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The Euphrates Center discussed: the causes and repercussions of the double economic shock in Iraq
Wednesday 25th February 2021
* Al Furat Center for Development and Strategic Studies / 2004-2021
A report issued by the Al Furat Center for Development and Strategic Studies, which was prepared by a group of academics specialized in economics
Wednesday 25th February 2021
Dr. Amer Omran Al-Mamouri - University of Karbala.
Dr. Abbas Fadel Resan - Ahl Al-Bayt International University.
Dr. Hussein Ahmad Al-Sarhan - Al Furat Center for Development and Strategic Studies
Dr. Ihab Ali Al-Nawab - Ahl Al-Bayt International University.
The researcher has his son Shimon Shlimon - head of research at the Central Bank of Iraq.
Researcher Haider Mortada Ali - writer in the field of economic policies
The first axis: the causes and repercussions of the double economic shock.
The second axis: ways out of the double economic shock.
Iraq began with an economic shock in 2003 when it adopted the transformation in a sudden and in one go, from central planning to the market economically, and it seems that this matter has become a system that Iraq runs on (the system of shocks and not the shock of the system).
Apart from the narration of previous shocks, the current double economic shock that Iraq was exposed to in terms of causes and potential repercussions, as well as the necessary proposals to avoid the occurrence of shocks, can be addressed and discussed with specialists after briefly presenting them.
Due to the Iraqi economy's excessive dependence on the state and oil, in conjunction with the weak investment environment, the reluctance of the private sector to invest, the failure to create job opportunities, and the increase in the armies of unemployment, which was a fertile environment for increasing the electoral balance in exchange for providing job opportunities in the country (disguised unemployment), the state became in a financial position. Be envied.
Because the financial deficit rose starkly (by 107%) from 28 trillion dinars in 2019 to 58 trillion dinars in 2021, by virtue of increasing public expenditures from 133 trillion dinars in 2019 to 150 trillion dinars in 2021 (before the amendment) in exchange for a decrease in public revenues from 105 One trillion dinars in 2019 to nearly 92 trillion dinars in 2021.
The matter changed after the amendment was made, as the deficit increased and reached 71 trillion dinars, and public expenditures rose to 164 trillion dinars, compared to an increase in public revenues to 93 trillion dinars, but with a lower rate than the increase in public expenditures. Therefore, the deficit increased by a greater percentage after the amendment was made, and the matter is still in the hands of the legislative authority. In particular, the Finance Committee is currently conducting intensive discussions with the executive authorities to determine its financial needs precisely.
In order to save money and address the critical financial situation, the state resorted to monetary and financial policies in one go and simultaneously in the 2021 budget, where the state announced a reduction in the value of the Iraqi dinar to be sold by 1,450 instead of 1182 to the central bank, 1460 to banks and 1,470 to the public at the level of monetary policy, and to reduce employee compensation At the very least, which represents the engine of the economic cycle at the present time; Large proportions at the level of fiscal policy.
In the sense that Iraq was subjected to a double economic monetary and financial shock, as the devaluation of the Iraqi dinar, which was implemented directly in conjunction with the reduction of compensation for employees by a large percentage that is still under discussion under the dome of Parliament and had a media impact, led together to the decline of economic activity due to the state of ambiguity and apprehension. About the future.
This shock, without a doubt; It did not happen without the existence of reasons that prompted its occurrence, and it will certainly have repercussions that extend into the future, perhaps negative or positive, or both, and this requires analyzing the causes of the shock and the means of salvation from its negative repercussions.
The first axis - the causes and repercussions of the double economic shock
There are many reasons that contributed to the occurrence of the double economic shock, which can be addressed as follows:
First - the ill-considered transformation and the absence of an economic vision
It is known that the process of economic transformation in Iraq after 2003 was not a deliberate, planned and smooth process, but rather it was caused by an external political and military factor, i.e. the policy of forced change or what is known as a sudden strong shock that eliminated all the capabilities, constituents and institutions of the state in Iraq, as the occupation strategy was focused On the destruction of all of the above, rebuilding it and arranging it again according to a new liberalism to destroy Iraq and empty it of all its capabilities, especially since Iraq did not possess a clear economic system, before 2003, as the talk about a central economic system planned is just an illusion.
A mixture of multiple styles subject in their application to the philosophy, mood and interest of the political system, and that the shift from this volatile and virtually unclear economic stereotype was not towards a market economy whose theoretical features were not mature and whose application was not clear because it was not linked to a national will, but rather it was linked to the curriculum and interests of the occupier.
Therefore, the claim of an economic transformation in Iraq is just heresy and an exaggeration in the media rhetoric, as what is happening is an attempt to leave multiple unclear patterns towards a new system that is more chaotic and hazy, as we did not see on the ground any shift towards a market economy as the Iraqi economy is still within the stage An unplanned chaotic transition due to the lack of a clear economic philosophy that simulates the nature and conditions of the Iraqi economy, from which a feasible economic system emerges that harmonizes and simulates the economic and social configuration in Iraq with the need for the process of rebuilding the state and its institutions to be a process prior to any economic transformation process, because the transformation is in the shadow of chaos.
Instability is pushing towards destructive chaos that prolongs the transition phase characterized by a distorted economic system incubating for corruption that leads to waste and waste of resources with the impasse in development and the loss of development opportunities.
Therefore, we are facing a hybrid and distorted economy that is almost completely dependent on oil rent, which is the basis for the continuity and sustainability of economic and life conditions, and deepened economic and financial chaos, misallocation of resources, lack of a clear economic vision to manage the Iraqi economy and the continuous confusion in economic policies from this imbalance, despite Of the financial surpluses that were achieved during the years of financial ease, the Iraqi economy remained reeling under a large volume of debt, up to $ 130 billion in 2018, which opened the door wide for international financial institutions to impose their agenda in managing the economic file in Iraq under the headings of restructuring and reform ...
Therefore, what happened recently of government measures under the so-called white paper consistent with the prescription of the International Monetary Fund and the draft budget of 2021 and the decision to reduce the exchange rate, which has sparked widespread controversy in Iraqi society, represents a walk on the same analysis previously mentioned, especially since most of the measures that have been applied or wanted Its application represents shocks that deepen the imbalance and deepen the wounds, especially since what is happening has not been studied and the economic and social effects of its application have not been studied and that the arguments that were announced for the purpose of diversifying the economy and getting out of the financial impasse are weak and contradictory with each other ...
Second - austerity measures instead of incentives
Most countries, due to the Corona pandemic, and to get out of its shock, followed incentive policies to revive the economy, but the measures in Iraq reinforced the shock with other shocks more harmful than the pandemic to the economy, so demand was targeted by reducing spending on salaries and wages, imposing taxes and reducing real income through devaluation and in The supply side, the procedure for raising the exchange rate under the pretext of raising the competitiveness of the local product will lead to a decline and contraction of local products because most of them depend on importing production inputs from abroad, which will be affected by the rise in the exchange rate, making the production cost high, which will push towards higher prices and loss of competitiveness, which will also be affected. By raising taxes and reducing subsidies, which will inevitably lead to a contraction of domestic commodity production.
What gives the treatment by reducing the exchange rate to competitiveness, it should be gradually consistent with the growth of the production base, but if the purpose is to finance the budget deficit, this procedure does not add more than 10 trillion dinars, which will be eroded due to the high import bill and in light of the reciprocal relationship between the budget deficit and the current account .. Therefore, the government's actions by raising the exchange rate, reducing salaries, increasing taxes, and raising subsidies will push towards the so-called phenomenon of stagflation, which will have devastating effects on the Iraqi economy, which will deepen the problems of the Iraqi economy and threaten social peace.
Third - Stopping production, widespread corruption and breaching the independence of the Central Bank
The basis of the problem was in the economic and financial policy through the complete cessation of the productive base in the first and the expansion of unjustified spending on the other hand, in addition to the embezzlement of state funds by various means in what is known as corruption, which is a focal point in this problem.
But ignoring the decision-maker and his mistake in diagnosis and going towards finding solutions and remedies using monetary policy by the government specifically, and its breach of the independence of the central bank created a problem and created a bigger crisis instead of finding appropriate solutions, and this situation will continue due to the deliberate error in diagnosis and submission to the disastrous IMF prescriptions.
As resorting to currency devaluation as a rebellion against the independence of the monetary authority and in implementation of the government's desire represents an escape from addressing the rampant financial and administrative corruption at the border crossings, and the actual customs revenues of up to 12 billion dollars, but what enters the budget does not exceed one billion dollars, so it was the government's failure to address the file of the border outlets. Devastating effects on the Iraqi economy, so how can a local product see the light in light of the collapse and cracking of the customs wall?
Fourth - Lack of political stability
The general unstable political situation has had devastating repercussions on the economy. This could include political corruption, the lack of independence of political and thus economic decision-making, and the multiplicity of non-governmental policy-making actors. This is mainly due to a political basis.
Moreover, the political will has lost its compass regarding economic policies, which makes any confrontation or confrontation of the imbalances in the economy is a prisoner of groups and parties that benefit from the state of non-politics, if you will, in economic affairs. The weakness of that will was also reflected in multiple forms, including the lack of commitment to the strategies and plans set in relation to diversifying budget revenues, poverty alleviation, revitalizing the private sector, and the national development plan.
This weakens the confidence of the international community, states and organizations, in the government and the Iraqi decision. Not to mention the lack of a common political will to impose security on the entire territory of the state, which made non-governmental interference play its role in the service of partisan and personal interests.
Fifthly - economic imbalance
The picture of economic disruption (rentier economy, and the weak role of the private sector) was clear, and this is an indicator for all post-2003 governments as well as international economic and financial institutions. All governments have emphasized in their governmental programs to overcome this imbalance, but the reality is that they are well aware that overcoming this imbalance may require some economic and social cost, and therefore the opponents of the economic affairs and the administration of the executive authority do not want to lose their political future.
Consensus on the economic decision and the government's lack of independence in the economic decision and the influence it is subject to in its economic decisions, and the interference of non-governmental actors motivated by regional or narrow interests, all of these greatly affected the economy through two things:
The first is the lack of clear economic policies except for the expansion of public spending, which comes for electoral reasons.
The second is the absence of a bold economic reform decision, which prompted all governments, without exception, to borrow to finance the "political money account".
Sixth: Corona and oil prices
Among the causes of the double economic shock was the crisis and complex shock (health, economic) that the Iraqi economy witnessed at the end of the first quarter of 2020. The first was the isolation measures to confront the outbreak of the Coronavirus Covid 19 after the World Health Organization officially announced at the end of January that the outbreak The virus is a public health emergency of international concern.
As for the second, the sharp decline in oil prices due to the epidemic and its transmission to many countries of the world, and the slowdown in economic activity, which confused the public finances in the country, and the financing of public spending became facing great challenges and difficulties, so the government resorted to taking severe austerity measures that will have negative effects. Long-term impact on the economy, and the shock really began when the OPEC + meeting failed to maintain the oil agreement, due to the decline in oil prices significantly, as well as reducing oil production quotas, this situation greatly affected the existing economic activity.
Seventh - Government intervention in the economy
Some argue that countries whose governments intervene in the economy are very natural to experience such shocks, and the worst repercussions are still coming.
The successive governments in Iraq have frequently manipulated the Iraqi economy’s counters, such as (currency exchange rate, wage rates, interest rates, customs fees, government employment rates, and others ...). This manipulation received the blessing of the people, thinking that the government’s manipulation in its favor, but it became clear today that the government and its manipulative policies are the problem, not a blessing.
We will compare these indicators that we mentioned above with (pain), we all live in physical pain, but there is a good reason for the existence of pain, because the pain was created by God Almighty to indicate to us that there is a problem in our bodies, and then the imbalance must be treated, not the symptoms.
It is possible to take pain relievers, in which case you temporarily relieve the symptoms, but the defect remains.
The same applies to economic indicators that are symptoms of any imbalance in the economy. For example, high prices indicate that there is a problem with productivity in a particular sector and a decrease in supply.
Instead of addressing the problem, the government forcibly lowers prices or lowered the price of the foreign currency. It has temporarily remedied the symptoms (price hikes), but the economic problem remains latent.
The second axis - ways out of the double economic shock
You can confront shock and get rid of its negative repercussions by:
First - Effective trade and financial policies
What should be done is to fortify the customs wall and to fully control all border crossings to increase the volume of revenues entering the budget, protect the local product, and reduce all unnecessary spending, especially in the three presidencies, allocations for maintenance, fuel, cleaning, dispatch, hospitality, cleaning, rent, and the abolition and integration of many unnecessary governmental bodies and institutions that drain Budget revenues and a review of laws and legislation that inflated the current public spending, which lacked standards of efficiency and fairness, and which burdened the budget, especially the retirement laws in the three presidencies, and also that preceded the formation of the Iraqi government.
On the revenue side, processing telecommunications network files and collecting the arrears owed by them while pushing toward establishing a national telecommunications company, as well as corporate files for licensing rounds, collecting tax revenues for companies and controlling the revenues of ports and airports, moving quickly to resolve corruption files, retrieving looted state funds, and following up on Iraq's funds abroad. ... and the trend towards legalizing imports to the narrowest possible extent and limiting themselves to what is necessary and regulating the process of foreign currency exit abroad. Addressing the issue of land ownership and slums, which will add large sums to the budget ...
Second - Monetary Policies - Multiple Exchange Rate
That is, it is necessary to go to the multi-exchange rate system, through which it is possible to have the exchange rate of essential food and pharmaceutical imported commodities low and identical to the previous price, i.e. linking the exchange rate with the flexibility of the commodity with the continuation of the agricultural calendar for agricultural commodities, and the exchange rate is raised on luxury goods and other than The necessary ... in addition to the existence of a competitive and preferential exchange rate for imported production requirements that enter into the production of locally produced goods in order to reduce production costs and raise their competitiveness.
Third - Communication companies, border crossings revenues and the industrial sector
There are many alternatives, foremost among which are telecom companies whose contractual deadline has expired and which generate revenues exceeding $ 20 billion annually, excluding the debts owed by them to the state.
In addition to controlling the revenues of the border crossings and the exclusion of foreign workers that drain hard currency and whose expenditures do not enter the internal economic cycle, the industrial sector can also be activated to meet many of the needs locally, and this operation can also contribute to covering the salaries of its employees at the very least.
Fourth - a common political will targeting security and the economy
Necessity calls for resolution, and the common political will of political forces and government is the basis from which to start. Availability of a plan for reform or availability of strategies is not sufficient. The Iraqi state has more than 20 strategies and plans in which experts, executive specialists, academics, and specialized international organizations have contributed, but none of them have found a full implementation path according to what is decreed, but the opposite is complete to escape forward and leave the pitfalls that characterize the economic decision in the country.
Today, the country is in a dangerous direction, and we do not forget that most of the experiences of countries that witnessed divisions were mainly security and economic reasons, and our country is witnessing an imbalance in the security and economic sectors. Therefore, it is necessary to face objectively the potentials of defects in economic security. We believe that this requires several pillars:
State sovereignty over its entire territory and the absolute monopoly of the right to coercion.
- Governmental political will, legislative power and even political forces towards real reform, confronting corruption, and independence in national political, security and economic decisions.
A realistic economic program that takes into consideration all the current macroeconomic and social indicators to avoid any measures that would increase the economic and social costs of reform.
Implementing the program through accurate legislative and executive frameworks, within the framework of public policies that support it.
Fifth: Reforming the political system is a guarantor of economic reform
The solutions to this situation are now known to all, but up to now they are useless. The political situation still casts its shadow on the economic scene, and without political reform movement at the level of the system and the political process, the improvement of the economy may be prolonged and the country will continue its rent and dependence on oil for long periods, exposing the country to more. Economic shocks, political reform has become necessary in order to stop the drain on the resources of the country's economy.
Sixth: Liberating the economy from government interference
As long as the government follows the same policies that brought the country to this crisis, the crises will continue and worsen.
Everyone focuses on quick solutions, but these quick solutions will make the situation worse if they are not part of a comprehensive strategy based on liberalizing the economy over the next five years.
In general, we have to monitor two main indicators if we want to follow the progress of government reform of the economy.
The first: the Index of Economic Freedom, which includes sub-indicators that help to closely monitor the economy.
The second: the Iraq Stock Exchange Index, as the index's rise will reflect the extent to which investors are comfortable with the business environment in the country.
Investor sentiment is a sincere indicator to a large degree, because the investor is not flattered or manipulated when it comes to his money! In contrast to government and economic reports, which can often be deceptive, the reporter will lose nothing if he makes a mistake in his report!
The first indicator will tell us whether the government continues to manipulate the economy’s meters ... and if the manipulation continues, it is unlikely that the second indicator will improve, and the only hope will remain an improvement in oil prices, but from the continuing corruption of course.
Seventh - Other Policies
1- Providing a base for monetary and financial stability that allows for the success of the investment effort and opens horizons for investors in the direction that price fluctuations do not affect the future of investment.
2- Moving towards a policy of economic diversification (diversification of sources of income) and raising the share of the private sector in the gross domestic product by achieving partnership between the public and private sectors in order to enhance its role in the sustainable development process.
3- Supporting the real activities of the Iraqi economy by continuing to provide a financial support package for private sector projects, that is, lending to private sector projects from specialized banks as well as supporting small and micro enterprises through the largest lending initiative in the history of Iraq presented by the Central Bank of Iraq.
4- The offering of bonds by the Central Bank for individuals and institutions, similar to the bonds that were offered in the 1980s under the name Corona crisis bonds (whether mandatory or optional), and this type is very beneficial for the economy, as it reduces inflation rates and helps reduce deficits The budget.
5- Reducing government spending on all aspects of expenditures (governorates, ministries, the Kurdistan region, regional development, the investment budget), and this option could lead to an economic recession, but at lower rates.
Issuing Islamic and traditional savings certificates for the benefit of the Ministry of Finance, as some banks allow customers to issue savings certificates that comply with Islamic Sharia, with the aim of attracting a segment of customers who do not deal with traditional banking products, and prefer products that comply with the provisions of Sharia, and banks set specific controls to calculate the return on these certificates According to Islamic law, it is represented in determining an estimated average return on certificates that are subject to rise or fall according to the annual net revenue of the bank's business, and in order to achieve the desired goals, they must be greatly supported by the media in order to transfer the behavior of the Iraqi citizen from a consumer to an investor, and to mobilize national savings.
First - Reforming the political system to be able to manage the country and bring it out of chaos for stability, as there is no economic reform without political stability.
Second - Combating corruption in all parts of the state and controlling border crossings, land, sea and air, to ensure that public revenues are counted and supplemented to the general budget.
Third - Paying attention to the file of the telecommunications companies in terms of paying the state's owed money, and working to establish a national telecommunications company (a joint stock company) whose shares will be offered to the Iraqis.
Fourth - To reduce public expenditures, especially unnecessary current, as much as possible, which leads to a reduction in the size of the fiscal deficit.
Fifth - Working at a multiple exchange rate according to the flexibility of commodities to ensure that economic and social costs are reduced and the cost of local production is kept from rising.
Sixth: Focusing on the quality of investment spending rather than its size, to ensure that the state proceeds in the right direction and in line with the new economic trend.
Seventh - Liberating the economy from the government, especially the factors of production, and specifically the land, where the state dominates 80% of it.
Eighth - Legislating the law on partnership between the public and private sectors, which was reviewed by the State Council since December 2017.
* Al Furat Center for Development and Strategic Studies / 2004-2021
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