BAGHDAD (AP) — Iraq’s finance minister said Thursday there is growing political will to undertake drastic reforms needed for the country to tackle a daunting liquidity crisis, which has pushed Iraq to the brink of collapse.
“There is more will now than there was five months ago,” Finance Minister Ali Allawi told The Associated Press. “Now, I think there is recognition that unless oil prices go up miraculously, this is something we have to cope with and manage.”
Low oil prices have slashed state coffers in the crude-exporting country by nearly half, and over-reliance on oil has limited the government’s ability to seek out other income. A widening month-to-month deficit has cast uncertainty over how future payments will be made for public wages, external debts and essential imports of food and medicine.
Iraq’s unsustainable economy, laid bare by fiscal pressures spurred by spiraling oil prices and the coronavirus pandemic, is a long-standing problem that has flummoxed reformists for over a decade.
This week, Prime Minister Mustafa al-Kadhimi’s government issued a much-anticipated 95-page “white paper” for economic reform that, if implemented, would prompt a drastic overhaul of the entire system within three to five years.
“It is a paper designed to create a strategic and policy framework for a new Iraqi economy,” said Allawi. “In the end of this period of change and reform … we are supposed to have a restructured and more dynamic economy, that is the point of it.”
The absence of support from major political elites has undermined similar efforts in the past. Al-Kadhimi’s government still depends on an endorsement by Parliament for the vision to gain steam.
“There is less denial, before it was all denial,” said Allawi.
With oil prices not expected to rebound in the near-term, only reforms will see Iraq avoid an economic catastrophe, top officials in al-Kadhimi’s government, including Allawi, have repeatedly said. The future of the project faces a major test: Parliament endorsement in the form of a binding resolution or legislation. Then, a detailed program for implementation.
“Once this is done, then we have to roll up our sleeves and start working,” the minister said.
Later, aspects of the plan outlined in the paper will be incorporated into the 2021 budget, said Allawi, something that will also require a parliament vote. The budget will include a “strong sense of fiscal order and discipline” which might translate to cutbacks, he said.
Government subsidies in the electricity and oil sectors will face particular scrutiny.
“Part of the problem with the finances of the public sector is the huge amount of subsidies,” he said. “We intend to tackle that head on in the 2021 budget.”
But public discussion over the white paper has focused on aims to bring public wages down from 25% of GDP to 12%. Reducing public sector wages, especially in an election year, is considered a widely unpopular move.
However, Allawi was firm: “I’ve said many times before, the portion of oil revenues devoted to salaries in 2004 was 20%, now its 120%.”
“Obviously this is not sustainable,” he stressed.
In September, Iraq made $3.16 billion in oil exports, which accounts for 90% of state revenue — less than half of the $7 billion needed to pay for salaries, pensions, imports and debts.
September salaries were delayed and the payment of October wages depends largely on the government borrowing internally. A previous bill allowing for $12 billion in internal borrowing has been used up; a new one, asking for $35 billion until the end of 2020, faces a parliament vote, sparking criticism from lawmakers.
Iraq’s dollar reserves stand at $53 billion.
“I hope parliament will approve it,” Allawi said of the bill. “If it doesn’t, we have potential for other alternatives, but it will be more difficult.”
Apart from the bloated public wage bill, Iraq has other binding expenses. Private electricity suppliers account for 50% of total power Iraqis consume and have to be paid; social security needs to be doled out as do debts instalments.
“These are fixed items you can’t avoid,” Allawi said.
In the absence of reform, the government has sought to increase revenue through customs at border points. Yield from tariffs are still low — Allawi estimates that while before, every dollar out of $10 was being recovered by the state, now it’s $1 out of $5.
Another option is to devalue Iraq’s currency, which has been pegged to the dollar for decades. While such a move would relax the pressure on the government to make urgent payments, it will likely draw public ire.
Allawi said the decision would be a “difficult one to take” but that talks were underway with the International Monetary Fund.
“We are discussing it now, intensively,” he said.