Iraq’s Foreign Minister Fuad Hussein has said the fallout from the Iran war threatens to push the country towards a fiscal “disaster” if oil exports, which ordinarily generate 90 per cent of Baghdad's revenue, do not resume.
Iraq's oil-reliant economy is facing a severe crisis following the closure of the Strait of Hormuz, which has been largely blocked by Iran since the end of February. The closure has also curtailed crude exports from Saudi Arabia, the UAE, Kuwait and Iraq, causing a sharp rise in worldwide oil prices.
Iraqi production has plummeted from an average 4.3 million barrels per day to about 1.4 million bpd in May, Oil Ministry figures show. Limited flows of about 200,000 bpd are being routed north through the Turkish port of Ceyhan, down from around 3.5 million bpd.
Last month, Iraqi Oil Minister Basim Mohammed said the country had exported 10 million barrels through the Strait of Hormuz in April, down from about 93 million barrels monthly before the Iran war.
“If the war continues to the end of the year, it will be a disaster for us because there is no revenue,” Mr Hussein said, according to excerpts from an interview with an Iraqi television channel due to be broadcast on Sunday night.
To mitigate the financial impact, the Central Bank of Iraq has printed about 25 trillion dinars, bringing the total currency issued to 125 trillion dinars, Mr Hussein added. He warned, however, that continued printing of additional dinars to cover state expenses is stoking inflation and eroding buying power. The bank did not respond to requests for comment.
“We cannot solve our financial problems through printing because it leads to inflation,” he said. “Inflation has risen now. We were in a good position regarding market prices and purchasing power, and now purchasing power will weaken,” the Foreign Minister said. “Printing [money] does not solve the problem – it’s dangerous.”
Boosting crude exports
With oil exports largely halted since the Strait of Hormuz was blockade was put in place, Baghdad has been relying on reserves and short-term advances from state banks to pay salaries.
“For salary payments we rely on what is available from reserves but there is no revenue,” said Mr Hussein. “We are still relying on our reserves. We don’t spend them, but we rely on them to issue bonds and obtain domestic debt.”
Baghdad is now pushing to increase exports to 500,000-700,000 bpd through alternative routes, he added.
Last week, Prime Minister Ali Al Zaidi asked oil companies operating in the Kurdistan region to restart oil production and supply the Iraq-Turkey pipeline.
Some oil and gas companies operating in the semi-autonomous region had been forced to stop production after drone attacks on energy infrastructure blamed on Iran-backed militias.
During a meeting with officials from the Kurdistan Regional Government and international oil company executives, Mr Al Zaidi emphasised “the importance of joint action, and the provision of an appropriate operating environment and essential requirements to support their work”.
He was briefed on the operating conditions in Iraqi Kurdistan during the conflict and plans for resuming activity as soon as possible.
“The damage sustained by Iraq as a result of the disruption of oil exports through the Strait of Hormuz has been significant, underscoring the need to intensify efforts to offset those losses by addressing the challenges hindering increased production,” his office added.
Seeking Gulf and western aid
Iraq’s economy is in a free fall not only because of the Iran war, but also due to Washington's pressure on Baghdad to disarm pro-Tehran militias, exacerbating long-delayed structural reforms.
The International Monetary Fund's regional outlook in April forecast Iraq's economy will contract by 6.8 per cent this year, a downwards revision of more than 10 percentage points from the previous October forecast – the steepest drop among directly affected oil exporters in the region.
Iraq's oil revenue has declined sharply since the war started on February 28. Baghdad's monthly figure dropped from about $6.8 billion in February to $1.96 billion in March, then $1.1 billion in April, according to Iraqi sources. Figures for May have yet to be released.
With domestic financing options limited, Mr Hussein said Iraq needs to turn to the Gulf and the West for support. “We need to open up to the Gulf states and western countries to see how we can get assistance,” he added, without elaborating.
