Hard choices for the Iraq's new government

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The global oil prices crash has left the new Iraqi government with hard choices to make. Experts say that if oil prices remain low, the government will have to slash salaries of public sector employees – that make up a significant portion of its labor force – or dig deep into its foreign reserves and seek the support of foreign donors.

Iraq has faced compounding crises since the beginning of the year when coronavirus began its lethal spread and oil prices came crashing down. In Iraq, the price per barrel fell from $61 at the end of January to $20 in April.

Ahmad Tabaqchali, senior fellow at the Institute of Regional and International Studies (IRIS), expects that Iraqi oil revenues will fall between $35-50 billion this year, compared to $90 billion in 2019.

Last year’s budget, which was $111.8 billion, is expected to increase to $140 billion this year, according to Dr. Abdel Rahman Najm Mshadani from the University of Iraq. With oil prices low, Mshadani said that an increase to state budget would produce an even larger deficit. The 2020 state budget has not yet been passed because of delays in government formation and disagreement with the Kurdistan region ( KRG) share of the budget. In May, Kurds described cuts in KRG salaries by the central government as illegal.

This will carry grave repercussions for Iraq's new government, headed by Prime Minister Mustafa Al-Kadhimi, which depends on crude sales for 90 percent of its revenues. In early April, the Financial Times reported that Iraqi Prime Minister designate Adnan Zurfi warned that the oil price collapse meant the government could be unable to pay half of its public sector salaries. In 2011, public employment accounted for nearly 60 percent of fulltime employment in Iraq, according to UN data.

Read more: Iraq won't be springboard to attack neighbors: New PM al-Kadhimi to US ambassador

Iraqi Prime Minister-designate Mustafa al-Kadhimi delivers a speech during the vote on the new government at the parliament headquarters in Baghdad. (Reuters)
Iraqi Prime Minister-designate Mustafa al-Kadhimi delivers a speech during the vote on the new government at the parliament headquarters in Baghdad. (Reuters)

In an attempt to quell popular discontent that has grown since October, the Iraqi government hired an extra 500,000 people, meaning 4 million Iraqis now work in the public sector. Additionally, there are 3 million pensioners and 1 million who benefit from social security, according to Tabaqchali.

To make up for the bloated deficit, the government will have to take tough decisions.” Unlike Gulf countries, Iraq does not have a large investment budget that it can slash to reduce spending, and will have to cut public sector salaries and benefits instead,” said Tabaqchali.

A second option will be to dig deep in the central bank foreign reserves, estimated by Mashadani at round $70 billion, although other estimates put them closer to $65 billion. Low oil prices in the medium to long term would translate in a significant erosion of foreign reserves, necessary to ensure the country’s continued ability to buy imports. Mashadani underlines however that the central bank is already taking measures to mitigate the crisis’s impact by limiting foreign currency spending to food and medical necessities.

Printing money is another option for the government if the crisis extends, but this option would lead to inflation and potentially create more problems than it solves, explained Tabaqchali.

A decline in foreign currency reserves and larger supply of Iraqi dinar could weaken the local currency and erode people’s purchase power.

A last option, one that Nashadani believes to be unavoidable, is for the government to seek the help of the International Monetary Fund (IMF).

“We do not have a good track record with the IMF given that we failed to meet our previous commitments in 2016,” says Tabaqchali. The expert warns that this time, the IMF will require real reforms before providing the government with funds.

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