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For 2016, Iraq’s economy needs reforms | ||
| 20/12/2015 | ||
Oil is the main source of income for Iraq. 43% GDP of the country depends on oil income, while 99% export of the country is nothing but oil. Hence, government of Iraq always remains under pressure to enhance oil production for increasing its revenues. The government expects to export 3.6 million bpd in 2016. Although this export volume is plausible, $45 per barrel is rather optimistic. In spite of global economic slowdown, oil price increased sharply in last few years, before down falling of price started of late. When oil price was high, Iraq administrators have inflated federal budgets and increased unnecessary hiring, providing unmerited and insufficiently qualified public sector personnel with salaries. From 2004 to 2015, in this period federal budget of Iraq has increased by five times. The budget always had around 20 percent deficit. Although Iraq, including the Kurdistan Region, has successfully increased production by 2 million barrels of oil per day (bopd) since 2010 and reached a total volume of 4.4 million bopd, the oil price collapse has eliminated 60 percent of oil’s previous market value. Moreover, the unpredictable cost of war with ISIS, managing 3.5 million internally displaced people, factional domestic politics and stalled mega-infrastructure projects could hinder further progress in the country. Hints of Positivity for Iraq The ministry of finance of Iraq has proposed a 2016 budget of $99.6 billion, with a forecasted deficit of $25.8 billion. The budget forecasts the price of oil at $45 per barrel, and assumes that the December 2014 deal made with the Kurdish regional government, which entitles the federal government to 550,000 bopd of oil from the fields below the Kurdistan Region in exchange for payment, will continue. The 550,000 bopd includes 300,000 bopd from the Kirkuk oilfields and 250,000 bopd from fields in the Kurdistan Region. The government expects to export 3.6 million bopd in 2016. Although this export volume is plausible, $45 per barrel is rather optimistic. However, at the ultimate stage, the year of 2016 will be difficult for Iraq as the federal dollar reserves of the central bank continue to sink. Fresh Political Culture Security and financial states of Iraq are lesser risky than its neighbors. In the absence of viable alternative sources of revenue, persistently low oil prices may present a real opportunity for reform in Iraq, as the nation has a genuinely domestic government that represents all ethno-confessional groups. Prime Minister Haider Al Abadi has enjoyed public support, as protests calling for government to provide public services, combat corruption and implement the rule of law began in various Iraqi provinces in early 2015. Important Steps Oil price is likely to stay low, and hence government should phase out subsidies on fuel and power generation to save at least $14 billion per year on local feedstock and imported liquids. Furthermore, the government must stop excessive hiring at public institutions. State salaries and unnecessary spending must undergo a meticulous review. Additionally, the government must offer incentives to the private sector to fill the operational vacuum in the various economic sectors, including oil and gas, left by decades of domestic turmoil. These advancements will save Iraq the excessive $10 billion paid in salaries to civil servants per year, easing pressure on the budget strained by lower oil prices. A Move Forward Iraq, as a first priority, needs to attract more international investors in power generation, downstream projects and flared gas utilization. The country will have to use savings from reforms to re-industrialize and begin manufacturing, which will mean eventually becoming less dependent on imports. Failure or success of Iraq as a state in upcoming year of 2016 will indicate the resiliency of Al Abadi’s reform package. However, reforms are not possible without government taking the right measures at the right time. | ||
Last Update:: 20/12/2015 | ||
Iraq Directory |