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“It's the economy, stupid,” the strategist in Bill Clinton’s 1992 election campaign, James Carville, famously quipped. What was true for the US then is very much true for Iraq now; the economy is taking precedent over all other matters to decide the country’s future.
It is no secret that the current government was elected while Iraq faced a severe economic crisis, due to the coronavirus pandemic and the sharp decline in oil prices. One of the government’s priorities was to “prepare an exceptional budget bill to deal with the current economic crisis”. But five months later, the government had not presented the budget bill, and made do with the Law of Internal and External Borrowing 2020, which was passed back in June. This forced the government to submit an economic reform paper, later named the “White Paper”, to parliament within 60 days.
Minister of Finance Ali Allawi admitted in a parliamentary session on September 8 that they would not be able to submit the reform paper within that time frame, and committed to a new date of October 15.
Current financial status
Before going into what the reform paper will bring, let us take a quick look at the current financial situation and see how things have turned out. Over the past 17 years, governments have inflated the public payroll by employing millions to work for state institutions. Public sector salaries have reached over 30 percent of GDP.
Iraq started feeling the pinch with the collapse of global markets as a result of the coronavirus pandemic and the decline in oil prices earlier this year, so much so that the monthly income from oil sales did not equal even a quarter of spending at times. A source close to the Ministry of Finance confirmed that the net income for the month of September was $2.6 billion, while spending reached nearly $8 billion – a deficit of $5.4 billion.
To close the deficit, the government set its sights on the Central Bank of Iraq’s $53 billion reserve, and it intends to borrow another 32 trillion Iraqi dinars ($26 billion), in addition to the 15 billion dinars ($12.6 billion) it withdrew between June and August – making devaluation of the dinar inevitable in the near future.
It is expected that oil revenues for the coming months will not exceed $3-4 billion – which means that the basic revenue of the state will be $36-48 billion, while spending could reach nearly $84 billion. This means that the actual deficit for the next 12 months could range between $36-48 billion. With the resources that Iraq has and little income from the non-oil sector, Iraq can only be heading towards an inevitable bankruptcy, unless exceptional measures are put in place by the government to address the massive spending.
The White Paper
The Minister of Finance and a core team of financial experts have been working hard to deliver the White Paper for economic reform. The minister confirmed that he will submit the paper to the Council of Ministers (CoM) on Tuesday, October 13.
A source close to the team confirmed that the paper consists of two parts. The first part is a detailed explanation of the current financial situation, and a historical account of the financial failures made in the past forty years; the second part deals with the financial reform measures that the government wants to undertake.
The second part is divided into five sections. The first section is on financial waste, and how to deal with it. The second section deals with economic reform in oil, electricity, agriculture, industry, transportation and other sectors. The third section deals with infrastructure and its financing, the fourth section deals with improving services such as hospitals and schools, and the fifth section deals with institutional reform and rationalization, such as procurement in state institutions, and centralizing it in ways that limit waste and corruption.
Another informed source says that “the paper will include drastic but necessary measures to reform the economy, adopt practical ideas to build, invest, support the private sector and raise the performance of the banking sector to turn the wheel of growth and investment”. It is clear that the Minister of Finance and his team have included many financial measures in the paper with which to take a stab at resolving the financial crises, and the minister has said that it is a “3-5 year plan of reform”.
Wrangling continues between parliament and the CoM, after the two bodies exchanged accusations about the deteriorating financial situation. The Speaker of Parliament called in a session on October 10 to "set a date for the attendance of both the Prime Minister and the Minister of Finance." This call comes after the government announced it would send the draft internal borrowing law to Parliament on September 30, while parliament denies the draft law has been received, despite it being sent almost two weeks ago.
This ongoing dispute between parliament and the CoM means parliament will not accept the reform paper as it is, and political forces will attack it because it includes many reform measures that will affect political parties while they are on the threshold of parliamentary elections, because it includes measures that could hurt their finances or affect their popularity, such as lifting government subsidies on electricity and expanding salary taxes to include the nominal salary and allowances, to which directly-impacted citizens will angrily react in the elections.
It is no secret that many political blocs are preparing to hold the government accountable, and hold the Minister of Finance responsible for the current state of affairs, while the Minister of Finance holds parliament responsible for the delay in salaries and accuses members of not understanding the financial situation.
It is known that the Minister of Finance is a recognized financial expert on the global level, but the tools he has to deal with the Iraqi financial situation are very limited, and he will not be able to make changes and reform without full cooperation from the political parties and their leaders. This cooperation is far from guaranteed; observers even expect that a group of parliamentarians will be looking to question the minister and pass a vote of no confidence, making him the first of parliament’s victims. Observers are not ruling out that the government may reluctantly agree to present the minister as a scapegoat to buy some time, and calm the political forces for a few months.
Consequence of collapse is chaos
It is not difficult to predict the collapse of the Iraqi economy if the government continues on the current spending schedule, given the mathematical facts mentioned above.
The reform paper is going to include tough but necessary reform steps. To not undergo reform would make the government unable to meet its obligations to both internal and external creditors; perhaps, and most importantly, it will default in paying salaries and pensions to millions, which could spark chaos that will rule the streets of Iraq. The Iraqis are angry at the entire political class, and hold them responsible for the status quo. It is likely that the people affected would take to the streets to demand the removal of the ruling class, meaning the collapse of the political process as we know it.
Any collapse in the system will impact the entire ruling political elite, nationwide. If the situation is not remedied, chaos will reign. Political parties and their leadership must therefore stop playing politics with the future of the country, and accept economic reform today, not tomorrow.
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