In Iraq, low oil prices are bigger threat than ISIS
LONDON -Tumbling world oil prices are emerging as a greater threat to the functioning of the Iraqi state than the depredations of the Islamic State (ISIS).
Prices for benchmark crude oil have plummeted by almost 70% since mid-2014, to around $30 a barrel. That translates to less than $25 a barrel for Iraq’s relatively heavy crude. Production is on the rise — Iraq announced its second best export total — but the oil is going into a glutted market that is causing problems for all producers.
Unlike most of them, however, Iraq is having to cope with an economic crisis at the same time as it is fighting a war. In 2015, $13 billion of an annual budget of about $100 billion went to the military and the fight against ISIS.
In the semi-autonomous territory of the Kurdistan Regional Government (KRG) the situation is, if anything, even worse, exacerbated by a recurring budget dispute with Baghdad. Authorities have responded by cutting government salaries as much as 75% for high-ranking officials and by seizing funds from local branches of the Iraqi central bank.
Fuad Hussein, a member of a senior KRG delegation that went to Washington in January to explain the severity of the crisis, told the Americans: “If this financial crisis continues, it will have a great effect on the front lines. You cannot send your fighters with empty stomachs to the fight.”
The central government, meanwhile, is issuing treasury bills and bonds to cover a 24% deficit in the 2016 budget after slashing public spending 40% in 2015 and tapping its foreign exchange reserves. Iraqi Finance Minister Hoshyar Zebari told Sky News that the government has introduced sales taxes and cut some costly military contracts not deemed vital to the war.
Baghdad depends on oil for 90% of its annual revenue. Much of that income goes on paying public-sector salaries, a factor in ensuring public support for the government. However, with prices rising and businesses being forced to shut down, there are fears the economic crisis could further destabilise a society already riven by sectarian conflict.
Even without the oil price shock, Iraq faces severe economic challenges. The steep decline in revenue has simply made them worse.
When Prime Minister Haider al- Abadi appointed Zebari as finance minister in late 2014, the crude benchmark was double what it is now, although already on a slide from levels of around $100 a barrel. Nevertheless, Zebari discovered that the Treasury cupboard was almost bare. “Iraq is going through a difficult financial crisis,” he said at the time.
A decade of war and sectarian conflict, coupled with the corruption and nepotism that characterised the premiership of Nuri al-Maliki, had taken its toll on an economy that should be one of the Middle East’s most prosperous. That followed a previous decade of stagnation and sanctions for which Iraq is still paying the price.
The World Bank is among the international institutions and foreign governments that have sounded the alarm about the consequences of the oil price drop. Announcing a $1.2 billion loan for budget support to Iraq in mid-December, the second injection in a year, the bank said the risk involved in supporting the Iraqi economy would help to avoid greater risks in the future.
The World Bank extended a $350 million loan in mid-2015 to pay for basic infrastructure and public services in areas liberated from ISIS.
Despite the limited World Bank aid, there is little sign that the United States and other foreign governments are prepared to directly bankroll Baghdad. “Cash handouts like those America has provided over the years in Iraq and Afghanistan should be out of the question,” the New York Times opined in a recent editorial headlined Iraq and the Kurds Are Going Broke. But the United States could offer technical advice and help it access credit from international institutions.
According to World Bank officials, what happens in Iraq, with its relatively large oil-dependent economy and its strategic location, inevitably affects the rest of the region. “The economy’s going through an extremely difficult time, and people’s suffering borders the unbearable,” said World Bank Regional Director Ferid Belhaj when the latest loan was announced.
“We think that helping the Iraqi economy recover fast and helping Iraq stabilise will have great benefit not just for the people of Iraq but also for the region.”