Economist: Iraq has become a “salary state” and the oil crisis threatens to paralyze it.
Financial expert Mahmoud Dagher confirmed on Monday that public finances in Iraq have turned into something resembling “salary finances” since 2004, as a result of the almost complete reliance on oil revenues to cover monthly operating expenses, primarily the salaries of employees, retirees and social welfare.
Dagher told Shafaq News Agency that “the continuous expansion in government appointments during the past years has led to an inflation of operational spending, so that most of the oil revenues are allocated to cover salaries, pensions and social assistance, which has made the success or failure of governments linked to their ability to secure salaries and disburse them on time.”
He added that “any oil crisis or halt in exports could paralyze public finances, as happened during previous crises or in light of current regional tensions, which may force the government to resort to exceptional options to provide liquidity, including discounting treasury remittances through the central bank.”
He explained that “the available alternatives are still limited in the short term, due to weak non-oil revenues, limited tax collection, the difficulty of diversifying the economy after two decades of dependence on the public sector, as well as the widening phenomenon of disguised unemployment and the dependence of large numbers of citizens on government jobs as a main source of income.”
Dagher pointed out that “the continuation of the crises for a long period may push the government to take austerity or temporary measures to alleviate the pressure on the budget, including improving the collection of electricity and water services, postponing the disbursement of some financial dues to farmers and contractors, reducing luxury imports, as well as freezing allowances, promotions, bonuses and profits.”
The financial expert continued, saying that the “zero oil revenue” scenario puts Iraq in front of difficult economic and political choices, in light of rising financial obligations and increasing social pressures, which makes dealing with the crisis more complicated and costly for the state and society.
The Iraqi economy is almost entirely dependent on oil, which accounts for about 90 to 95% of budget revenues, making any disruption to exports a direct challenge to the government’s ability to finance operating expenses, especially salaries, pensions and social welfare, with a monthly need estimated at about 9 trillion dinars ($6.8 billion).
Experts suggest that the continued halt or decline in exports may push Iraq to rely on part of its foreign reserves, which could affect monetary stability if the crisis lasts for a long time, given the limited reliance on export alternatives or non-oil revenues.
The war between the United States and Israel on one side and Iran on the other has caused a near-complete paralysis of navigation in the Strait of Hormuz, leading to a decrease in Iraqi exports to less than 800,000 barrels per day and losses estimated at about $128 million per day, according to the Eco Iraq Observatory, amid rising shipping and insurance costs and increasing fears of global economic repercussions due to the importance of the strait through which about 20 million barrels of oil pass per day.
Shafaq.com