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.

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