Tough year ahead for Iraqi economy, finance minister warns


Iraq’s Finance Minister Hoshyar Zebari warned that a tough year is ahead for the war-scarred country, as oil revenues continue to shrink. But he said he is also optimistic that global oil prices will rise again in September or October this year, when supplies are expected to stabilize.

In an interview with Rudaw, Zebari said that things could become even more dramatic this year in terms of delayed salaries and pensions for civil servants, before the economy begins to recover.

“We were able to pay the salaries to employees last year, but if things continue as they do now, we could be in trouble later on in April and unable to pay wages again. This is a reality that people should know about,” warned Zebari, who is a Kurd. Below is Rudaw’s full interview with the finance minister.

Rudaw: What should we expect in 2016 in terms of the state of the Iraqi economy?

Hoshyar Zebari: 2016 will be a tough year for Iraq. 2015 was difficult but this year will be tougher according to our estimates at the finance ministry – but probably not the whole of the year. The price of oil could climb again in September or October. Up to 90 percent of Iraqi economy is dependent on oil exports, which is why we have calculated what to do then. We were able to pay the salaries to employees last year, but if things continue as they do now, we could be in trouble later on in April and unable to pay wages again. This is a reality that people should know about.

When you say the price of oil could rise again, is this your personal assessment? OPEC says that oil prices will not climb to $60 until 2016?

There are many organizations that make estimates about the price of oil, such as expert oil firms, legal companies and large global banks. Oil prices depend on demand and supply. When supply is high, the price will be low. Some say the offer will decline in the fall of 2016, and that will of course impact the price. What happened to oil was closely related to the Chinese economy. But oil will remain a vital strategic asset. We have had instances in the past when the price fell as much as now, but rose again. But no country, including Iraq, can afford to have the same economic policies as before. It is impossible to only rely on oil. The price of oil fell from $120 to $30. If you only rely on oil, you will sooner or later find yourself in big trouble, and sometimes even unable to pay salaries, which is why you should think about alternative economies.

If the price of oil keeps declining, what could replace it?

There are some solutions. One can borrow money from international bodies which have low interest rates. We have done so too. For instance, we have asked the International Monetary Fund to help us borrow $1.2 billion, which we also received. We have also asked them to monitor how we conduct our economic policies. If we succeed, they could help us more. Iraq is better off this year than the last year, as we were less experienced. We could even think about raising the value of the dinar. We have even thought about paying only part of the salaries and paying the remaining part in the future, although this is risky and could incite public unrest. The other alternative is to sell oil but receive payment in advance. We could also raise the prices of electricity, water and fuel in domestic markets. But again, it is easier said than done, and any government could face public unrest if it went through with such policies. Economic decisions are always tough. Of Iraq’s 36 million people, over 7 million are state employees. We pay out $4 billion in wages every month.

In the Iraqi budget, 1.2 trillion dinars were allocated for the Hashd al- Shaabi. Why was nothing allocated for the Peshmerga?

This is only the second year we were able to prepare a national budget on time in Iraq. Iraq has never managed to do so in the past. We have been talking to both the Kurdistan presidency and the Kurdistan Regional Government, and tried to earmark the KRG share like the previous year as an alternative. If the parties approve of it, then it is already allocated. If not, then we could have other agreements. As a duty, we will defend the Kurdish share of the national budget. If Kurdistan exports its oil through the Iraqi owned SOMO company, then we pay the KRG’s budget through the sales, because Iraq has no money at the moment. With regard to the Peshmerga, their share is within the national Iraqi budget. The Peshmerga share of budget has been recognized in this government’s political agenda. The Peshmerga’s share is within the Iraqi infantry division. We secured the Peshmerga budget for about six months, according to the terms of agreement between Baghdad and Erbil (in December 2014). But unfortunately, it was blocked later. But even now the (Iraqi) government is ready to pay the Peshmerga budget.

Is it you or Iraqi Prime Minister Haider al-Abadi who withholds the KRG share of the budget?

It is not like that. There is a budget. I said that in a cabinet meeting last week and reminded them that the Peshmerga budget has not been paid. They said we have not decided not to pay Peshmerga salaries. But they have internal disputes. We said Peshmerga should not suffer for such disagreements. I want to reiterate that there are no decisions not to pay Peshmerga salaries. But of course, Abadi, who is the commander in chief of the armed forces, should make that decision.

When the Hashd al-Shaabi militia has received its budget, why not the Peshmerga?

Well, the government is a Hashd government, it’s a Shiite government. They are the majority. Kurds have three or four ministers. And it’s not the government who pays the Peshmerga salaries, but the Iraqi defense ministry. That decision is not with me.

When was the last Peshmerga budget sent?

It has not been paid since June last year.

Have any Kurdish parties protested against that?

Unfortunately, the Kurdish stance is not unified in Baghdad. Kurdish role has been weakened there, but in regard to the budget, Kurds have had a common stance. Some Kurdish parties told Abadi that the Peshmerga budget benefits only one side and that is indeed one reason why the budget is frozen.

How much is the Iraqi debt that the government pays back annually?

The debt is huge. We pay portions of it back every year. And that has given Iraq credibility.

Is it true that if Iraq does not pay back its debt to the French Club of Paris, it will balloon to $50 billion?

No it is not. When we signed the agreement with the Paris Club, we demanded that 80 percent of Iraqi debt be written off. Accordingly, Iraq should pay only 20 percent in instalments. We have borrowed money from both foreign and domestic donors. Our debt is now $30 billion, which is not much in comparison to other countries’ debts.

Iraq has border guards who have been paid, but Kurdish border guards have not been paid since August 2014. Is this because they are Kurdish?

No, it is not. There are some things that should be evident to the people. It’s true that the Kurdistan budget is currently not coming from Baghdad, but it doesn’t mean Iraq has no obligations towards Kurdistan. There are state benefits like medicine, kerosene, fuel and food which the Iraqi government grants all people in Iraq, including people in Kurdistan. There are other federal expenses too, like border guards… who receive their salaries regularly. Border guards are part of the interior ministry. We have regularly paid the monthly budget of the interior ministry.

Has the Iraqi government spent anything on dams in Kurdistan?

I think so. Of the $1.2 billion we received in loans from the IMF, $200 is for the Mosul dam.

Why are border gates not included?

Because the Kurdistan region does not send back revenues from these gates to Baghdad.

Does the Iraqi government pay for provincial development? Has Halabja, which is a deprived province, been given special attention in the budget?

We pay parts of the budget for provincial development, but not all of it. We have allocated a budget for that. But we gave special attention to Kirkuk city. Regarding Halabja, we did allocate a special budget last year as part of Sulaimani province’s overall budget, and this year we have allocated a sum within the national budget for Halabja.

What is the Iraqi monthly revenue now?

The Iraqi budget is 105 trillion dinars (about $87 billion. We have 80 trillion dinars in revenues and of course we have 25 trillion dinars of deficit. We agreed with the IMF that expenses should not exceed revenues. We are now in an experimental stage.

Is it Baghdad or the KRG that is not committed to the December Baghdad agreement?

Both. It’s not just the budget. There are many security and commercial ties between the two, which they both are in need of. This is a federal country. Some people, who were in the government or are there now, cannot accept it. But I think Iraq will head towards more federalism in the future. President (Masoud) Barzani has been regularly speaking to Prime Minister Abadi on the telephone. They have also exchanged letters and delegations.

A KRG delegation should have traveled to Baghdad now, why hasn’t it done so?

I really don’t know. I was myself trying to persuade both parties that they should meet in Baghdad. And they all agreed. But Baghdad withdrew once and did not show up, and the other side withdrew on a later occasion.

Do you think it’s good for the Kurdish delegation to go to Baghdad?

Yes, indeed. Nothing is better than negotiation.

It is said that a second region will be set up in Iraq, this time for the Sunnis. Is that going to happen?

According to the constitution it is their right. But in the end it is for the Sunni leaders to decide whether they think they are better off or not. I think Iraq will head towards more federalism in the future.

So we should expect another federal region and not independence?

I think so too. Since Iraq as a state has political, economic and regional support from the outside world.

You were Iraqi foreign minister for 10 years. What is the prospect for a Kurdish state?

It depends on the assessment of the situation. Kurds have the right to self-determination. It is noted also in the foreword of the constitution. It says the peoples of Iraq stay together as long as the constitution is upheld. But when it is violated, then all options are open. I think this (Iraqi) government is better than the previous one. I think we can reach a deal. This government really tries to find solutions. It respects Kurdistan as it is. It has tried not to be part of internal Kurdish disagreements.

But in terms of the budget, Abadi has done the same as his predecessor, Nouri al-Maliki. Why do you think he is better?

I’m not here to justify Abadi’s government. But this government does not intend to be a foe of Kurdistan. It is better than the former government. For instance, the KRG independently sells its oil since June last year, but Baghdad has not created any problems in that regard. Still, the Iraqi government has many weaknesses and deficiencies.

Did the problems with the Kurdistan region increase?

No, they did not because there is a mechanism to find solutions.

What is Abadi like?

He is tough to deal with. But he is cooperative. Sometimes he is unresolved in some matters. But now he has wide support both inside and internationally. They think it is a great chance to help Iraq get rid of terror and then start reforms so that it no longer has a sectarian government or an ally of Iran, which is why it is being supported more than before.

Except for the agreement that was signed before, do you think Erbil and Baghdad should strike a new deal?

Yes, I think so.