Abu Dhabi, UAEMonday 25 May 2020

Iraq’s new prime minister has to fix a broken political-economic model to ensure a better future

Iraq is committed to reducing its oil production as the country's economy is projected to shrink 9.7% this year with the government registering a budget deficit of 22% GDP

As former intelligence chief, the new Iraqi prime minister, Mustafa Al Kadhimi, can have no illusions about the task before him. There may never be a good time for a political vacuum in Baghdad, but the last five months of interregnum, with the coronavirus outbreak, an oil price crash, heightened US-Iran tensions and revival of Isis activity, were worse than most.

Each Iraqi oil-fiscal crisis has been worse than the last: the 2008-2009 great recession, the 2014 price slump and Isis assault and now an even faster and deeper fall in oil prices.

A lockdown imposed to fight the pandemic, probably with many more cases than reported, slashed travel and shopping by between 40-60 per cent before it was eased late last month. Most border crossings with Iran, Kuwait and Jordan remain closed, restricting trade and pilgrims, but a reopening could lead to further arrivals of the coronavirus from its eastern neighbour.

Iraq has committed to dropping oil production to 3.59 million bpd in May and June and 3.8 million bpd for the rest of the year from 4.65 million barrels per day. The 2020 budget plans are based on an assumed oil price of $56 per barrel and about 4.2 million bpd of production. In April, the oil ministry earned $1.4 billion (Dh5.1bn) at $13.8 per barrel, compared to a year earlier when the same volume of exports earned more than $7bn.

Iraq's new Prime Minister Mustafa Kadhemi chairing the ministerial meeting of the new Iraqi cabinet in Baghdad. The new government has a number of challenges before it economically and politically. AFP
Iraq's new Prime Minister Mustafa Kadhemi chairing the ministerial meeting of the new Iraqi cabinet in Baghdad. The new government has a number of challenges before it economically and politically. AFP

The economy is projected to shrink 9.7 per cent this year with the government registering a budget deficit of 22 per cent of gross domestic product, according to the World Bank and International Monetary Fund. Iraq’s bonds yield more than 15 per cent, well above similarly unstable and oil-dependent Nigeria.

Many Iraqi politicians still expect prices to recover soon and think they can muddle through as usual, with the help of the IMF. The new government’s programme allows it to raise domestic and foreign debt and includes cutting spending and tackling corruption.

Mr Al Kadhimi has not yet appointed an oil minister, perhaps the country’s most crucial position after the prime minister. In a concession to Basra, which produces most of Iraq’s oil, he has promised the role will go to a Basrawi.

To meet its Opec commitments, output from state-operated fields has already been cut to low levels. To reduce production from the bulk of fields operated by international oil companies (IOCs) requires tricky negotiations, as Iraq would be liable to pay them fees for unused production capacity.

Yet, with Shell having departed the giant Majnoon field in 2018, the IOCs were already frustrated with the poor financial returns, struggles with bureaucracy and lack of adequate infrastructure for exports, power and provision of water to inject to maintain reservoir pressure. The contracts will have to be restructured to offer more upside and discretion to the operators, in return for spreading out payments and sharing the risk of low prices.

Lower oil output will mean less associated gas as the summer peak demand season arrives. The US greeted Mr Al Kadhimi’s appointment by extending a waiver to buy Iranian gas and electricity by a longer-than-usual 120 days.

Baghdad has started talking to the autonomous Kurdistan region about “importing” some of the region’s surplus gas. This is eminently achievable, and part of a possible bargain over the Kurdish share of the budget and oil exports, but at least two years away even under good circumstances.

Meanwhile, previous electricity minister Luay Al Khatteeb has unfortunately not been retained. Despite a short tenure, he had initial success in one of the country’s most intractable challenges, increasing generation capacity and patching up the transmission and distribution grid, which loses 40 per cent of power to technical faults and 20 per cent to theft.

Without reliable electricity, discontent will continue to strike each summer and a sustainable private sector will be all but impossible. Realistic pricing and full payment for electricity needs to be phased in, in return for reasonable service.

But even these actions, challenging as they are, will only buy some time.

Mr Al Kadhimi may be sympathetic to the cause of the protesters who filled squares in Baghdad and other cities from last October, more than 550 of whom were killed. He has ordered the release of those jailed and reinstated the popular general whose politically motivated firing triggered the demonstrations.

But he cannot follow the usual course of placating unrest by handing out government jobs and subsidies. The population has grown by more than a third since the 2009 financial crisis. Even equal division of a greatly shrunken oil pie will not support more than bare survival.

Baghdad has to fix the country’s broken political-economic model, be honest with its people and present a compelling vision to persuade them, especially the young, to accept some tough times.

Mr Al Kadhimi seems to want to empower the prime minister’s office, to bypass corrupt and overstaffed ministries, where arguably not just the minister but every position is the result of political bargaining and patronage rather than meritocracy. Yet the ministries still have to deliver their side of projects.

The eventual goal has to be a mostly private economy, where oil funds a social safety net and core public infrastructure. With barely a year on its mandate, his government can do no more than survive the current crisis, set a direction for reform and lay down an election law that weakens the entrenched sectarian parties – something they will bitterly resist.

Iraq can either keep floundering through a succession of ever-deeper crises, or it can give the protesters of Tahrir Square a country worthy of their sacrifices.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

Updated: May 11, 2020 02:54 PM

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