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Iraq’s fiscal woes
4/12/15
For weeks recently, all eyes were on Tikrit, where 30,000 Iraqi troops, two-thirds of whom Shiite “popular mobilization” militias coordinated by Iranian military advisers, wrested that Sunni town from IS forces who had holed up there since their blitz last summer.
The campaign highlighted one crucial fact: Without the support of precision airstrikes by the US-led coalition, the advance on Tikrit subduing the town would have been impossible, though to hear some government officials tell it, as the New York Times reported last week, “Americans deserved little or no credit, and many of the militiamen involved in the fight say the coalition air campaign actually impeded their victory, even though beforehand they had spent weeks in a stalemate with IS militants holed in Tikrit. Some even accused the US of fighting on the side of IS.”
So now all eyes will be on Mosul? I would direct these eyes elsewhere. The military campaign in Tikrit against IS, whose forces continue to occupy much of the north and the west of the country, was tough indeed. But a more daunting challenge in the coming months, perhaps even years, will not be Mosul, but Iraq’s fiscal problems. Wars are costly and Iraq, though not quite broke, has a depleted treasury. And governments with depleted treasuries can act strangely, irresponsibly and even desperately.
Few analysts in the Arab media write about it, but Iraq’s economy, afflicted with as many woes as its politics, is in shambles. Look at it this way: Iraq, like other oil producing countries in the region, relies on oil for virtually 90 percent of government revenue. But unlike them, it does not these days have the reserves to cushion it against the recent, precipitous fall in the price of oil. Over the last year, as every automobile driver in America and Europe will gleefully tell you, that price has dropped by more than half.
Earlier this year, the government in Baghdad cut its budget by 16 percent, slashing spending by all its ministries, including the defense ministry, and has resorted to ineffectual, some will say mickey mouse, efforts to garner funds, such as raising taxes on mobile phones, airline tickets, automobiles, and cigarettes. Clearly that will not leave much of a dent in a projected deficit of $25 billion.
The Economist, quoting from the Economist Intelligence Unit, a sister company, explained that even that projection is optimistic. The magazine’s correspondent, filing from Baghdad, reported in the last week of March: “The budget is based on an oil price of $56 a barrel, and assumes exports of 3.3m barrels a day. In January, Iraq exported 2.4 million b/d, at an average price of $41 a barrel.” And there you have it — a deficit far in excess of the projected $25 billion.
To avoid a gridlock, Baghdad is resorting to desperate measures, such as selling a $6 billion bond with Citigroup, borrowing from the International Monetary Fund (IMF) and the World Bank, dipping into the Central Bank’s reserves (estimated at $78 billion), even urging Kuwait to defer some of the reparation payments Iraq owes Kuwait for its 1990 invasion.
According to the IMF, Iraq’s economy has shrunk by 27 percent and unemployment now stands at over 25 percent, a figure that an industrialized nation, or a Third World nation with a dynamic economy, would consider disastrous. Moreover, foreign investment in Iraq, even before IS compounded the country’s many woes, was a pitiful $2.9 billion, which, again according to the Economist, is a “fraction of what Iraq needs to rebuild its war-torn infrastructure and revive its oil industry.”
And we have not yet begun to look at the bitter, and still unresolved, dispute between the central government in Baghdad and the Kurdish regional government in the north over the issue of an equitable distribution of oil revenue between them.
To be sure, IS has contributed to the current free-fall in Iraq’s economy, whose mainstay is oil — estimated at 143 billion barrels, the fifth largest in the world and the highest in the Middle East after Saudi Arabia and Iran. Traditionally, through its control of the oil sector, the central government, which employs about 40 percent of the labor force, influences virtually all the economic activity in the country, while the private sector plays a minor role.
In 2003, when the Coalition Provisional Authority (CPA) was established, its innocent experts, with doctorates in the discipline of economics, who knew, say, all about the co-efficient of cross elasticity but little about the Sunni-Shiite divide in Iraqi society, had a grand vision of an Iraq with a transformed, vibrant, diversified and modern economy, led by the private sector, and to that extent outlined the institutional reforms that would bring about that idealized outcome. All that came to naught, and as the Atlantic Council averred in a report last August, that same economy “remains virtually unchanged from the economy of Saddam Hussein days.”
Sadly, the conviction — or at least hope — that we all embraced at the end of 2011, when American forces ended their occupation and left it to Iraqis to run their own country, namely that Iraq will move on, has now crumbled to dust. IS, lest we forget, first emerged in Iraq, initially as a response to the sectarianism of a Shiite ruling elite that refused to believe that pluralism, along with social equity, not the domination of one sect or one tribe or one ethnic group over another, is the major building block of a stable, dynamic nation. Now we instead embrace the conviction that sometimes the chickens will come home to roost.
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4/12/15
For weeks recently, all eyes were on Tikrit, where 30,000 Iraqi troops, two-thirds of whom Shiite “popular mobilization” militias coordinated by Iranian military advisers, wrested that Sunni town from IS forces who had holed up there since their blitz last summer.
The campaign highlighted one crucial fact: Without the support of precision airstrikes by the US-led coalition, the advance on Tikrit subduing the town would have been impossible, though to hear some government officials tell it, as the New York Times reported last week, “Americans deserved little or no credit, and many of the militiamen involved in the fight say the coalition air campaign actually impeded their victory, even though beforehand they had spent weeks in a stalemate with IS militants holed in Tikrit. Some even accused the US of fighting on the side of IS.”
So now all eyes will be on Mosul? I would direct these eyes elsewhere. The military campaign in Tikrit against IS, whose forces continue to occupy much of the north and the west of the country, was tough indeed. But a more daunting challenge in the coming months, perhaps even years, will not be Mosul, but Iraq’s fiscal problems. Wars are costly and Iraq, though not quite broke, has a depleted treasury. And governments with depleted treasuries can act strangely, irresponsibly and even desperately.
Few analysts in the Arab media write about it, but Iraq’s economy, afflicted with as many woes as its politics, is in shambles. Look at it this way: Iraq, like other oil producing countries in the region, relies on oil for virtually 90 percent of government revenue. But unlike them, it does not these days have the reserves to cushion it against the recent, precipitous fall in the price of oil. Over the last year, as every automobile driver in America and Europe will gleefully tell you, that price has dropped by more than half.
Earlier this year, the government in Baghdad cut its budget by 16 percent, slashing spending by all its ministries, including the defense ministry, and has resorted to ineffectual, some will say mickey mouse, efforts to garner funds, such as raising taxes on mobile phones, airline tickets, automobiles, and cigarettes. Clearly that will not leave much of a dent in a projected deficit of $25 billion.
The Economist, quoting from the Economist Intelligence Unit, a sister company, explained that even that projection is optimistic. The magazine’s correspondent, filing from Baghdad, reported in the last week of March: “The budget is based on an oil price of $56 a barrel, and assumes exports of 3.3m barrels a day. In January, Iraq exported 2.4 million b/d, at an average price of $41 a barrel.” And there you have it — a deficit far in excess of the projected $25 billion.
To avoid a gridlock, Baghdad is resorting to desperate measures, such as selling a $6 billion bond with Citigroup, borrowing from the International Monetary Fund (IMF) and the World Bank, dipping into the Central Bank’s reserves (estimated at $78 billion), even urging Kuwait to defer some of the reparation payments Iraq owes Kuwait for its 1990 invasion.
According to the IMF, Iraq’s economy has shrunk by 27 percent and unemployment now stands at over 25 percent, a figure that an industrialized nation, or a Third World nation with a dynamic economy, would consider disastrous. Moreover, foreign investment in Iraq, even before IS compounded the country’s many woes, was a pitiful $2.9 billion, which, again according to the Economist, is a “fraction of what Iraq needs to rebuild its war-torn infrastructure and revive its oil industry.”
And we have not yet begun to look at the bitter, and still unresolved, dispute between the central government in Baghdad and the Kurdish regional government in the north over the issue of an equitable distribution of oil revenue between them.
To be sure, IS has contributed to the current free-fall in Iraq’s economy, whose mainstay is oil — estimated at 143 billion barrels, the fifth largest in the world and the highest in the Middle East after Saudi Arabia and Iran. Traditionally, through its control of the oil sector, the central government, which employs about 40 percent of the labor force, influences virtually all the economic activity in the country, while the private sector plays a minor role.
In 2003, when the Coalition Provisional Authority (CPA) was established, its innocent experts, with doctorates in the discipline of economics, who knew, say, all about the co-efficient of cross elasticity but little about the Sunni-Shiite divide in Iraqi society, had a grand vision of an Iraq with a transformed, vibrant, diversified and modern economy, led by the private sector, and to that extent outlined the institutional reforms that would bring about that idealized outcome. All that came to naught, and as the Atlantic Council averred in a report last August, that same economy “remains virtually unchanged from the economy of Saddam Hussein days.”
Sadly, the conviction — or at least hope — that we all embraced at the end of 2011, when American forces ended their occupation and left it to Iraqis to run their own country, namely that Iraq will move on, has now crumbled to dust. IS, lest we forget, first emerged in Iraq, initially as a response to the sectarianism of a Shiite ruling elite that refused to believe that pluralism, along with social equity, not the domination of one sect or one tribe or one ethnic group over another, is the major building block of a stable, dynamic nation. Now we instead embrace the conviction that sometimes the chickens will come home to roost.
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