Samson: Harvesting the Iraqi economy for the year 2017
17th December, 2017 by Dalal al-Ukaili
Iraq suffers from the burdens of war with the Organization of the preacher and the effects of low oil prices since the middle of 2014 and maintained the strength of oil production on the growth rate, but the non-oil economy has experienced a sharp contraction and still 10% of Iraqis suffer displacement and displacement due to continuing unrest and supports a large international funding package efforts Reform undertaken by the Government.
Following an agreement reached by OPEC, oil production is expected to fall in 2017, but if oil prices rise, this will help improve the balance of public finances and external balance and non-oil sectors will return to positive growth, but risks remain high.
The economic outlook for Iraq is expected to improve if a favorable security environment is in place, fiscal consolidation continues and the non-oil economy is expected to recover in 2017 after three years of deflation thanks to improved security and increased non-oil investment spending. Real GDP will contract by 3% in 2017 due to an expected 6% drop in oil production as a result of OPEC members’ agreement in November 2016 to reduce oil production by 1.2 million barrels per day.
The decline in oil production could lead to a 5% drop in exports in 2017. Oil production and exports are expected to return to 2016 levels in 2018 and 2019. Iraqi oil exports are expected to average $ 47.4 per barrel in 2017 compared to the average of $ 35.6 During 2016.
In the event of high oil prices, this will lead to a decrease in the budget deficit and the current account to 4.4% and 4.5% respectively of GDP in 2017 and in 2016, it is estimated that the total growth rate was 10% supported by the oil production force and forced The government, due to security and oil shocks, quickly resorted to reducing expenditures, which negatively affected consumption and investment in the private sector.
The non-oil economy shrank by 10% annually in 2015 and 2016. The average inflation rate was 0.4% in 2016.
Monetary Policy Challenges
The Iraqi economy is facing serious economic challenges threatening the growth rates and economic stability in the country. The chronic decline in oil prices and increasing expenditures to sustain the momentum of the war on the urging and rehabilitation and reconstruction of liberated areas and production ceilings imposed by the new oil agreement on the Iraqi oil pumps and the continuous erosion of the central bank reserves and the risks of floating the Iraqi dinar Inflation rates out of control are all indicators of the next slide and economic decision-makers in the country must deal seriously with the realities of the post-oil economy.
In this context, it is believed that monetary policy plays a pivotal role in saving the Iraqi economy from the acute part of the crisis.
Monetary policy is one of the pillars of macroeconomic policies used to achieve growth, financial and economic stability and overcome the cycles of the reverse cycle by controlling its quantitative and qualitative instruments.
In Iraq’s oil economy, the monetary policy and its instruments were exceptional in view of the dominance of the general budget, financed mainly by the oil supplier, on the decisions of the monetary authority despite the independence of the Central Bank in accordance with its law No. 56 of 2004 where the Iraqi government gets its revenues from the dollar in exchange for exporting large quantities of oil to markets And the Ministry of Oil transferred these dollar balances to the account of the Ministry of Finance.
And because most of the government expenditure in Iraqi dinars, the Ministry of Finance resort to replace the dollar oil Iraqi dinar already available to the Central Bank of Iraq, and consequent entry of the dollar to the Central Bank against the exit of the dinar and the latter control the government dollars replaced with the Iraqi dinar within the reserve reserve foreign currency
Foreign exchange is used to feed the demand of the business sector (traders and others) and the family sector (the public) on the dollar in the exchange market, resulting in the exit of the dollar from the central bank against the entry of the dinar.
The above mentioned mechanism is a very important and dangerous fact that frames the work of the monetary policy in Iraq. “The levels of local cash liquidity are a function of the volume of government expenditures associated mainly with oil revenues, while the cash flow levels should be under the control and supervision of the Central Bank, .
The flow of oil abundance extends to the independence of the Central Bank of Iraq and disrupts the work of monetary policy tools in achieving the usual goals such as growth and financial and economic stability. In this regard, it is possible to address a number of contemporary challenges that the Central Bank suffered recently,
1. The achievement of financial stability in the country requires the balance of the non-oil budget coffers, local revenues in dinars (taxes, fees, state property revenues, etc.) with domestic expenditures in dinars (current and investment). To pay foreign debts and cover the government’s purchases from abroad, but the economic reality is flawed in the country marks different and dangerous, where the domestic revenues are covered only 10% of the total domestic expenditure while the use of oil resources and loans to cover the non-oil deficit in the budget At the expense of the external debt of the country to pay.
In the period of oil recovery and the abundance of oil revenues (until 2013), the budget swallowed up about 70% of the total oil exports, after replacing them with the Iraqi dinar of the Central Bank while the remaining part (30%) was devoted to repay external debt and cover the state’s imports either during the collapse of the price Of oil has directed about 90% of oil revenues towards financing the public budget and the remaining portion (10%) was allocated to repay external debt and cover the government’s purchases from abroad.
2. Excessive dependence on oil generates adverse trends in monetary policy and fiscal policy in the country. At the same time, the public budget is exerting inflationary pressures and a direct impact on the reserves of the central bank, especially when the latter enters to buy treasury transfers from secondary markets
The central bank recently forced, due to the drop in oil revenues and the increase in the volume of military expenditures to meet the difficulty and the difficulty of adjusting public expenditure with the sharp drop in oil prices, to the deduction of government transfers of 16 trillion dinars to finance the general budget at the expense of the decline of the dollar reserve by the size of funding, Government expenditure on the dollar to demand on the dollar in the foreign exchange market is owed to the dollar in order to maintain the stability of exchange rates and price levels successively.
The fall in the reserves of the Central Bank clearly translates these facts. As a result of the loss of proportionality between the government expenditure on the Iraqi economy and the decline of oil revenues in 2014, the bank’s reserve of the dollar fell from about $ 77 billion in 2013 (before the collapse of oil prices) Billion dollars in 2017 due to high levels of demand for the dollar and the commitment of the monetary authority to feed the market in foreign currency in order to maintain the stability of the dinar exchange rate in order to avoid the waves of inflation and the recovery of speculations on the dollar.
3. Monetary policy generally uses its traditional instruments to control the supply of money through open market operations (bond sale and purchase, weekly and monthly deposits), as well as the discount rate against commercial paper and treasury bills, as well as the interest rate.
And the low percentage of the financial depth (the proportion of capital of companies contributing to GDP not exceeding 2%), the phenomenon of monetary economy and the tendency to compact rather than saving, and weak awareness of banking, the role of monetary policy instruments in the performance of its functions, Clear Or directing it to serve economic objectives.
Between oil and war remnants
Despite the Iraqi parliament’s approval of the new budget provided by the government of Prime Minister Haid al-Abadi in 2017, many political forces are still not satisfied with the apportionment of allocations and many economists doubt the possibility of filling items that depend on borrowing and aid since the vote on the budget in The seventh of this month, did not stop comments and analyzes of Iraqi forces, especially some Sunni and Kurdish forces.
Although the budget was about 6 percent less than this year’s budget, it may not be enough to meet the demands of international institutions (such as the World Bank and the International Monetary Fund) that Iraq needs to borrow from. The budget (more than 100 trillion dinars, about 85 percent) Billion dollars) 12 trillion dinars for the war on a dodger, not included in the budget of the Ministry of Defense and allocations to the militias of popular mobilization.
The popular crowd was demanding about $ 7 billion, but the government budgeted 110,000 salaries for the popular and tribal mobilization forces involved in the battle against Mosul. The dilemma facing the government is reconstruction projects in the areas it is reclaiming, creating jobs for its people and improving Living conditions.
There is no provision for this, but the budget has adopted loans and aid as a major resource for those efforts. Many Iraqis compare the situation of residents of areas that have been restored by the government, such as Anbar, Diyala and others, to the population of Nineveh. They took up their fire under duplicitous control over their areas, and this is the biggest challenge for Abadi’s government.
Iraq relies on oil revenues as a major source of income. The share of oil revenues from the country’s income in 2015 is about 85 percent, and despite the increase in Iraqi production above 4 million barrels a day, the price of oil (not much more than 40 dollars Iraqi crude price 42 dollars) Makes the returns insufficient.
Although the budget is austerity, the Ministry of Interior and Defense received a significant increase in its allocations in addition to health and education. To compensate for the lack of spending cuts, the budget included an increase in the prices of essential services provided to the citizens along with a 3.5 percent reduction in the salaries of employees. The biggest burden of what the government sees as “economic reform” while corruption is gnawing in the country and wasting billions of dollars a year on Iraq.
The budget also includes aid from Western countries such as Britain and Germany, along with the United States. For the first time, the budget linked the payment of salaries of employees in the Kurdistan region (650,000) to the commitment The government of Erbil to leave the right to sell 550 thousand barrels per day of Kurdistan oil through the Baghdad government.
Is oil prices so high?
The International Monetary Fund classifies Iraq, Libya and Yemen as fragile countries due to regional conflicts, warning that “most of the oil exporting countries in the Middle East region (Including Iraq), North Africa, Afghanistan and Pakistan will be depleting their financial safeguards in less than five years. “
The conflict in Iraq, Libya and Yemen led to a collapse in economic activity and increased pressure on public finances, he said in a report issued in October 2015, calling on those countries to cope with the drop in oil prices in the global market.
The Iraqi economic expert in the name of Antoine believes that if the policy of his country depends on oil rents will be his economy threatened and unstable, explaining in an interview to the site (raise your voice) “Oil has become an economic political commodity controlled by (OPEC) and Saudi Arabia, so Iraq should begin to diversify the economy Through the sectors of agriculture, industry and tourism, and create jobs by giving the private sector a distinctive role in the economy. “
“There are signs of rising oil prices that could serve 10 percent to improve the economy, but not a solution. The economy is collapsing rapidly, but not rapidly,
The oil reserves in Iraq exceed 143 billion barrels, which is a good indicator of the investor’s confidence in the Iraqi economy, according to the economist, who added, “It is necessary to take advantage of previous mistakes and build an economy depends on competencies and elites who are competent in the development of plans to get rid of the economy and promote it.
While the war on terror has been exhausted by the Iraqi economy because of the cost of military operations, the opportunity exists to boost its economy with huge returns through investment, especially as Iraq has become a “good investment yard if it is advisable to use economic tools and create a clean device away from the corruption that has ravaged the Iraqi economy. “He said.
A five-year plan that does not depend on oil
The Ministry of Planning, in turn, began work in the second half of 2016 on the development of a five-year plan, dependent on the activation of economic sectors other than oil in the development of the Iraqi economy, “the Lord of the harmful benefit,” says ministry spokesman Abdel-Zahra al-Hindawi to the site (raise your voice) Surprisingly, oil prices prompted the government to seriously consider looking for treatments that are not only immediate, but futuristic.
“The Ministry of Planning and in coordination with all other ministries of the State concerned to develop a broad and general outline of a new development plan for the years 2018 – 2022.
As the problem of the Iraqi economy is not limited to its monopolization of revenues based on oil, but beyond to rely on the public sector in all its details, and this challenge contributed to the creation of the crisis
“There is a great government seriousness to go to these sectors, especially to move to the private sector and reduce the dominance of the government sector on development and the economy,” he said.
The Ministry of Planning spokesman said that the work of the five-year plan will begin in the second half of 2017. “In preparing this plan, we have relied on international expertise with the participation of the International Monetary Fund to take advantage of their most clear vision for the world’s economies and where they are successful.” Iraq has sectors capable of reactivating Economy, and can be used in activating the joints of development to be an alternative to oil, such as agriculture, industry and tourism.
Gap between income and expenditure
The Iraqi Vice President, “Iyad Allawi,” that the Iraqi public debt reached its highest level, recording $ 133 billion, which means that it constitutes 65% of the Iraqi gross domestic product, but “Allawi” did not explain the reasons for this increase The International Monetary Fund predicted that the size of the Iraqi debt in 2017 to about 123 billion dollars, and to reach 132 billion by 2018, according to the Fund, Iraqi domestic revenues amounting to 174 billion dollars, and that debt devour 61% of this revenue.
The government is seeking more loans from the World Bank or the International Monetary Fund to cover the deficit and to complete the reconstruction process, forcing it to take several measures that may worsen the situation According to statistics last year, the poverty rate in Iraq reached 35%, recording the highest rate Nearly 100 years ago during the British Mandate at the turn of the century.
The Iraqi economy is considered a single economy. The state budget is based mainly on the return of oil exports in the absence of development of other sectors. This is what the experts consider to be suicide because in light of fluctuating oil prices, the reserves may see a frightening decline. Iraq suffers from a large gap between revenues The total budget for the coming year is 108 trillion and 113 million dinars (about 91 billion dollars), while the revenue is 85 trillion dinars (72 billion dollars). Thus, the deficit reaches 22 trillion dinars (about 19 billion dollars) .
Corruption is the biggest obstacle
Iraq is not only facing terrorism, but there is a bigger internal enemy, corruption.
Iraq is one of the most corrupt countries in the world. It is ranked 161th out of 168 countries in the classification of corruption, so it is considered a country rich in oil and wealth. That they are wasted and are not used or invested.
The Prime Minister, “Haider Abadi,” that the next war will be on the corrupt, after the near elimination of the “dashing”, but the problem is that the government entrusted with the fight against corruption accused of corruption reached the highest levels.
The recovery is driving Iraq’s economy after “hasty” yet
Recent moves and military clashes have renewed risks for Iraq’s economic prospects and working environment as the country benefits from encouraging economic news. Observers of Iraq’s economy have long said the Iraqi authorities recognize the need for traditional economic policies aimed at continuing. Reforms in areas that foreign experts have been investigating for years.
Iraq has been able to increase oil production by 1.5 million barrels per day in the period 2014 to 2016, an increase of 25%, largely due to previous oil sector investments and the completion of long-term infrastructure that supports oil exports helped increase Iraq to confront The sharp drop in oil prices between 2015 and 2014, and in terms of production, Iraqi GDP grew by 11% in 2016, one of the fastest growth rates in the region, according to the International Monetary Fund, while the non-oil economy Macroeconomics are unlikely to grow significantly M 2017, but it is the overall growth rate for the year 2017 is impressive.
Risks of currency counterfeiting
Said a member of the Finance Committee of the Iraqi Council of Representatives, that the phenomenon of counterfeiting the local currency has become a threat to the Iraqi economy, pointing out that influential parties stand behind the support of the phenomenon and announced the Iraqi security authorities, the arrest of a specialized gang to rig the Iraqi dinar in Baghdad, Fake money. “There is a great weakness in the control bodies to prosecute the currency cartels, and the phenomenon has become a threat to the Iraqi economy,” Sarhan Ahmed told Anatolia.
He added that “the gangs of counterfeiting currency are behind influential parties, taking advantage of the phenomenon, and the lack of rapid action to contain it, which will lead to financial and economic repercussions,” and the reserves of the Central Bank of Iraq to 50 billion dollars in November last, after it was $ 53 billion In June, affected by the lack of financial revenue from the sale of oil, as well as private sector financing.
Iraq is suffering a severe financial crisis, due to the decline in oil revenues due to the low prices in the world markets, in addition to increasing the expenses of the war on the organization of the “State” Iraqi forces, with the support of the International Alliance, fighting since 2014, to restore large areas in the north and west of the country, Organization. LINK