Is it one challenge too many for Iraq’s new government to bear?
First came the political unrest. Then the coronavirus. Now an oil price crash completes a trifecta of problems that are pushing Iraq’s finances and its fragile stability to the edge.
Oil accounts for 67 percent of Iraq’s economy. Income from crude sales funds roughly 90 percent of its government budget. That is not a problem when oil prices are buoyant. But when they plummet, Iraq’s finances are at the mercy of the markets.
And this year has been particularly merciless.
COVID-19 containment measures have obliterated global crude demand. Prices started to retreat in January and February as China – the world’s biggest crude importer and Iraq’s biggest customer – went into lockdown. Those price pressures collapsed into a full-blown crash in March, after Saudi Arabia initiated an oil price war.
“One day our GDP looks brilliant, the next day it looks horrible, simply because oil prices change, given the role of oil in our GDP,” Ahmad Tabaqchali, senior fellow at the Institute of Regional and International Studies (IRIS) told Al Jazeera.
A truce was called on April 12 with an historic agreement between the Saudi-led Organization of Petroleum Exporting Countries (OPEC) and its allies to curb production.
But the record 9.7 million barrel-a-day curb struck by the group known as OPEC+ is not nearly enough to offset the coronavirus demand-blow and revive prices meaningfully.
The imbalance turned the market on its head on April 20, when US benchmark crude prices turned negative as traders paid to have oil taken off of their hands rather than risk having nowhere to store it. Global benchmark Brent crude sank below $20 a barrel that day.
Though oil prices have since clawed back some of those losses, with Brent currently trading just shy of $30 a barrel and storage capacity still an issue, markets could well be roiled again.
Iraq now faces a severe economic crisis. The World Bank now reckons the country’s economy will contract 9.7 percent this year – the worst performance since the fall of the late President Saddam Hussein in 2003.
Twin crises and political turmoil
Iraq entered the twin crises of coronavirus and the oil price crash steeped in political turmoil.
Frustration with corruption, a lack of jobs, poor public services and political sclerosis boiled over into anti-government protests late last year that forced the resignation of former Prime Minister Adel Abdul Mahdi.
Months of political deadlock finally gave way on Wednesday after Iraq’s Parliament voted to approve the majority of Prime Minister-designate Mustafa al-Kadhimi’s new cabinet.
But while Iraq has a new government, it is still without an oil minister.
“There is no doubt that the political blockage and the repercussions of the spread of the coronavirus are all factors that will constitute challenges for the new government’, former Iraqi oil minister Ibrahim Bahr Alolom, told Al Jazeera.
“And these challenges will increase if Iraq adheres to OPEC’s decision to reduce its oil production,” Alolom added.
Not only is Iraq getting less for the oil it produces, as OPEC’s second-largest producer, it has also agreed to pump significantly less of it.
Iraq’s share of the OPEC+ production cut that went into effect last Friday amounts to more than one million barrels per day or just over 20 percent of its overall production.
“The economy is in for a massive shock as government revenues have fallen by more than half due to low oil prices,’ Sajad Jiyad, a Baghdad-based political analyst, told Al Jazeera. “Public payroll continues to expand by billions of dollars per month that the government will have to cover.”
Gaping budget gap with no easy patches
Belt-tightening is never popular, but for a country prone to unrest, slashing budgets can ignite anger if the pain is acutely felt by the people. About half of Iraq’s budget goes to state salaries, pensions, and benefits for millions of government employees.
While a budget has not been approved for 2020, a stimulus package introduced in October assumed that oil would fetch $56 a barrel.
Should oil prices stabilise in the low $30-a-barrel range and the government fails to rein in spending, Iraq could be looking at a financing gap of $54bn this year, says the World Bank.
“To showcase the severity of the fiscal situation, Iraq would need at least a US$58/barrel oil price to meet its wage and pension obligations alone,” the World Bank said in its latest update on Iraq’s economic outlook.
There are no easy remedies for closing the gap between Iraq’s shrinking oil income and its financing needs.
“There are only two solutions,” Iraq analyst Yahya al-Kubaisi a consultant with the Iraqi Center for Strategic Studies, told Al Jazeera, “using the CBI’s [Central Bank of Iraq] cash reserves or resort to borrowing, not only from the IMF but from other sources too.”
Iraq’s foreign exchange reserves hit $68bn last year – enough to cover 10 months worth of imports. They now cover less than six months of imports, having dwindled by at least $9bn.
Conditions are far from ideal for borrowing on international debt markets, given capital is flying out of emerging markets, rather than into them. Issuing domestic debt is extremely expensive and crowds out credit for Iraq’s struggling private sector.
Wealthier states are less likely to come to Iraq’s rescue as their economies are knocked sideways by the coronavirus. And the International Monetary Fund (IMF) may be less inclined to throw a lifeline to Baghdad, given Iraq’s failure to implement structural reforms the last time the IMF stepped up with an aid package in 2016.
“I’m sure the IMF can lend the money to Iraq but given our abandoning of the IMF Stand-By Agreement, it will require real reforms that we don’t have the luxury to make,” said Tabaqchali. “The world is a very different place right now.”