Last year, the government of Iraq posted a rare budget surplus, helped by higher oil revenues and improvements in security. The fiscal breathing room has not lasted long though. The administration of Prime Minister Adil Abdul-Mahdi has reacted by going on a spending splurge – expenditure is expected to rise by 33 per cent this year, according to IMF estimates.
At the same time, revenues are falling, as a result of the abolition of some taxes, subdued oil prices and cuts to crude production as part of the Opec+ accord. “Those who would like to see more prudent economic policies are not happy,” said one close observer of the country, although he suggests there is a rationale to the plans, pointing out that high spending is a “stabilising factor” for the country’s political scene.
As a result of the government’s approach, the IMF predicts Iraq’s budget will fall back into the red this year, with an anticipated deficit of 4 per cent of GDP. But the organisation also admits there are good reasons to spend heavily. In an assessment released in late July, the IMF said “social conditions remain harsh, post-war reconstruction progress is slow, development needs are large”.
Reforms are being pushed by the government in a range of areas. The technocratic administration of Abdul-Mahdi set out a 138-page policy programme in February. The proposals range from providing soft loans to farmers, to encouraging investment in struggling industrial firms and constructing thousands of new school buildings. It is also setting up a reconstruction and investment commission, to encourage more foreign direct investment into the country, and planning reforms to the banking sector.
Speaking privately, one senior government official said “The sectarian fight is no longer there. We are past the time of fighting others and each other. Our task is to provide services to the people. The strategy of this government is about building the economy and building it together.”
Even with approval of extra spending though, the task facing the authorities is immense, as President Barham Salih acknowledged in a speech in London during the summer. “Iraq continues to be in transition,” he told an audience at the Chatham House think tank on 26 June. “Things are improving, but we still have some way to go before things will be good and will be of a standard that the Iraqi people deserve.”
Perhaps the most critical area needing improvement is the country’s basic infrastructure, which remains well below par – something evident in Iraq’s lowly ranking in the World Bank’s annual Doing Business report, where the only countries in the region that ranked below it were the worn-torn economies of Syria, Libya and Yemen.
The extent and reliability of electricity supply is a particular – and widely-acknowledged – problem. Some large contracts have been signed, including five-year deals with US-based GE and Germany’s Siemens agreed in October 2018, but much more remains to be done.
“The first priority is to reshape, restart and rebuild the electricity sector. This is the main problem,” said the senior government official. “That will reshape the economy, encourage private sector investment and also diversify economic sources.”
Another thorny issue is corruption, something which now outweighs security concerns in the minds of many foreign investors thinking of going into the country. Anti-graft campaigners Transparency International rank Iraq at 168 out of 180 countries.
Baghdad acknowledges the problem, with some officials even suggesting it represents a bigger problem than the battle against Islamic State.
“The key problems facing the private sector are corruption and bureaucracy,” said Salih, in his speech. “What is a problem in Iraq is crony capitalism. It is feeding on the system like a parasite. We have some work to do on that.”
The regional situation is also not helping matters. Iraq is caught in the middle of the standoff between its ally the US and its neighbour Iran and picking sides is not easy.
The US continues to be an important security partner and could provide the sort of investment the Iraqi economy so badly needs. But Baghdad relies heavily on Iran for electricity imports and there are myriad social and political links between the two countries.
Iraq also owes Tehran a debt of thanks for its help in defeating Islamic State, via the numerous Shia militia known as the Hashd Al-Shaabi (also called Popular Mobilisation Units) as well as the elite Quds force of the Islamic Revolutionary Guards Corp.
Abdul-Mahdi has tried to bring these militia under tighter control of Baghdad. On 1 July, he issued an executive order that they be integrated into the national armed forces. He has Salih’s support on this policy, but there has been resistance from unit commanders, who value their autonomy.
Some Iran-linked militia have targeted international oil interests on a number of occasions this year and their actions threaten to drag Iraq further into the dispute between the US and Iran. It is something which Baghdad is adamant it wants to avoid.
“We cannot afford our country to be dragged into conflict by internal actors or by outside powers,” said Salih.
“There is a storm sweeping across the Middle East. We are right in the middle of it. Our priorities are Iraq’s stability and security and we do not want to squander that. We don’t want to become a victim, a footnote to another conflict in the Middle East.”
Iraq has also been trying to forge closer relations with countries in the region, in an effort to promote dialogue over confrontation. This has taken several forms, including efforts to establish a new trilateral alliance with Jordan and Egypt. The most recent meeting between the three was on 4 August, when Minister of Foreign Affairs Mohamad Alhakim hosted a meeting in Baghdad with his counterparts, Egypt’s Sameh Shoukry and Jordan’s Ayman Safadi.
Just as important has been Baghdad’s diplomatic outreach to Kuwait, Saudi Arabia and other GCC states, with Salih and Abdul-Mahdi both regular visitors to other Gulf capitals.
The message they offer is a clear one: that Iraqi stability is something from which the whole region can benefit.
“We truly want to transform Iraq’s dynamic from a zone of conflict, a zone of regional competition between our neighbours, into a zone of common economic and security interests,” said Salih.