Iraq is facing the biggest challenge to its economy since 2003. Even during the vicious and costly conflict with ISIS, when oil prices plummeted and the government struggled to finance the war, the economic shock did not appear to be as insurmountable as it does today. The COVID-19 epidemic in Iraq has shown no signs of abating and the IMF predicts that Iraq’s economy will contract by 4.7% in 2020. The most immediate challenge for the government is finding enough money to cover the country’s basic running costs including schools, hospitals, public salaries and social welfare.
At this critical juncture, the natural inclination would be to ask, what does Iraq need to do to get through this crisis? But in fact a far more difficult question to answer is, how does Iraq do what is required to get through this crisis? Iraqi policymakers need little help in diagnosing the flaws that underpin the economy. Nor do they require much assistance in identifying reform measures that would steer the country towards a more sustainable path. Iraq has no shortage of strategic plans, roadmaps and policy papers that outline in detail all the key sectors that need to be addressed. Partly because of the strong presence of the international community in Baghdad, much of Iraq’s policymaking infrastructure is heavily influenced by the advisory arms of the World Bank and IMF, in addition to technical assistance from the United Nations and diplomatic missions. Every area of economic reform has been discussed, debated and evaluated over the years, from banking sector reform, to public sector restructuring, to private sector development.
Where the real shortfall lies is in implementation. Even the best strategic plans cannot be translated into tangible results on the ground without a clear-eyed, systematic approach from the government. Assuming that political will exists at the highest levels of executive authority, it is important to consider the underlying systems and structures that largely shape what is and isn’t possible to undertake.
The government of Mustafa Al-Kadhimi inherited the fiscal crisis from its predecessor. Economic advisors in both administrations advocated similar thinking about how to deal with inflated pubic spending and address the immediate balance of payments crisis. Given that public sector salaries and pensions represent nearly half of all government spending, it was seen as inevitable that if the government wanted to rein in spending, it needed to make cuts in public salaries.
But like any country in the world, cutting salaries is easier said than done because of the unavoidable political backlash. This approach was made even more difficult because Al-Kadhimi’s government lacks a political base in parliament that could support its policy preferences. The initial plan was to target allowances, since government salaries are typically composed of a base salary known as 'al-ratib al-ismi’, and allowances, known as ‘mukhasasat’, that are determined by factors such as educational attainment, the number of dependents, and danger pay for sensitive ministries. According to some estimates, base salary payments amount to some $12 billion annually, whereas allowances represent $23 billion of the government budget. By targeting allowances, it was thought that significant savings could be made that would ease pressure on the state treasury.
But there was no appetite in parliament to support such a move and Al-Kadhimi’s government quickly caved in to pressures to scrap the plan. The government’s plan B was to apply income tax on allowances and pensions, something that had not been enforced for over a decade. Although significantly diminished compared to the original plan, it was estimated that the added revenue would generate at least $300 million monthly. But this plan also spectacularly failed. Pensions are typically paid towards the start of each month, whereas salaries are disbursed towards the end of the month. The Al-Kadhimi government applied the tax on June pensions but the public backlash was so great that Al-Kadhimi was forced to backtrack, even insisting that the cuts in pensions were not due to a new policy but rather a temporary shortfall in cash. Pensioners were then reimbursed days later.
Since then, the government appears to have ditched any attempt to rein in spending on public salaries, pursuing other means of alternative revenue generation, namely related to import customs and tariffs. It is estimated that customs revenue alone is worth in the region of $10 billion annually, but only a small fraction of that actually finds its way into the state treasury because of massive corruption at border crossings. Al-Kadhimi launched a campaign to secure these crossings but the impact has so far been inconclusive.
This has left the government with the only other fallback option: borrowing. After finally getting the green light from parliament, the government plans to borrow up to $13 billion domestically, mostly from state-owned banks, and up to $5 billion from international markets. This approach effectively signals the government’s failure, at least for now, to enact any significant cost-saving measures that would ease the fiscal burden.
Resistance from parliament and the general public is inescapable, but that does not mean that the government should resign itself to defeat. Any approach to pushing through reforms requires two key ingredients: focus and persistence. This is where the Al-Kadhimi government, like its predecessors, has fallen short. Rather than maintaining the public’s focus on the dire state of the economy and reinforcing messages that demonstrate why cuts are essential, Al-Kadhimi has sought to pursue an ambitious and broad array of issues, jumping from one issue to another. By biting off more than it can chew, the government has left little political capital for dealing with the economic crisis.
After coming into office, Al-Kadhimi pledged to prepare a white paper that would outline the government’s comprehensive plan for addressing Iraq’s economic woes. The expected launch of this paper in September represents a second chance for the government to push through meaningful reforms. But to demonstrate any degree of success, it will need to stay focused and persist in its efforts to translate the white paper into actionable goals.