Iraqi government approves economic reforms to extricate country from crisis

The government and international organisations have warned that the country is heading to uncertainty without real economic reforms

Ali Allawi has brought forward a bill with sweeping reforms. EPA

The Iraqi Cabinet on Tuesday approved a long-awaited economic reform plan aimed at salvaging the country’s ailing economy battered by decades of war, mismanagement and endemic corruption.

“We are facing dangerous consequences as a result of accumulation [of irresponsible activities] from the past and that we have to go ahead with these reforms,” Iraq’s Minister of Finance, Ali Allawi, told a press conference.

Mr Allawi didn’t go into the details of the plan, but described it as a “road map for the reforms for the coming three to five years.”

The three-year plan addresses the economic and fiscal crisis mainly through cutting public spending, stopping waste, fighting corruption and moving away from oil revenues, according to an executive summary seen by The National.

It targets the productive and service sectors of the government to improve poor public services and debilitated infrastructure, says the summary. For the private sector, it calls for loans and facilitation for procedures in order to create jobs.

The plan will be sent to the parliament for final endorsement.

The Iraqi government and international organisations have warned that the country is on the brink of catastrophe and that it is heading towards uncertainty without meaningful economic reforms.

The main challenge the Iraqi economy faces is that it relies almost completely on the sale of oil to fill state coffers - oil revenues currently provide nearly 95 per cent of state spending. Plummeting oil prices on the international market have left the government struggling to pay salaries to its bloated public sector and forcing it to stop projects.

Widespread corruption and mismanagement since the 2003 US-led invasion that toppled Saddam Hussein has also drained government resources. Iraq was ranked 162 of the 180 most corrupt countries by Transparency International in 2019.

Tired of corruption and lack of opportunities, young Iraqis took to the streets in October 2019 in a protest which has lasted a year, calling for change.

The outbreak of the Covid-19 pandemic has worsened the situation as the government diverted much of its resources to contain the disease.

The finance minister has touted his plan as a “vision to tackle all the problems in the structure of the Iraqi economy.”

“The problem in Iraq is we have a disfigured economy from all aspects…amidst a worrying international situation and that we can’t continue like that,” Mr Allawi told a local TV Channel early this week.

Realising that his plan could spark public backlash, Mr Allawi warned Iraqis that without reforms “the situation will worsen not only for themselves, but for their sons and grandsons.”

Some of the proposed reforms can be achieved within months, while others need a year or two, he said. He added that the plan will help prepare the country for the post-oil age.

In a fresh study on Iraq issued early this month, the World Bank warned that the country’s economy is set to shrink by 9.7 per cent this year, its worst performance since 2003.

"Iraq is on the brink of catastrophe," the Washington-based lender warned in its study, Breaking Out of Fragility.

It says the country is “caught in a fragility trap” as it faces increasing political instability and fragmentation, geopolitical risks, growing social unrest, and a deepening divide between the state and its citizens.

Dropped oil prices, coronavirus pandemic and existing fragilities “could lead to economic meltdown and a new cycle of violence and conflict – or they could provide an opportunity to fundamentally realign the government’s priorities, advance much-needed reforms and tackle the deep structural issues that hold back progress."

To address the fiscal deficit, Iraqi government paid salaries and other commitments through borrowing from local and international lenders.

In June, the parliament endorsed a law to allow the government to borrow $5 billion from international lenders and 15 trillion Iraqi Dinar (about $12.7 billion) from local banks.

By September, it ran out of money and asked the parliament to endorse another borrowing law to secure resources for the rest of the year, Mr Allawi said.

Based on the Iraqi Oil Ministry estimation, oil revenues for the rest of the year will not exceed 15 trillion Iraqi Dinar (about $12.7 billion), below the nearly 58 trillion Iraqi Dinar (about $49 billion) needed for paying salaries and other commitments, he said.