Iraq will squander record budget without reform, says PM's adviser

Warning that corruption could reverse gains as government debates a record $152 billion budget

Mohammad Al Darraji, advisor to Iraqi Prime Minister Mohammed Shia Al Sudani. Photo: Engineer Muhammad Sahib Al-Daraji / Facebook

Iraq could squander a chance to improve services and its economy after a year of record oil revenue, a senior adviser to Iraqi Prime Minister Mohammed Shia Al Sudani has told The National.

Mohammad Al Darraji, former minister of trade and one-time minister of housing, warned endemic corruption could undo any gains as the government debates a $152 billion draft budget.

Iraq’s parliament is currently dominated by a super coalition known as the State Administration Coalition that brings in major Kurdish and Sunni parties alongside the powerful Co-ordination Framework, a Shiite bloc which is the largest in parliament.

Mr Al Darraji played a key role co-ordinating some of these leading parties during a previous government formation effort in 2020, working with with Qassim Al Araji of the Iran-backed Badr Organisation ― now National Security Adviser ― Mr Al Sudani and Sunni politician Muthana Al Samarraie, among others.

Each bloc in the current coalition has pushed to control ministries and senior government positions within Mr Al Sudani’s cabinet.

The Prime Minister’s authority rests on this power-sharing arrangement, a feature of post-2003 Iraqi politics.

Across all sectors in Iraq, the clamour for government funds stretches from politically connected tribes to state-run companies, official security forces and even Iran-linked militias.

Iraq's President Abdul Latif Rashid, second right, hands over the letter of assignment to form a new government to Prime Minister Mohammed Shia Al Sudani, centre, in Baghdad in October 2022. EPA

The leading political blocs defend a system that divides the spoils of state resources.

But Mr Al Darraji told The National that “red lines” put in place by politicians were derailing attempts at reform.

He said the ability to hire from Iraq's pool of millions of unemployed was highly valued, giving parties the chance to buy loyalty amid regular protests calling for jobs.

“Corruption in Iraq is not on an individual level, it's not a personal level, it's organised by political parties to finance themselves to reinforce their abilities," he said. "That's why we need to be very clear and frank when we talk about these things.”

Iraq is trying to pass a draft budget that would see record spending locked in for three years and a record high deficit, making up for a year without budget due to political wrangling before Mr Al Sudani’s government took office in October.

Battling for bigger budgets

One energy consultant who asked not to be named said the budget process had become farcical, with each party clamouring for higher and higher allocations for their ministries.

Supporters of Mr Al Sudani are looking forward to the return of investment in Iraq’s infrastructure, to the tune of $40 billion a year.

Last week, Electricity Ministry spokesman Ahmed Musa said the budget would represent a “quantum leap” for the sector amid regular blackouts.

The Rumaylah oilfield near Iraq's southern port city of Basra. AFP

But analysts say growing operational expenditure of rising state payrolls — caused by politicised hiring — will crowd out investment in public services.

The draft budget could increase public sector hiring by 700,000.

At $68 billion for salaries alone, $5.6 billion per month will go to payslips even before adding pensions and welfare, significantly higher than spending on services.

Oil price concern

The draft budget banks on an average barrel of oil price of $70, but forecasts are uncertain amid concerns over China’s economy and the US debt ceiling.

Kirk Sowell, who runs Utica Risk, an Iraq-focused consultancy that has advised the World Bank, said this figure, known as a fiscal breakeven price, is not realistic.

“If Sudani's budget were passed in its original form, Brent would need to be $85 to $90 just to pay operational expenses with revenues (oil and non-oil combined),” he said.

“Maybe they will pass it in a form in which Brent at $80 is enough to meet that threshold. But even so, that is too large and there are problems funding the deficit.”

Mr Sowell said the parties are largely behind the prime minister in support of bumper spending. Meanwhile, previous efforts by Iraqi prime ministers to reign in expenditure have met fierce opposition.

“If there is another oil price collapse, Iraq will be right back into the 2020-level insolvency very quickly, unable to pay the salaries of the new hires,” Mr Sowell says.

Former prime minister Mustafa Al Kadhimi faced uproar in 2021 when a plan to cut government salaries was leaked. In contrast, Iraq’s draft budget proposes a public sector minimum wage hike from around $200 to $275.

“The operational budget will be too high,” Mr Al Darraji said, in the event of a fall in oil prices. “So there would be no room for the investment budget and projects that will be sufficient for the needs of communities.”

He said government hiring is an overlooked aspect of corruption in Iraq.

“In regarding corruption, yes, Sudani has intent and vision to counter the problem with new anti-corruption processes,” he said.

“But the question which needs to be answered is about the red lines that have been put in place by political parties, whether they’ll allow Sudani to cross them. By red lines, I mean political backing for corrupt people.”

“Corruption is not just stealing money or taking commissions, it’s when you put an ineffective person in a very important position so he can’t manage the role properly. So it's a very big problem.”

Countering corruption

In November, Mr Al Sudani formed a new Higher Commission of Anti-Corruption, a similar move to that of former prime ministers.

Progress over the years has been slow. Despite the formation of new, supposedly independent anti-corruption bodies by the previous three prime ministers, earlier this year it was revealed that $2.5 billion dollars had been stolen from a bank account overseen by the finance ministry, a theft called the “heist of the century” by Iraqis.

Mr Al Sudani has expressed a desire to rigorously assess the performance of party-appointed “special grades” positions, senior ministry positions that in some cases have wide-ranging powers, such as influencing contract awards.

Critics say Mr Al Sudani, like those before him, is simply replacing failing officials with more loyalists.

Saudi-Iran peace

Alongside this effort, Mr Al Sudani has strongly pursued building on Iraq’s ties to its neighbours, including Jordan and the Gulf States, countries that have historically had a difficult relationship with Iraq.

The biggest surprise this year has been a deal brokered by Iraq, Oman and China to thaw ties between long-time rivals Saudi Arabia and Iran.

“The deal will have a positive impact on Iraq, because of our location and the influence of both countries, who are also key players in politics. So getting this agreement, or stability in the relations between Saudi Arabia and Iran will play a very good role in Iraq, if the government makes the best benefit of it,” he said.

For that to happen, Iraq must attract new regional investment to combat unemployment.

People gather in Tahrir Square to stage a demonstration marking the third anniversary of the pro-reform protests, in October 2019. Getty

One step is passing a new law that outlines how Iraq’s many state-owned enterprises can team up with foreign investors.

Those enterprises are involved in everything from oil and cement production to dairy products and overland freight, employing more that half a million Iraqis and propped up by ministry budgets.

“The Public Private Partnership law is still struggling in parliament, so there is no progress unless this law will be in place," Mr Al Darraji said. "We're trying to push this several times, and I have a personal interest to reorganise the state-owned enterprises and to spur private investments in them.”

Experts say as long as these 176 companies are shielded from private competition, most represent a dead weight on Iraq’s economy.

For now, Mr Al Darraji said potential private-public partnerships are “very limited,” and governed by 1997 legislation known as the Companies Law, one of several Saddam Hussein-era laws still used in Iraq.