US Institute: the continuing decline in oil prices may give a real opportunity for reform in Iraq

19 12 2015
In August 2015 Prime Minister Haider al-Abadi proposed a package of reforms to reduce the size of government and tackle corruption. He wanted Iraq's oil exports that dominates the rentier economy of the country, where oil revenues make up 43% of GDP, and 99% of exports, and 90% of total federal revenues.
For this and in order to increase public revenues, the government always under pressure to increase oil production capacity regardless of market fluctuations. The government expects to export 3.6 million barrels of oil per day in 2016. Although this size but reasonable price of $ 45 per barrel somewhat optimistic.
Despite the global economic crisis that affected the oil market in 2008, oil prices have continued to rise steadily over the past decade compared to the years of nineties.
As a result, the successive Iraqi governments of exaggerating the federal budgets and excessive unnecessary appointments in government departments, resulting in paying salaries to employees are not eligible in the public sector.
And increased federal budget for Iraq size at a rate five times between 2004 and 2015. Regardless of the size of the incoming oil revenues to the treasury, there is a deficit in the budgets of nearly 20%, while the actual spending is always up to 70% or more, leaving less than 30% for investment and development.
Although Iraq - including the Kurdistan region - has succeeded in increasing production at a rate of two million barrels of oil per day since 2010 and reached the total production of 4.4 million barrels per day, the collapse of oil prices it has canceled 60% of the previous value of oil in the market.
Moreover, the war is expected to Daash costs, and the Department of 3.5 million displaced people in the interior, internal factional politics, and stumbled giant infrastructure projects, are all caused obstruction to achieve further progress in the country.
However, the Ministry of Finance has proposed a budget of 99.6 billion dollars for 2016, with a projected deficit of $ 25.8 billion. It expects the budget price of a barrel of oil of $ 45 assumes the continuation of December 2014 deal with the Kurdistan Regional Government - that the federal government authorizes access to 550 thousand barrels of oil per day from the southern fields in the region in exchange for payments.
This amount - 550 thousand barrels per day - include 300 thousand barrels of Kirkuk oilfields and 250 thousand barrels of fields in the region. The government expects to export 3.6 million barrels per day in 2016 and the fact that the price of the barrel is expected - $ 45 - is reasonable therefore it will be a difficult year in 2016 from a financial point of where the federal central bank's dollar reserves are still sinking.
Security and financial situation of Iraq is less dangerous than its neighbors from non-Gulf Cooperation Council (GCC). Without the existence of alternative sources of revenue, the continued decline in oil prices may give a real opportunity for reform in Iraq.
Since popular protests, which the government called for the provision of services and the fight against corruption and implementing the rule of law, became Abadi enjoys popular support Although the parliament approved the initial package of reforms, the people expect more action.
With the prospect of continued low oil prices, the government should gradually abolish the support for fuel and electricity generation in order to provide at least $ 14 billion a year for imported raw materials and fluids. Moreover, the government should stop the excessive employment in government institutions should also be subject to government salaries and spending is essential to a thorough review. In addition to the government to provide incentives for the private sector to fill the void in the various economic sectors, including the oil and gas sector, which had been neglected because of the years of internal turmoil.
These developments will provide for Iraq ten of billions of dollars paid annually on the salaries of the staff form, and ease the pressure on the budget, which have been strained as a result of lower oil prices.
A first priority, to Iraq to attract more international investors in the field of energy and refining projects and the use of flared gas generation. Iraq must also use available funds of reforms in the industry and start re-industrialization, which means thus reducing the country's dependence on import.
The success and the failure of Iraq as a state in 2016 will reveal the extent of flexibility Abadi reforms package. Although the task seems difficult, the reforms are not impossible if the government has taken the right actions.
About: Brookings Institution