Saturday, 13th December 2014

Iraq reconstruction remains elusive as corruption depletes finances

Fiscal and monetary issues may seem irrelevant while (according to most external narratives) Iraq’s very existence within Sykes-Picot borders is being challenged by Islamic State (ISIL or ISIS) and Kurdish calls for independence. But Baghdad’s response to the challenge of restoring its depleted finances and tackling astonishing shortfalls in governance could prove just as important in shaping the region’s future.

A senior, federalist-inclined Kurdish policymaker observes that an “almost empty” treasury in Baghdad will be incapable of providing the funds Prime Minister Haider Al-Abadi needs, if he is serious about rebuilding Iraq. Critical to restoring Sunni confidence and reinforcing the Kurdish Regional Government (KRG)’s adherence to a national future will be a revived commitment to revenue-sharing, devolved resources and decision-making, and a serious effort to curb corruption.

The distribution of state resources has been chaotic at best since the US invasion. Ex-premier Nouri Al-Maliki’s freeze on paying Kurdish salaries came after a period when, GSN has been told, the KRG was kept afloat by a monthly government helicopter delivery of dollars (not dinars) to Central Bank of Iraq (CBI) branches in Sulemaniyah and Erbil. When Baghdad stopped paying even these funds, Peshmerga forces were paid by wealthy businessmen (GSN 965/6); the KRG has subsequently raised several billion dollars in loans, mortgaging oil sales, to keep its security forces and administration running (GSN 972/12).

Baghdad’s arrears to the KRG alone (roughly estimated at $10bn) are more than Iraq can immediately pay. Only with radically improved governance can depleted state coffers – emptied by extraordinary levels of corruption in the post-Saddam military and other arms of state – be refilled. Maliki complained to visitors after his elite regiments ‘evaporated’ in the face of ISIL’s advance that auditors discovered salaries being paid to thousands of soldiers, less than 10% of whom were actually present. His aggressive politicking added to problems. Central bank governor Sinan Al-Shabibi lost his job in October 2012 after a highly politicised Integrity Commission probe, triggered after the widely admired official showed increasingly public alarm about malfeasance across the state (GSN 934/1).

A former senior official told GSN that, even under stress from ISIL, Iraq should have sufficient money to function, but “lacks an institutionalised working methodology for overseeing its finances”. In less elegant terms, Iraq lacks adequate controls on spending and corruption, allowing state coffers to be raided with impunity.

To compensate for a fiscal deficit equivalent to nearly 6% of GDP in 2013, the government has depleted the Development Fund for Iraq (DFI), whose reserves should provide a fiscal buffer in times of economic stress. In 2013, some $11.5bn left the DFI, a big chunk of its $18bn end-2012 balance. And that was during a period when the US was officially protecting the fund (which ended in May 2014). With oil output flat, such support is essential: the stalled draft budget proposed spending up by nearly 26%, at around $140bn, compared to revenues of around $119bn, 93% of which would come from oil exports. Output averaging 3.3m b/d in 2013 constrained growth; lower crude prices in 2014 add to concerns.

Iraq is the region’s once and future wealthy economy. But, just now, its fiscal fortunes are as poor as its political outlook. If Abadi is serious about rebuilding the Iraqi national consensus – to which all sides say they are committed, provided Baghdad changes its Maliki-era ways – he will need all of Iraq’s economic muscle to resolve its myriad problems, rather than enriching a well-connected few. The resources issue and control of finances by properly devolved and regulated institutions remains central to the Iraqi narrative, as they should have been a decade ago, when US military successes quickly disintegrated into governance chaos.

Bahrain's Economic Performance

read more

Gulf boundaries and hydrocarbons infrastructure

read more

The Gulf region: economy and society

read more

Iraqi Kurdistan hydrocarbons infrastructure map

Revised in January 2015, this map provides a detailed overview of hydrocarbons infrastructure in the Kurdistan area of Iraq.

read more
Register now Buy credit to view GSN articles Search the GSN archive Sign up for GSN News Alerts Request a GSN free trial

GSN View

MBS era rollercoaster ride of reformist highs and murderous lows

The entertainment revolution promised by Crown Prince Mohammed Bin Salman (MBS)’s Vision 2030 will bring the world’s...

read more

Saudi Arabia: MoD transformation falters

Three years into an ambitious plan to transform the Ministry of Defence (MoD)’s operational effectiveness, the programme is...

read more

Saudi interest in Syria shifts towards the Kurdish east

Omani state minister for foreign affairs Yusuf Bin Alawi Bin Abdullah’s 7 July visit to Damascus was the most high-level...

read more
SEE ALL POSTS

Events

30 September-3 October

Global Health Safety and Environment Conference

Kingdom of Bahrain

14-16 October

Middle East Process Engineering Conference & Exhibition (MEPEC)

Bahrain International Exhibition & Convention Centre

14-16 October

World Petroleum Council (WPC) Downstream Conference

Bahrain International Exhibition & Convention Centre

14-16 October

Leadership Excellence for Women Awards & Symposium

Bahrain International Exhibition & Convention Centre

19-21 November

Middle East Electricity Saudi

Riyadh International Convention Center, Riyadh Kingdom of Saudi Arabia

9-10 December

Oman Sustainable Energy and Technology Summit

Crowne Plaza Hotel Muscat

10-12 December

Middle East Artificial Lift Forum (MEALF)

Muscat, Oman

SEE ALL EVENTS

Head Office
4 Bank Buildings
Station Road
Hastings
TN34 1NG
United Kingdom

T: +44 (0)1424 721667

Web Design by FDC