The following post was written by Guest Contributor, Zeinab Shukur, Department of Sociology, University of California, Riverside. It was originally published by the Emirates Policy Center, https://epc.ae/topic/poverty-conflict-and-politicaleconomic-crisis-in-a-fragile-iraq
Iraq’s economic outlook has rapidly deteriorated since the onset of the COVID-19
pandemic. For many years, economic progress and state legitimacy in the country
have been undermined by an non-diversified economy, as well as Iraq’s dependence
on oil revenues, bloated public sector, rigid budget, rampant corruption and
weak state capacity.
This economic and political deterioration has inspired
conflict and instability, contributing in 2019 to the rise of one of the
country’s biggest social and political uprisings. It has also left the country
with limited capacity to mitigate and manage the COVID-19 crisis and its//
socio-economic impacts.
However, unlike previous crises, the current economic
breakdown and its resultant political consequences are far from temporary.
The
2021 year does not promise any significant improvement in this regard, with a
budget deficit estimated at 63 trillion dinars (US $43 billion) – the biggest in
Iraq’s history and the highest among the OPEC countries.[1]
The measures implemented now by Iraq’s ruling elites will be instrumental in
determining the future of the country and the overall stability of the region.
Therefore, how will the country's worsening economic situation and rising poverty
affect its already unstable political structure?
Precursors to the Current Iraqi Crisis
Over the past two decades, corruption and weak state capacities have left Iraq
vulnerable to a multitude of economic, political and humanitarian crises. Weak
state capacity has led to the formation of multiple ‘states within the state’ –
political parties and interests that control the various different ministries
and state institutions.
Unchecked corruption, a vast system of patronage and an accompanying network
of “ghost employees” have allowed these political parties to redirect oil revenues
towards their own interests and constituencies, providing jobs and protection
to their supporters.
The impacts of this situation have stripped the state of its
ability to govern, destroyed any vestiges of a private sector and left young people
– of which Iraq has the largest proportion in the region – with little to no
alternatives other than to seek employment in an already bloated public sector,
join one of the many militias, or emigrate.
And even then, political groups monopolize the system of jobs-through-patronage,
which are sold to the highest bidder, leaving many people unemployed and
impoverished.
There are three main consequences to these dysfunctional
circumstances.
First, oil revenues – the main driver of the Iraqi economy since
the 1950s – have continued to dominate the economy and undermine the private
sector, a status quo there is little incentive for political parties to change.
Second, poverty and economic hardship have increased steadily; a 2018 report by
The Iraqi Central Bureau of Statistics showed that unemployment had reached 13.8
percent and poverty 20 percent for individuals aged 15 years and over. More than
a fifth of young people in the country were neither employed nor in school in
the same year, and women represented only 12 percent of the labor force.[2]
Third, the fallout from the COVID-19 crisis and the decline in oil prices have
aggravated the already vulnerable economic and political situation. A spokesman
for the Ministry of Planning stated that a study prepared with the World Bank
and UNICEF found that the number of people in poverty increased by 2.7 million
in 2020, on top of the 6.9 million who were previously known to the Ministry. He
added that the poverty rate in Iraq had reached 31 percent, with at least 2.8
million children living below the poverty line.
In certain parts of the country, such as in al-Muthanna province, the poverty rate
was as high as 52 percent, with some individual villages within the province
reaching 70 percent. Furthermore, 3.4 million people – or 12 percent of the
population of Iraq – live in slums.[3]
These numbers are not surprising. The Iraqi government requires around $5
billion each month for salaries and pensions and $2 billion to cover essential
services and operating costs.
Yet, with the decline in oil prices, Iraq’s
monthly income in 2020 fell to between $2.5 and $3.5 billion, leaving the
country with a $3.5–4.5 billion monthly deficit and $80 billion of debt.[4] '
The Problematic Nature of the 2021 Budget
In an effort to address the ongoing crisis, a team from the International
Monetary Fund (IMF), led by Tokhir Mirzoev, held a virtual liaison with the
Iraqi authorities from November 11 to December 10, 2020 to conduct discussions
on the situation.
The conclusions drawn from these discussions was clear – real GDP growth had
contracted by 11 percent in 2020, and without structural changes, Iraq’s net
foreign assets would continue to drop into 2024, leaving the country with one
of the highest debt-to-GDP ratios among the OPEC+ countries.[5]
According to Finance Minister, 'Ali 'Allawi, Iraq will run out of hard currency
6–7 months into 2021 if oil prices remain below $70 per barrel (although in the
2021 budget, oil prices are estimated at $42 per barrel).[6]
Most projections
suggest the continuation of low energy demand and further price volatility in
2021.[7]
The IMF recommendations included reversing the expansion of wage and pension bills,
raising non-oil revenues, rationalizing the electricity sector, introducing and
enforcing tax and customs policies, and reforming state-owned banks.[8] This is
not particularly surprising, argues Naomi Klein, who explains that "shock
treatment" approaches such as these capitalize on disruptions such as the
COVID-19 crisis and the oil price collapse to pass economic and social policies
that the population would ordinarily reject.
The next steps of the Iraqi government will likely reflect the suggestions of the
IMF. As part of broader plans to trim the bloated public sector and introduce
structural changes to the country’s rentier economy, the Iraqi government announced
on December 19, 2020 that it was devaluing the dinar – by 23 percent – for the first
time since 2003 to secure billions of dollars in foreign aid.
As a result, the Finance Ministry will sell its dollars to the Central Bank at an
exchange rate of 1,450 dinars per dollar, which will in turn be resold to local banks
at 1,460, providing a marginal benefit.[9]
The Iraqi government is therefore signaling
to the IMF and the world that Iraq is serious about its economic future. However, without accompanying economic reforms – which many political elites refuse to
consider – devaluation will only undermine savings, increase prices and raise poverty;
and since Iraq imports the majority of its food and goods, devaluation will make
these goods scarce, triggering further inflation.
Another step suggested by the IMF, and discussed by the Parliamentary Finance Committee,
is the introduction of a value-added tax (VAT) of 12 percent in 2021. Currently, the
government collects four types of tax – sales, income, transfer of ownership and company –
at rates ranging from 10 percent to 35 percent.
However, these taxes, which constitute two percent of GDP, are mostly collected from
major concerns such as telecommunications companies and foreign oil firms.
Shaker
al-Zubaidi, Director General of the General Authority for Taxes, revealed that the
Iraqi government is planning to implement a stipulation in the 2021 budget law that
includes imposing a sales tax of 10 percent on commercial centers, markets, hotels,
restaurants, cars and leased real estate, as well as creating a law to tax all
working Iraqis.
Of course, there are many challenges to such a plan. Most purchases and financial
exchanges among average Iraqi citizens are in cash; thus, implementing tax law without
modernizing the banking system will prove challenging.
Furthermore, there are fears
that imposing taxes on companies and businesses in the country will only increase the
prices of goods and services – which is what happened when the government levied a 20
percent tax on telecommunications companies, leading to a corresponding 20 percent
price increase in the services provided.[10]
Price increases in goods and services will most severely impact average Iraqi citizens
who are already struggling to survive, especially given the absence of a social safety
net to protect the poorest and most disadvantaged citizens in society. Even though the
Iraqi government is implementing the steps recommended by the IMF and showing its
willingness to introduce meaningful structural changes, the reality in Iraq is unlikely
to change.
A brief review of the 2021 budget provides some insight in this regard. The expenditures
allocated to the Iraqi Popular Mobilization Forces (PMF) – comprising fighters, many of
whom belong to militias supported by Iran – amounted to 2.4 trillion dinars. The PMF
budget is the equivalent of the combined total budgets of the Ministries of Justice,
Foreign Affairs, Culture, Water Resources, Planning and Transportation. It also exceeds
the budget of the Ministry of Education and is only slightly less than the budget of the
Ministry of Health, despite the ongoing COVID-19 crisis.
In spite of the IMF's encouragement for Iraq to develop its non-oil economy, the Ministry
of Industry only received 33.22 billion dinars, whilst the Ministry of Agriculture
received 43.46 billion dinars and the budget of the Ministry of Water Resources was
143.31 billion dinars.[11]
The superficial changes made by the Iraqi state are unlikely to save the collapsing
economic system nor stem the increasing levels of poverty and unemployment in the country.
If spending levels continue in their current form without substantial adjustments,
within a few years the Iraqi government will be unable to cover its expenditures and
will face the risk of bankruptcy.
Even if oil prices recover dramatically, reaching $100 per barrel – which is highly
unlikely according to most market experts – this increase will not be sufficient to cover
rising budget expenditures in the medium term.[12] Thus, even in the best-case scenario,
these steps will merely postpone a collapse, rather than sustain a healthy economic system.
The Conflict Trap: The Relationship Between Poverty and Conflict
While research clearly shows that political instability and ethnic diversity can act as
precursors to conflict, high poverty levels have also been shown to directly increase the
risk of conflict. Collier and Hoeffler (2004) find that countries with a GDP per capita
of $250 face a 15 percent risk of war within five years, while countries with a
GDP per capita of $600 are at a 7.5% risk of war within five years, and those
with a GDP per capita of $5,000 GDP face only a 1% risk of war over the same
period.[13]
Research by Fearon and Laitin (2003),[14] Sambanis (2003),[15] and Collier, Hoeffler and
Rohner (2006),[16] as well as other case studies and cross-national research works, have
shown that low income per capita is a good indicator of the likelihood and duration of
conflicts. Furthermore, Collier and Hoeffler find that in addition to GDP per capita, a
drop in income or change in GDP per capita are also indicators of conflict. They claim
that a one percent increase in GDP per capita will increase the risk of conflict by a
corresponding one percent.[17]
This relationship produces a “conflict trap,” wherein conflict tends to undermine the
livelihoods of the population and shift public resources away from priorities like
education and healthcare, which breeds poverty that leads to further conflict. Hence,
there is little doubt that poverty is a good indicator of social, economic and political
instability.
Therefore, facing increasing levels of poverty and unemployment, and prolonged economic
and political crises, the disenfranchised Iraqi population, as well as the competing
political factions, are increasingly likely to engage in some form of conflict.
The bitter truth is that the fragile Iraqi political structure will not survive
the increasingly likely collapse of the country’s economy.
This, in turn, may well trigger another round of conflict between competing factions.
The collapse of al-Kadhimi’s government will lead to a political vacuum that tribes,
political parties and militias backed by Iran will seek to fill, and will
inspire neighboring countries to intervene to protect their interests in Iraq.
Economic and political collapse will also trigger widespread public anger and
demonstrations – as witnessed in December 2020 in the relatively stable
Kurdistan region after the payment of salaries was delayed.
Iraq must commit to
meaningful, long-term economic reforms that include the revitalization of the
private sector, a shift away from the rentier policies and a reduction in the
state’s role in managing the economy.
A “white paper” on potential reforms, produced by a specialized government team on
10 October 2020, includes plausible solutions and a road map to this end. However,
in the absence of any concerted efforts to include young Iraqis in the political
process, and with no central economic philosophy, institutional capacity, or political
will to take such difficult steps, disaster will never be far away.
REFERENCES
[1] Reuters (2020), “Iraq's cabinet approves 2021 draft budget of $103 billion,”
https://www.reuters.com/article/iraq-budget-int/iraqs-cabinet-approves-2021-draft-
budget-of-103-billion-idUSKBN28V2G8
[2] Iraqi Ministry of Planning (2018), “The Central Bureau of Statistics and the
Executive Management implemented the poverty alleviation strategy in the
Ministry of Planning,” https://mop.gov.iq/news/view/details?id=76
[3] Nas News (2020), "Detailed figures on the poor in Iraq before and during the
'Corona' pandemic," https://www.nasnews.com/view.php?cat=48918
[4] Alaaldin, Farhad and
Kenneth M. Pollack (2020), “ Iraq’s Economic Collapse Could Be Biden’s First
Foreign-Policy Headache,” Foreign Policy,
https://foreignpolicy.com/2020/12/14/iraqs-economic-collapse-could-be-bidens-first-
foreign-policy-headache/
[5] IMF (2020), “IMF Staff Completes 2020 Article IV Mission with Iraq,”
https://www.imf.org/en/News/Articles/2020/12/13/pr20372-imf-staff-completes-2020-
article-iv-mission-with-iraq
[6] Bloomberg (2020), “Iraq Devalues Dinar to Push Economy Forward Ahead of
Deficit,” https://www.bloomberg.com/news/articles/2020-12-19/iraq-devalues-dinar-
to-push-economy-forward-ahead-of-deficit/
[7] Bradstock, Felicity (2020), “The Real Crisis For Oil Is Yet To Come,”
OilPrice.com,
https://oilprice.com/Energy/Crude-Oil/The-Real-Crisis-For-Oil-Is-Yet-To-Come.html
[8] IMF (2020), “IMF Staff Completes 2020 Article IV Mission with Iraq,”
https://www.imf.org/en/News/Articles/2020/12/13/pr20372-imf-staff-completes-2020-
article-iv-mission-with-iraq
[9] AP (2020), “Iraqis panic as leaked budget draft signals devaluation,”
https://apnews.com/article/financial-markets-baghdad-iraq-state-budgets-
c691936afd77edd12ad776b993e79d9e
[10] Al-Monitor (2020), “Iraqi government considers sales tax to relieve budget
crisis,” https://www.al-monitor.com/pulse/originals/2020/12/iraq-economy-tax-
finance-parliament.html#ixzz6hI32xtg9
[11] Al-Hurra (2020), "The Iraqi budget ... a huge deficit and ‘illogical’
numbers for mobilization and armaments,” https://arbne.ws/3ixMXDL
[12] Abbas, Aqeel (2020), “The rentier state in Iraq is in its final stage,”
SkyNews Arabia, https://bit.ly/3o3DiGc
[13] Collier, Paul, and Anke Hoeffler (2004), “Greed and Grievance in Civil War,”
Oxford Economic Papers, 56, pp. 563–595.
[14] Fearon, James D., and David D. Laitin (2003), “Ethnicity, Insurgency and
Civil War,” American Political Science Review, 97:1, pp. 75–90.
[15] Sambanis, Nicholas (2003), “Using Case Studies to Expand the Theory of Civil War”,
CPR Working Papers.
[16] Collier, Paul, Anke Hoeffler and Dominic Rohner (2006),
“Beyond Greed and Grievance: Feasibility and Civil War,” Center for the Study of
African Economies, Working Paper.
[17] Collier, Paul and Anke Hoeffler, “Greed and Grievance in Civil War,”
Oxford Economic Papers, 56, 2004, pp. 563–595.
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