Iraq faces financial crunch despite rising oil production

Friday 20/11/2015
Flames burning off excess gas are seen at Nasiriya oilfield in Nasiriya province, south-east of Baghdad, on October 30th.

Beirut - Iraq’s oil production capacity stands at about 4 million bar­rels per day (bpd), the second largest in OPEC after Saudi Arabia, with average exports of around 3.2 million bpd. Average monthly oil revenue is close to $3.3 billion.
Despite its oil income, the coun­try is virtually bankrupt.
The government is not able to pay civil servants’ salaries or pen­sioners. The Ministry of Oil was not able to pay in cash to international oil companies and it reimbursed them instead with crude oil. Con­struction of scores of projects has been delayed for lack of funds. The government is not able to meet payments to consultancy and con­struction companies.
Iraqi Prime Minister Haider al- Abadi’s government blames the financial shortfall on the rising military budget to fight the Islam­ic State (ISIS); the collapse of oil prices since mid-2014; and, the fact that it received an empty treasury due to widespread corruption that took place under his predecessor Nuri al-Maliki.
Iraq’s oil revenue totalled about $800 billion during 2003-15. The high oil revenue has been attribut­ed to increasing production (from 2 million to 3.8 million bpd) and ris­ing prices (around $100 per barrel for approximately three years).
Iraqi Oil Minister Adil Abdul Mahdi confirmed in August that the country’s oil revenue was $800 billion since the 2003 US occupa­tion but said approximately $420 billion was unaccounted for. Par­liament’s Commission of Integrity confirmed in November that half the government’s revenue during Maliki’s tenure (2006-14) has been “siphoned”.
Parliament’s Finance Committee announced that the government exhausted the state bank’s finan­cial reserves.
The government is negotiating with the World Bank and the Inter­national Monetary Fund to extend soft loans to assist Iraq. The inter­national economic organisations are calling for major institutional reforms, appointment of interna­tional auditors to review the state and private banks’ books, and the adoption of new economic poli­cies.
It is doubtful that recommenda­tions by the two international bod­ies can alleviate the poor economic conditions of Iraq if there is no seri­ous attempt to put a stop to Iraq’s poor management and widespread corruption.
On the other hand, if reforms are carried out, there is fear that the downsizing of the inflated civil service could lead to social and political unrest. The civil service has been inflated mainly to serve the interests of the political par­ties and to placate the delicate bal­ance of the confessional system. Civil servants number around 4 million employees and retired of­ficials make up another 4 million. Iraq’s total population is about 30 million. Most of the government’s revenue is allocated to salaries. tAbadi’s government also has to take decisive actions towards what is termed “the greatest political corruption scandal in history”. The government is obliged to be cau­tious as Maliki and his aides con­tinue to command a sizeable num­ber of parliamentary seats and are supported by Iran.
This raises the questions: What can the government do to alleviate the situation? How many reforms can it implement to turn a new page? How soon can the reforms be implemented? What are the po­litical consequences, especially as Iraq is already encountering sev­eral domestic and regional threats?
Iraq has usually relied on rising oil revenue during difficult finan­cial times but there are few options available now. Oil production is projected to have a limited increase of around 200,000 bpd in 2016 bit it is not clear if or when international crude oil prices would increase.
Much depends on whether the world’s commercial reserves would start declining, whether the spare oil capacity of around 2 million bpd would decline rapidly and whether global oil demand would rise soon as a result of the low oil prices. Another factor is whether Chinese economic growth would rise to its former growth of around 8% annu­ally.
Iraq’s 2016 budget is based on crude oil exports of about 3.6 mil­lion bpd, including 550,000 bpd by the Kurdish Regional Government (KRG). The KRG has been in arrears for several months. Iraqi pipelines have been sabotaged frequently in recent weeks.
The bombings are attributed to either Turkey’s Kurdistan Workers’ Party (PKK) or ISIS.
Iraq has the capacity to produce the targeted volume of 3.6 million bpd in 2016. The question is what will be the average price of oil next year?