Iraq Suffers As Dollar Increases In Value

(Al Sharqiya)

On January 23, Prime Minister Mohammed al-Sudani fired the head of the Central Bank of Iraq Mustafa Ghaleb over the falling value of the dinar against the U.S. dollar. Ghaleb was scapegoated for the crisis in the economy caused by the U.S. Federal Reserve increasing interest rates to fight inflation which has increased the value of the dollar. Politicians have been complaining about the exchange rate and activists from the protest movement are planning on a demonstration on Wednesday over the matter. Since the dinar is pegged to the dollar there is little Baghdad can do about the issue other than attempt face saving measures such as getting rid of Ghaleb.

Iraq’s 2021 Draft Budget’s Limited Changes All Hit The Poor And Middle Classes

The draft of Iraq’s 2021 budget was released and it caused quite a controversy in Iraq. The document has record spending despite the Kazemi government pushing economic reform. It also puts all the burdens upon the lower and middle classes without directly addressing the larger problems in the country. It will now have to go through parliament where lawmakers are threatening to end even the modest attempts at change.

IMF Report On Iraq’s Economy Sees Short-Term Growth, But Long-Term Structural Problems

In May 2013, the International Monetary Fund (IMF) released a short report on Iraq’s economy. It predicted continued growth in the short to medium-term, but warned of structural problems as well. Iraq is obviously famous for its oil industry, which still has huge potential to expand. The issue with the country’s economy is that there is little else to build upon. The government also plays a dominant role with all its inefficiencies, and that has a negative effective upon the business environment. That represents the dichotomy of Iraq. Oil presents a huge source of wealth, but it could undermine the country as well.

In the aggregate, Iraq looks like it has a bright future. Its economy grew 8.4% in 2012, and is expected to grow 9% this year. That contributed to per capita Gross Domestic Product (GDP) going from $1,300 in 2004 to an estimated $6,708 by 2013. Inflation dropped as well from 6% in late-2011 to 3.6% by the end of 2012, but is expected to go up this year to 5%. Its foreign reserves went from $61 billion at the end of 2011 to $70 billion by the end of 2012, while the reserves held at the Development Fund for Iraq increased from $16.5 billion to $18 billion. Iraq failed to execute its investment budget as it usually does, which contributed to those amounts. Overall, Iraq will probably be one of the fastest growing economies in the next few years. That is due to the predicted expansion of the oil industry. At the same time, the IMF noted that there are governance issues that will have a detrimental affect.

	2010	2011	2012	2013
Real GDP growth	5.9%	8.6%	8.4%	9.0%
GDP	$135.5 bil	$180.6 bil	$212.5 bil	$233.3 bil
GDP per capita	$4.278	$5.529	$6,305	$6,708

The IMF pointed to budget execution and the exchange rate as two problems that Baghdad had. The government suffered from not only poor budget planning and execution in the last few years, but large off budget spending as well. In 2013, that led to a large number of unfunded projects. The IMF suggested that public expenditures be reduced as a result by cutting the number of government jobs, and slashing energy subsidies and support for state-owned enterprises. Recently there has been a run on the dinar. That created a gap between the official exchange rate offered at state-run banks and the rate offered at private money exchanges. The IMF believed that the dinar needed to be stabilized. It suggested that the authorities support the Central Bank of Iraq’s policies, which are aimed at achieving that goal. After 2005, the Iraqi government suffered from a lack of trained staff to plan and execute the budget.  That led to almost the entire budget going to paying government employees, and very little for investment. The money that was set aside for that task in the capital budgets was hardly spent as well. Officials eventually improved, but then in recent years the budget has grown tremendously due to rising oil prices. This has led to far more money being appropriated than the bureaucracy can handle, and the investment rate has gone right back down. The government appears to be more interested in the amount of each budget, so that it can brag to the public rather than whether those funds can actually be expended. As for the dinar, it is being manipulated by political parties, gangs, money exchanges, and foreign countries right now. The acting Central Bank Governor Dr. Abdul Basit Turki claims that he is reforming the anti-money laundering department, and trying to place more regulations on the weekly money exchanges, but there doesn’t appear to be any changes on the ground yet.

More importantly, the IMF noted the major structural problems that could hinder Iraq in the long-term. First, Iraq is heavily dependent upon oil. Its GDP and growth are directly related to how much petroleum it can produce and export. That means that if oil prices were to drop, Iraq’s budget and growth would be threatened as well. The government’s entire development plan is based upon boosting oil output as quickly as possible. The money that it raises is supposed to help diversify the economy, but that hasn’t happened. Instead, this has swelled the government’s coffers, and increased the state’s role. This is a classic example of the oil curse. Like many other bodies, the IMF has suggested that the authorities speed up their reforms to support the private sector, so non-oil jobs can be created. Finally, political and security instability were noted. Iraq has seen a huge increase in investment in recent years, but that was directly related to the end of the civil war when foreigners finally felt comfortable about sending their money to the country. Now security is worsening as the insurgency is growing. The rival political parties have been in an on going test of wills against each other that has led to deadlock in Baghdad as well. Together this has economic repercussions as major legislation like the oil law has no chance of being passed in the current political environment. The growing threat by militants could also scare away investors. All together this poses a daunting set of barriers to Iraq’s future. The government isn’t following its own suggestions, and warnings by various international bodies about its oil dependency. Instead, it is making the situation worse. The fact that Iraq’s ruling elite are at each other’s throats doesn’t help either, because it means that no major decisions can be made or the business environment improved. Finally, the worsening security situation could reverse the flow of investment to Iraq.

At first look, Iraq looks to be a dynamic economy with high economic growth rates and vast natural wealth. Under the surface, there are major structural problems that severely limits realizing that potential. The oil curse means that Iraq can bring in huge amounts of cash, while the majority of the population faces high poverty and unemployment with the best hope being getting a job with the government. Unless Iraq changes its regulations, and begins to truly support its private sector this trend will not be broken. The political and security situation may not allow that to happen by blocking necessary legislation and decreasing investment. These were the warnings that the IMF tried to raise. It’s yet to be seen whether Baghdad is listening.

SOURCES

International Monetary Fund, “IMF Executive Board Concludes 2013 Article IV Consultation with Iraq,” 5/21/13

Joint Analysis Policy Unit, “Iraq Budget 2013, Background Paper,” Inter-Agency Information and Analysis Unit, January 2013

Special Inspector General for Iraq Reconstruction, “Quarterly Report and Semiannual Report to the United States Congress,” 7/30/12

- “Quarterly Report to the United States Congress,” April 2013

Tijara Provincial Economic Growth Program, “Assessment of Current and Anticipated Economic Priority In Iraq,” United States Agency for International Development, 10/4/12

UC SAN DIEGO VIDEO: Iraq's Journey From Dictatorship To Democarcy With Amb Hamid Al-Bayati

Controversial Case Against Central Bank Of Iraq Officials Continues

In June 2013, the controversy surrounding the Central Bank of Iraq returned to the news. Back in October 2012, the governor of the bank and many of his top officials faced arrest warrants over wasting government funds by not properly overseeing its weekly money auctions. The former deputy governor of the bank recently went to the press attacking the case against him and others as the work of political parties who were trying to manipulate the country’s finances for their own gain. Several politicians are concerned about the new management of the bank as well. They are worried about stories of money manipulations and laundering through the weekly auctions, which were the same reasons why the former bank officials were charged. The story shows that the reason why the previous bank leadership was removed might have been to stop them from trying to control the currency since so many are profiting from its current lax regulation.

Former Deputy Governor of the Central Bank Salah accused political parties being behind the charges that he other bank officials face (Al Masalah)

Former Deputy Governor of the Central Bank of Iraq Matheher Mohammed Mudher Salah blamed political parties for interfering with the running of the bank in an article published in Al-Mada in June 2013. Last year, Salah, and 29 other bank officials received arrest warrants. He was detained, and released on bail in March. The case against the group involved the wasting of government funds, and the decline of the value of the dinar due to the weekly auctions the bank held. Salah claimed there was never an investigation to check whether the charges against him and the others were true or not. He went on to accuse the new bank administration of having more money auctions than the old leadership did, which was only making the situation worse with regards to the value of the currency. In the end, Salah said that political parties were behind the removal of the bank officials, so that loyalists could be placed in charge of the bank. Three days before, a parliamentary source told Al Rafidayn that the investigation into the Bank was done, and that likely only seven officials would go to court including former Bank Governor Sinan Shabibi who would be tried in absentia as he was out of the country when his arrest warrant was issued, and he has not returned as a result. The others are a member of the Board of Directors, an adviser to the bank, the assistant to the director general of the money laundering department, the director of accounts, and the general manager of banking and credit, all of which had been arrested and held for months with no charges until being released around June. The Central Bank case was controversial from the beginning. Many saw it as a power grab by Prime Minister Nouri al-Maliki. It’s his State of Law that Salah is probably accusing of interfering with the bank’s operation. The way the case came about was what raised questions about it.

Former Central Bank Governor Shabibi had a number of disagreements with Premier Maliki over bank policy including whether to regulate the weekly money auctions more (AP)

Governor Shabibi had a number of differences with Prime Minister Maliki, and it was a group of his supporters that later brought charges against the bank. Originally, the finance committee started to look into the Central Bank’s monetary policy. Later, another committee was formed that came up with a case against Shabibi and the other bank officials without the finance committee’s knowledge. The new committee was led by the deputy speaker of parliament Qusay Abdul Wahab Suhail from the Sadr bloc, two State of Law members, and one member of the Board of Supreme Audit. Arrest warrants were then issued in October 2012. One member of the original investigative committee said they found no improprieties, while the integrity committee claimed that Shabibi was being targeted, because he turned down a request by Maliki for money to help finance the government. Beforehand, the premier asked to have access to part of the Iraqi Federal Reserve managed by the Central Bank, and also wanted it to help fund power plants outside of the national budget. Shabibi refused. The governor was also trying to stem the flow of dollars being sold at auctions, which was opposed by the prime minister. The bank believed that there was money laundering and smuggling going on through those auctions, which it said was the work of high-level politicians. Finally, Maliki was opposed to Shabibi’s plans to revalue the dinar. All together there was plenty to point to the charges against the bank officials being political. The committee that made the case against Shabibi and the others was led by Deputy Speaker Suhail who was recently accused of being too close to the prime minister by Moqtada al-Sadr who tried to force him to resign. That meant three of the four committee members were pro-Maliki. Second, Shabibi and the premier were at odds over a number of major issues, which would give him motivation to get rid of the governor. Last, Maliki has used corruption charges to get rid of a number of independent officials who stood in his way in the recent past, so the Shabibi case would just be another example of that.

To add to the matter, there are complaints that the new bank administration is doing exactly what Shabibi and the others were charged with. There are continued concerns about the decline in the value of the dinar, and the increasing number of dollars being sold at auctions. Money smugglers, political parties, Iran and Syria, and bank officials have all been accused of manipulating the auctions for their own gain. The Board of Supreme Audit claimed that up to $800 million was being smuggled out of the country as a result. Iran and Syria are involved, because they are trying to get around international sanctions, which are cutting off their access to hard currency, by buying up dollars in neighboring Iraq. For the money launderers, politicians, and bank officials they are just in it for the profit. Another issue is that state-run banks are charging higher prices to exchange dinars for dollars to maintain the value of the currency than money exchangers are, and people are using that difference to make a profit. For example, at the end of May one dollar was going for around 1,900 dinars at public banks, but 1,200 dinars at money exchanges. That meant someone could take a dollar to a state-run bank and get 1,900 dinars, and then buy a dollar at a money exchange for only 1,200 dinars making a 700 dinar profit. Members of parliament want to question acting Central Bank Governor Abdul Basit Turki what he is doing about these issues. If the reason why Shabibi and the others had arrest warrants issued for them was the money auctions, and the decline in the value of the dinar then the current management should be charged as well. All the problems that existed under the old leadership are continuing with the new one except at a seemingly larger scale. That might have been Maliki’s reason to get rid of Shabibi who was trying to stem the flow of dollars and hold the currency at a stable rate. The premier opposed these actions, because his followers and other political parties were profiting from them, and he didn’t want that to stop. Rather than stemming corruption the bank officials might have been charged to allow it to continue.

Prime Minister Maliki has been trying to gain control of Iraq’s independent institutions for the last few years. The move against the Central Bank of Iraq was part of that effort. Like with the heads of the Integrity Commission and the Election Commission, Governor Shabibi was charged with corruption. The case was formulated by a number of supporters of the premier, and the charges were very questionable since the governor was attempting to stop the very issues included in his arrest warrant. That ultimately might have led to Shabibi’s removal, as the prime minister seems happy with the current status quo that allows politicians, gangs, and foreign countries to continue to manipulate bank auctions. In the longer term it is important to find out whether Maliki also succeeded in gaining access to the country’s reserves and obtained financing for development projects. Since there’s little transparency in the Iraqi government it might be months or years before the larger implications of the Central Bank case are known.

SOURCES

Abedzair, Kareem, “Commission orders arrest of Iraqi Central Bank Governor on corruption charges,” Azzaman, 10/15/12

Agence France Presse, “Iraq cabinet names interim central bank governor: spokesperson,” 10/16/12

AIN, “Urgent….Sayadi reveals “Araji, Shihili, Dori, Zubayi, Karbouli involved in CBI corruption,” 11/12/12

Al-Akhbaryia News Agency, “embezzlement took place in one of the branches of Bank of Iraq $ 17 billion dinars,” 4/16/11

Dagher, Sam and Nabhan, Ali, “Iraq Dismisses Central Bank Chief Amid Investigation,” Wall Street Journal, 10/16/12

Habib, Mustafa, “dodgy dinar: fake passports in bogus banking, currency crisis,” Niqash, 5/30/13

Harissi, Mohamad Ali, “Iraqi dinar casualty of Iran, Syria sanctions,” Agence France Presse, 4/12/12

Al-Hassoun, Nassir, “Iraqi Central Bank Fighting Money-Laundering Problems,” Dar al-Hayat, 6/11/12

Hatem, Oudai, “Iraq Lawmakers See a Power Grab In Maliki Ouster of Central Banker,” Al-Hayat, 10/18/12

Kami, Aseel, “Iraq tries again to buoy dinar, stem dollar flight,” Reuters, 6/6/12

Al-Khalidi, Sabah, “Iraqi police storm Central Bank; arrest 36 officials,” Azzaman, 10/25/12

Al Masalah, “Refer the Deputy Governor of the Central Bank of the appearance of Mohammed Salah to retire after the cancellation of the extension service,” 3/13/13

National Iraqi News Agency, “Sa’edi affirms that no personal reason for accusing the Governor of CBI,” 10/19/12

Peel, Michael, “Iraq bank moves to allay laundering fears,” Financial Times, 4/2/12

- “Iraq issues arrest warrant for bank governor,” Financial Times, 10/18/12

- “Iraq leaders’ fairness queried in scandal,” Financial Times, 10/22/12

Al Rafidayn, “Completion of the investigation in the case of “central” and the exclusion of Shabibi trial in absentia,” 6/15/13

Rao, Prashant, “Iraqi PM in power grab by ousting bank chief, experts say,” Agence France Presse, 10/22/12

Sabah, Mohammad, “Former official of the Central Bank trial with 30 employees on charges of not being investigated,” Al-Mada, 6/18/13

Sadah, Ali Abel, “Iraqi First Deputy Speaker, From Sadr Bloc, Resigns Amid Queries,” Al-Monitor, 6/26/13

Saleh, Khayoun, “Iraq hard cash reserves exceed $60 billion,” Azzaman, 4/10/12

- “Iraqi foreign exchange offices implicated in money laundering and smuggling,” Azzaman, 8/8/12

Sami, Zeena, “Central Bank fails to stem Iraqi dinar’s weakening vis-à-vis the dollar,” Azzaman, 4/17/12

Al Sayegh, Hadeel, “Iraq’s former central bank chief criticizes government,” The National, 11/9/12

Shafaq News, “CBI Former Governor Refused Granting money to PM,” 4/9/13

- “Integrity committee reveals the reasons of dismissing al-Shabibi,” 10/17/12

- “Liberal bloc denies its MPs involvement in the Central Bank case,” 11/12/12

- “Shabibi: attempts to dismiss me started since 2009,” 11/10/12

- “Shabibi deputy: there is no official notice against me,” 10/17/12

Al-Shaher, Omar, “Iraq’s Central Bank a Political Battleground,” Al-Monitor, 1/2/13

- “Iraqi Government Seeks Control Over Central Bank,” Al-Monitor, 1/21/13

Shattab, Ali, “Iraqi politicians accused of meddling in Central Bank auctions,” Azzaman, 5/6/13

Sowell, Kirk, “Inside Iraqi Politics No. 39,” 5/29/12

- “Inside Iraqi Politics No. 49,” 10/31/12

- “Inside Iraqi Politics No. 50,” 11/21/12

Special Inspector General for Iraq Reconstruction, “Quarterly report to the United States Congress,” 10/30/12

Al-Tamimi, Iyad, “Parliamentary Integrity: 4 of senior officials of the Central Bank are still in prison since 6 months without legal basis,” Al-Mada, 5/27/13

Does Iraq Suffer From The Oil Curse?

Iraq is the most oil dependent country in North Africa and the Middle East. More than half of its Gross Domestic Product and almost all of its foreign exchange come from petroleum. That has led to major difficulties with its economy. Some would explain this through the resource curse. That theory holds that countries that are natural resource dependent usually underperform, lack productivity in other parts of the economy, suffer from poor social indicators, poor governance, authoritarianism, and corruption. Having oil does not automatically mean that a nation will run into these problems. There are plenty of countries that have petroleum such as the United States, Canada, and Norway that have prospered. The deciding factors are trying to base development solely upon exploiting that resource, and then how the wealth generated is used and distributed. The resource curse definitely helps explain many of Iraq’s current economic difficulties.

There are several different versions of the resource curse. The four main ones are the rentier thesis, the repression thesis, the rent seeking thesis, and the Dutch Disease. The rentier thesis argues that oil creates regimes, which are not dependent upon their publics. Petroleum brings in so much money that taxes are not necessary to fund the government. That makes countries dependent upon oil, and less accountable and representative of their publics. The result is that there is no social contract formed between the people and the authorities. Petroleum dependence also leads to booms and busts in the economy and government spending. When oil prices are high, public expenditures not only go up, but countries usually over spend, causing inflation. Likewise, when prices go down as they traditionally have, spending has to be dramatically cut. Oil is also capital and technologically intensive, and employs few people. Not only that, but petroleum producing countries usually lack the skilled labor force to work on the industry, and have to import foreign workers meaning there are even fewer jobs available. The huge amount of wealth generated from hydrocarbons, and the large government projects that are started with it open up ample opportunities for corruption. The repression thesis is based upon the idea that oil leads to authoritarian governments. Oil money is used to fund large security forces to keep the elite in power. The rent seeking thesis believes that oil becomes the spoils that factions within countries compete over. Political parties then use the petroleum wealth to create patronage systems to stay in power. For example, they start government programs that are about distributing goods and services to hold onto their followers rather than ones that are about producing things. Finally, the Dutch Disease is based upon the experience of the Netherlands. In the 1960s, it found natural gas in the North Sea, and went on to emphasis it over other industries, which distorted its economy. Nations afflicted by the Dutch Disease see the value of their currency driven up by oil profits, which makes their other exports less competitive as a result. Businesses then start focusing upon sectors that are not affected by the appreciation, and that usually leads to less innovation. The government then steps in by creating high protective tariffs to try to preserve those sectors, which are struggling. The net results it that the agriculture and manufacturing sectors most often get pushed out, and the countries become even more oil dependent. The growing strength of the domestic currency also drives up demand for imports as they become cheaper. The overall affects are countries that on the surface appear rich, but are actually economically hollow, corrupt, have weak bureaucracies, and ruling elites that are intent upon staying in power.

Iraq appears to have many of the characteristics of a nation struck by the resource curse. First, according to a 2010 study by the International Monetary Fund (IMF), Iraq is the most oil dependent country in the Middle East and North Africa. 60% of its Gross Domestic Product (GDP) and 95% of its foreign exchange comes from petroleum. In comparison, Saudi Arabia, which is the large producer in OPEC, depends upon oil for less than 30% of its GDP and approximately 78% of its revenue. Second, Iraq does not rely upon taxes. They only account for 2% of the government’s income. That means the government is not dependent or connected to the public. Third, public spending and the GDP are directly correlated to oil revenues. For instance, in 2008, Iraq earned $58.79 billion in oil receipts, and had a $72.18 billion budget. That year, its GDP was $86.53 billion. The next year, oil revenues went down to $37.02 billion, driving down the budget to $58.61 billion, and the GDP declined to $65.84 billion. Then in 2010, oil prices went back up, and so did the budget and GDP. That’s a classic example of the boom and bust that oil dependent countries experience. Not only that, but much of the public spending goes towards salaries, pensions, and goods and services provided by the government with only around a quarter being for infrastructure and investment. The Food Ration System for instance, takes 7% of the budget, and is the largest in the world. The state is also the largest employer in the country. Fifth, the reason why the public sector employs so many is because the country’s largest industry, oil, only provides 1% of jobs. The government therefore has to step in, and uses jobs as a form of social service to keep the public content. They are part of vast patronage systems run by the ruling parties, so that they can stay in power. Sixth, Iraq has been ranked one of the most corrupt countries in the world since 2003. In 2012, it was eighth from the bottom of 174 countries in Transparency International’s Corruption Perceptions Index. Seventh, there is a huge pent up demand for products in Iraq after years of wars and sanctions. Most of this spending goes towards imports, and is fueled by government salaries, which are in turn, paid for by oil profits. Those all point to Iraq suffering for the resource curse, but there are some differences. For one, Iraq’s dinar has not seen a large increase in value as the Dutch Disease argues. While there was high inflation in the mid-2000s, the Central Bank has now gotten that under control. It now wants to revalue the currency upwards, but Prime Minister Nouri al-Maliki is opposed. Iraq does not have many tariffs either. There are few protectionist barriers, and those that exist have just been implemented, because the Americans got rid of most of them when it ran the country after the 2003 invasion. That’s a major reason why Iraq’s agriculture and industry have regressed. Iraq has been flooded by cheap imports, which have put out of business many of Iraq’s farmers and factories. Last, Iraq is predicted to be one of the fastest growing economies in the world over the next several years. Bank of America and Merrill Lynch estimated that Iraq’s GDP would grow 10.5% in 2012 and 8.2% in 2013. That’s due to the massive government spending that is going into affect with high oil prices. That is the opposite of most oil dependent countries that have traditionally underperformed compared to others that do not rely upon natural resources. There are far more characteristics of the oil curse apparent in Iraq than not. Oil affects the economy, government, and society. It has created a country that depends upon oil for growth and a large public sector that is responsible for goods, services, and jobs. It also helps keep the ruling parties in power, and provides them with plenty of money to pocket as well.

There are many ideas on how to solve the oil cruse, but they would be very difficult for Iraq to implement right now. Transparency is being pushed by international organizations such as the World Bank in Iraq. Baghdad recently singed on to the Extractive Industries Transparency Initiative for example, which will make the authorities open up some of its books on the oil industry. That could help reduce the amount of theft going on, and give the public more confidence in the authorities. Privatization could get the government out of the oil business. It would in turn, force the government to set up a taxation system, and re-connect it with the public. Iraq could follow other countries that have set up oil funds. That would limit public spending, and provide a means for escaping the booms and busts that afflict it right now. Smart investing using those funds could also help diversify the economy. Oil profits could be directly distributed to the public as well. That could increase private spending, and provide an incentive for the growth of businesses. This was included in the 2012 budget, but has not been followed through with. Still, Iraq would face many problems trying to follow any of these policies. A big one is that Iraq’s government lacks skilled staff, and has weak institutions to carry out reforms. The oil money not being distributed to the public is an example of this. Second, the ruling parties and the public would oppose privatizing the oil industry. Iraqis are very nationalistic about oil, and would not want to turn it over to businesses especially if that meant foreign control. The political parties would lose a huge source of money to steal and spend, and therefore would be against the idea as well. Finally, even in developed countries, some of these ideas don’t work out. Setting up oil funds for example require difficult decisions about how much money should be taken out of the budget, and requires smart investing both of which can go wrong. Transparency can only go so far, as many of the energy companies that have joined the Oil Ministry, as partners do not want to divulge their business. Iraq also has bad bookkeeping, and many of its records are incomplete even if wanted to make all of them public. For the foreseeable future then, Iraq is likely to remain under the resource curse. Changes in the economy and governance could very well take place, but they’re likely to take a generation, because Iraq is coming out of such a problematic past.

Iraq seems a fitting example of the resource curse. It is an oil dependent country, and that has caused distortions in both the economy and government. Everything from the budget to jobs to food to investment are largely driven by the petroleum industry. Not only that it has created a public that relies upon the state rather than the other way around. Baghdad has talked a lot about diversifying the economy with all the money it is generating, but there have been very few concrete steps in that direction. That doesn’t mean it can’t happen, but right now the status quo seems pretty much set as there would be political and public opposition to many of the ideas on how to reform things.

SOURCES

Birdsall, Nancy and Subramanian, Arvind, “Saving Iraq From Its Oil,” Foreign Affairs, July/August 2004

Dickey, Christopher, “The Oil Curse,” Newsweek, 5/7/10

Al-Hassoun, Naseer, “Iraq Parliament Stalls Handout Of Surplus Oil Cash to Citizens,” Al-Hayat, 12/10/12

Karl, Terry Lynn, “Covering Oil, Chapter 2-Understanding the Resource Curse” Covering Oil, A Reporter’s Guide to Energy and Development (Open Society Institute: New York, 2005)

Kumas, Gizem, “The Oil Curse and Iraq,” Bilkent University

Kurdish Globe, “Iraq to be world’s fastest growing economy 2012/2013,” 11/25/12

Looney, Robert, “Can Iraq Overcome the Oil Curse?” World Economics, January-March 2006

Mustafa, Karim, “Iraq’s current monetary crisis: bubbles or fleeting appearance of a deeper economic crisis?” Al Mowaten, 5/13/12

Naim, Moises, “The Devil’s Excrement Can oil-rich countries avoid the resource curse?” Foreign Policy Sept./Oct. 2009

Peel, Michael, “Iraq issues arrest warrant for bank governor,” Financial Times, 10/18/12

Shafaq News, “Parliamentary Economic committee: 2013 won’t witness the birth of the new Iraqi currency,” 12/2/12

Special Inspector General for Iraq Reconstruction, “Quarterly report to the United States Congress,” 10/30/12

Transparency International, “Corruption Perceptions Index 2012,” December 2012

West, Johnny, “Iraq’s Last Window: Diffusing the Risks of a Petro-State,” Center for Global Development, September 2011

Al-Zubaidi, Hassan Latif, “social welfare flip-flop: why iraq’s ration card can’t be scrapped,” Niqash, 11/15/12

More On Central Bank of Iraq Scandal

The October 2012 announcement that the governor of the Central Bank of Iraq Sinan Shabibi and several of his staff were facing arrest warrants came as a surprise to many. The initial stories said they were being charged with manipulating the value of the dinar, money laundering, fraud, and other illegal activities. Now it seems that the investigation only involves the first matter. Whenever something controversial happens in Iraq, politicians are quick to jump in, and make their own announcements about the matter before the official story comes out. That’s why the case against the Bank officials is still unclear, and is likely the result of political manipulation.

There was some initial confusion over what exactly Central Bank Governor Sinan Shabibi was being charged with. The Supreme Judicial Council issued warrants for Shabibi and 15 other bank officials on October 15. There were contradictory reports about what the head of the integrity committee in parliament, Sadrist Bahaa Hussein Ali Kamal Araji said about the charges against them. Agence France Presse for instance, said that Araji claimed that Shabibi had manipulated the value of the Iraqi currency, the dinar to lower its value. Shafaq News on the other hand, said that the governor had increased its value. A State of Law parliamentarian was cited in the Wall Street Journal that the bank officials were being investigated for the capital requirements the Central Bank made of private banks, fraud, and money laundering. The head of the integrity committee Araji denied all of those accusations. One member of the integrity committee told Al-Hayat that it had not looked into the matter at all, rather that it was done by a special group made up of Qusay Abdul Wahab Suhail, the Sadrist deputy speaker of parliament, Haidar Abadi of State of Law who is the head of the finance committee, Haitham al-Jabouri from State of Law, and one member of the Board of Supreme Audit, which is in charge of looking into the government’s finance. There are still some contradictory stories coming out about the matter. It does appear that Shabibi and his staff are only being looked at for manipulating the value of the dinar. Whether that’s for raising or lowering its price in relation to the dollar is still not clear. This is what happens during political crises in Iraq. All kinds of politicians chime in, and that leads to all the different versions of events. Many believe that Prime Minister Nouri al-Maliki is using the situation to get rid of Shabibi, which could be the reason why State of Law members have been quoted making the greatest accusation against the bank officials. 

The fact that Shabibi and the others are being accused of exploiting the value of the dinar is very suspicious since the Central Bank is widely considered to have saved the currency from a dramatic devaluation earlier in the year. Buying dollars is relatively easy at Iraqi money exchanges. Starting in December 2011, (1) the dinar started dropping in value as huge amounts of dollars started being bought up. Governor Shabibi told the press that demand for American currency had increased 40-50% at the beginning of 2012. The situation got so bad that the Central Bank was afraid there would be a run on the dinar, so it started vastly increasing the amount of dollars in circulation. Before, the Bank usually sold around $150 million a week to other banks. That suddenly jumped to $400 million. Many believed that Iran and Syria were involved, buying dollars in Iraq to make up for their shortage of hard currency due to sanctions. Shabibi responded by issuing new rules to tighten the dollar supply. That seemed to stabilize the dinar by the end of spring. Foreign experts believed that the actions of the Bank were commendable in this situation. Now it seems this series of events is at the heart of the charges against the governor and his staff. That only adds to the questions about the validity of the investigation. Again, because the premier has been known to oppose the Bank’s actions, he could just be using this situation to trump up charges to either get rid of Shabibi or intimidate him, so that he does not stand up to the prime minister in the future.

What exactly the case is against Governor Shabibi still seems to be in contention. The latest reports are focusing just upon the value of the dinar, but whether it’s increasing or decreasing it is not clear either. What is apparent is that the actions of the Central Bank were critical in stopping a run on the dinar vis-à-vis the dollar at the beginning of the year. A credible case can also be made for the fact that Prime Minister Nouri al-Maliki has attempted to take control of the Bank before, has opposed its plans to revalue the currency, and has wanted to replace Shabibi. The premier has been making a series of moves in the last year or two to take over all of the country’s independent institutions. The Central Bank could be just the latest example of Maliki’s political maneuverings to achieve this goal.

FOOTNOTES

1. Saleh, Khayoun Ahmed, “Per capita income in Iraq to reach $10,000 in 2015,” Azzaman, 1/4/12

SOURCES

Agence France Presse, “Iraq cabinet names interim central bank governor: spokesperson,” 10/16/12

Al-Ansary, Khalid and Razzouk, Nayla, “Iraq Deplores ‘Currency Attack’ as Dollars Flow to Syria, Iran,” Bloomberg, 1/12/12

Dagher, Sam and Nabhan, Ali, “Iraq Dismisses Central Bank Chief Amid Investigation,” Wall Street Journal, 10/16/12

Habib, Mustafa, “dinar woes: iraqi currency traders break Syria, iran sanctions,” Niqash, 5/17/12

Harissi, Mohamad Ali, “Iraqi dinar casualty of Iran, Syria sanctions,” Agence France Presse, 4/12/12

Hatem, Oudai, “Iraq Lawmakers See a Power Grab In Maliki Ouster of Central Banker,” Al-Hayat, 10/18/12

Kami, Aseel, “Iraq tries again to buoy dinar, stem dollar flight,” Reuters, 6/6/12

Kami, Aseel and Chaudhry, Serena, “Iraq dinar hit by fallout from sanctions next door,” Reuters, 4/15/12

Khallat, Khudr, “Battle against counterfeit gangs before change in currency,” AK News, 4/9/12

Muhammad, Barzan, “Erbil Currency Traders Lose Out as US Dollar Value Fluctuates,” Rudaw, 5/27/12

Peel, Michael, “Iraq bank moves to allay laundering fears,” Financial Times, 4/2/12

- “Iraq issues arrest warrant for bank governor,” Financial Times, 10/18/12

Sami, Zeena, “Central Bank fails to stem Iraqi dinar’s weakening vis-à-vis the dollar,” Azzaman, 4/17/12

- “Iraq expands ties with Iran,” Azzaman, 1/14/12

Saleh, Khayoun, “Deputy Premier warns against attempts to meddle in Iraqi Central Bank’s affairs,” Azzaman, 4/16/12

- “Iraq hard cash reserves exceed $60 billion,” Azzaman, 4/10/12

- “Per capita income in Iraq to reach $10,000 in 2015,” Azzaman, 1/4/12

Shafaq News, “Integrity committee reveals the reasons of dismissing al-Shabibi,” 10/17/12

Sowell, Kirk, “Inside Iraqi Politics No. 39,” 5/29/12

U.S. Reports On Iraq’s Economy & Services

In January 2009 both the Defense Department and the Special Inspector General for Iraq Reconstruction (SIGIR) released their quarterly reports to Congress on Iraq. Both included overviews of Iraq’s economy and services. While the Pentagon tends to stress the positives, the SIGIR has some of the most up to date statistics, and gives a much more in depth look at the major sectors of Iraq’s economy. Both found aggregate improvements in the country, but still massive problems that need to be addressed.

Growth

The Iraqi Ministry of Planning recently reported that Iraq’s Gross Domestic Product (GDP) grew 10.9% in 2008. That was above the 9% growth predicted by the International Monetary Fund (IMF). While the improved security conditions has allowed more space for Iraqi businesses, the one major reason why Iraq’s economy grew so much last year was because of the massive increase in the price of oil. With the dramatic drop in the petroleum market, Iraq’s economy can be expected to shrink in 2009. There are also large structural problems. Iraq’s oil sector has been largely stagnant since the U.S. invasion. The violence has kept foreign investors away and hindered local businesses, which has left the state the driving force in the economy. The country needs massive investment to upgrade its infrastructure and provide jobs. Officially the unemployment rate is 15%, but the Minister of Planning Ali Baban and other sources believe it is much higher. The SIGIR thinks that unemployment and underemployment could be as high as 60%. Corruption also affects every part of the government and economy, and takes a large toll.

Oil & Gas

Oil is the main driver of Iraq’s economy. All the oil companies are state-run, and are expected to account for 85% of the country’s revenue in 2009. The drop in oil prices therefore will cause a major crisis for Iraq at least in the short term. Besides that the country has no flexibility in its oil exports to make up for fluctuations in international prices. Oil production in 2008 averaged 2.42 million barrels a day, an almost 15% increase from 2.11 million barrels a day in 2007. However that was below the 2.5 million mark from before the U.S. invasion. Overall, production has been stagnant since 2003, with minor changes up and down. The same thing applies to exports. In the last three months of 2008 Iraq exported 1.79 million barrels a day, a 3% increase from the previous quarter, but a 6% decrease from the same period in 2007.

The U.S. has spent $1.86 billion on the oil and gas industry, but it still needs several billion dollars more in investment. An audit by the SIGIR of work done by Kellog Brown & Root to work on Iraq’s southern oil fields and port found that Iraqis may not be taking care of many of these projects finished by the United States. At the end of 2008 the Oil Ministry also began two rounds of bidding for international companies to invest in nineteen oil and gas fields across the country. By the middle of this year the Ministry hopes to have these contracts completed. They are hoping that these corporations will boost exports to two million barrels a day in 2009, and overall production to 6 million by 2015. Iraq has also signed up a Japanese company to work on improving the port in Basra where the vast majority of the country’s exports flow through. Baghdad is moving ahead with these deals despite the fact that the Hydrocarbon law that will define the role of companies and the government in the oil and gas fields has been deadlocked in parliament for almost two years now.

Despite Iraq’s oil wealth it cannot meet its public’s demand for refined petroleum products. At the end of 2008 it did not meet its benchmarks for production of a range of goods like gas and diesel. By that time it was short 51% of gas needs, 36% of diesel, 24% of liquefied petroleum, and 15% of kerosene demand. The production of these products has gone up, but it is being outstripped by the Iraqis’ desires for more.

Corruption and transparency is also a problem with the industry. In December 2008 the IMF said that Iraq was not doing enough to fight corruption in the oil sector. The IMF and United Nations also both criticized Baghdad for not setting up rules for better accountability with its revenues. The huge amount of money generated by petroleum is obviously a huge attraction to officials hoping to steal, but Prime Minister Nouri al-Maliki has never shown any enthusiasm for stopping it. Instead he sees it as a public relations problem to be solved by simply not talking about it.

Farming

The Pentagon’s report said that farming has the biggest opportunity for growth this year. Agriculture accounts for 6% of GDP, and employs around 25% of the workforce, the second largest private employer in Iraq. Most of it is subsistence however, rather than for profit. The Defense Department listed all the structural impediments to this sector actually improving any time soon. Farming lacks government support, tariffs to keep out foreign competition, modern technology and techniques, electricity and fuel shortages that hinder the use of pumps for irrigation, a system that is broken down throughout the country, credit and investment, markets, and security. For those reasons Iraq imports 50% of its food needs.

In 2008 Iraq was also hit by a drought. It was mostly concentrated in the north affecting the provinces of Irbil, Dohuk, Tamim, Diyala, and Ninewa the worst. As a result wheat and barley production are down 51%, two of Iraq’s three major crops. The Water Resource Ministry reported in January 2009 that rain and snow was again down one third from normal, which could mean another water shortage this year. Kurdistan is working with the U.N. to help relieve the issue, while the Ministry of Agriculture began several assistance programs as well. The U.S. doesn’t think the government’s moves have been very effective however.

State Owned Businesses

As reported before, under Saddam the economy was state-run. After the U.S. invasion, the Coalition Provisional Authority unsuccessfully tried to privatize it, which led to the closing of hundreds of government owned businesses that employed up to 15% of the workforce. In 2006 the Defense Department began a program to revitalize these public industries to create more jobs. Over $100 million has been put into this project. That funding is now coming to an end, and Baghdad will now be responsible for their revitalization. At the end of 2008 the SIGIR did an audit of this effort, but found no reliable data to determine whether it was effective or not. It also found that cash was being given out without invoices, which would encourage corruption.

Debt

One area where Iraq has made a lot of progress has been with its foreign debt. Iraq owes money to two groups, the Paris Club and non-Paris Club countries. Most of this was from the Saddam era. Since 2004 Baghdad has been able to get $74 billion of its debt forgiven. That leaves $50-$75 billion still owed. The Paris Club, which is made up of western industrialized countries holds $7.6 billion in Iraq debt, down from $50 billion. Iraq reached an agreement with them on this remaining amount at the end of 2008. Most of Iraq’s remaining obligations belong to Saudi Arabia, China, and Kuwait. Negotiations with them are on going.

Banking

Banking is another industry the government is hoping will grow in 2009. The Iraqi Central Bank has been able to keep inflation in check. In 2006 it was at 32%, but by September 2008 it was cut to 12.9%. Control over inflation has allowed the Iraqi dinar to appreciate in value. From November 2006 to October 2008 Iraq’s currency increased 20% in value, and stood at 1,172 dinars for one American dollar in December 2008. The low inflation and appreciation has given Iraqis more buying power. The Central Bank is now cutting interest rates to encourage loans.

State owned banks account for 90% of all banking assets in the country. There are seven such enterprises that control 66% of the branches. The two main ones are the Rafidain and Rasheed Banks that have 150 branches each. The Agricultural Cooperative Bank, the Real Estate Bank, the Industrial Bank, the Iraq Bank, and the Trade Bank of Iraq follow those. In total the government has 397 bank branches. The largest private banks are the Al-Qarka Bank for Investment and Funding with 68 branches, the Investment Bank of Iraq with 22, and the Basra International Bank for Investment with nineteen. There are 194 private bank branches overall. Private banks have expanded with the improvement in security with more moving out to the provinces.

Like everything else, Iraq’s banks still have many problems. A December 2008 audit of the Rasheed and Rafidain banks found no business plan, no rules or regulations for workers, no reporting rules, no technology, little risk management, and hardly any services offered. For example, there are no personal accounts, safety deposit boxes, or dealings with foreign banks. More importantly, in late December 2008 two state-run banks ran out of cash, leaving Diyala province with no money to pay for government salaries, pensions, or reconstruction projects. The head of the Rafidain bank told Radio Free Europe/Radio Liberty in January 2009 that if banking were a sign of economic progress, Iraq would be far behind. The entire system needs to be reformed as a result.

This year the government is attempting to solve some of these problems by encouraging foreign banks to do business in Iraq. At the end of January 2009 the Finance Ministry held a conference asking international banks to invest and open branches in Iraq. The Finance Ministry promised them that he could clear any bureaucratic obstacles that they might face. The two-day event was attended by officials from American, English, Turkish, Iranian, Lebanese, Jordanian, and Bahrain owned banks. The Iraq Central Bank had already issued licenses to three foreign banks. JP Morgan Chase and Citibank said they were interested as well.

Stock Exchange

The Iraqi Stock Exchange was opened for business in August 2007. Since then it has sputtered forward. The number of shares traded in 2008 was down from 2007, although there are now more foreign stocks available. In 2007 there were 94 companies listed on the exchange. In 2008 that only increased by two. The number of sessions went up from 119 in 2007 to 139 in 2008, as well as the shares traded, however their value went down from $357 million to $251 million.

Services

American surveys of Iraqis have found mass disappointment with the delivery of services. The Pentagon declared that in 2009 meeting basic needs would be the top issue surpassing security for the first time since the invasion. It should be no surprise than that this was a major issue in the January 2009 provincial elections. While the U.S. has found some improvement in the government’s abilities, supply of essential services still does not meet demand.

Iraqis are generally unhappy with their supply of food, water, electricity, sewage, and health. A survey from the end of 2008 found that only 16% were satisfied with the amount of electricity they received, down from 32% in 2007. 26% said they were happy with their health services, down from 36% in 2007. 31% were satisfied with their drinking water, the same amount as 2007.

Electricity

Electricity production has increased, but it is only meeting 66% of demand. By the end of last year Iraq was producing 4,997 megawatts per day, a record high. That was a 2% increase from the previous quarter. The capacity of Iraq’s generators has increased by around 1,500 megawatts on average. Like the oil industry, the power system needs massive investment to repair and upgrade facilities. Security and fuel shortages also hinder production. Climate changes, like the drought have also cut hydroelectric output.

The U.S. has spent $4.78 billion on Iraq’s electrical system and added 2,683 megawatts. Iraqis have matched this investment. In 2007 they spent $1.4 billion, in 2008 $2.3 billion, and in 2009 the proposed budget sets aside $1.1 billion. The Ministry of Electricity signed a $3 billion deal recently with General Electric to provide generators. The Ministry wants to double production eventually, and match demand. In the meantime, many Iraqis have been forced to rely upon private generators that produce between 2,000-3,000 megawatts. Thankfully, the number of attacks on the system are also down with no major ones since April 2008. Previous ones however have kept four of eleven damaged power lines out of use.

Health

Baghdad is making small steps to provide more health services, but lacks the personnel to be effective. Iraq has 27.5 million people, but only 15,500 doctors. A study said they need about 100,000. Many physicians have left the country due to the violence. The Health Ministry has a large budget, $192 million in 2008, but like the rest of the administration, has not been able to spend most of it. By the end of September 2008 they had only expended $28.5 million, 14.8%. The Ministry did launch a public relations campaign to educate Iraqis about health issues last year, has plans to build six new hospitals and 1,000 health clinics by the end of the decade, and conducted a successful five day polio campaign that vaccinated 97% of Iraq’s five million children. Until Iraq is able to meet its staffing deficit however, it will be hard to do more.

Water

Iraq’s water system is in disrepair. The facilities are operating below capacity because of a lack of maintenance, and problems with operating them. For example, when the U.S. turned over the Nassiriya Water Treatment Plant in September 2007, which cost $278 million to build, it had a capacity to treat 10,000 cubic meters of water per hour. When the SIGIR later looked at it they found that Baghdad wasn’t providing enough power, leaks were not fixed, and the personnel were not trained for their jobs. By the beginning of 2008 when American inspectors went back they found that it was operating at less then a quarter of its capabilities. The U.S. had to sign two contracts worth $1.1 million to save the project, since it felt that Baghdad would not.

As reported before, Iraq suffered a cholera outbreak in 2008 that affected more than half of its eighteen provinces. Besides the incompetence of some provincial officials that used expired chlorine to clean water, the broken down sewage and water system were largely to blame. International organizations have said that Iraq will face annual cholera incidents as a result.

Food Rations

Iraq has the largest food ration system in the world. It took up 8% of the 2008 budget. It is looked at as a basic indicator of how well the government can provide services. For 2009 there are plans to cut wealthy families from the program because of the budget crisis caused by the drop in oil prices. Less money is also going to be appropriated for it overall.

Transportation and Communication

Iraq’s Ministries of Transportation and Communication have not been able to spend most of their 2008 budgets. Transportation only spent $55 million by the end of September 2008 of its $322 million, 17%, while Communications expended $28 million of its $315 million budget, 8.8%. Iraq’s roads are in need of repair, but the lack of spending by the government means that will not be taken care of. The Ministry of Transportation does have a plan to revitalize the country’s railway system. It is opening a plant at Abu Ghraib to manufacture railroad ties at a cheaper price than imports.

Conclusion

Overall, Iraq’s economy is too dependent upon oil, and its management by the government is inefficient and corrupt. Petroleum is the only thing that makes Iraq’s economy grow, since its other industries are small and underdeveloped. The legacy of Saddam’s system still resonates, as Iraq’s bureaucracy does not function without orders from the top officials. There is little to no individual initiative. Many ministers have to sign for everything even down to hiring people. The government is also paper based, which makes things move at a snail’s pace. Many of the country’s best and brightest have left the country and are not coming back. That has led to a massive talent deficit. The lack of transparency and accounting has allowed large-scale corruption to occur largely unencumbered by any real government effort to stop it. The lack of tariffs has meant that many private businesses have suffered from cheap foreign imports. Fuel and electricity shortages, and the lack of security have increased costs. Iraqis have also shown a general lack of willingness to maintain their infrastructure, which leads to breakdowns and plants operating at less then capacity. The one positive is that security has improved, which could allow foreign companies in oil, gas, electricity, and banking to finally invest in Iraq. The lack of competent bureaucrats could negatively affect that as well as they could give foreigners too much control over Iraq’s resources, deter companies from coming because of bad contracts, or provide new avenues for graft and bribes. Still foreign know how, technology, and money is desperately needed. It will be a long and hard struggle to overcome Iraq’s many problems, and create a diversified economy that can meet the needs of its public. There is no guarantee that it will ever happen.


SOURCES

Abouzeid, Rania, “Mismanaging Iraq: No Cash to Carry,” Time, 12/29/08

Associated Press, “Iraqi official appeals to foreign banks to invest,” 1/28/09

Aswat al-Iraq, “GDP higher by 10.9 % in 2008,” 2/11/09
- “Iraqi Unemployment Rate Dropped by 15% in 2008,” 1/27/09

Chon, Gina, “Western Bank Giants Prepare to Revamp Iraq’s Financial System,” Baghdad Life Blog, Wall Street Journal, 1/28/09

Department of Defense, “Measuring Stability and Security in Iraq,” December 2008

O’Hanlon, Michael and Campbell, Jason, “Iraq Index,” Brookings Institution, 11/20/08

Radio Free Europe/Radio Liberty, “Official: Iraqi Banking System Needs Overhaul,” 1/13/09

Al Sabah, “Iraq faces massive water shortage, Water Resources said,” 1/21/09

Special Inspector General for Iraq Reconstruction, “Quarterly Report to the United States Congress,” 10/30/09
- “Quarterly Report and Semiannual Report to the United States Congress,” 1/30/09

El-Tablawy, Tarek, “Official: 80 percent of Iraq pipelines damaged,” Associated Press, 2/11/09