Iraq’s Economic Rescue Threatened by Popular Anger

April 22, 2016

Photo: Prime Minister Haider al-Abadi at the World Economic Forum in January 2016 (WEF)
Iraq is facing a severe economic crisis, but political elites and their popular constituencies stand ready to block desperately needed economic reforms.

A small team, including Iraq’s Prime Minister, Finance Minister, and Governor of the Central Bank, have been working hard to hammer out the details of an arrangement with the IMF that could unlock $15 billion of funding for Iraq over three years. But the economic crisis that prompted these negotiations remains little understood by the wider Iraqi public and their political representatives, who are likely to block any attempt to cut public sector jobs or reduce salaries through public demonstrations and obstructionism in parliament.

In an era of low oil prices, Iraq’s current spending levels are fundamentally unsustainable. Its monthly oil revenues cover only half of its monthly public sector salary and pension bill, leading the country to burn through 20 percent of its foreign currency reserves in 2015 and to rack up a budget deficit of at least $25 billion. And the country is not even putting any money towards the vast cost of reconstruction in areas that have been liberated by the Islamic State (ISIS), where the bill is currently being picked up by the UN and international aid. But the long-term needs of these destroyed communities will eventually be the responsibility of the Iraqi government.

Conversations with Iraqi political elites, analysts, professors, and young people during a recent trip to Baghdad and Najaf with the Task Force on the Future of Iraq revealed they were widely unaware of the chasm between revenues and spending, and were unwilling to absorb the pain of spending cuts. The IMF, the US Treasury, and other international partners need to work closely with the Iraqi Prime Minister, Haider al-Abadi, to implement a public awareness campaign if there is to be any hope of economic reform in the country.

Public understanding of the problem will not be enough. The Iraqi public is understandably furious that during the years of plenty, Iraq’s politicians lined their own pockets rather than invest in public services. If the Iraqi public is to be persuaded to accept job losses and salary cuts, there must be a campaign to prosecute corrupt officials, and some attempt to recuperate stolen funds. Nigeria’s Economic and Financial Crimes Commission, which claims to have recovered $11 billion in funds lost to corruption, could provide Iraq with one potential model. That model demonstrates the importance of international partners helping in the pursuit of ill-gotten funds through the convoluted global financial system.

Targeting corrupt government officials will inevitably prompt a firestorm of opposition from a political elite that is almost universally guilty of siphoning-off public money. Political opponents are likely to accuse the government of enacting a foreign conspiracy against them, aided by the evil and predatory IMF, and the government needs to counter such political attacks with an aggressive public relations campaign that emphasizes the guilt of these individuals.

It is also crucial that the government engages in intensive internal diplomacy to convince key political actors of the necessity of its economic reform program, and of the need to prosecute corrupt individuals from across the political spectrum. International partners including the United States can reinforce this message by heavily engaging with the full range of political players and by explicitly linking its continued financial, political and military support to the government’s plans to achieve solvency.

Prime Minister Abadi has weathered an incredible political storm over the last few weeks. Escalating protests led by the Sadrists prompted him to propose a technocratic cabinet, which was then rejected by the leaders of political blocs. The ensuing uproar prompted two former Prime Ministers—Nouri al-Maliki and Ayad Allawi—to stage a sit-in in parliament in an effort to overthrow the Abadi government. Although the fate of parliamentary speaker Salim al-Jibouri remains uncertain, for now it looks like the rebels simply do not have the numbers that they would need to defeat the Prime Minister.

As Abadi emerges from this latest upheaval, the pressing issue remains that Iraq is running out of money and that the current public sector salary bill is completely unsupportable. Up to now, the Iraqis have been slashing spending on everything apart from salaries, pensions, and subsidies, but this is short sighted. Cuts to investment in the oil sector are threatening production growth at a time when Iraq is dependent on oil sales for 90 percent of its revenue. Although the country reached a record production of 4.55 million barrels a day last month, economists forecast that production is likely to plateau or even decline in the coming years because of underinvestment in the oil industry.

The IMF implemented a staff-monitored program in Iraq late last year to lay the groundwork for further IMF financial assistance, but Iraq missed two of the five benchmarks because of its continued non-payment of oil companies and its failure to cut its salary bill.

Although there has been slight recovery in oil prices early this year, the failure of the meeting between OPEC and non-OPEC oil producers in Doha this month to agree on production cuts further delays prospects for a significant rise in oil prices. Moreover, if such a deal does go ahead Iraq will also be forced to cap its own oil production, continuing the limit its ability to fuel its recovery through oil revenues.

Although the government has plans to incentivize voluntary departures from the public sector, and to tax entitlements, these measures do not go far enough. It will take political courage to effectively tackle the bloated and grossly inefficient public sector, but it is the only way of setting Iraq’s economy on a stable course at a time when low oil prices look set to remain the norm.

Dr. Nussaibah Younis recently led the Task Force on the Future of Iraq on a trip to Baghdad, Najaf and the Kurdistan Region of Iraq. She is a Resident Senior Fellow at the Rafik Hariri Center for the Middle East at the Atlantic Council.