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The Iraqi flag (right) and the American flag
Economy News - Baghdad
The last thing US President-elect Joe Biden wants is a new Iraqi crisis. Unfortunately, it would be the first foreign-political problem he would face.
Iraq is on the verge of economic collapse, and in its fragile state of government, it is likely that this financial collapse will be accompanied by the collapse of its dilapidated political system, which may lead to fueling another round of civil war.
Over the past two decades, corruption in Iraq has created a problem with two sides. Weak, complicit, and totalitarian governments mean that every major political party will run one or more ministries. These parties run bureaucratic ministries not out of the country's interest but with the aim of creating a massive patronage network - corruption machines that absorb oil revenues from the government treasury and pass them on to their constituencies in the form of jobs, contracts, and other benefits. The phenomenon of rampant graft has strangled what was owned by Iraq from the small private sector, which means that there are not many alternatives to public employment.
As a result, the state has become the largest employer in Iraq, and a large proportion of the country's population lives on its imports, either directly in the form of salaries and pensions, or indirectly in the authority of contracts or providing goods and services to employees in government institutions. Even small companies in Iraq depend on the government in the end because many of their clients - especially in the major governorates - take their salaries from the government in one way or another. Moreover, the Iraqi government continues to provide a monthly “food basket” through a public distribution system, which remains an important component of the daily life of the poor and toiling class in Iraq.
It is not surprising that the increase in public sector jobs since 2004 has increased by three times, and the government pays salaries that are 400% higher than it paid 15 years ago. Thus, the government and its oil revenues became the main engine of the economy and the main supplier to Iraqis.
The result is that Baghdad needs $ 5 billion a month to cover monthly salaries and pensions, in addition to $ 2 billion to cover basic services and operational expenses, many of which contribute indirectly to support the population. However, with the advent of the Corona pandemic, which coincided with the collapse of oil prices (which represents 90% of the government’s imports), the monthly revenues for Iraq ranged between (2.5 - 3.5) billion dollars, and this means a monthly deficit faced by the Baghdad government ranging between (3.5 - 4.5). Billion dollar.
Iraq is currently consuming its money to cover this deficit. Last October, Iraqi Finance Minister Ali Allawi said, "The central bank's reserves amount to $ 53 billion." Since then, the Iraqi Council of Representatives has approved a law to finance the fiscal deficit to cover the salaries of employees for three months - October, November and December of 2020. This brings the total debt of Iraq to 80 billion dollars, according to government sources and the annual draft budget, as the government allocated 12 billion dollars of Annual principal and loan repayment budget - all of which further exacerbate the government's capital shortfall.
According to government officials, the central bank's reserves will deplete if the government pays its dues. For this reason, it is forced to print money in order to pay off the loans that will go to cover employee salaries and operating expenses, which increases the risk of inflation. For this reason, the Baghdad government may soon be forced to depreciate the dinar instead, and this, in turn, also carries significant economic and political risks. The devaluation of the dinar without being accompanied by economic reforms - which the political forces in Iraq refuse to consider - will restrict imports, undermine savings and increase hardship.
What's more, a devaluation is likely to cause more inflation as well. Evaporation of hard currency means that Iraq will not be able to pay for imports of goods and foodstuffs. Iraq is an importer of almost everything except oil. If the flow of hard currency decreases and the value of the dinar falls, most goods will become scarce and their prices will rise. If the government continues to withdraw the remaining funds in the central bank, the value of the dinar will decrease with it within six months, once the currency is devalued.
Some Iraqi government officials hope that the expected increase in oil prices during the spring season will save them. However, according to many statements of oil traders and analysts, they expect an increase in prices of between 10-15%, which is a very small percentage to eliminate the looming Iraq crisis. Even this percentage may diminish if Iraq, Iran and Libya follow the example of Saudi Arabia and Russia with the process of increasing production to protect their market share.
If Iraq were to become unable to secure salaries and minimal operating expenses, this would have dire consequences. The Iraqi Prime Minister, Mustafa Al-Kazemi, sounded the alarm at a press conference on November 17, saying, "We will face the problem of paying salaries in the first month, I warn you from now."
As a technocratic figure without the power of a political base, Al-Kazemi was unable to push the political parties to address the financial crisis, let alone solve it. Although the government issued the "White Paper for Reform" on October 17, it did not implement its provisions. As a result, there were no efforts to cut salaries, reduce the number of state employees, or get rid of hundreds of thousands of space job ranks for fear of angering important Iraqi political leaders.
Upon taking power, Al-Kazemi had widespread support: from Iraqi citizens, thousands of protesters, the Shiite religious establishment in Iraq, moderate Shiite parties, many Sunni parties as well as the Kurds. He was seen as an intelligent man, out of the political arena, influential, and on good terms with the American side. However, there are growing concerns that Al-Kazemi will not be able to repair the broken Iraqi system. The economic crisis that will result from the money running out may be the nail in his coffin. It is very possible that Al-Kazemi will lose his credibility completely, and many political parties will try to make him a scapegoat to avoid the inevitable popular reaction. Meanwhile, political forces close to Iran - who opposed Al-Kazemi - will try to exploit the chaos to reassert their influence in the Iraqi government.
It is almost certain that the financial crisis in Iraq will lead to the outbreak of large-scale demonstrations in the streets again, as Iraqis will again demand a change of government. It will be difficult for the next government to maintain order if it does not pay salaries and its prime minister lacks power. Armed groups and clans, including armed factions close to Iran, will try to fill the void and take on the role of the Iraqi security forces. These groups will fight with each other over control of land and income-generating resources such as oil, ports, border crossings, large companies, agricultural land, and private property.
In such a situation, armed conflict and land grabbing would again become commonplace. Except for some areas that have strong security, such as the Kurdistan Region. However, even the region will not be safe from internal economic problems unless it can expand its resource base, because it is also financially dependent on Baghdad. Kirkuk and its oil fields may be one of the Kurds' most visible targets, but this will only ignite the conflict between Erbil and Baghdad, not to mention the Shiite factions that will resist such a move.
As was the case in the two periods (2005-2007) and (2014-2017), another round of civil conflict in Iraq will take place and will attract neighboring countries with it. Iraq, simply put, is very important to all of them, and they can be expected to intervene in order to secure their interests.
Turkey will feel threatened by Kurdish gains, especially if Kurdistan manages to capture Kirkuk. Ankara will feel the duty and obligation under the slogan of protecting Turkmen in Kirkuk and preventing the Kurds from reviving the dream of independence. Iran will work to restore its dominant influence in Baghdad. Tehran cannot sacrifice revenues from trade with Iraq (which amount to $ 12 billion) in addition to opportunities for smuggling and access to global financial markets. The Saudis may respond to the increase in Iranian influence by supporting Sunni groups and Arab tribes with financial funding and weapons to protect themselves. Especially since Riyadh cannot rely on the presence of a large number of American forces to deal with the problem, as it happened in 2006. Iraq can easily slide into a civil war between internal groups and regional intervention and make the Iraqis struggle with each other.
Given the gravity of the situation and the importance of Iraq in the region and the international oil market, the United States and the international community cannot stand idly by. Of course, during the first six months of his administration, and with the presence of a widespread epidemic and economic crisis in his country, the new American President Biden will not be able to bear the costs of making Iraq a top priority for him, but sooner action will be less expensive and avoid facing difficult choices at a later time, When Iraq collapses.
If the United States wants to show some leadership, it is possible that the allies will participate with it as well. International financial institutions such as the World Bank, the International Monetary Fund, the Gulf states, and even some European countries and East Asian countries may participate.
The next crisis in Iraq is a liquidity crisis. Iraq will need money to prevent the collapse of its financial system, which will be the first domino to fall after it. If the United States pledged to secure a specific amount of money, perhaps one billion dollars, then it would be possible to collect a financial package of 5 to 10 billion dollars by America's allies.
The idea of providing a billion-dollar emergency budget to support Iraq may seem impossible at the moment. But it should not be impossible. Because it does not come out of the pockets of American citizens in the form of increased taxes. America is supposed to have learned two important lessons in the past twelve years in this part of the world.
First, what happens in the Middle East will not just stay there. Second, the value of an ounce of prevention of risk is equal to the value of a pound of treatment - as illustrated by Washington's tragic policies in Iraq, Syria and Libya.
Of course, and given the high rate of financial burning in Iraq, the amount of 10 billion dollars will not run state affairs for only three months. For this reason, the funds must be accompanied by strong conditions attached: austerity measures to encourage savings, significant cuts in government spending, strict anti-corruption measures, the integration of Hashd members fully with the Iraqi army as individuals and not as factions, and thus obey only government orders. In addition to subsequent financial relief promises as incentives if there is a good commitment by Iraq to these measures.
This international relief package will have essential collateral benefits. In Iraq, the only way to support a political agenda and build a foundation to see the light later is through resources. Al-Kazemi has repeatedly demonstrated his right intentions and sound ideas but lacks the political and military strength to implement them. Putting billions of dollars at his disposal, but under strict conditions, would give him the necessary resources to build this popular support and use it to undermine the current parties, militias and the thief regime.
These measures are what Iraq needs in the long term as well. The more Al-Kazemi blames the international community for forcing Iraq to take these measures, the more Iraqis understand that obeying these measures will save them, otherwise the entire system will collapse, leading to a greater ability to implement what he always hopes and what the US government always hopes for his ability to act.
When Biden was vice president, he won the dubious mission of running Iraq. Considering President Obama's past policies, it can be said that he was the worst job ever. But when he takes office and becomes president, addressing the problems of Iraq may not be one of his priorities or within his desires, but the Baghdad crises represent an opportunity to make Iraq - and America's interests there - on the right path in a way that he could not have been in the previous time when Biden was responsible for the Iraqi file. .
Translated by: Rudaw
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