Iraq’s economy needs urgent reform to avoid ‘hitting a wall’
The country has lost $450bn in public funds to corruption since 2004, according to Transparency International
Baghdad — Iraq's economy could reach irreversible lows within the next year unless urgent reform measures are adopted, finance minister Ali Allawi warned in an exclusive interview on Monday.
“Reform is inevitable,” said Allawi, who has been tasked with stabilising Iraq's economy following an oil price crash that saw state revenues slashed by half.
“If we do not amend the situation throughout the next year, we may face shocks we cannot fix.”
Iraq's economy is projected to shrink by 10% in 2020 following a dramatic drop in oil prices from over $50 per barrel to about $20.
Opec's second-biggest oil producer relies almost exclusively on its crude exports to fund its budget, which includes a bloated public sector and broad state subsidies.
When he took over the finance ministry in May, Allawi told AFP, he was “shocked” to find so little liquidity.
“A government should normally have at least one-and-a-half months of spending in its accounts in case of emergencies or shocks, but in reality there was only a tenth of this amount. There should have been 10-15 trillion dinars (up to $12bn), but there were only 2-trillion dinars,” he said.
Iraq spends at least $4.5bn a month just to pay public workers and run the government.
“The finances are worse than it was in 2005 or 2006. We are in an existential economic situation,” said Allawi, who was also finance minister at that time.
At the time, Iraq was paying public salaries to about a million people, with oil prices near $35.
Now, a barrel sells for the same amount, but the state is responsible for 4.5-million workers, 2.5-million retirees and about 1-million welfare recipients.
'Hit a wall'
At his family home in Baghdad, surrounded by books on history and economics, Allawi told AFP he hoped to pay June and July's public salaries on time by borrowing internally.
“We can do this up to a certain ceiling, but if we exceed that ceiling then we'll face serious risks,” he said.
To navigate these dangers, Allawi said he would propose a full reform plan to parliament within three months, including austerity measures that could last two years.
He hopes to cut senior salaries, halt “double-dipping” for Iraqis who receive multiple state welfare packages, access aid from the International Monetary Fund and World Bank, and boost Iraq's non-oil revenues to make it less vulnerable to dramatic price changes.
Economic experts — including Allawi — have advocated for such steps ever since the 2003 US-led invasion.
“If oil prices stay at this level for a year, and our expenses stay the same, without a doubt we're going to hit a wall,” Allawi sad.
“We can't lead a country, particularly from the economic side, by hoping oil prices rise enough to cover costs.”
Allawi, who served as finance minister in a transitional government Iraqi in 2005, finds himself in a similar position now: part of a short-term cabinet that has inherited a web of challenges from its predecessors.
Former prime minister Adel Abdel Mahdi's cabinet discussed austerity measures at length but never implemented them, top Iraqi officials said, fearing backlash from the public and the political elite using state coffers to buy influence.
Instead, public outrage has focused on new Prime Minister Mustafa al-Kadhemi and Allawi.
The new cabinet sought to save by cutting monthly disbursements to former political prisoners and retirees earning a double wage, but that sparked accusations it was targeting the country's most vulnerable citizens while turning a blind eye to graft among top officials.
Iraq is perceived as the 16th most corrupt country in the world according to Transparency International, with about $450bn in public funds vanishing into the pockets of shady politicians and businessmen since 2004.
Asked if he thought he could regain the public's trust, Allawi admitted it would be a big task.
“There have been major failures on behalf of successive governments in recent years, leading to a loss of confidence between the state and citizens,” he said.
“I'm not asking them to trust us first, but to wait for the measures that we will take if they are fair, equitable and useful,” he added.