By John Lee.

GE Gas Power has reported that it has successfully completed services on four 9F.03 gas turbines, two steam turbines and six generators at Iraq’s Besmaya Power Plant safely and on time, while continuing to execute wider operations and maintenance (O&M) works at the site despite the many challenges posed by the COVID-19 pandemic.

These service activities reduced the risk of unplanned downtime of power generation equipment at the site, enabling the plant to reliably supply up to 3 gigawatts (GW) of electricity to the national grid to help meet the peak summer demand for power.

Owned by Mass Group Holding (MGH), Besmaya is Iraq’s largest power plant. Phases 1 and 2 of the project can generate up to 3 GW and Phase 3, which is currently under construction, is expected to add up to another 1.5 GW. The facility is the first one in the country outside the Kurdistan region to be developed by an independent power producer on a build-own-operate basis for the Iraqi Ministry of Electricity.

GE has supplied eight gas turbines, four steam turbines and 12 generators that are covered by a 20-year service agreement and is also responsible for O&M services for Phases 1 and 2 of the project to ensure smooth operations at the site. Additionally, GE won a contract to supply four 9F.04 gas turbines and four generators for Phase 3. Much of the electricity generated at Besmaya is fed to the capital Baghdad and surrounding areas and its uninterrupted operations are critical to power local healthcare facilities, homes, businesses and more.

Ahmad Ismail, Chairman of MGH, said:

At MGH, we are committed to strengthening Iraq’s power sector further.

“The logistical and mobility constraints resulting from the COVID-19 outbreak led to several unexpected difficulties in carrying out the required service works at Besmaya including delays in the arrivals of parts and challenges in access to technical experts.

“However, the determination, flexibility and efficiency GE displayed by being able to draw on local teams on the ground, remote support from experts and access to a global supply chain, enabled us to keep the plant operational with high levels of reliability and efficiency and to deliver on our commitments.

Beginning February 2020, over 110 GE and FieldCore (a GE-owned field services execution company) staff members liaised closely with MGH to execute the services safely and as per schedule. The works conducted included the first phase of Hot Gas Path inspection services of the gas turbines, steam turbine minor inspections and generator MAGIC (Miniature Air Gap Inspection Crawler) inspections.

Experts based in the Middle East and Europe liaised with the local site team through digital tools, video conferences and phone calls on a daily basis to remotely support mechanical and commissioning works, identify and transport stocks of parts that needed to be replaced and keep track of overall project progress. To reduce the risk of exposure to COVID-19, additional hygiene, health and safety measures were implemented at the site, including more frequent disinfection and cleaning activities, thermal screenings of everyone entering the site, distribution of additional mandatory personal protective equipment such as gloves and masks, COVID-19 prevention training sessions, accommodation for staff on-site, as well as other precautions.

Joseph Anis, President and CEO of GE Gas Power, Middle East, North Africa and South Asia said:

As we work through these exceptional times, our resolve to support the Ministry of Electricity and people of Iraq by providing the electricity needed to power everyday life, growth and progress remains unchanged. Our top priority remains the safety of our people, while continuing to deliver results for our customers and the communities we serve.

“I would like to thank the supportive staff at GE and MGH who stayed away from their loved ones for months, working long hours to secure reliable power supplies during this unprecedented period and for the hot summer months ahead. Together, we are honored to make a positive difference to the lives of millions of Iraqi citizens.

GE and FieldCore have up to 300 people across Iraq. The company has supported the development of the country’s energy infrastructure for over 50 years and since 2011, helped to bring up to 15 GW of power online across Iraq, including up to 1.4 GW in conflict affected areas such as Diyala and Mosul.

The company has also helped bring over US$2.4 billion in financing for energy sector projects in Iraq in collaboration with export credit agencies, commercial banks and other organizations.

(Source: GE)

In Iraq, a country most recognized for its oil production, it’s the micro – small – and medium-enterprises (MSMEs) that bring life and colour to the streets. Despite being the ‘small’ players in business, the private sector (excluding oil) accounts for close to 60% of employment, with MSMEs active in the widest range of sectors and with the greatest opportunities for youth.

In Basra City and Al-Qurna, two cities in the largest oil producing region in the nation, the unemployment rate has risen to at least 30% in recent years. Largely attributed to the lack of government employment opportunities and the skills mismatch of the growing youth demographic, investment in micro- small- and medium-enterprises is bringing new hope and opportunities for economic development.

Since mid-2019, the United Nations Development Programming (UNDP), in partnership with the Norwegian Refugee Council (NRC), has provided targeted support to 319 new and established MSMEs across Basra City and Al-Qurna through business development training and cash-grants. The training worked to build skills that would enable enterprise growth, such as finance and accounting, marketing, human resources and employment management, as well as soft skills such as communication, leadership, negotiation skills, decision making and problem solving.

“I learned the importance of good leadership,” says Labieb, 57, father-of-5 and owner of a cherry and nuts store in Basra City. “I also learned how to best deal with customers and be part of a team.” Following completion of his training and receiving his cash-grant, Labieb was able to hire an additional staff member to manage increased stock and customers and enjoyed a 15% increase in profits.

But like most other cities around the world, the socio-economic impact of COVID-19 was also felt in Basra and Al-Qurna. Businesses took all precaution to prevent the spread of the virus, ensuring the safety of both staff and customers by wearing personal protective equipment (PPE) and adhering to the government curfews, with limited operating hours. By demonstrating solidarity, these business owners were not only able to continue making a livelihood for themselves and their employees, but to set an example for the community.

“As a business owner, I am empowered to build something successful – that I created the plan for, and that enables me to give back to the community,” explains Hisham, 40, father-of-2 and owner of a small five-a-side football stadium in Abu Al-Khaseeb.

For Kawthar and Jenan, both mothers-of-five and owners of successful beauty salons in Basra and Al-Qurna respectively, hygiene and care are always a big part of their daily work. “After receiving the grant, I was able to hire three new staff members and saw my profits increase by 40% – this is because I put together a good business plan, but also because we take the necessary precautions to keep ourselves and others safe,” says Kawther.

MSMEs continue to face challenges to their growth during COVID-19 pandemic, limiting their capacity to hire additional employees, but with the recognition and support they need, could MSMEs be the way forward for economic growth in Iraq?

Sustainable livelihoods through small business development and job placement in Basra

Together with NRC, and generous funding support from the Government of Japan, UNDP has supported 319 MSMEs through training and cash-grants and placed 125 individuals in jobs through private sector partnerships, since mid-2019.

(Source: UNDP)

Characterized by long, hot and clear summers, Najaf, Iraq’s holy city, seems like the ideal place to realize the potential for solar energy in Iraq. Which is why in 2016, Najaf was selected as one of three sites to pilot rooftop solar photovoltaic (PV) systems, testing their potential for application across the sunny nation.

Energy consumption in Iraq is dominated by fossil fuels, at 96%. Not only is this a missed opportunity for the subtropical nation, but it has had very real, and visible consequences for the environment. As public infrastructure struggles to cope with the growing population, dependency on diesel generators has created a smoggy reality, with the air pollution levels in Iraq linked to health consequences for the nation.

In 2016, with support from the Global Environment Fund (GEF), six families were selected to receive rooftop solar PV systems. These initial six families, were selected as part of a pilot to raise awareness and demonstrate the potential benefits of solar energy. Since then, some of these families have benefitted from the cost savings and all are excited by a new vision for clean energy and solar for their country.

“I knew that using solar energy had positive returns on the environment, and in a country like my homeland, Iraq, there is an urgent need to use it,” explains Ihsan, 49-year-old father-of-four and recipient of a rooftop solar PV system in Najaf. “But I was also surprised in many aspects, I didn’t know that by generating clean energy, I could contribute to my community,” he adds, pointing to the excess energy the panels provide being pumped back into the government grid.

For Qusai, a 45-year-old father-of-four and Ihsan’s neighbor, the benefit was also linked to the “clean” aspect of solar energy production, “The financial burden of relying on expensive diesel generators and the noise and smog produced, makes solar energy very appealing,” he explains. “It’s also very efficient!”

On average, each of the six households were able to save $2,300 over the past four years and a total of 58,000 kgs of CO2 was saved from being emitted into the atmosphere – that’s the equivalent of consuming more than 7,000 gallons of diesel.

But to make the use of solar energy more sustainable, UNDP and the GEF knew that Iraq would need trained and experienced personnel to maintain and repair the systems.

Faridha, a local Najaf resident and Head of Amal Al-Hayat Organisation for Culture and Information, was one of 25 civil society organization members – including 15 women – trained in operating and maintaining solar PV systems, to both support the piloting of these systems over the past four years, but also act as advocates for the adoption of cleaner, greener energy across Najaf.

“Before the training, we had heard about solar energy, but we did not know how we could benefit from it in Iraq, especially in the province of Najaf,” she explains. “Solar energy is an investment for the citizen. If people consume wisely, they benefit not just themselves, but their community.”

(Source: UNDP)

Siemens Energy and the Iraqi Ministry of Electricity have signed a contract for the Al Hamudhia substation, which will provide reliable and efficient power supply to the cities of Ramadi, Fallujah, Saqlawyah, Khalediyah and surrounding areas in Al Anbar governorate, North West of Baghdad.

Located about 20 kilometers away from Ramadi city, the turnkey 400- kilovolt (kV) Al Hamudhia substation will support greater grid connectivity and allows for a higher utilization of the Al Anbar power plant’s generated power, supporting anticipated energy demand growth of 10% annually.

Ammar Mohammed Kadhim, General Director of Planning and Studies Department, Iraqi Ministry of Electricity and the Head of the Japanese loan team “IQP22” projects at the Ministry, which are being financed by the Japan International Cooperation Agency (JICA), said:

A top priority for the new government of Iraq is rebuilding the country’s power infrastructure. Upgrading and strengthening the Iraqi power grid is crucial to this ambitious plan, which will ultimately support Iraq’s economic, industrial and infrastructure development.

“We’re already working on comprehensive grid projects across the country in collaboration with international partners, like Siemens, to deploy the most reliable and advanced technologies.

The new substation will connect up to 750 Megavolt Amperes (MVA) to the national grid, helping decrease bottlenecks and transmission losses. Construction of Al Hamudhia station is expected to start in July 2020, and is scheduled for completion in July 2022.

Mahmoud Hanafy, Senior Vice President, Transmission Solutions at Siemens Energy, Middle East, said:

The new substation will support in providing reliable power to the homes and industries in the governorate of Al Anbar.

“Our grid technology enables more reliable, sustainable, efficient and flexible power systems. From transporting electricity from power plants to the distribution stations, all the way to the citizens, our ability to optimize flexibility and efficiency will contribute to boosting the transmission infrastructure of Iraq.

Part of the JICA’s projects in Iraq, the 400-kV Al Hamudhia’s scope of work includes the design, construction, equipment supply, erection, testing and commissioning and training of personnel. The project will be completed by Siemens Energy’s engineers in collaboration with specialized local Iraqi subcontractors.

The company is currently building 13, 132/33-kilovolt substations as part of the Siemens Roadmap for the Electrification of Iraq. These projects aim to strengthen the country’s electricity transmission and distribution network – with a particular focus on the governorate of Basra as well as the other governorates that are located in the middle and south of the country. Siemens is also supplying 35 power transformers to support the Iraqi power grid.

In April 2019, Siemens and the Government of Iraq signed an agreement to implement Phase 1 of the Roadmap, which is designed to meet the country’s reconstruction and power sector goals, and includes the addition of new and highly-efficient power generation capacity, rehabilitation and upgrade of existing power plants and the expansion of transmission and distribution networks. Following Siemens Roadmap for the Electrification of Iraq agreement, 791 MW of electricity has already been added to the country’s grid.

(Source: Siemens)

Timely $10 million USAID contribution protects more communities against COVID-19 outbreak

The United States Agency for International Development (USAID) has committed over US$10 million recently to fight the COVID-19 pandemic in Iraq, allowing the United Nations Development Programme (UNDP) to scale-up its response to the pandemic into three additional governorates.

The funds – pledged under UNDP’s Funding Facility for Stabilization for activities implemented in partnership with the Government of Iraq – will be used to rehabilitate healthcare facilities and provide medical equipment and furniture to hospitals in the originally-identified priority locations of Basra, Duhok, Karbala, Kirkuk, Najaf, and Ninewa, as well as three additional areas: Babil, Dhi Qar and Maysan.

Funding will also be used to rehabilitate the East Mosul Medical Fluid Factory – one of the largest in Iraq, and a critical source of medical supplies to government hospitals, primary healthcare centres and pharmacies. The factory was severely damaged in the ISIL conflict.

“The steep rise in COVID-19 cases detected over the past few weeks is gravely concerning and shows that the virus has not yet reached its peak in Iraq,” says Resident Representative of UNDP Iraq, Zena Ali Ahmad.

“USAID’s generous contribution comes at exactly the right time, allowing us to target even more communities by expanding our geographical scope to an additional three underserved governorates. As our biggest donor, we’re extremely grateful for USAID’s continued dedication to putting vulnerable communities first, and leaving no-one behind,” she adds.

“The United States is proud to support this work to combat COVID-19 and assist the people of Iraq; this work will directly support citizens throughout the country to get the high-quality treatment they need to fight coronavirus,” said Dana Mansuri, USAID Mission Director.

USAID joins Belgium, Denmark, Japan, the Netherlands and Sweden as key partners supporting UNDP Iraq’s response to the COVID-19 pandemic.

(Source: UN)

Prime Minister Masrour Barzani chaired a video conference meeting on Tuesday on notarisation of lands and residential housing projects.

In the meeting attended by Deputy Prime Minister Qubad Talabani and other cabinet ministers, Prime Minister Barzani spoke about separating land plots allocated for projects in a bid to resolve the issue of lands granted to people by municipalities, and the issue of residential apartments which will be notarised under the names of owners.

The meeting also discussed the subject of reorganising income from companies providing services at cities and villages in a way these services are affordable by people. They also stressed the importance of speeding up the procedures of compensating those whose lands fall within the map of cities.

They also reviewed the implementation of laws and instructions relating to ownership of residential lands which have been trespassed in light of the parliament law no. 3 of 2019, which concerns the notarisation of lands that are trespassed in a way that favours low-income people and prevents trespassing of public properties.

Cabinet ministers explained their perspectives on these issues and their suggestions were approved following an exchange of views on these questions.

(Source: KRG)

Prime Minister Masrour Barzani chairs meeting on combating new wave of Covid_19

KRG Prime Minister Masrour Barzani on Wednesday chaired a meeting with the government’s high-level committee on the coronavirus outbreak via video conference.

In the meeting attended by Deputy Prime Minister Qubad Talabani, the Minister of Health presented a detailed report on the increasing number of infections and fatalities in the Kurdistan Region due to a recent surge in Covid_19 cases. The Minister of Interior then presented a report on government measures to enforce compliance with the government’s health advice.

Following an exchange of views on how to curb the spread of the disease, the government’s committee on coronavirus made the following decisions:

  1. First: The government’s public health guidance will continue, including quarantine and delivering services to the infected, contacts and tourists. The campaign to spread awareness on the disease and health advice will intensify too.
  2. Second: The committee also decided to make wearing a mask mandatory in public places and institutions. There will be a supply of masks at government institutions for people visiting these places. Violators will be held accountable to the law.
  3. Third: The government will allocate an additional 5 billion Iraqi dinars to fight the pandemic. Health institutions in all provinces and counties can benefit from these funds.
  4. Fourth: The government will facilitate the production of masks and other equipment to ensure high quality and affordable pricing.
  5. Fifth: The Ministry of Health is permitted to expand laboratory services and set necessary mechanisms to diagnose and identify virus patients Ministry teams will continue contact tracing and tracking suspect cases.
  6. Sixth: The Ministries of Health and Interior along with the Department of Foreign Relations were assigned to contact and visit relevant departments in the Iraqi government and the World Health Organization (WHO) in Iraq and the Kurdistan Region as well as consulates and international organisations to seek assistance for the fight against the virus.
  7. Seventh: The travel ban between provinces in the Kurdistan Region and between the Kurdistan Region and Iraqi cities will continue, and measures to protect from the virus will toughen amid a recent surge in infections. The Ministries of Peshmerga Affairs and Interior were also assigned to schedule reporting to duty hours in a way to minimise travel and contact, especially for those who commute from other cities to work. The same will apply to employees of other departments, who have to commute to work.

(Source: KRG)

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

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

Market Review: “Not as Bad as Feared, but Still Pricing It”

As May drew to a close the ‘worst-case’ prognosis for Iraq in the wake of the carnage brought about by COVID-19 turned out to not be as bad as originally feared – not by a wide margin. But its equity market is still discounting the worst of possible outcomes, notwithstanding a strong close for the month with the Rabee Securities RSISX USD Index (RSISUSD) up 10.7%.

The first of the negatives to dissipate was the political chaos that gripped the country for over six months since the youth-led protest movement forced the resignation of the prime minister. The severe crisis brought on by the collapse in oil prices, and the threats – health and economic – of COVID-19, forced the political elite to suspend their quarrels and appoint a prime minister whose reform agenda would threaten their interests.

The fundamental governing equations of Iraq’s political system – which largely allowed the political elite to maintain their oversized influence on economic policies – are mostly still functioning. Yet, the scale of the economic crisis is providing the new government the opportunity to pursue meaningful economic reforms. As articulated by the Minister of Finance, these reforms include a fundamental retooling of the budget’s structural imbalances that favoured current spending over investment spending.

The first of these are likely to be cuts to public payroll expenditures (at 47% of the 2019 budget), which coupled with other rationalization measures and an improving oil price environment (discussed below) would relieve the pressure on government finances. Crucially, embarking on such reforms would allow a resumption of the dialogue with the IMF, following the straining of the relationship by the prior government’s abandonment of the 2016 Stand-by Agreement. Such a dialogue would allow Iraq access to debt markets as it seeks to restructure its past failed economic model.

The appointment of the new PM was followed by easing of the concerns that prompted the collapse in oil prices to historic lows in late April. Q2 is likely to see a much less dramatic decline in world oil demand, estimated to drop 20% versus last year, whereas expectations were for a drop of 30%.

This was complemented by a surprisingly massive, estimated, 12% drop in world oil supply in May as the OPEC+ agreement came into effect, as well as a much larger than expected drop in production elsewhere, especially in US shale oil. The combination reduced the severe pressures on global crude storage capacity and provided support for oil prices.

Finally, like in the rest of the world, Iraq is slowly emerging from lockdown and resuming economic activity, providing much-needed relief to the country’s private sector. While every sector of the economy has felt the effects of the lockdown, the informal sector – dominated by retail trade, transport and hospitality, and which accounts for the bulk of private-sector economic activity – has been particularly hard hit as seen from the chart below, which shows changes in economic activity compared to the baseline between January 3rd and February 6th.

(Baseline is the median, for the corresponding day of the week, during January 3rd – February 6th,

Source: Google, data as of May 29th.)

However, economic activity has recovered to about 80% of pre-lockdown levels – with the big drop in late May being due to the Eid holiday. This recovery will likely gradually continue over the coming weeks and will contribute to the healing of the economy. However, it should be repeated that the decline in activity is likely to have been more precipitous than shown in the above chart as activity in the retail, transport and hospitality sectors was subdued during the baseline period given the chilling effects of the dramatic events at beginning of the year. More so, these events came on the back of a slowdown induced by the continued countrywide demonstrations since October 2019.

The lockdown, for all its ills, brought some unexpected benefits to the beleaguered private sector. Part of the imposed measures were the closure of border posts with neighbouring countries. This provided breathing space for the private sector and an opportunity to grow – an opportunity that is likely to be enhanced as part of the new government program to diversify resources by stricter implementation of tariffs on imported goods.

During May, the Iraq Stock Exchange (ISX) continued operating in-line with the government’s guidance of reduced commercial activity, with three trading days per week down from the prior five – which was further reduced as the market closed on 21st May ahead of the extended Eid holiday. As argued last month, the misguided attempt to calm the market’s fears by lowering the daily stock price limit down to 5% from 10%, after leading to a sell-off in the three trading days in April, reversed sharply in May’s nine trading days as the market rose 10.7%.

The not as bad as feared hypothesis notwithstanding, the outlook for Iraq is still fraught with uncertainties. For starters, oil prices have recovered significantly and have begun to discount a supply-demand imbalance in favour of supply sooner than expected. Yet the evolution of the COVID-19 pandemic is uncertain as the world slowly emerges from a global lockdown and the consequences of global economic disruptions in the wake of COVID-19 are still unfolding with significant implications for oil demand. Higher oil prices will also likely bring back some of the shuttered supply – especially relevant in the case of US shale oil given its sensitivity to price. The most likely scenario is still a 12-month average price of $30-40 per barrel (/bbl) for Brent crude and $45-55/bbl average for the subsequent 12-months.

Additionally, the new government has a herculean task of passing its proposed reforms through the status quo focused political elite which dominates parliament, while at the same time needing acceptance of its austerity program by an alienated population. Finally, the ease of the lockdown measures brought a sharp increase in COVID-19 cases, raising fears of a second wave of the pandemic and a re-imposition of lockdown measures as evidenced by the introduction on 31st May of a one-week curfew to contain the latest increase in cases, which was subsequently extended for another week.

These concerns notwithstanding, as Iraq’s equity market was discounting neither an economic nor a corporate earnings recovery, it is worth concluding this update with the same one made here last month, i.e. citing the closing argument of the Asia Frontier Capital team in the March newsletter:-

The recent stock market correction, though painful, is now providing an excellent entry point to investors as valuations across our universe are at 10-year lows – stock picking has never been easier. Though we believe global markets could remain volatile in the near term as the number of infections rise and poor economic numbers come through, a sustained rally could be seen once there is an indication of infections peaking especially in Europe and the U.S.

“Asian frontier markets have bounced back very strongly after previous episodes of market dislocation such as in 2008-09 with markets like Pakistan and Vietnam generating much higher returns than major indices. Though it is very easy to get distracted with the negative consequences of the pandemic, Asian frontier markets are at present and will over the next few months provide an opportunity to invest in these markets last seen a decade ago.”

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), and an Adjunct Assistant Professor at 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.

The Iraq Energy Institute (IEI) has published an interview with Dr Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund; it is re-published with permission by Iraq Business News:

In the latest instalment in our series on sustainable job creation in Iraq, we spoke to Ahmed Tabaqchali, visiting fellow at the American University of Sulaimani’s Institute of Regional and International Studies (IRIS). Mr. Tabaqchali is also CIO of Asia Frontier Capital’s Iraq fund and Board Member of the Credit Bank of Iraq. Additionally, he has decades of experience in finance, having also worked with the National Bank of Kuwait’s investment arm.

In our last interview, we spoke with World Economic Forum contributor and distinguished economic historian Ewout Frankema, who discussed the role of the state in job creation.

This month we take a different tack and hear Mr.Tabachali’s views on the role of finance and markets, Iraq’s early efforts mobilizing financial technology (FINTECH) for the unbanked and kickstarting small and medium-sized enterprise (SME) growth.

AT: In terms of strategy, everything the new government will have to do has to go through parliament, including accessing foreign loans and reforming the public sector. When it comes to Iraq it is not a question of how strong the institutions are or how competent individuals are, it is a question of passing this through parliament with all of its political fragmentation, between the different pollical parties and within each party between its leadership and members, all of which makes reaching a consensus to embark on real, and thus difficult, reforms very hard. However, the scale of the crisis, brought by COVID-19 both socially and economically, might act as a catalyst for real change.

What is the current risk with having so much of the hiring in the public sector and what might be done to minimise this problem?

AT: Some things have to be done now that are comparatively easy and have been done in the past. Ad hoc measures such as freezing new hiring, cutting staff through attrition, putting a cap on benefits and letting this cascade through every department. This worked last time to a limited extent. But these changes are small scale, easily reversible and they do not solve the wider problem.

One problem is that you cannot have every ministry manage its own human resource processes, there is a need to have a central human resource structure. One course of action could be to separate benefits from salaries and link them to performance. This may sound horrendously complicated but on the public sector side, there is a little alternative. I don’t subscribe to the idea that this is a crisis that will pass, it is a multi-year crisis, a lot of oil demand will come back, but I cannot see a recovery anywhere near the pre-COVID situation.

Iraq is now not only battling a difficult internal situation but a weakened global economy. We are not just talking about a major disaster in one sector only. Consider such effects on hospitality and tourism; that will affect entire countries dependent on tourism, and then consider the knock-on effect on other sectors: what does that do to worldwide aggregate demand? What does that mean to Iraq? It means that oil prices will recover but they won’t be anything sustainably higher than $50 or $55. This points to the need for a complete change in mentality within the Iraqi governing elite and indeed, society at large.

Within Iraq, the government has very limited space to manoeuvre. If you look at Central Bank data on bank lending to the government and on T-Bill issuance, we survived in 2014-2017 through using reserves, via indirect monetary financing, and government bank lending. But while some of that has been paid off, CBI data as the end of November 2019 show that total domestic debt has increased to the prior crisis’ peak. So, I cannot see that being repeated, not in the same way as then. This time, I struggle to see the state banks’ lending beyond a few billion. The reserves are there but not un-limited and then there are conditionality constraints on any upcoming IMF loans. So, there will be no waiting out this crisis, there has to be decisive reform.

What danger is there to the SME sector, in terms of constrained available credit from banks, given this lending is important for start-ups?

AT: For the private sector banks, if you look at the end of 2018’s data, there is something like a $9 bn deposit base, 70% of which is in current accounts, so they can’t lend more than one-third of this, maximum. So, you can’t look to the private sector for state loans. That leaves the state banks, and they are so undercapitalized, burdened by un-resolved legacies of the prior regime, they function by a miracle or by pushing the accounting rules’ envelope. For example, you have an asset that is no longer a creditworthy asset, but you leave it on the books without making realistic downward adjustments to its value and without taking sufficient provisions. So that room for manoeuvre is very limited. Iraq has the foreign deposits at the Ministry of Finance, there is about $6bn there so there are some available funds here and there to meet immediate needs, but how far will you go with that? The need for the state to access domestic debt will eventually place restrictions on available funds for the SME sector.

Iraq is sliding towards a danger zone, a crunch point with foreign reserves where there is a risk of currency devaluation.

AT: Yes. And one problem here is that the last government, to appease the October demonstrations, hired additional employees and lowered the retirement age, adding at least another $6bn to the salary and pensions outlay which is now baked into the current budget. So, the $44bn in salaries and pensions in 2019, is more like $50bn for 2020. Similarly, the $73 bn spent on current expenditures, which also includes transfers to SOE’s, social security and subsidies for fuel and energy, is now more like $80 bn in current expenditures. How much can you cut from that without real restructuring?

So Iraq is facing an emergency situation to mobilise the private sector and there is a risk state banks may have limited room for lending to SMEs. One thing Iraq can do perhaps is maximise export finance and partnerships with foreign banks for SME lending, such as the recent scheme with Commerzbank. And of course, the Iraqi government has its own fund for this, the One Trillion Dinars initiative.

AT: There is no doubt that these initiatives are vital for new business ventures. The issue is structural impediments that are limiting these schemes. Access to finance is very crucial for start-ups to work, but in order for these organizations to operate you need to remove the stifling regulatory environment. The arbitrary nature of taxes, the expenses involved in just setting up and the many bureaucratic steps required to get started. So at the moment many of these start-ups are informal. The only way for these schemes to work is for them to start in the informal sector.

But they can’t make the transition to formality because the process to attain that status is so complicated and expensive, to start and to maintain. We always talk of mobilizing the private sector, but we are throttling it on a daily basis. Look at the UAE for example, they have the Free Zones, a very low time required for company registration, but with Iraq it is a stifling number of procedures.

The solution as far as the Iraqi government are concerned sadly seems to be another level of bureaucracy. In order to mobilise more start-ups, the government following the October demonstrations allowed for 18-35-year-olds to have fast-track separate set of regulations for start-ups in certain industries. So, the same bureaucracy will handle two parallel categories. You open up the door for even more corruption with more bureaucracy.

Every country, of course, has bureaucracy. But we have absurd requirements on top of the usual. Even just very small things, like paying a bill, can be a nightmare. And this is the legacy of formal socialism.

You are saying that in Iraq, socialism is not simply a term to be used as a political label, it is a word that is formally used in laws that are still on the books from decades ago.

AT: That’s right. So what Iraq needs is a change in the political economy. Look at the informal sector -it is mostly in retail, such as hawking goods, and in hospitality such as restaurants, and not in productive sectors. It’s informal because it is so expensive to start up formally. Change the regulations so it is more like the UAE, give them a year’s amnesty before you implement a much easier, formal registration process. These businesses hide because the only way they can operate is by bribing various officials. An amnesty would free them from harassments and un-necessary expenses during the transition to sensible regulations. The government needs to do something that is drastic, and very different from the past, to mobilise the private sector.

You can’t have a top-heavy, authoritarian socialist bureaucracy creating jobs or opening up the private sector. During the Kuwait conference, Iraq’s National Investment Commission came up with the One-Stop-Shop initiative – more bureaucracy on top of the bureaucracy. Why not follow the Kurdish Region of Iraq’s approach? Just get a visa on arrival for certain nationalities. That is the direction we need to be going in.

There has been a growing relationship between telecoms and banks in Iraq to provide services such as mobile wallets. Some of it is Iraqi initiative, some of it is fostered by development agencies. Perhaps one danger now is that if public sector payments are digitized, the salaries are still in jeopardy. How important have these FINTECH developments been?

AT: This is where we will see a lot of growth and excitement. One barrier to further progress is not technological. We have decent internet so the issue is firstly, we need to increase the number of areas where these innovations can be used. Right now they are quite limited. I am thinking of using a mobile e-wallet but I have to go to an official shop in town and register, supply the required set of documentation, and once you use it, the places you can use it in are rather limited. A part of the potential in this technology is that it will make it difficult to cover up small scale corruption, which is easy with cash. But there is still a chicken and egg situation in terms of outlets where e-wallets can be used.

So we could say in the long run, the public demand for convenience may crowd out the demand for corruption?

AT: Yes, and in the long run, it can have a huge effect on the “unbanked” and that will have huge potential for job creation. I have some relatives in government who started receiving their salaries through their banks, and their usage followed the same patterns seen by those in the private sector who were provided with Bank cards as I learned from speaking to bankers. At the beginning where there was an ATM when salaries were dispersed the ATM would just empty as people used it as a cash-out outlet. But in time they started leaving money in the bank and starting using the cards for making purchases. So, the cards have been extremely useful in the transition away from cash.

Similarly, for the government’s initiative when the card/ e-wallets were linked to a Mastercard, people started keeping some funds on the card. In the process they were creating deposits, giving the bank the ability to lend as these deposits grow and become sticky. So, there is convenience and value there, and that could spark wider financial development. But there needs to be a bigger deposit insurance scheme in banks, more than the very small $25,000-dollar limit recently introduced. But in the long term, this is extremely exciting. And these are the reforms that need to be pushed, and they should be COVID-inspired reforms because this is how Iraq gets out of its nightmare.

Would you say then, this is not about what the government needs to do but in some ways, about what the government should not do?

AT: I agree although of course there is a vital role for the government in general. The government should ensure there are law and order. Without that, a business cannot run, they need reliable mechanisms of exchange, debt and credit, and the enforcement of contracts. That is only done through law and order. It doesn’t have to copy a Western model either, but what is needed is the monopoly of violence by the state, and its monopoly to enforce the law, i.e. when rules of the game are predictable, enforceable, and applicable to all. Other competencies of the government are in infrastructure. Roads and electricity are enablers, as well as education and healthcare. Healthcare is a great equalizer, at least with decent healthcare you are helping the most vulnerable, and in the process building the state’s legitimacy. And if the government focuses on these and opens up the private sector, it will flourish.

(Source: IEI)