As Trump eyes Iraq’s oil, Abadi struggles to pay the bills
London - In January, the United States backed Iraq’s issue of $1 billion of government bonds as Baghdad struggles to pay the bills in a cash-strapped economy.
The US guarantee means the government will pay just 2.1% interest on the 5-year bonds, well below the price of its unguaranteed debt.
That is a useful discount to have for an administration that has been buffeted by political instability, a war against the Islamic State (ISIS) and, above all, depressed world oil prices.
Baghdad relies almost totally on income from oil exports and was badly hit by a more than 40% drop in crude prices from 2014, the same year that ISIS grabbed about one-third of the country’s territory.
Since then, ISIS has retreated and the oil price has recovered from the depths of that depression. Oil prices are hovering between $50-$60 a barrel, well down from the $100- plus levels of mid-2014.
By the end of 2015, oil sales only covered half the Iraq budget and this year the deficit will be around $20 billion. It is not just about the oil price, however. Baghdad has been running deficits throughout the decade and more since the US-led invasion, even when the crude price was high.
The high post-invasion oil price encouraged runaway hiring in the government sector in which a growing phalanx of under-employed bureaucrats has been draining the public purse. The budget went up fivefold in barely more than a decade.
The piles of pay going to phantom employees who did not actually exist was a factor prompting reforms announced by Iraqi Prime Minister Haidar al-Abadi in 2015.
The effect of the reform programme will be a factor, along with boosted oil production and international loans, in meeting the healthy growth rates international institutions are cautiously predicting for the rest of the decade.
However, the Baghdad government will still have to sustain many of the costs of combating ISIS, still to be completely ousted from Mosul, funding post-war reconstruction and providing for 3.5 million people displaced in the conflict.
The United States, leading the international coalition supporting Iraqi forces against ISIS, is a key backer, as the loan guarantee indicates, but since Donald Trump entered the White House, future strategy in Iraq is one of the many unknowns about the direction of Washington’s foreign policy.
Baghdad will want an assurance — at a minimum — that the United States will continue its military support. Abadi will be looking for political support for policies aimed at bringing Iraqis together at a time when sectarian strongmen of various stripes snap at his heels.
Above all, the government will want to know what assistance will be forthcoming to help it put the country physically back together.
Trump’s “America First” slogan and his promise to prioritise infrastructure renewal at home may mean Iraq joining others at the back of the queue for aid. His first remarks on Iraq as president, echoing his rhetoric during the campaign, indicated his priorities might not be the same as Baghdad’s.
Speaking at CIA headquarters on the first full day of his presidency, Trump said: “If we kept the [Iraqi] oil, you probably wouldn’t have ISIS, because that’s where they made their money in the first place, so we should have kept the oil,” before adding ominously, “but, OK, maybe we’ll have another chance.”
It may have been a characteristic throwaway remark or it could have been a hint that Trump wants to get his hands on Iraq’s oil wealth, perhaps as compensation for the treasure the United States has laid out since 2003.
Either way, it did not generate confidence that the new administration will be investing its own dollars to rebuild the shattered regions of Iraq.
It was not exactly well received in Iraq. “There’s no way Trump could take the oil unless he launched a new military front and start a new world war,” a member of the Popular Mobilisation Forces was quoted as telling BuzzFeed’s Borzou Daragahi.
Maybe Trump’s words were just rhetorical bluster. Iraqi state television subsequently quoted Abadi as saying he had received messages from the new US administration offering to increase its level of assistance to Iraq.
Abadi needs all the aid he can get. It is estimated that just to rebuild Ramadi, the Anbar province city from which ISIS was evicted in 2016, will require an investment of $10 billion. Mosul, the urban front line between Iraqi and ISIS forces, is three times bigger.
Once ISIS is eradicated in Iraq, aid experts estimate it could take a decade to put liberated areas of the country back together.
That will inevitably require international assistance to Baghdad, regardless of domestic growth levels and increased oil revenues. In that context, Trump’s decision in his statement at CIA headquarters to quote the expression “to the victor belong the spoils” maybe was not very helpful.