Business

As Terror Recedes, the Iraqi Economy Tries New Things

After eight months in office, the Iraqi prime minister can point to a period of calm, increased foreign investment and a building boom in Baghdad as signs that his country is moving in the right direction. Onlookers are concerned, however, at the disproportionate economic influence of Iran and the government’s lackluster effort to stem corruption.
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colorful-fruits

Baghdad, Iraq – June 28, 2019: Various and colorful fruits,olives, legumes and seeds.Traditional Iraqi food.Three positive workers posing in background © Focus and Blur/ shutterstock.com

June 22, 2023 23:15 EDT
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At a Chatham House roundtable in London last week, the focus was on the sustainability of Iraq’s rebound from the political and economic stalemate that followed the accession of Mohammed al-Sudani to the prime ministerial office in October of last year. The roundtable was conducted using Chatham House rules, i.e. anyone who comes to a meeting is free to use information from the discussion, but is not allowed to reveal who made any particular comment.

Iraq is back in business, or so it seems

What is apparent to visitors to Baghdad, many of which were at the roundtable, is that café culture has returned; there is a sense of security after years of violence. As a recent The Economist article notes:

Hotel lobbies bustle with businessmen from China. Spectators pack the reopened horse racecourse. After a 20-year hiatus, cranes are in action building malls and housing estates. Normality, or at least a version of it, is returning to Iraq.

As a contributor said, “this is a favorable motivator” for the foreign direct investment that the Iraqi economy so urgently needs. The security comes, at least in part, from the fact that the prime minister, as The Economist points out, has strong links with armed militias—the Popular Mobilization Forces (PMF)—many of which themselves have direct links with Tehran. Under al-Sudani the numbers counted as being in the PMF have increased by a whopping 116,000 to 230,000 and given an annual budget of 2.7 billion US dollars. With that sort of backing, there is no need for the militias to use their weapons to secure gains.

The budget released on 11 June was set at $153 billion and it was based on oil prices of $70 per barrel. Given the volatility of the market, that decision seems (putting it kindly) somewhat naïve. Granted, after the Russia invasion of Ukraine prices had peaked to $123 in March 2022. Prices slumped, however, rallied briefly in June last year and since then have steadily declined to hover around that $70 mark.

In its February assessment of the economy, the International Monetary Fund noted that the fiscal shortfall of the non-oil GDP had widened from 45% to 63%, and went on to say:

With gradually declining global oil prices, both fiscal and external current account balances are expected to turn into deficits over the medium term, resulting in renewed financing pressures, drawdown of foreign exchange reserves, and exhaustion of fiscal savings. This outlook is subject [to] additional downside risks related to a faster decline in oil prices, social unrest, escalation of geopolitical tensions, and realization of contingent liabilities, notably in the electricity sector.

As one participant at the round table, casting doubt on the competency of the budget, wryly noted, “what happens when oil goes to $50 a barrel?”

Corruption is going to be a lingering problem

The al-Sudani government is at pains to point out that it has a campaign in place to address endemic corruption, with 52 summonses being issued in May against former cabinet ministers and serving deputy ministers and governors. The selling of ministerial and other senior government posts has, the government claims, now been halted. The catchphrase doing the rounds, though, is, “you can’t stop 20 years of corruption in 20 months.” The mood at the round table was skeptical that this government would fare any better than its immediate predecessor at slaying the beast of corruption that continues to devastate the economy and attack development potential going forward for this energy-rich nation.

One sign that things are not going in the direction the government claims is the fact that in the budget Iraq’s already hugely bloated public sector is set to swell with the addition of more than half a million new positions. One contributor suggested that the figure could be 600,000, only to be corrected. It was, in fact, 739,000, prompting the comment that the government’s solution to ongoing street demos was to give the protesters jobs.

Amidst the general gloom, there are some rays of good news. With the more secure country and capital, foreign investors are signaling renewed interest, coming thus far primarily from Qatar, Turkey and the UAE. China, too, is engaged, and Egypt, Italy and Germany are sniffing around. In fact, on the same day as the round table, the Qatari emir was in Baghdad to sign a deal aimed at developing projects worth $9.5 billion. Included is the building of two power plants that will generate a combined 2400 megawatts.

However, it is worth making the caveat that it is in the energy sector that some of the worst corruption occurs. “The mother of all corruption hides behind subsidies to energy, costing $30 billion in lost revenue and another $30 billion in lost opportunities,” went the comment from one of the participants.

Iraq is beholden to its eastern neighbor

One contributor pointed out the powerful presence of Iran in the sector. Despite its vast hydrocarbon resources, Iraq is dependent on Tehran for gas imports and when, as is frequently the case, it falls behind in payments the gas supply is threatened by curtailment, creating even more misery for ordinary Iraqis whilst further damaging the economy.

A $17 billion project undertaken in partnership with Shell to use gas capture from flaring in southern Iraq to generate electricity is being built by an Iranian company with ties to the Revolutionary Guards. In its investigation of the deal, the Financial Times noted “Tehran-based Mapna Group … is entitled to 78% of the revenue from electricity sales, according to documents seen by the Financial Times and three people involved in the contracts.” The article notes that the US is concerned “with the role that Hassan Danaeifar, a former Iranian ambassador to Baghdad and former member of the country’s Revolutionary Guards, has played in lobbying Baghdad on behalf of Mapna.”

Whether outside foreign investment can free Iraq from the shackles, economic and otherwise, that Tehran has imposed, remains an open question. Certainly that is the direction of travel most Iraqis would like to see taken. But, as the Chatham House roundtable showed, there is little indication thus far that the al-Sudani government has much appetite for a challenge, direct or otherwise, to the Iranian regime’s tight hold.

[Arab Digest first published this piece.]

[Anton Schauble edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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