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Iraq’s dire economic state

Picking Up the Pieces

Men repair a bridge near Mosul, Iraq.
In the aftermath of conflict reconstruction of infrastructure is essential. Here, men repair a bridge near Mosul, Iraq. Photograph: Sebastian Backhaus

After over a year of ongoing protests throughout Iraq, the economy is in worse conditions than ever. Can Prime Minister Mustafa al-Kadhimi’s interim government prevent total collapse?

Just a little over a year since the first wave of anti-government protests broke out in Iraq, yet more exasperated and incensed Iraqis have taken to the streets this December to call out the government’s corruption and dire mishandling of the country’s economy. In mid-December, the Central Bank of Iraq took the decision to devalue the struggling Iraqi dinar by over one fifth against the US dollar, the first devaluation in half a decade.


Government officials, such as the Minister of Finance and Deputy Prime Minister Ali Allawi, insist that this devaluation was an essential move without which the country’s foreign currency reserves would have run out mid-2021. While this may be the case, this decision has been met with great criticism and backlash by Iraqis on the ground, who view it as yet another addition to the long list of failures carried out by their government.


Speaking at an international conference in late November, Allawi emphasised the crisis point which Iraq finds itself at. In his unexpectedly candid speech, he detailed the problems which the current Iraqi government has inherited from generations past, corruption being one of the most deep-seated and harmful. This comes a month after the creation of Emergency Cell for Financial Reform, an Iraqi governmental economic advisory body chaired by the Prime Minister and comprising a number of ministers, as well as the Governor of the Central Bank. It published its White Paper for Economic Reform at a Cabinet meeting in October, during which the paper was formally adopted.


Moving towards reducing the bloating of Iraq’s public sector


Given Iraq’s significant economic challenges currently, this White Paper is a critical piece of policy research. It suggests a number of recommendations to deal with the present financial crisis following years of accumulated corrupt activity and ensuing debt. Its aims are not only to battle the recent problems caused by the sharp decline in oil prices and the COVID-19 pandemic, but also to weather the effect of decades-old fiscal problems facing the country.


Comprising an ambitious economic reform plan, the report aims to establish and maintain macro-economic stability across the spectrum, as well as working on the key aim to diversify the economy beyond its current emphasis on the oil and public sectors. It recommends the implementation of a reform programme which primarily seeks to balance the budget deficit, as well as seeking to ensure a sustainable future for the country’s economic status. It is clear that these recommended steps are not intended as a sticking plaster solution, but rather a mid- to long-term programme projected to take three to five years to complete.


The paper can be broadly split into five primary areas of interest for the Iraqi government’s economic overhaul efforts: sustainable fiscal stability, implementing macroeconomic reforms, improving vital infrastructure, providing essential services, and developing the government’s legal and institutional environments. Its goal of halving the expenditure of salaries from 25% to 12.5% of the federal budget in particular is a significant move towards reducing the bloating of Iraq’s public sector, notorious for its over-employment and disproportionate salaries.


With the push to reduce a reliance on the public sector also comes the need to make the investment environment attractive to public enterprises. To this end, the report recommends the creation of a private sector support fund, which aims to simplify the governmental procedures needed to conduct business. Given Iraq’s ranking of 172 out of 190 economies in the World Bank’s Ease of Doing Business Index for 2020, this would be a welcome boost to the country’s attractiveness to external investors.


Iraq’s economy is on its way towards total collapse


At the heart of this White Paper is sustainability. It aims to overhaul the current system, as well as reforming basic infrastructural elements, such that the economy can remain resilient and carry the weight of the numerous challenges to come, not least the long-lasting effects that the pandemic will bring. Its ambitious infrastructural reforms include modernising the financial sector, including developing and supporting the banking system (both private and public), and bringing e-services to the fore.


There are those who welcome these reforms as a step in the right direction but still have fears that the government will simply not be able to implement the ambitious reforms due to political opposition curtailing these measures. Allawi elaborated on the problems of tightening Iraq’s purse strings: “somebody has to say ‘no’ at some point and now, I suppose this has fallen to me to say ‘no’ but you can only say ‘no’, up to a point, or then they will say ‘no’ to you.” UNAMI has emphasised the fear that without widespread political consensus across the spectrum, the reforms of the political consensus will risk “remaining just ‘words’ on a page.”


What offers some hope of accountability and follow-through is the recently established Iraqi Economic Contact Group (IEGC). Announced during the Prime Minister’s visit to London in October, the IEGC is an international financial alliance made up of institutions like the IMF, WB, and EBRD, among others. Its primary aim is to work with Iraq’s Government and financial institutions to develop a roadmap for the reforms’ implementations, as well to align and mobilise international support to support in the delivery of the new measures. It is hoped that its quarterly meetings will function as a means of complementing the Iraqi Government’s ongoing efforts for economic development and reform.


But to many, corruption and a lack of government competence seems to have become part of the fabric of Iraqi society. Its bloated public sector — consisting of 6.5 million government employees and pensioners — sees even junior customs border officials receiving upwards of $100,000 in salaries. With over 90% of job opportunities coming from the public sector, Iraq’s economy is on its way towards total collapse.


450 billion dollars have been lost


In the almost two decades since 2003, common public opinion scorns the corrupt Iraqi politicians and government officials who have squandered away billions of dollars in public money. No surprise then that protests have been the norm since anti-government protesters took to the streets in October 2019, fervently continuing to do so in the fourteen months since. Jaded by the government’s total mishandling of the state since 2003, thousands of protesters, many of them of the younger population, rallied against the latent corruption present in civil society, which they feel is, at the most, only superficially being handled.


Despite the country’s oil wealth, these revenues fail to be spent on the provision and maintenance of basic services and infrastructure, such as hospitals, schools, and roads. In Transparency International’s Corruption Perceptions Index 2019, Iraq ranks 162 out of 180 states. It is widely known — and, in the case of the Iraqi people, despondently accepted — that political forces and armed factions have been using the state’s resources to fund their activities. The financial losses have been estimated to amount to 450 billion dollars. Needless to say, this is a critical time for Iraq’s economic policy-makers.


In more recent times, these protests have spread up to the usually stable city of Sulaymaniyah in Iraqi Kurdistan. Since the beginning of December the city has been overcome by increasingly violent anti-government protests. Kurdish civil servants have not been paid their salaries since April, another critical example of not only the Iraqi central government’s economic distress and mismanagement, but the Kurdish Regional Government’s inability to negotiate competently with Baghdad. It is clear to see that throughout the country, people are unhappy with how their governments are handling their political and economic affairs. The real victims here are Iraqis.


With the voting in of the current Prime Minister in May, Mustafa al-Kadhimi, came hopes of a bold governmental anti-corruption movement, seen as inextricably linked to the dire financial situation. Running on a campaign which emphasised its aim to fight corruption, all eyes have been on al-Kadhimi to see how well he fares with this. The establishment of the Deterring Corruption Committee in August, headed by the retired general Ahmed Taha Hashim, saw the beginning of a number of arrests of individuals charged with partaking in corrupt activity. But considering the previous similar committee which have existed before — the previous Prime Ministers Adel Abdul Mahdi and Haider al-Abadi boasted the restructuring and founding respectively of the Supreme Anti-Corruption Council — this is not necessarily a perfect solution.


Momentary glimmers of hope


A number of anti-corruption institutions are ostensibly already at play in the country, but they seem not to have made much of an impact in the name of curbing the spread of corruption. It remains unclear whether the impact of the Deterring Corruption Committee, in its collaboration with the Counter Terrorism Squad, will offer sustainable change to Iraqi’s mode of governance, or if its highly publicised high profile arrests — such as that of Ahmed al-Saidi in September, the former director of the national pension fund — will offer just momentary glimmers of hope.


The Government’s White Paper comes at a critical time in Iraq, addressing generations-old problems currently exacerbated by the effects of the pandemic. This marks the first time that Iraq’s government has published a paper detailing extraordinary efforts directly connected to the current state of affairs. The 96-page document’s findings are based in facts, statistics, and analysis, a real results-focused undertaking which accepts the need for significant government efforts and implementation. This fact-based approach can only be seen as an echo of al-Kadhimi’s maintained insistence upon technocracy in his government, trying to reinstate a sense of rigour and accuracy to its policy approach.


Its publication offers an insight, in granular detail, into the financial problems facing Iraq at the moment. But to counter its concerning diagnosis, its steps for transformation offer hope of a promising future. Considering the months of protests which have swept across Iraq, comprising thousands of angry, disillusioned, and salary-starved citizens, it will take a great deal to rebuild the Iraqi people’s trust in the government’s financial handling.


A crucial step for the government now could be how seriously it takes the recommendations of the White Paper in developing new policy, and how much faith the population has in these steps. Facing an 11% shrinkage of the economy and 40% of the country’s population being in poverty, Iraq finds itself faced with existential issues more severe than ever before. Without practical and effective steps, the Government’s recent recommendations and measures risk being not only a damning evaluation of Iraq’s economic status, but also a sign of the progress that could have been made had Iraq’s leaders not consistently failed its people over the past two decades.

Dina Khadum is a researcher specialising in the current affairs of Iraq.

Dina Khadum