The Iraqi government says Iraq faces an immediate challenge caused by the decline in oil prices and the impact this has had on the economy and fiscal liquidity.
Officials say that the impact of the fall in oil prices is compounded by other weaknesses caused by decades old policies of a command economy, and by the approach to the economy by successive Iraqi governments over the past seventeen years.
These policies, they add, have led, amongst other things, to an exponential increase in the size of the public sector, low levels of private investment, mismanagement and administrative corruption.
According to official figures, salaries and staff allowances in the public sector constitute approximately 60% of public spending, and this does not include other expenditure on daily activities of ministries, while spending on investment projects represents 2% of the budget.
The figures show that the number of people employed in the public sector in 2005 was around 850,000, but the number of state employees has risen to more than 3 millions now, and this figure does not include contract employees or those on daily rates, costing Iraq US$36 billions annually, a ten-fold increase from US$3.6 billions annually a few years ago.
The new Iraqi Cabinet announced the establishment of the Emergency Cell for Financial Reform to lead the response to the crisis, under the chairmanship of the Prime Minister, and with the membership of the Ministers of Finance, Foreign Affairs, Planning, the Governor of the Central Bank, the Secretary General of the Council of Ministers, and other officials as nominated by the Prime Minister.
The Cell’s mandate is to ensure financial liquidity, agree measures to rationalise public spending, diversify resources, and propose finance mechanisms for reconstruction and investment projects from outside government funding streams.
As well as rationalising public spending, the new Iraqi government says it will embark on an economic reform programme in Iraq that includes:
Supporting the expansion of the private sector and encouraging investment
Introducing automation and simplifying procedures in the public sector
Adopting a single budget account to monitor spending by ministries to reduce waste and corruption
Expanding the electronic payment system for salaries, and pressing ahead with the e-government project
Rebalancing Iraq’s economic relations with all neighbouring countries
Earlier this month, the Minister of Finance, Ali Allawi, said that cutting spending was essential, and that this will include reductions to the the benefits and allowances of state employees, including those of senior officials, but he stressed that the basic salaries of employees will not be reduced, and that any cuts will not include employees or pensioners who earn 500,000 dinars or less a month.
The opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.
America and Britain have failed in introducing democracy into Iraq because they handed power to politicians, most of whom do not have the qualification or experience to be in their positions. They are now paying the price for their mistakes.
17 years ago, Iraq was ruled by a dictator who had an agricultural, industrial, health, educational, military, and police system. Today, Iraq is a failed state with diminished local production, also experiencing domestic security and political instability.
Since 2003, all the elected government officials have been unable to address issues concerning mismanagement and corruption. They have failed to prioritize the Iraqi interests and meet the needs of its people. Likewise, the failed parliament has become hated and unwelcome by the Iraqi people because many political parties and blocs are corrupt, competing amongst each other for power. Members of parliament do not have the vision, knowledge and creditability to establish clear political, economic or social programs in rebuilding Iraq.
The popular protests that started in October of last year were a result of continued political failure and mismanagement of the country since 2003. The mass protest movement started with demands to improve social and economic conditions. Following the brutal suppression by the government the protests grew against government corruption, the constitution, control of militias and Iranian interference. As the protests gained momentum, they started to become more organized and unified amongst the provinces. The protest movements are now demanding to dissolve the parliament, form an interim government, and hold early elections with the aim of bringing about a fundamental change in the political system.
The Iraqi government made a mistake in not taking advantage of international experts working in the Provincial Reconstruction Team (PRT) and the Iraqi-American Strategic Framework Agreement (SFA) signed in 2008 to develop the Iraqi socio-economic programs.
The Iraqi politicians in power since 2003 and until now have not offered anything to future generations, and they are the least responsible for their people. They have destroyed the economy, spreading ignorance and not educating and empowering their people.
Iraq suffers from widespread and persistent corruption across all levels of government and sectors. According to the World Bank’s governance indicators, from 2003 until 2013, Iraq has consistently scored in the bottom 10 percentile for control of corruption, rule of law and political stability which created successive living and economic crises for citizens. The Transparency International Organization reports that 300 billion dollars has been looted since 2003 and local Iraqi sources state that another 350 billion dollars have been mismanaged and stolen within more than 5000 projects funded between the period of 2003-2014 in the sectors of housing, health, education, roads, bridges, and electricity. The report claims most of these projects were fake and not implemented because of poor planning.
Today, Iraq needs a strong prime minister who is able to make important decisions to meet these challenges. The Prime Minister-designate Mr. Mustafa Al Kadhimi has recently been appointed to form new cabinet. To succeed in his mission, he MUST create a team with strong political and economic credentials to present radical solutions to a transitional program that includes:
Restore the security and political stability;
Strengthen the integrity of national sovereignty;
Implement reform programs to fulfill the demands of the demonstrators and respond to their legitimate aspiration;
Development of the economy and international relations.
Since 2003 the GoI has continuously failed its citizens and contributed to the deteriorating economic and security situation. The corruption and lack of security control cannot continue as the population has reached a tipping point. History has proven that the GoI cannot independently rebuild Iraq, they must collaborate with international agencies as they do not process the expertise. If Iraq continues on the same path then we can only expect a continued path towards a failed state.
By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund. This article was originally published by the LSE Middle East Centre.
Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.
Between a Rock and a Hard Place: Iraq’s Political Class’ Dilemma between Budget Realties and Protestor Demands
The twin shocks of the effect of coronavirus on the world economy and the current oil price war will stress Iraq’s budget to the limit, and lead to an economic crisis if it continues for an extended period.
While as extraordinary shocks they were unforeseeable, the Iraqi budget’s structural imbalance would have inevitably led to such an economic crisis – the only question being when and not if.
A low oil price environment exposes the structural faultiness of the budget with projected revenues not covering current spending, which is mostly composed of salaries, pensions and welfare spending. These have increased from 50% of current expenditures in 2004 to an estimated 81% in 2019, and likely to more than 85% in 2020. As such the default choice for the government would be to cancel all investment spending, especially non-oil investment spending, and resort to borrowing.
Such measures have allowed the government to continue functioning, but these come at a huge cost to the economy as Table 2 below shows. Global debt markets are not as accommodating as they were in 2014-17 given Iraq’s estranged relationship with the US and the change in the IMF’s stance toward Iraq. As such the government would have to resort to domestic sources, which ultimately means indirect monetary operations by the CBI at the expense of the its foreign reserves as happened in 2014-16.
Moreover, these measures would only postpone and not resolve the crises, needing much higher oil prices to contain or mask it like in 2017-19. Medium-term oil prices would probably (for Brent prices) settle within a range of $50-60/bbl, which should partially relieve the stress on the budget, but not the need to address its imbalance.
Iraq’s 2019 budget, initially proposed by the prior government, submitted with minor changes by the current government and approved by the current parliament, perpetuated the same deficiencies and weaknessess of all Iraq’s budgets since 2003. Crucially, it deepened the structural imbalance between the budget’s current and investment expenditures, in which public sector wages consumed an ever-increasing share of government revenues.
Moreover, it undermined and reversed most of the small, but essential, fiscal reforms agreed with the IMF in the 2016 Stand-By Agreement (SBA) to address this structural imbalance; and which needed considerable follow-up reforms over the years to put the country on a sustainable path to growth and reduce the economy’s vulnerabilities to the volatile oil market. The extent of these vulnerabilities came to the fore during the collapse in oil prices in 2014, and coupled with the cost of the ISIS conflict, this led to a sharp contraction to the non-oil economy in 2014-17.
Undeterred by these memories, the budget’s planners, buoyed by the bounty of higher oil revenues, from late 2017 embarked on an expansionary budget that magnified these very vulnerabilities. This was achieved by simultaneously reversing the growth of non-oil revenues and by increasing current spending. Non-oil revenues decreased in both absolute terms and as a percentage of total revenues: -18% and -29% respectively in 2019 and 2018.
Additionally, 25% of these non-oil revenues were in fact oil-related in the form of taxes on foreign oil companies and the budget’s share from profits from the state’s oil companies. Current spending increased by 15% with the salary and pensions component growing by 7.5% instead of decreasing continuously.
The budget’s trumpeted increase of 29% in investment spending hides the fact that only 43% of this total spending for 2019 was earmarked for non-oil investment, which would nevertheless increase by 43% in 2019. However, historically this spending is on paper only, with an execution rate of under 65%. The performance in 2019 was much worse than normal with non-oil investment spending at about IQD 3.3 trn as of November 2019 from a planned budget of IQD 14.0 trn, or about a 24% execution rate.
The budget planners’ aims for 2020 were for a continuation of the expansionary budget of 2019, which dismayed the IMF enough for it to issue a critical country report (19/248) – the first since 2004. Adding to the dismay was the fact that the government’s plan for fiscal probity was based on expectations of continued high oil prices, as well as sticking to its historic under-execution of the budget. Essential budget reforms to address the structural imbalance were delegated to an expression of interest for inclusion in medium term fiscal strategy planning.
The IMF then modelled for a 2020 budget with revenues estimated at IQD 113.1 trn based on oil price assumptions of $55.8/bbl. Expenditures were estimated at IQD 123.2 trn, made up of current expenditures at IQD 99.1 trn, while oil investment spending was estimated at IQD 15.5 trn and non-oil investment spending at IQD 8.6 trn. This would have needed debt financing of IQD 10.0 trn to balance the budget. Since it’s almost impossible to cut the bulk of current spending, the government must have been anticipating a better budgetary situation through Iraqi oil prices higher than $55.8/bbl and from under-executing much needed non-oil investment spending and reconstruction.
By October, plans for budget expenditure ballooned by 31% to IQD 162.0 trn, necessitating debt financing of IQD 48.9 trn. While there are no details apart from spending and deficit figures, the political paralysis following the failure of the prime minister-designate to form a government in early March has put a halt to these runaway expenditure plans.
As long as the political class’ existential fear from the five-month long youth-led countrywide demonstrations continues to ebb and flow, this political paralysis is likely to continue. However, the main economic consequences would be the same whether a new government forms under a new prime minister-designate, or if the current caretaker government continues to limp on. The outcome either way will be that no new budget will be passed, with the government continuing to implement the executed parts of 2019’s budget throughout 2020 according to the ‘1/12th rule’.
Essentially, this means the government will continue to spend (per month) 1/12th of the actual spend in 2019 – effectively extending the current spending component for 2019 in addition to the increased spending of IQD 10.5 trn as a result of government measures to appease the demonstrators in October 2019. The government will likewise continue with the investment projects initiated in 2019.
Estimating the effects of the current events on the Iraqi budget is fraught with uncertainty. Current predictions on the extent of the decline in oil prices mirror those made following the 2014 oil price war, which then assumed a continuation of the decline into the future. This in time proved to be overly pessimistic, as will the current ‘worst-case’ prognoses. Moreover, though the effects of the new coronavirus on the world economy will be profound in Q1/2020, the extent and the continuation of these effects for the rest of the year remains uncertain.
However, these negative effects would be compounded for oil prices by a sharply increased supply in an environment of weakened demand. The upshot would be an extended period of lower oil prices. The table below looks at the budget for 2015-19 and estimates for 2020 based on different realised oil prices for 2020 as whole (please see footnote 2 for notes and assumptions used).
Past policies of spending oil revenues on expanding the public payroll and welfare spending, in the process depleting the country’s wealth without building its infrastructure, has resulted in an economy dependent on imports of goods and services, a stunted private sector and a labour market skewed towards public employment. This development has been at the root cause of successive countrywide demonstrations. The need to urgently restructure the budget’s structural imbalances will require painful reforms and a long adjustment period, and thus would need a buy-in by the population at large.
This, given the extent of the current anti-political elite protest movement and the scale of the repression of this movement, is unlikely without significant political reform.
 The percentage figures are made up of salaries, pensions and transfers. Transfers are mostly composed of welfare spending and transfers to State-Owned Enterprises (SOEs) which in turn are primarily for salary payments and support to SOEs. Source: IMF Iraq country reports 2004-19.
 Revenues and expenditures for 2015-19 sourced from Ministry of Finance (MoF). These figures constitute revenues and expenditures actually received/made at the time and not booked. As such they differ, sometimes significantly, from those provided by the IMF. The crucial difference being that they resemble an actual cash flow statement and not an income statement. This can be seen from the difference between the Ministry of Oil’s (MoO) revenue data which show sales made and the MoF’s data which how funds received which can lag actual sales.
Iraqi oil sales and average Iraqi oil price are taken from MoO website, while average Brent prices can be found here. CBI foreign reserves are as of end of 2019 and are found here. 2019 budget numbers are as of November 2019 and projected to continue into end of 2019. Oil revenues are based on MoO data which are available as of the end of December 2019. The 2020 budget numbers assume a continuation of the budget spent for 2019. It is assumed that Iraq would maintain market share through aggressive pricing and thus that the discount to Brent would increase from $3.35 for 2019 to $4.50.
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.
KRG Prime Minister Masrour Barzani chaired a cabinet meeting on Wednesday to discuss the implementation of the KRG’s ambitious Reform Law.
The meeting of cabinet ministers was attended by the heads of the Financial Monitoring Diwan and Commission of Integrity in Kurdistan, as well as the President of Public Prosecutions.
Prime Minister Barzani emphasised the significance of the KRG’s modernisation efforts, which will enhance the efficiency of all government sectors and streamline the delivery of services to the public. He called on all parties to support the reform agenda.
A high-level committee was established to oversee implementation, and the Prime Minister requested that ministers submit recommendations on the prompt and effective enacting of the Reform Law within 15 days.
The Prime Minister also highlighted the role of financial monitoring authorities, the Commission of Integrity, and Public Prosecutions in supervising the reform process.
During the meeting, it was agreed that the cabinet, as part of its core responsibilities, will consider the restructuring the Kurdistan Region’s revenues and expenditures to bring greater transparency to the oil and gas sectors.
KRG Prime Minister Masrour Barzani and Deputy Prime Minister Qubad Talabani chaired a meeting of the cabinet on Wednesday to discuss implementing best practice for the taxation system of the Kurdistan Region.
The ministers reviewed an internal pilot project tasked with developing a new legal and auditing framework. The framework updates current auditing practices and increases the transparency of the taxation system.
Prime Minister Barzani emphasised his cabinet’s commitment to an ambitious reform agenda, notably tax revenue reform in the Kurdistan Region, which will ensure fair implementation of the system and provide the government with the enhanced enforcement tools.
The cabinet also approved a project designed to improve monitoring and auditing of government and private sector budgets, the facilitation of which will be supported by the Ministry of Finance and Economy.
During the cabinet meeting, the KRG also approved the merging of the High Institute for Audits and Accounting with the Ministry of Higher Education and Scientific Research, bolstering their research capabilities and raising scientific standards.
Prime Minister Barzani called for everyone to work together to ensure that public property and government vehicles are used in the best interest of the public and in accordance with government rules and regulations.
By Christine McCaffray van den Toorn and Raad Alkadiri for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.
US-Iran tensions shift Iraq from brink of reform to brink of war
Rising US-Iranian tensions over the past week have seemingly brought the two sides closer to outright confrontation than at any time in the past four decades.
Tehran’s vow to take revenge for the US drone strike Jan. 3 that killed the commander of the Islamic Revolutionary Guard Corps (IRGC) Quds Force, Qasem Soleimani, along with Abu Mahdi al-Muhandis, deputy head of the Popular Mobilization Units (PMU), or Hashid Shaabi, last week in Baghdad has been met with equally bellicose statements by US President Donald Trump, who sent 3,500 additional troops to the Middle East after the assassination and promised that any Iranian action would be met with a massive US military response.