Iraq at a Crossroads: Radical Reforms to Avert State Collapse

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Iraq at a Crossroads: Radical Reforms to Avert State Collapse

by Farhad Alaaldin

Jun 2, 2021

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Without radical reform, Iraq faces potential dissolution and geographic fragmentation in the case of an increasingly likely economic crisis.

 

https://www.washingtoninstitute.org/policy-analysis/iraq-crossroads-radical-reforms-avert-state-collapse

 

If the current political situation in Iraq continues as it is without drastic reform, collapse of the state is all but inevitable. This collapse could result from any number of interconnected factors: Iraq’s rentier economy, widespread corruption, endemic poverty, and the country’s many armed factions. It could even come swiftly in the event that oil prices drop to the point where national oil revenues cannot cover the state’s expenditures for a year or more, triggering political turmoil, diverging interests, and armed factions clashing with the state or each other for control of resources. An increase in poverty and unemployment rates would certainly follow, constituting a motive for young people to rise up against the political system and demand radical change. We saw a glimpse of this potential in October 2019.

But barring a sustained dip in oil prices, Iraq’s collapse would more likely be gradual, unfolding through a continuing chain of severe crises and bottlenecks. This appears to be the path Iraq is currently treading, with corruption intensifying within the state and parties governing without concern for the interest of the people and the future of the country. In addition, Iraq faces a continued shortage of services, lack of social justice, and spreading unemployment and poverty.

In fact, the only reason that the Iraqi government has not failed completely in past years has been an abundance of oil revenues, which have covered the state’s operational expenses and were enough for all the parties to divvy up up their shares without butting heads. Even as the overall situation continued to deteriorate, political parties did not feel pressure to mobilize.

Now, however, this former financial abundance is in danger due to the decrease in oil prices, bloated spending on an inflated public sector, and increased operating expenses. The day will come when the state will not be able to manage its finances. As such, the pace of the state’s collapse will accelerate with the first sharp drop in oil prices. Examples of this danger emerged with the state’s inability to pay is employees’ salaries for several months in a row when the price of oil fell below $40 per barrel last year.

In response, Prime Minister Mustafa Al-Kadhimi was forced to announce that the state would not be able to pay salaries in the first month of 2021. The Ministry of Finance resorted to lowering the value of the Iraqi dinar by approximately 23% against the U.S. dollar to prevent this from happening, though the measure severely impacted the local market and worsened the living conditions for all Iraqis, to varying degrees. Along with the global oil market’s recovery and the price of oil’s return to $70 per barrel, these severe measures allowed the government to pay government salaries but demonstrated how fragile government revenue is in Iraq.

Were the situation to deteriorate further, the most likely scenario would be the administrative collapse of the current regime and the retreat of the government’s role to conducting limited business with control of certain areas including central Baghdad and the Green Zone. In this case, the government would come to lack legitimacy and lose control of some of Iraq’s provinces as parties in some provinces potentially refuse to recognize the central government altogether.

The struggle for control of geographical areas, especially the provinces, will intensify as partisan forces—especially those that are armed—try to control these areas and their resources, turning them into a fiefdom or principality under their control. Given the spread of weapons among multiple factions, the southern regions would become principalities and cantons. Armed factions would battle one another to extend their influence, and infighting would rule the day.

The other scenario is a revolution of the hungry—large groups coming out into the streets, taking control of government facilities, and declaring their rebellion against the current regime’s rule and their rejection of the parties’ authority. This would potentially mean an outbreak of chaos in all the provinces, especially those in the south. Some of these scenes were evident in the October demonstrations, when government institutions and party headquarters were besieged, closed, and burned in Dhi Qar, Najaf, Maysan, and Basra.

Iraqi Kurdistan, in the event of such a collapse, would likely extend its hand to the contested regions in an attempt to annex them, fortify its positions, and prevent the spark of chaos from spreading into its cities. In return, armed Arab factions may well rise up to prevent any attempt to gnaw away at these contested territories, even if the matter required fighting Peshmerga forces.

The Sunni element may work to fortify its areas and control them administratively and militarily, which would not be easy due to the current presence of armed Shia factions in these areas. This would lead to infighting between the Tribal Mobilization Forces and the Popular Mobilization Forces and other factions, with both seeking to spread their influence in Sunni regions.

This collapse could end with the partition of Iraq into two smaller states. But dividing Iraq would be no easy matter regardless of the context. The division cannot be based on ethnicity, between Arabs and Kurds; or sect, between Shia and Sunni; or a mixture of those two among Sunnis, Shia and Kurds. Partitioning Iraq on any basis would expose Iraqis to a grinding internal war punctuated with ethnic cleansing in many multi-ethnic and multi-sectarian regions.

Worst of all, neighboring states would not be likely to remain passive. Rather, these states would likely intervene directly to extend their influence within the rival principalities and cantons in the event of the collapse of the centralized state. It is not unlikely that they would militarily penetrate Iraq under the pretext of protecting their national security, with the potential for an Iranian incursion in the south, a Turkish incursion in the north, and a Saudi intervention in the west. Iraq would become an arena for these countries to settle scores and protect their interests, in parallel to the role Iraq played centuries ago when it served as the site of proxy conflicts between these countries’ old empires.

 

Halting Collapse and Building Up the State

Iraq’s current situation requires radical solutions to avoid the potentially catastrophic repercussions of the status quo. This can only be accomplished if political parties, religious leaders, and civil society work together to salvage what can be saved and return the country to a place of civil peace and coexistence. They must take the lead of construction, sustainable development, and consensus around a series of shared solutions.

 

Political Solutions

It has become necessary for the political regime to be changed by amending the constitution to fully meet the requirements and aspirations of Iraqi society. Holding fair, transparent elections free of fraud and manipulation should be at the forefront of this effort.

The political elite—especially the ruling parties—must put the highest interests of the country over their personal interests. This will only be achieved by abandoning the current practices of distributing appointments according to patronage and favoritism, and by adopting instead the principle of employing the right person in the right place. At the same time, these parties should form a competent government capable of running the country separate from partisan influence and interference. They must choose the ministers and special grades on the basis of experience and competency, not partisan affiliation, and they must abolish the economic offices of the parties.

 

Keeping Weapons in State Hands

The presence of weapons outside of the scope of state control is not a viable long term situation. These arms must be restricted to the military and security institutions of the state. The state must therefore extend its control and influence over all parts of the country in accordance with the constitution. The armed factions should directly enter into the military and security formations under the authority of the Commander-in-Chief of the armed forces, without affiliation with parties and personalities, and all armed manifestations should be eliminated; the voice of the state should be strongest and loudest. The state is responsible for preserving the security of citizens and the sovereignty of the country.

 

Economic Development and Governance Reform

Completely replacing Iraq’s rentier economy and undertaking any necessary economic reforms must become a priority for any future government. Development plans must be adopted in long-, medium-, and short-term stages, especially with regard to developing Iraq's industrial, agricultural, touristic, and financial sectors. This allows for moving away from a dependence on oil as a primary source of national income by diversifying revenue streams. Oil industries should be developed and crude oil used as a raw material for manufacturing, not just export.

An integrated plan should be drawn up for administrative and financial reform and to stop the waste of public funds. Government spending should be lowered from 65 percent to normal rates of the federal budget, since the government is the primary and biggest employer. Here, encouraging the private sector and giving it responsibility for developing the country is the ideal solution. The Kadhimi government’s White Paper may be a good starting point, though it requires the will to implement the useful solutions it includes for administrative, financial, and economic reforms.

The fight against corruption must also move from slogans to implementation. This work starts with activating anti-corruption laws and stopping the interference of parties to protect corrupt people who belong to them. This requires activating the role of the public prosecutors and judiciary, along with removing political interference in their work. The judiciary must impose the harshest penalties on the corrupt, from the entry-level public employee to the minister, and the judge must not accept party interference in any case.

While implementing these solutions would require a difficult and radical departure from Iraq’s current governance structures, it is not possible for Iraq to continue on its current path. If Iraq does not collapse due to internal factors, it will collapse due to external factors—with a potential drop in oil prices being the most obvious immediate threat. Iraq’s ruling parties and their leaders must know that they bear full responsibility for state collapse. When that happens, angry groups of people, the afflicted, will not have mercy on them, and the torrent will sweep everyone away. At present, the only way to save the country is to adopt serious reforms before it is too late.

 

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A State in Collapse: Mapping Iraq’s Economic Woes

by Farhad Alaaldin

Jun 2, 2021

 

https://www.washingtoninstitute.org/policy-analysis/state-collapse-mapping-iraqs-economic-woes

 

 

Brief Analysis

Poverty, unemployment, and a lack of local industry continue to plague Iraq's economy, and the resulting public unrest could be dangerous.

Attempting to precisely and objectively describe the situation of Iraq, many academics, observers, and analysts who support their country and its highest national interests agree that, in its current form, the country’s situation consists of a dilapidated rentier economy and an industrial and agricultural sector that has all but collapsed. It may have already fully collapsed, with the exception of individual efforts by farmers, industrialists, and investors to enter the state through establishing modest projects of little value. There is a frightening increase in poverty levels, especially in central and southern Iraq, accompanied by a population explosion due to a lack of family planning or control of its gradual growth.

Along with major security issues and political inertia—discussed in a separate article—much of this crisis can be understood through an economic lens. Specialists agree that, in the current situation, there are no economic drivers in Iraq. The only significant economic activity is merely the oil industry, the revenues of which get allocated as operating expenses. In the event of a revenue deficit from oil expenditures, as happens yearly and has happened for a number of years, the government resorts to internal and external borrowing. This has prompted the state to completely stop rebuilding what has been destroyed in previous wars, developing the basic services sector, or launching sustainable development in the period since 2003.

Iraq’s economy depends primarily on oil, with oil revenues making up 96% of the real value of the federal budget. Because oil is tied to a global market in which prices constantly fluctuate and are usually unstable, oil has turned the Iraqi economy into a rentier economy. The state, the country’s main employer, has approximately 3.26 million employees, which does not include those working on monthly contracts and temporary daily wages. At this point, Iraq’s oil revenues can no longer cover its operating expenses; in the 2021 federal budget, for example, operating expenditures for ministries and provinces were more than 88 trillion dinars, compared to oil revenues of 81 trillion dinars.

There were hopes that the economic White Paper project presented by the Mustafa Al-Kadhimi government—which acknowledged some of the necessary reforms needed to recalibrate the Iraqi economy—could be a starting point to correcting the economic path and beginning necessary reforms. But the paper ended up on a shelf, forgotten or ignored. With elections on the doorstep, political powers found it in their interest to oppose any reforms not coming from themselves alone. As such, yet again, Iraq has lost the opportunity to actually initiate reforms.

Outside of the public sector, Iraq’s private economy is also eroding. Iraq was, in its recent past and across its agricultural map, the region’s breadbasket. But after a series of wars, Iraq’s agricultural sector has gradually declined. Signs of collapse in the agricultural sector have been noted, including recurring drops in the quantities of water flowing from neighboring countries through the Tigris and Euphrates Rivers, the loss of state control over agricultural land, the prevalence of bulldozing orchards to turn them into residential and commercial areas throughout the provinces, and the migration of farmers to the cities to obtain civil and military jobs.

Industry has fared no better than agriculture. The industrial sector, and especially light industries, has collapsed. The latter was impacted prior to 2003 by the effects of wars and a blockade lasting around 13 years. With the loss of control over the borders in the years following the fall of the former regime, different goods and products flowed in at a time of import chaos that has continued until today. While state agencies and their security and military forces limit and control the land and sea border crossings, import regulations lack the economic and financial standards in force globally. This has consequently eliminated the last remaining Iraqi factories, as they were no longer able to compete with regional or global importers. The subsequent shuttering of factories led to thousands of workers joining Iraq’s army of the unemployed.

Likewise, financing is in a similarly dismal situation. The government banking sector has turned into mere shops that distribute salaries or deposit wages and fees, while private banks now focus on competing for what is available on the currency auction of the Central Bank of Iraq, infamous for obscene profits that do not benefit the country’s economy. This has hindered the energies and efforts of investors and business leaders to ramp up construction and investment because the profits made from the currency auction mean they have no need to enter into the difficulties and complications of projects and risk their capital. The matter has reached a loss of confidence by depositors in those banks due to the lack of laws protecting their cash deposits. This has caused the financial sector to lose nearly 50 trillion dinars of the money supply in circulation, which is frozen because it is confined in the homes of the depositors, preferable to any risk of capital.

 

Total Dependence on Oil

Iraq continues to rely on oil as a source of national income. Iraq extracts and sells oil in the global markets, spending the revenue on operating expenses. Often, income is impacted by the rise and fall of oil prices, which are largely headed towards a decline as developed and oil-consuming countries move towards renewable energy.

The Wood Mackenzie Group announced in a report that demand for oil will begin to sharply decline as of 2023, with the expectation that the price of a barrel of oil will be no more than $40 starting in 2030, and just  $10 in 2050. Even if these dire predictions do not come true, oil prices certainly seem set to decrease. Major car manufacturers have been turning towards electric-powered cars, with one group even announcing they will stop producing conventional cars starting in 2030. The volume of consumption in the global battery market has reached $60 billion and is expected to reach $124 billion in 2024.

All these indicators give a worrying warning to oil-exporting countries like Iraq that oil sales—and therefore oil prices—will begin to shrink over the coming few years. If the policies of Iraqi governments continue to ignore this warning and its indicators, then they face only one choice: to declare bankruptcy in the near future. This will happen if they do not move towards diversifying income sources and investing in oil as a raw material for local manufacturing, which could help rein in the chaos of uncontrolled imports.

 

Population Explosion, Unemployment, and Poverty

However, Iraq is already experiencing an unemployment crisis. The Minister of Planning, Khalid Batal Najim, said on April 22, 2021 that “Iraq is witnessing large population increases that are not commensurate with the size of resources, especially with the expansion of the youth among population segments.” Iraq’s population is approaching 40 million people, with an annual increase of one million people. This means that the state’s need to build schools and hospitals and create job opportunities for young people increases every year, even as federal budgets continue to lack the resources necessary to keep pace with this population explosion.

Furthermore, the poverty rate in Iraq has reached around 27% percent, according to statistics from the Ministry of Planning, and 31% according to a report by the World Food Programme (WFP). The former Minister of Labor and Social Affairs, Mohammed Shia’ al-Sudani, said that there are more than 1.4 million families receiving social security assistance, on top of more than a million others applying to the Ministry of Labor and Social Affairs to be included in social security. This means a large percentage of Iraqi society lives below the poverty level, and these percentages are continuously increasing. 

Unemployment in Iraq is also approaching a continuous increase, and, according to the WFP, it has exceeded 40%, especially among youth. Every year, more than 180,000 students graduate from private and public universities and institutes, with only rare work opportunities available in the public or private sector. Large percentages of the population live under the poverty line, and the armies of unemployed young people do not see much of a future appearing on the horizon.

Today, these economic pressures have become a time bomb. There are already signs of grave consequences in the October demonstration and the demonstrations that followed, where graduates demanding employment in front of the headquarters of various ministries. In the past few weeks, youth’s demands for revolution and for boycotting the elections are being renewed, as well as a call for change in the existing political system. It is not unlikely that demonstrations will return in force to threaten the political system and remove the ruling class. Moreover, the country’s governance failures—discussed in a separate article—demonstrate the ways in which corruption and a proliferation of arms have further destabilized Iraq.

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They have squandered every opportunity that could have propelled their country to the economic forefront. All because their politicians don’t give a crap about the people.