Iraq’s economy is collapsing under the double blow of sinking oil prices and coronavirus lockdown
The coronavirus epidemic has pushed Iraq’s economy to the brink of catastrophe, experts say, with the outbreak aggravating the risk of public desperation and renewed social unrest if the needs of millions of Iraqis are not met by sweeping reforms.
The crisis has been decades in the making, as the political system born in the wake of the 2003 U.S.-led invasion became riddled with corruption while politicians grew rich on the spoils. But the epidemic has accelerated the crisis, tanking global oil prices and the oil revenue that keeps Iraq afloat — while forcing a lockdown that is ruining livelihoods and forcing families to go hungry.
Millions of those now stuck in their homes were already living hand to mouth, feeding their families through jobs in the informal economy. In Baghdad’s Binook district, Hussam al-Kaisi’s yellow taxi sits idle on his street, and inside the cramped house that he rents with borrowed money, it’s getting harder to put food on the table.
“This year has been really bad,” the 29-year-old father said. “If things carry on like this, we’ll die of starvation, not coronavirus.”
The pandemic has meanwhile cratered demand for oil. Just months ago, some 90 percent of the country’s provisional 2020 budget was expected to come from oil exports, with calculations based on a price of $56 per barrel. Iraq’s sales have remained steady, but as economies ground to a halt, oil revenue fell to its lowest level in a decade, according to figures published by the Iraq Oil Report.
“I think the next couple of months are going to be quite terrifying for everybody,” said Ahmed Tabaqchali, chief investment officer for Asia Frontier Capital Iraq Fund.
In Iraq’s post-2003 political system, power is allocated among various ethnic and religious groups, and each one uses its access to state resources, and particularly to government jobs, to develop extensive patronage networks. The result is a bloated public sector, which sucks up an estimated $50 billion each year in salaries and benefits alone, a majority of the state budget.
Finance Ministry data shows that April’s oil revenue has left it more than $2 billion short of financing those costs. The shortfall for the coming month is projected to be far larger.
Even before the coronavirus outbreak, Iraq’s government was dealing with crises on multiple fronts. Violence between Iranian-backed militias and U.S. forces was escalating. Islamic State militants were attempting a comeback. And the prime minister had been unseated by the largest grass-roots protest movement in the country’s history.
The streets have fallen quiet for now, but the problems that sent tens of thousands of young men and women out to protest remain unsolved. More than 60 percent of Iraqis are under the age of 24, and youth unemployment is high as access to jobs remains, for many, dependent on family connections and payoffs.
Without major revisions, the Jefferies financial services institute puts the country’s external financing needs for 2020 at around $40 billion. While foreign governments and international institutions like the International Monetary Fund are willing to offer support, their contributions alone will not be enough, said Alia Moubayed, managing director of fixed income strategy at Jefferies.
“Iraq is too large for the donor community to shoulder,” she said. “Iraqis will need to rely on themselves by adopting painful fiscal consolidation measures, reducing the size of government and possibly weakening the currency further to reduce the rapid erosion of their foreign currency reserves.”
Iraqi officials are concerned that the country’s deepening economic crisis could bring more protesters to the streets in the coming months as summer temperatures soar and electricity and water supplies falter, as they have done repeatedly in recent years.
The lockdown is already sparking spontaneous but brief outbursts of rage in the city of Nasiriyah and in Baghdad’s impoverished district of Sadr City. In a video last month, from Nasiriyah, a group of day laborers screamed into the camera as fires burned behind them. “We can’t live like this,” one shouted.
In Binook, al-Kaisi said that he had been holding down two jobs before the lockdown began, supplementing his work as a taxi driver by driving for the Careem ride-hailing company to bring in much needed cash. Now, he earns nothing. “Since the curfew began, I’ve barely been providing even the most basic food for my family,” he said.
Although Iraqi officials say they are studying proposals to strengthen the country’s finances by cutting public sector salaries, experts say the government is unlikely to make sweeping changes in the short term.
“The only solution is cutting employees’ salaries,” said Nabil Jaafar, an economist in Baghdad. “But cutting those salaries will have disastrous results.”
The country has yet to replace its lame-duck government and thus remains without a leader to take responsibility for such a sweeping decision. Even accessing the country’s reserves — estimated at $63 billion — will first require a government to pass a law that endorses it.
For many politicians, supporting revisions to halt economic disaster would likely also mean giving up patronage, a vital source of their popular standing.
“The idea of hiring of people as a route to legitimacy isn’t unique to Iraq,” Tabaqchali said. “But here we’ve created a Frankenstein version.”
According to government officials, the debate surrounding salary cuts centers on whose pay to slash and by how much. The salaries of public sector workers are usually supplemented by additional payments, compensating an individual for travel or for family expenses. In 2005, these payments stood at $3.8 billion, according to a study by the London School of Economics. Today, they hover around $36 billion.
“There will be cuts,” said Abdul-Hussein Al-Hanin, an adviser to Iraq’s caretaker prime minister, Adel Abdul Mahdi, describing a program that involves shaving the allocation for all government employees. The most significant cuts, he said, would affect ministers and other high-ranking officials.
Low-level government employees asked about potential salary cuts said they were scared, sometimes bitter, that their salaries might become casualties of decades of mismanagement. “They should stay away from our income,” said Muthana al-Aboud, who works at the Water Ministry. “It’s their fault, so why should we pay for their mistakes?”