The roots of Iraq’s coming financial crisis

[SocalDinar]

The roots of Iraq’s coming financial crisis

 

Oil exports are by far the most important segment of Iraq’s economy, making up about half of the country’s GDP and 90% of government revenue. Given the state’s reliance on oil, investors pay careful attention to the conditions of the industry. And today those conditions are mixed.

On the positive side, the country appears to be pumping and exporting more oil than expected, almost four million barrels a day, thanks to investments in production. And the government in Baghdad appears to be on better terms with semi-autonomous Kurdistan—neither were upholding the terms of the 2015 budget agreement, with the former paying less money than promised and the latter providing less oil than promised.

But Iraq’s oil industry, and the government’s budget, is being squeezed by low oil prices. As a result, the nation’s finances are being hit hard: the market price is now half that needed to break even, expanding the budget deficit, forecast to return to balance until the rise of IS, to a projected 9% of GDP.

In the past, Iraq’s leaders approved budgets without seriously taking into account a drop in the price of oil. Now the severe revenue shortfall is forcing leaders to cut back on new investments. Russia’s Lukoil, Royal Dutch Shell, and Italy’s ENI are also cutting back, eyeing neighbouring Iran’s pending economic opening as a safer investment.

Despite improving its finances after the US troop withdrawal, the drop in oil prices and the rising costs of battling IS have pushed Iraq’s economy into a state of near-crisis. According to the IMF, the nation’s GDP shrank by 2.7% in 2014 and unemployment is estimated to be over 25%.

The World Bank rated Iraq one of the worst places in the world to do business in 2015: 156th out of 189 countries. The government is in talks with the IMF for a loan worth over $800 million to finance some of the budget shortfall. However, the country requires more fundamental reforms if it is to achieve long-term economic stability.

The link between violence and economic instability

Iraq’s latest economic problems are linked to the increasingly costly battle with IS, now in control of much of Anbar province and Mosul, the nation’s second-largest city. To stop the insurgency, many analysts have called on Iraq’s Shia-dominated government to reach a reconciliation with the Sunni minority. But Sunnis have a long list of grievances, stemming from the atrocities committed during the civil war under US occupation and the intense political conflict after the US withdrawal.

Iraq’s Sunnis claim that they are targeted by security forces as punishment for collusion with insurgents like al-Qaeda in Iraq and IS. Reports of detentions without evidence, the use of de-Baathification laws to keep them out of lucrative government jobs, and forced eviction from their homes may have contributed to IS’s rise. Many Sunnis see the extremist group as preferable to the Shia-led government and current security forces.

But Iraq’s Sunni-Shia divide is a symptom of a more fundamental problem in poor governance. Writing for the Brookings Institution, Luay Al-Khatteeb explains how power in Iraq has been highly concentrated with the executive branch and bureaucrats, who have wide discretion to implement policy without legislative or judicial oversight.

The judiciary, already at a disadvantage after years of irrelevance under Saddam, is subject to executive pressure and does not adequately enforce property rights. Corruption has also worsened after the US withdrawal in 2011.

Rather than being the cause of Iraq’s poverty, persistent violence has become part of a cycle that feeds off the country’s weak institutions, in what Stanford economist, Barry Weingast, calls the “violence trap”.

The key problem is that reducing violence in the long term requires alternative opportunities, and those opportunities tend to require reforms that respect the rule of law, protect property rights, and promote trade. Yet, those reforms rarely arise absent the kinds of opportunities that reduce violence in the first place, and so poorly governed states like Iraq are trapped in a cycle of violence.

Partition: the least bad option?

The long-term threat that violence poses to Iraq’s future is illustrated by the increasing role that Shia militias, often trained and funded by Iran and unconnected to the central government, now play in combating IS. Financial Times correspondent, Borzou Daragahi, argues that the Shia domination of the security services “will have the deepest and most lasting impact on Iraq.”

This deepening sectarianism is convincing some analysts that the best option, or perhaps rather the least bad option, is for Iraq to divide along ethnic or denominational lines. Iraqi Kurdistan is already largely self-governed, and is even planning to issue semi-sovereign bonds to help finance oil industry development and its own fight against IS. Writing for Foreign Affairs, Marina and David Ottoway describe how the Kurdish example is prompting other provinces to seek greater autonomy from Baghdad.

Not all agree, but most arguments against partition do not put enough emphasis on Iraq’s poor governance. In Iraq, imperfect partition or poorly-executed federalism may be preferable to the current regime, despite the fact that conflicts over state finances, especially access to natural resources, would pose huge challenges.

Solving Iraq’s financial crisis requires fundamental reforms to how Iraq is governed, not just the defeat of IS and a sectarian reconciliation. But the slim prospects of reform from within the central government may drive some in Iraq’s periphery to push for more independence from Baghdad.

Frederic Hof, a senior fellow at the Atlantic Council, describes the growing movement for self-government among the victims of Syria’s civil war. It is likely that minorities in neighbouring Iraq, stung by years of corruption and abuse by their leaders, have similar designs.

http://globalriskinsights.com/2015/08/the-roots-of-iraq-coming-financial-crisis/

[SocalDinar]

A Lot of similar articles in the news section and many are calling the financial problems of Iraq as smoke or BS.   My personal opinion is that they are not BS articles and I don't think the media is posting these articles as a smoke screen for an impending RV.

Of course his is just my opinion and that's not worth a lot from an electrical contractor I know. So I am posting this to see what others think. I'm wondering why so many call this smoke?

[caz1104]

Media & Gov print stories or provide press releases at nausea that most would argue are less than factual. Iraq is no different - imo.  Ya gotta weed thru to find what YOU believe to true. And of course if one has already made up his/her mind, u look for info that reinforces that view.

Edited August 5, 2015 by caz1104

[rockfl9]

A Lot of similar articles in the news section and many are calling the financial problems of Iraq as smoke or BS.   My personal opinion is that they are not BS articles and I don't think the media is posting these articles as a smoke screen for an impending RV.

Of course his is just my opinion and that's not worth a lot from an electrical contractor I know. So I am posting this to see what others think. I'm wondering why so many call this smoke?

SD: You are right Iraq is facing major problems . Anyone that doesn't see that is ignoring the facts. They cannot make the budget this year without a $5+Bn loan.  Cancel all projects  next year if oil doesn't go above $70bbl. so far that is not likely'. October is a critical month but not how the RVers  would think .  They need to put together the 2016 budget. They cant make the payroll without drastic pay cuts or layoffs. If they layoff , will only go on welfare.  

If Iraq really was such a WEALTHY country WHY the emphasis on the ration cards?

I am going to stick my neck out and predict that the CBI will devalue the dinar by 15% before the end of this year to accommodate  the 2016 budget. 

[TrinityeXchange]

A Lot of similar articles in the news section and many are calling the financial problems of Iraq as smoke or BS.   My personal opinion is that they are not BS articles and I don't think the media is posting these articles as a smoke screen for an impending RV.

Of course his is just my opinion and that's not worth a lot from an electrical contractor I know. So I am posting this to see what others think. I'm wondering why so many call this smoke?

completely agree with you SD.  this is NOT BS.  most of the writings from members asserting BS on news is interpreted as ignorance and fear.  when a person doesn't understand something, it is human nature to reason it in terms that make sense to them.  you ever have a person tell you that their internet was running slow because the weather has been bad lately?  same thing.  so here is what i think.  there is news and then there is investment news, they are two entirely different things.  for instance, last year the news said daesh was at the gates of baghdad and preparing to take the capital.  this spread like wildfire all across the west.  investors resultingly dumped their stocks on the iraq stock exchange.  this was perfect for me because i understood what was really happening from an investment standpoint.  so what did i do? i bought up every stock i could at basement prices.  eventually it became apparent that daesh did not have the wherewithal to siege the capital and investment sentiment turned positive, investors returned.  i sold for a killing!  

 

the question people need to ask themselves when they see "bad" news come out about iraq is "is this situation reconcilable?"  so far, from what i am seeing, iraq has no where to go but up....time to buy and invest before big money arrives and the little guy is squeezed out.  big money is only waiting for one thing....stability.  big money could care less about a partitioned or unified iraq, those discussions are for news hounds not investors.  now when maliki was running the show, i will admit that if he had won a 3rd term i was getting out of the investment.  with abadi leading the way, i like what i am seeing economically and am excited about the potential gains.  

 

I am going to stick my neck out and predict that the CBI will devalue the dinar by 15% before the end of this year to accommodate  the 2016 budget. 

i am going to hold you to this rockfl9.  but one has to ponder why would iraq devalue the currency, hence interjecting instability, while at the same time soliciting foreign investment?  monetary stability and foreign investor confidence are tied at the hip.  secondly, a devaluation of currency is entirely monetary policy while management of budgetary issues is entirely fiscal policy.  are you implying that the goi and cbi collude together in order to support bloated government spending?  one of the main issues with the budget deficit is 1/4 of the population being bankrolled by the goi.  from what i have been reading, through the new reformation program, privatization is being introduced as a policy to offload budgetary pressure.....a brilliant idea i might add.  should iraq transition from a state-run economy to a privatized market economy, the budget will begin adjusting itself almost overnight wouldn't you agree?  

 

i see them tackling their fiscal problems through modern economic models which, in my opinion, is the way to go instead of doing it through monetary policy.  

Edited August 21, 2015 by TrinityeXchange

[rockfl9]

 

 

i am going to hold you to this rockfl9.  but one has to ponder why would iraq devalue the currency, hence interjecting instability, while at the same time soliciting foreign investment?  monetary stability and foreign investor confidence are tied at the hip.  secondly, a devaluation of currency is entirely monetary policy while management of budgetary issues is entirely fiscal policy.  are you implying that the goi and cbi collude together in order to support bloated government spending?  one of the main issues with the budget deficit is 1/4 of the population being bankrolled by the goi.  from what i have been reading, through the new reformation program, privatization is being introduced as a policy to offload budgetary pressure.....a brilliant idea i might add.  should iraq transition from a state-run economy to a privatized market economy, the budget will begin adjusting itself almost overnight wouldn't you agree?  

 

i see them tackling their fiscal problems through modern economic models which, in my opinion, is the way to go instead of doing it through monetary policy.  

The CBI and MOF must work together for the survival of the country. If one fails they go down together. The gov of the CBI has issued a paper that suggested the MOF take steps to manage next years budget .  

When you add up all govt employees, pensioners and welfare/unemployed you probably find the GOI budget supporting more than half of the population. But laying off employees only transfers then to another category.

The small business loans wont make a dent in unemployment for another year. What kind of business can you  start with 10 -15K dinar? A chicken farm maybe.  

The problem with adopting a new economic model is that it takes too long.

[Shabibilicious]

The roots....the roots....the roots are on fire.    

 

GO RV, then BV

[caz1104]

"roots" wasn't that a multi-part movie from the 70's?

[SnowGlobe7]

[caz1104]

Yeah that's it!!!! Thanks SG

[Shabibilicious]

Chicken George......and his "Root"sters    

 

 

GO RV, then BV

[TrinityeXchange]

The problem with adopting a new economic model is that it takes too long.

can't argue with you there, and also the reason why i stopped coming up with dates/rates.  if we have to wait for this thing to appreciate organically, then we might be here awhile.  as long as i am seeing the right kind or progress, i am prepared for patience.

[rockfl9]

can't argue with you there, and also the reason why i stopped coming up with dates/rates.  if we have to wait for this thing to appreciate organically, then we might be here awhile.  as long as i am seeing the right kind or progress, i am prepared for patience.

Progress???????

So far just a lot of different talk.

[TrinityeXchange]

Progress???????

So far just a lot of different talk.

an interesting perspective that you have seen zero progress since abadi took office.  interesting perspective indeed 

[rockfl9]

an interesting perspective that you have seen zero progress since abadi took office.  interesting perspective indeed 

Where do you see actual progress?

Tried to fire the 3 stooges , but they are still there.

Restructure ministries is under fire. Not done.

These are all good plans BUT except for shifting some security people nothing has really happened.

I like the plan to bring in experts to solve fiscal and technical problems, lets see if that really happens!

[SocalDinar]

Abadi totally bailed on the Sunnis in the Anbar province. It will take more than lip talk to gain their trust. Without Abadi leaving his party I do not think it is possible.