Iraq oil revenue set for record $9bn a month, but will people benefit?

Iraq could earn more than $9 billion in one month if oil prices approach $100

A girl carries her school bag as she walks in the Nahr Bin Omar village, across from the eponymous oil field and facility in Iraq's southern Basra governorate. AFP

Iraq’s oil revenue is approaching a historic high, hitting $8.27 billion in January — on track to beat the April 2012 all-time record for the country of $8.8bn if oil prices keep rising.

“Revenue could be more than $9 billion a month,” says Sajad Jiyad, an analyst at the Century Foundation think tank, citing a tight oil market and relatively stable Iraqi production.

That would give Iraq more money in a single month than Sudan’s entire 2022 proposed budget — a country with two million more people.

It is also nearly $4 billion more than Syria’s entire 2022 budget.

However, Ahmed Tabaqchali, a fellow at the Atlantic Council, is not optimistic that bumper revenue will be spent wisely.

“Previous governments have been using revenue on salaries and pensions. This is very difficult to cut back on,” he says.

Experts point out that a growing proportion of revenue is wasted by political parties who fill the payrolls of ministries with loyalists.

Quote
Powerful demographic pressures will, over time, erode the buying power of increasing oil revenue
Ahmed Tabaqchali, Atlantic Council

In 2018, Iraq spent almost five times as much money on salaries and pensions than on desperately needed water, electricity and healthcare facilities.

That year, a water crisis caused by dilapidated infrastructure in Basra poisoned around 100,000 people, causing a political storm in parliament.

But the crisis did not lead to more funds being set aside for public works.

A proposed 2018 hiring freeze that could have made room for new infrastructure spending was not implemented amid widespread protests calling for jobs.

Last year, the government salary outlay was still extremely high, at 77 per cent of the budget.

Meanwhile, one of Basra’s main water projects, Al Shuaiba, is currently funded by the UN — despite Iraq’s 2021 budget coming in at $89 billion. In comparison, Algeria, with a population of over 43 million, had a 2021 budget of $58 billion.

Parliament and the budget process

Despite this long-term trend, Iraqi MP Hussein Arab is optimistic that a new government could be different.

“We need to know first the new government vision in regard to the country’s needs and how it will manage the abundance of revenue we have now,” he says.

Iraq has a Ministry of Planning that is supposed to co-ordinate with the Ministry of Finance to assess spending needs for infrastructure. But pressure from parliament often derails the budget formulation effort, with some MPs saying salary cuts are a “red line.”

“The previous governments drastically failed at pouring money in agriculture, industry and public service and that’s what we are going to look at,” Mr Arab says.

Nearly a decade after Iraq’s 2012 oil revenue spike, the country needs as many as 15,000 new schools, according to the Ministry of Planning.

Students, mask-clad due to the COVID-19 coronavirus pandemic, attend a class at a school in in Sadr City, east of Iraq's capital Baghdad on December 7, 2020. (Photo by AHMAD AL-RUBAYE / AFP)

Mr Arab says parliament is planning to discuss the budget thoroughly this time, given the colossal challenges the country is facing.

“The problem is that after an election, winners will have supporters to reward and costs to recoup,” says Omar Al Nidawi, senior researcher at EPIC, an Iraq-focused NGO.

“This means the winners will need to push for more questionable public sector jobs, more corrupt contracts, and more favourable conditions for allies to displace competition and corner the private sector,” he says, referring to political control of state-run firms.

“So long as there's enough cash flowing in, few would feel pressure to make tough, unpopular decisions like cutting subsidies or a new hiring freeze,” he says.

Mr Nidawi’s reference to corruption is another notorious challenge — in 2012 for example, Iraq embarked on an ambitious plan to build 1,200 new schools.

The project ended amid a corruption probe, according to the Organised Crime and Corruption Reporting Project (OCCRP), an NGO. Only around 10 per cent were finished, OCCRP said.

“Going forwards, there’ll be lots of debate on whether we will have an inclusive government. We’ve had a low participation rate in the election, which puts the government under a lot of pressure to meet the public’s needs,” Mr Tabachali says.

Budget delay

Mr Jiyad notes another challenge for Iraq is the risk that political deadlock could delay the budget, hurting all sectors of the economy. In 2014 and 2020, political wrangling led to no budget being passed.

“There’s no budget for 2022 in Iraq at the moment, so we are now spending according to the 2021 budget, and only month to month spending,” he says, referring to a law that limits spending in the absence of a new budget.

“So the government is spending on operating costs, salaries and keeping ministries functioning. They will take the 2021 budget, divide it by 12 and apply it every month,” he says.

Mr Jiyad says if there's any room for optimism, Iraq’s currency reserves could remain stable in a high oil price environment.

“Even though we have high revenue at the moment, part of it will go towards increasing foreign reserves which helps keep the dinar stable and for us to have dollar cash in hand,” he says, noting that Iraq is often unable to spend surging revenue during price booms.

Mr Tabaqchali believes that whatever the outcome of political negotiations with regard to oil revenue, the fundamental question is whether the public can regain faith in politics.

“I think it doesn't really make a difference who comes in. The one thing that will be a constant whatever new government comes in, is legitimacy,” he says, referring to the idea that a legitimate government is one that is seen as delivering services and opportunities for the public.

Mr Tabaqchali recently warned that Iraq’s “powerful demographic pressures will, over time, erode the buying power of increasing oil revenue.”

Iraq’s population is projected to reach 50 million by 2030, placing even more pressure on the government to provide jobs and services.

Updated: February 09, 2022, 5:23 AM
EDITOR'S PICKS