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Iraq Faces Calamity From Dropping Oil Prices 1 / 30




© Essam Al-Sudani/Reuters The Nahr bin Umar oil field, north of Basra, last month. A collapse in the price of oil, which accounts for more than 90 percent of the Iraqi government’s revenue, points to even tougher times ahead.

BAGHDAD — Iraqis seeking to withdraw money from banks are told there is not enough cash. Hospitals in Baghdad are falling back to the deprivation of the 1990s sanctions era, resterilizing, over and over, needles and other medical products meant for one-time use.


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© Alice Martins/Associated Press Shoppers at a market last month in Erbil, Iraq. Less than two years ago, with oil revenues pouring in, Iraq’s autonomous northern Kurdish region was booming, but after a collapse in oil prices, government workers…

In the autonomous Kurdish region in the north, the economic crisis is even worse: government workers — and the pesh merga fighters who are battling the Islamic State — have not been paid in months. Already, there have been strikes and protests that have turned violent.

© Ahmad Al-Rubaye/Agence France-Presse — Getty Images “I’m not a man of denial,” Hoshyar Zebari, the Iraqi finance minister, said. “If the situation is not good, we must say it’s not good.”


These scenes present a portrait of a country in the midst of an expensive war against the Islamic State that is now facing economic calamity brought on by the collapse in the price of oil, which accounts for more than 90 percent of the Iraqi government’s revenue.

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Analysts and officials, though, say much tougher economic times are ahead, even as they insist the war will be largely unaffected because of help from foreign powers determined to defeat the Islamic State. The United States, for instance, recently extended new loans to Iraq to buy weapons, and other countries are stepping up with donations of arms and ammunition.

But Iraq, where nearly eight million people rely on a government salary or pension, will probably be forced to make crippling budget cuts. The economic shock, they fear, could lead to large-scale social unrest even as the country is pulled apart by war, displacement and sectarian animosities.

“Eighteen months ago, Daesh was the existential threat to Iraq,” said Mouwafak al-Rubaie, a member of Parliament and a former national security adviser, using an alternative acronym for the Islamic State, also known as ISIS or ISIL. “I think we managed to contain it and push it back. Now the existential threat is financial bankruptcy.”

He worried that come summer, when temperatures soar and electricity shortages spread, there will be “civil disobedience all over the country.”


In a country increasingly fragmented along ethnic and sectarian lines — Shiite and Sunni Arabs and Kurds — and with a widening gulf between the public and a political class widely viewed as corrupt and ineffective, a government salary or pension is perhaps the last link between citizen and state.

“Cutting the salaries would represent the full destruction of the Iraqi people,” said Salman Najam, 37, an administrator at Kirkuk University. “We cannot accept cutting off our salaries because the salaries are the main source of our living, and we do not have another alternative.”

Mr. Najam added that cutting salaries would be “the bullet that hits the Iraqi state and the unity of Iraq.” In fact, he says, “It might completely destroy it.”

Ahmed al-Rubai, a local politician in Diyala Province, where farmers are struggling to get paid by the government, said, “What we are afraid of in this economic crisis is the inability of the government to pay salaries for millions of employees because this might lead to a social earthquake with dangerous results.”

When Prime Minister Haider al-Abadi proposed late last year to slash salaries, protests in the streets forced him to back off, for the time being.

In many ways, the fall in oil prices is forcing a painful reckoning with how Iraq has conducted its economic affairs. When oil was selling at $90 to $100 a barrel, the norm in recent years, the cash fed a corrupt political system based on patronage. Instead of investments in public services, the money fed an unsustainable expansion of government payrolls, and with it a rise in consumer spending, highlighted by shopping malls that have sprouted up in Baghdad in recent years.

Luay al-Khatteeb, an adviser to the Iraqi government and founder of the Iraq Energy Institute, said the country needed radical reforms that “touch on every single aspect of the economic system and the social structure of Iraq.”

Already there have been painful budget cuts. Across the country, the landscape is blighted by stalled construction projects — hospitals, schools, factories and a soccer stadium. The Health Ministry is proposing to charge fees for health care, essentially dismantling the free system established by the Baath Party in the 1970s. Growth in luxury spending that propelled the economy in better times is slowing drastically, and the owner of the local Jaguar dealership said he may be out of business soon.

In Mr. Khatteeb’s view, many of the most profound changes under consideration by the government have become necessary: a tax system, the substantial whittling of government payrolls, and a reduction in the fuel subsidies and monthly food rations — sugar, tea, rice and cooking oil — that every Iraqi citizen receives.

Any of these steps, if taken, would represent a fundamental reordering of a society in which citizens rely on the government for a livelihood.

“It’s the culture in Iraq,” said Mudher Mohammed Salih, Mr. Abadi’s adviser for financial policy. “Everyone is looking for a free lunch.”

This culture will make it difficult, if not impossible, for the government to establish a tax system, as it is trying to do in an attempt to expand revenues beyond oil.

“I would not pay taxes,” said Fadil Yaseen, 55, a retiree in Baghdad. “Pay for what? The state is not giving us any services, and not improving any sector or aspects of our lives. When the state improves and develops the country, then I would pay.”

Mr. Salih recently returned from the World Economic Forum in Davos, Switzerland, where he and the prime minister sought financial help from the international community. To pay its bills, the country is drawing on roughly $40 billion in reserves, which experts say will run out in 12 to 18 months. But Mr. Salih is pursuing other options. The government is working with advisers from Deutsche Bank, J.P. Morgan and Citibank, and may renew efforts to sell bonds on the international market.

Iraq will also try to sell savings bonds in the coming months to Iraqi citizens, in an effort to raise more than $4 billion, and appeal to national unity in its sales pitch. That will be a tough sell in a country where most people keep their money in cash at home and have little trust in government.

The International Monetary Fund is also working with the government on its budget, part of a process that could lead to billions of dollars in loans.

Still, Mr. Salih said, even as the government pursues these measures, it is also preparing for what he said is the worst-case scenario: that oil prices fall further and the country faces economic conditions reminiscent of the sanctions period of the 1990s, which devastated the economy.

He said that if there is one thing the government is determined to keep spending money on, it is war.

“The priority is war,” he said. “It’s a matter of our existence.”

Speaking to reporters recently, Hoshyar Zebari, the finance minister, said, “The tremendous decline in oil prices will sadly continue.”

He noted that in recent years, when oil prices were high, the country could count on nearly $8 billion per month in oil revenue, compared with less than $3 billion last month. Salaries alone cost the government close to $4 billion per month.

“I’m not a man of denial,” Mr. Zebari said. “If the situation is not good, we must say it’s not good.”

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