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The industrialized world continues to struggle through a prolonged economic crisis. An Iraqi commentator in Berlin considers the impact of this on Iraq and how the country might avoid negative effects of a global recession. in this article from Niqash.
Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.
The Euro zone’s debt crisis, the US recession, a slowdown in growth and sharp fluctuations on global markets for stocks, currencies and raw materials: all of these indicate that the world may be facing the worst prolonged economic contraction since that which swept the world’s industrialized countries after World War I.
The question is: what impact will all of this have on Iraq?
At first glance, the answer seems easy. Iraq shouldn’t suffer too much. Iraqi banks don’t hold Greek bonds and don’t much care whether Greece is bankrupt. And as long as they are preoccupied with trying to find solutions to pressing intractable domestic problems, such as power shortages and corruption, Iraqi decision makers are not thinking a lot about what is happening inside the US or European economies.
But such disconnectedness is hardly a good sign. It is an indication that much of the Iraqi economy is not linked to the global one. And this disconnectedness is also seen in Iraq’s financial markets – more specifically in the banking sector and on the Iraqi stock market – which haven’t been able to attract much foreign investment.
Additionally because Iraq is so dependent on oil exports for its national income, the country is exposed to global market fluctuations. Any changes in oil price have an impact on the federal budget. And because, in light of a weak private sector, the Iraqi government is the main driver of the local economy – among other things, the government is the biggest employer in the country – any impact on the federal budget will have an impact on the local economy.
In light of this dependence on oil, the Iraqi government should be thinking about how to build up some financial reserves in case of unexpected developments.
The Iraqi Central Bank is trying to protect foreign exchange reserves by cautiously splitting the reserve, currently estimated at around US$60 billion, between US dollars and the Euro as well as retaining a portion in gold and other international currencies. But that alone will not be enough to help the country withstand external pressures.
In 2008, as a result of the historic financial crisis that accompanied the bursting of the real estate bubble in the US, oil prices declined significantly. Previous to this they had been at historic heights. And although oil prices have since come back up, they didn’t rise to the levels they had been at. Iraq felt this and lost billions of dollars in expected revenues. This led to the country’s first significant national budget deficit in 2009, forcing Iraq to borrow from the International Monetary Fund, as well as domestic economic repercussions.
Whether this scenario will be repeated due to a continuing recession in oil-buying, industrialized countries like the US and in Europe is unclear. Turmoil in international markets is already being reflected on the oil markets, which have seen pressure and price fluctuation.
And besides changes in global demand, analysts suggest these changes are also due to political factors, such as the unrest caused by Arab Spring protests in countries like Libya, a major oil exporting nation. Experts believe that sudden changes like these may continue to pose serious risks to the Iraqi economy.
But the Iraqi government does not seem to care. Especially while their current financial situation looks good and there is a big budget surplus. It seems as though the current government is spending in the optimistic hope that the oil boom will last forever.
However common experience over the past few decades suggests that this cannot be. Booms are always followed by a decline and this will always put the Iraqi government, the country and the country’s development into difficulties, sooner or later.
The current Iraqi government should have been making use of the recovery on the global oil market to increase production and exports. They should also have started investing in Iraq’s gas resources in order to ensure the best yield there. This would have helped accumulate reserves for difficult times in the future.
It is true that efforts to increase production have been successful over the past few years with Iraqi efforts producing an average of 2.9 million barrels per day. However Iraq’s exports have virtually remained stagnant.
And so far Iraqis have nothing more than promises that their own country will soon be able to compete with Saudi Arabia as the largest source of oil in the world.
The Iraqi government has not managed to use the petrodollars it has earned wisely. Because of rampant corruption, incompetence and the continued waste of resources – financial, human and natural – the money Iraq has earned has not made the difference in development that it should have.
The Iraqi government needs to develop long term plans to reduce the national dependence on oil production. This doesn’t mean that the importance of oil should be underestimated. But there must be some focus on diversifying sources of income – this is a difficult and ongoing task requiring concrete programs to develop promising sectors of industry, those which are capable of regional and global competitiveness. Some would argue that tourism and agriculture have the potential to be those sectors.
But the one thing that should be stressed is that retreating or isolating itself from the global environment will not help Iraq deal with external economic crises. Instead, foreign trade needs to be resuscitated and Iraq needs to become more integrated within the global economy, with links to other nations. Iraq shouldn’t confine its exports to oil either. All of this would give the country’s policy makers the flexibility they need to deal with the impact of external issues.
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[b]
Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.
The Euro zone’s debt crisis, the US recession, a slowdown in growth and sharp fluctuations on global markets for stocks, currencies and raw materials: all of these indicate that the world may be facing the worst prolonged economic contraction since that which swept the world’s industrialized countries after World War I.
The question is: what impact will all of this have on Iraq?
At first glance, the answer seems easy. Iraq shouldn’t suffer too much. Iraqi banks don’t hold Greek bonds and don’t much care whether Greece is bankrupt. And as long as they are preoccupied with trying to find solutions to pressing intractable domestic problems, such as power shortages and corruption, Iraqi decision makers are not thinking a lot about what is happening inside the US or European economies.
But such disconnectedness is hardly a good sign. It is an indication that much of the Iraqi economy is not linked to the global one. And this disconnectedness is also seen in Iraq’s financial markets – more specifically in the banking sector and on the Iraqi stock market – which haven’t been able to attract much foreign investment.
Additionally because Iraq is so dependent on oil exports for its national income, the country is exposed to global market fluctuations. Any changes in oil price have an impact on the federal budget. And because, in light of a weak private sector, the Iraqi government is the main driver of the local economy – among other things, the government is the biggest employer in the country – any impact on the federal budget will have an impact on the local economy.
In light of this dependence on oil, the Iraqi government should be thinking about how to build up some financial reserves in case of unexpected developments.
The Iraqi Central Bank is trying to protect foreign exchange reserves by cautiously splitting the reserve, currently estimated at around US$60 billion, between US dollars and the Euro as well as retaining a portion in gold and other international currencies. But that alone will not be enough to help the country withstand external pressures.
In 2008, as a result of the historic financial crisis that accompanied the bursting of the real estate bubble in the US, oil prices declined significantly. Previous to this they had been at historic heights. And although oil prices have since come back up, they didn’t rise to the levels they had been at. Iraq felt this and lost billions of dollars in expected revenues. This led to the country’s first significant national budget deficit in 2009, forcing Iraq to borrow from the International Monetary Fund, as well as domestic economic repercussions.
Whether this scenario will be repeated due to a continuing recession in oil-buying, industrialized countries like the US and in Europe is unclear. Turmoil in international markets is already being reflected on the oil markets, which have seen pressure and price fluctuation.
And besides changes in global demand, analysts suggest these changes are also due to political factors, such as the unrest caused by Arab Spring protests in countries like Libya, a major oil exporting nation. Experts believe that sudden changes like these may continue to pose serious risks to the Iraqi economy.
But the Iraqi government does not seem to care. Especially while their current financial situation looks good and there is a big budget surplus. It seems as though the current government is spending in the optimistic hope that the oil boom will last forever.
However common experience over the past few decades suggests that this cannot be. Booms are always followed by a decline and this will always put the Iraqi government, the country and the country’s development into difficulties, sooner or later.
The current Iraqi government should have been making use of the recovery on the global oil market to increase production and exports. They should also have started investing in Iraq’s gas resources in order to ensure the best yield there. This would have helped accumulate reserves for difficult times in the future.
It is true that efforts to increase production have been successful over the past few years with Iraqi efforts producing an average of 2.9 million barrels per day. However Iraq’s exports have virtually remained stagnant.
And so far Iraqis have nothing more than promises that their own country will soon be able to compete with Saudi Arabia as the largest source of oil in the world.
The Iraqi government has not managed to use the petrodollars it has earned wisely. Because of rampant corruption, incompetence and the continued waste of resources – financial, human and natural – the money Iraq has earned has not made the difference in development that it should have.
The Iraqi government needs to develop long term plans to reduce the national dependence on oil production. This doesn’t mean that the importance of oil should be underestimated. But there must be some focus on diversifying sources of income – this is a difficult and ongoing task requiring concrete programs to develop promising sectors of industry, those which are capable of regional and global competitiveness. Some would argue that tourism and agriculture have the potential to be those sectors.
But the one thing that should be stressed is that retreating or isolating itself from the global environment will not help Iraq deal with external economic crises. Instead, foreign trade needs to be resuscitated and Iraq needs to become more integrated within the global economy, with links to other nations. Iraq shouldn’t confine its exports to oil either. All of this would give the country’s policy makers the flexibility they need to deal with the impact of external issues.
[You must be registered and logged in to see this link.]
[b]
