statements from the supervisory authority responsible for conducting the elections and overseeing the integrity of results.

Saad al-Hadithi, a spokesman for the prime minister, stated June 11 that the decision to rerun the election “is vested in the Federal Court, not the executive branch or any other party” — a clear comment on Jabouri’s call for a redo. Similarly, Board of Commissioners member Saad Kakaee said, “The decision to cancel the election results following the fire does not lie in the hands of the Board of Commissioners but with those in the Judicial Council and the Federal Court.”

The Judicial Council previously announced that there is no straightforward legal provision that allows the restaging of elections. Meanwhile, the winning blocs are opposed to any rerun, as indicated by previous statements from Sadr and Sairoon Alliance leaders, as well as from the Fatah Alliance that ranked second. Fatah Alliance spokesman Karim Nuri said, “We do not support a restaging … the compromise is a recount.”

Nullifying the results from the Rusafa district — whether accompanied by another election in the area or not — would open the path for opposition from other blocs that claim fraud has occurred in their constituencies. Among them are Al-Wataniya of Ayad Allawi, who has called for a referendum on the fate of the elections, and Kurdish opposition blocs including the Movement for Change (Gorran), which has accused the Patriotic Union of Kurdistan and the Kurdistan Democratic Party of widespread electoral fraud.

The only remaining option is to proceed with the manual counting of outstanding votes by the judiciary, which has already appointed nine judges to supervise the process. Yet such a solution is not expected to yield results that differ markedly from those previously announced.

In the past, such electoral differences had been resolved through political settlements that sought to satisfy losing parties that contest the election results, while avoiding provoking opposition from the winners who endorse them. After a settlement is secured, the outcome will be announced through a decision by the judiciary, and will not be easily contested by the disputing parties.

From AFP. Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

Emergency services try to put out a fire that ripped through Iraq’s biggest ballot warehouse in eastern Baghdad’s Al-Russafa district, ahead of a vote recount prompted by allegations of fraud during legislative elections that saw a surprise victory for a populist cleric:

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By John Lee.

The Iraqi parliament has ordered a nationwide manual recount of all votes from the parliamentary elections, following claims from Prime Minister Haider al-Abadi that there had been serious violations.

Iraq’s top judicial authority, the Supreme Judicial Council, will also take over the Independent High Electoral Commission (IHEC), replacing the local heads in each of the provinces by judges.

Last month’s elections saw a low turnout, and an unexpected victory for Shia leader Moqtada al-Sadr.

(Sources: Al Jazeera, Reuters, AP)

By Mustafa Saadoun for Al Monitor. Any opinions expressed here are those of the author and do not necessarily reflect the views of Iraq Business News

On May 30, the Independent High Electoral Commission of Iraq annulled votes cast at more than 1,000 of the country’s polling stations, including 186 stations in Kirkuk, a city that has faced political unrest among its three social components — Arabs, Kurds and Turkmen — since the elections on May 12.

On the same day, Jan Kubis, the head of the United Nations Assistance Mission for Iraq, talked during a meeting of the United Nations Security Council in New York, where he noted reports of electoral fraud and said that Kirkuk was “one of several hotspots” of tension over the election results, adding that the situation there continues to be “volatile.”

Hundreds of members of the Iraqi Turkmen Front in Kirkuk have staged a sit-in surrounding the warehouses where the governorate ballot boxes are being kept. This has prevented the electoral commission staff from retrieving the ballot boxes despite being accompanied by a counterterrorism force.

According to statements from the commission, the boxes from some polling stations in Kirkuk remain in the warehouses and have not been transferred to the Iraqi capital because of the sit-in, which is headed by parliamentarian Arshad Salhi. “There are armed men among the protesters near the warehouses,” the electoral commission’s statement said.

Al-Monitor secured a copy of a May 30 press statement by head of the electoral commission Riad Badran. The statement said, “The Kirkuk Election Office was unable to reach the ballot boxes because of the gathering of some groups affiliated with certain political parties.”

There are concerns over the possible breakout of a conflict between different ethnicities in Kirkuk, which is what deputy head of the Turkmen Front in Kirkuk Hassan Toran warned against.

“Not responding to the demands of the Turkmen to manually recount the votes could ignite a crisis in the governorate,” Toran told Al-Monitor.

Toran, who is a member of the current Iraqi parliament, accuses the Patriotic Union of Kurdistan (PUK) — which is led by the two sons of the PUK’s late leader Jalal Talabani, Qubad and Bafel — of “vote-rigging” in Kirkuk.

“President Fuad Masum is defending the false results and using his position for partisan purposes,” Toran said in a jab at Masum, who requested the federal court decide on the annulment of some votes cast.

On May 30, Masum said that annulling some poll results would be “unconstitutional.” Masum’s position came less than 24 hours after the PUK — the president’s party — rejected the proposal of having judges oversee the manual recount of votes.

Kurds indirectly accuse members of the Turkmen Front in Kirkuk, who are protesting against the election results, of “conspiring” against the peaceful coexistence in the governorate. PUK Bloc parliament member Shwan Daoudi went as far as to draw comparisons between this sit-in and the protests in the Anbar province in 2012-13, which were part of a civil conflict from which the Islamic State emerged.

In reference to the Turkmen Front, the PUK — which emerged with six seats in Kirkuk — has accused “political parties and militias” of storming into the warehouses where the ballot boxes are stored in Kirkuk.

“The head of the electoral commission office in Kirkuk handed the keys to the warehouses to the armed militias,” Daoudi said during a press conference May 30.

Arabs in Kirkuk also joined the protests against the election results. Arab political figures there believe the PUK has rigged the vote in the governorate because it seeks the return of peshmerga forces to Kirkuk.

Kirkuk Gov. Rakan al-Jabouri, who belongs to the Arab Coalition that came in second in the governorate after securing three seats in the future parliament, accused the electoral commission of covering up the fraud and vote-rigging in Kirkuk elections.

The Arab group in the Kirkuk Governorate Council warned of a conflict that may elevate the crisis in the governorate to an “unknown” state because of the results of the current elections. All of these serious repercussions indicate that there is a crisis looming in Kirkuk as long as the integrity of the elections remains in question.

“The crisis in Kirkuk is very serious, as it is related to the size of the administrative representation [of the different components] in the governorate. Turkmen believe that their representation rights are being rejected by the Kurds,” Falah Mashaal, the former editor of state-owned al-Sabah newspaper, told Al-Monitor.

“Should the situation remain at a standstill, the crisis could shift down a conflictual path and unprecedented ethnic escalation, leading to an armed conflict that would end the relative calm that has been ongoing in the governorate for years,” he added.

The international dimensions of the dispute only compound the crisis. Turkish President Recep Tayyip Erdogan also has concerns about the election’s repercussions, as was evident in his recent contact with the leader of the Sadrist movement, Muqtada al-Sadr, indicating that any potential conflict between Kurds and Turkmen will also include Arabs.

By Bryant Harris for Al Monitor. Any opinions expressed here are those of the author and do not necessarily reflect the views of Iraq Business News

As parliamentarians in Baghdad work to form a new governing coalition in the wake of this month’s elections, their counterparts in Washington are seeking to sanction more than a dozen of the Iraqi legislators over their links to Iran.

The House of Representatives unanimously voted last week on legislation requiring President Donald Trump to sanction “persons that are officials, agents, affiliates of or owned and controlled by” two prominent Iran-backed militias that operate in Iraq and Syria.

The amendment from Rep. Ted Poe, R-Texas, to a must-pass annual defense authorization bill targets Asaib Ahl al-Haq and Harakat Hezbollah al-Nujaba, both of which are part of the Shiite-led Popular Mobilization Units battling the Islamic State.

Both militias joined with other Iran-backed military forces as part of the Fatah, or Conquest, political coalition, which came in second in the May 12 elections with 47 out of 329 parliamentary seats. Asaib Ahl al-Haq won 14 of those 47 seats, according to Iraq analyst Kirk Sowell, while Harakat Hezbollah al-Nujaba did not field any candidates.

“The US Department of Treasury will ultimately determine if the political wing constitutes an affiliate or entity controlled by” Asaib Ahl al-Haq, a Poe aide told Al-Monitor. “Congressman Poe believes [Asaib Ahl al-Haq] will likely be subject to these penalties unless it completely breaks all ties with the armed wing, renounces violence and acts solely as [an] Iraqi political party with no backing from Iran.”

“Political parties are about engaging in peaceful civil discourse, not about representing armed thugs who commit violent atrocities to achieve political ends,” the aide added.

The Trump administration has taken an increasingly hawkish approach to Iran following the US withdrawal from the nuclear deal earlier this month, vowing to go after Iran’s proxies throughout the region. If it so chooses, however, the administration has some wiggle room to avoid sanctioning the 14 new Asaib Ahl al-Haq lawmakers as Iraqi law requires political parties to formally separate themselves from the militias. However, the parties retain the same names as their respective militias and Asaib Ahl al-Haq’s leader, Qais al-Khazali [pictured], has landed a seat in parliament.

The Iraqi Embassy did not respond to Al-Monitor’s inquiries about its positions on the provision.

After Poe introduced similar legislation last year, a Harakat Hezbollah al-Nujaba spokesman denounced the bill as a “conspiracy and victory for the Islamic State and all other terrorist organizations supported by Washington.”

Despite the conspiratorial rhetoric, both the Asaib Ahl al-Haq and Harakat Hezbollah al-Nujaba militias formed an alliance of convenience with the United States during the fight against the Islamic State. Previously, both groups had battled US forces following the 2003 invasion of Iraq with the backing of Iran’s Islamic Revolutionary Guard Corps (IRGC). The United States has sanctioned the leader of Harakat Hezbollah al-Nujaba, Akram al-Kaabi, since 2008.

Despite Washington’s fear of growing Iranian influence in Iraq, Shiite cleric Muqtada al-Sadr’s nationalist Sairoon Alliance won the most seats. He is now working with Prime Minister Haider al-Abadi’s Nasr (Victory) coalition in an attempt to establish a new government, even as disgruntled parties are demanding a recount.

While Sadr previously directed the Mahdi Army against US troops following the 2003 invasion, he is also critical of Iranian influence in Iraq. This has prompted IRGC commander Qasem Soleimani to coordinate with pro-Tehran parties in Baghdad as a bulwark against Sadr.

Other than potential sanctions on the 14 Iraqi parliamentarians, it remains unclear how much of an impact such measures would actually have on Washington’s ability to do business with Baghdad as Iraqi politicians attempt to create a new coalition.

“The most meaningful impact of sanctions like these is often less on the direct targets and more on their environment,” Nathaniel Rabkin, the managing editor of the newsletter Inside Iraqi Politics, told Al-Monitor. “The more Iraqi entities and persons you sanction, the more US businesses will be cautious about doing business in Iraq more generally and the more carefully they’ll be vetting Iraqi partners.”

The Senate Armed Services Committee advanced its own draft of the annual defense bill last week, but has not publicly released the text.

UN Iraq Representative Kubiš says elections were held in generally calm and stable environment, urges calm as electoral appeals are being adjudicated through established legal channels.

Briefing the UN Security Council, Special Representative of the Secretary-General for Iraq Ján Kubiš said national elections were held on 12 May in a generally calm and stable environment. He called on political actors and their supporters to uphold peace as electoral appeals are being adjudicated through established legal channels, and urged the independent electoral management bodies to adjudicate all appeals properly, fully and expeditiously, to enable corrections of the problems, justice and the timely certification of the final election results.

Mr. Kubiš noted that many Iraqi political leaders publicly endorsed the electoral process including the Prime Minister and the President, but some other political leaders, including Vice Presidents of the Republic and the Speaker of the Parliament, raised concerns over some of the technical shortfalls encountered with the electronic vote tabulation devices, as well as reports of fraud and vote rigging, active intimidation of voters including by some armed formations, and political interference.

“We continue to urge all Iraqi political actors and their supporters to uphold peace, as electoral appeals are being adjudicated through established legal channels. I also call on the Electoral Commission to continue to safeguard the integrity of all electoral materials and equipment and to cooperate fully and abide by the decisions of the Electoral Judicial Panel, including possible measures to effectively address complaints as lodged by stakeholders in a number of locations. We urge the independent electoral management bodies to adjudicate all appeals properly, fully and expeditiously, to enable corrections of the problems, justice and the timely certification of the final election results.”

The Special Representative highlighted the readiness and availability of United Nations electoral advice and expertise, in support of any activities and measures that may be required to retain confidence in the process, including as regards Kirkuk also in the light of the forthcoming Provincial Council elections across Iraq and the regional elections in the Kurdistan Region later this year.

Mr. Kubiš stated that the elections were marked by a low voter turnout of 44.52 percent as reported by the Independent High Electoral Commission (IHEC), a significant decrease in comparison with previous national elections in Iraq after 2003. This sends a strong signal to the elites ruling the country since 2003, a loud call on their representatives to finally rise up to the people’s expectations. “I urge the Iraqi political elites to hear that call and draw the necessary conclusions on the need for improved representation, justice for all, democratic accountability and good governance void of corruption, sectarian quota system, nepotism and patronage.”

In his briefing, he noted that despite defamation campaigns aimed at undermining the candidacy of women which he roundly condemns, several female candidates received a high number of votes within their political lists, and that some 19 female candidates were elected to parliament.

“Our expectation for the future is that the 25% quota which now guarantees 83 seats for women, represents the minimum threshold and not the ceiling,” he added, calling on political leaders to ensure the full participation of women in political negotiations and their representation at the highest levels in Iraq’s political and decision-making structures.

The SRSG urged political leaders to build on the achievements of the current government in the post-election phase, stressing the need to prioritise inclusive, non-sectarian dialogue, and to ensure the swift formation of a new truly national Government which reflects the will of the people of Iraq.

(Source: UN)

From Al Jazeera. Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

Iraq’s electoral commission says it is cancelling the results from more than 1,000 polling stations used in this month’s parliamentary vote.

It says it has evidence of fraud at voting centres both in Iraq and for citizens living abroad.

Iraqi MPs called for votes in the predominantly Sunni provinces of Anbar, Diyala, Salahuddin and Nineveh and all ballots cast by Iraqis living abroad to be manually recounted.

The demand was supported by many Sunni politicians and others who oppose the election results which saw a successful outcome for three main Shia-led blocs in Iraq’s first election since the defeat of ISIL.

Prime Minister Haidar al-Abadi warned in his weekly news conference of potential political instability if demands for recounts continued.

Al Jazeera‘s Charles Stratford has more from Baghdad:

The victory of Shiite cleric Moqtada al-Sadr’s party in Iraq’s recent election has put the United States in a wait-and-see position, Defense Secretary James N. Mattis told reporters yesterday in Colorado Springs, Colorado.

The secretary was in Colorado to preside at the change-of-command ceremony for North American Aerospace Defense Command and U.S. Northern Command.

“History tells us that all wars eventually end, and the decisions you take following a war — comparing the United States leadership after World War II, versus what came out of Versailles after World War I — can set the conditions for the future,” the secretary said, adding that in this case, the United States must first see who is going to be the prime minister, because no party or coalition won enough to govern Iraq on its own.

After World War II

“First, all wars eventually come to an end. By 1948, ’49, after the vicious World War II, the Pacific Island Campaign was as vicious a fighting between two nations that’s ever been in history,” Mattis said. “We all know what Germany did during World War II with death camps [and] with invasions across Europe.”

And yet, by 1948 and 1949, he said, “we were standing up NATO to defend Western Europe, and we were working with Germany.”

“The Marshall Plan was underway,” Mattis said. “We were [also] working with Japan.” Germany and Japan now are U.S. treaty allies, he noted.

Mattis pointed out that despite the rout of the Islamic State of Iraq and Syria, some terrorists remain in Iraq. “But it was interesting, wasn’t it, that in the midst of everything going on next door in Syria, having recently destroyed the ISIS strongholds in Iraq – they are still isolated cells of them, of course,” the secretary said.

A Responsive Government

The secretary reiterated the United States will have to see whether the new Iraqi leaders form a responsive government.

Mattis noted the Marshall Plan was met with initial skepticism.

“People in 1944 were told basically in five years we’ll be serving alongside German troops and sending locomotives and railroad tracks to Germany,” he said. “We would have laughed in your face, said that’s not going to happen; this is a war to the death. Damn near lost.”

But that’s exactly what we did, he noted.

“So wars rub the veneer off all of us and leave the passions really exposed, and now it’s time for strategic thinking, for looking to the future, and determining how the Iraqi people can dictate their future,” the secretary said, “not external threats from Iran, not money from Iran, not internal threats from ISIS or other terrorists.

“This is between our two governments, and we’ll see what government they end up with,” Mattis said. “So we’ll play that forward. It’s too early to tell.”

(Source: US Dept of Defense)