After tough 2020, Iraq eyes more economic pain ahead | AFP

[Published here December 17, 2020]

A year of economic agony for pandemic-hit and oil-reliant Iraq is drawing to a close, but a draft 2021 budget involving a hefty currency devaluation could bring more pain for citizens.

Officials who prepared the document told AFP their goal was to aim for “survival” solutions after an unprecedented fiscal crisis brought on by the coronavirus pandemic and the collapse in the price of oil.

Iraq, which relies on oil sales to finance 90 percent of its budget, projects that its economy has shrunk by 11 percent this year, while poverty doubles to 40 percent of the country’s 40 million residents.

A slew of measures included in the 2021 budget draft, to be discussed at an extraordinary weekend cabinet session, are an attempt to offer a remedy.

The toughest decision at play is an official devaluation of the Iraqi dinar from 1,182 to the US dollar to 1,450, the first such re-calculation in a half-decade.

“We are trying to reduce pressure on the public sector wage bill, which is our single biggest expenditure,” an Iraqi official told AFP as the budget was being prepared.

He explained that authorities can make inroads into the deficit — projected by the IMF at 20 percent of GDP for 2020 — if they continue paying state employees in dinar, while the government rakes in dollars from oil sales.

“We can spread that money further,” he said.

The government is Iraq’s biggest employer with around four million public sector workers, plus three million pensioners and one million people on welfare.

News of the devaluation has enraged public sector workers, in a country that lacks a developed  manufacturing sector and is heavily reliant on imported goods.

“Our salaries will be worthless,” complained Mohammad, a doctor at a Covid-19 ward in Baghdad.

State employees already saw their October and November salaries significantly delayed, straining their purchasing power — and their patience.

“I’m nervous watching the rate go up, and I’m angry at the government,” Mohammad told AFP.

Over the last week, the unofficial rate at exchange houses across the country had edged up, with the dinar trading at 1,300 against the dollar from around 1,240.

During a global recession, when other countries are trying to encourage more spending, a devaluation of the dinar could do more harm than good, said economic expert Ali al-Mawlawi.

“Yes, the government is desperate and has no other options. But my worry is that it will hit poor people the hardest by knocking their purchasing power down,” he said.

Iraqi officials hinted to AFP there could even be another dramatic devaluation next year with the dinar reaching 1,600 against the dollar, following pressure by the International Monetary Fund.

Adding to the pain, mid-level and senior public servants will take home less dinars next year than they did this year, as their salaries will be subject to a new income tax set at 15 percent.

The government also plans to boost its electricity tariffs to force citizens to pay more for state-provided power.

Despite such austerity measures, the draft 2021 budget projects spending of 150 trillion dinars — higher than the 133 trillion budgeted in 2019, one of the government’s biggest spending years on record.

Pressure on spending will be exerted in part by the short-term costs of the government pressing public servants into early retirement, a measure designed to reduce the crippling public sector wage bill over the long-term.

The government hopes to generate 18 trillion in Iraqi dinars in non-oil revenues in 2021, up from 11 trillion budgeted in 2019.

It also it expects 73 trillion in oil revenues. But that is 20 trillion less than 2019.

The bottom line is therefore another hefty fiscal deficit for the coming year, projected at 58 trillion Iraqi dinars.

The drop in expected oil earnings is due to the 2021 budget forecast that Iraq will sell each barrel at $42.

That is slightly less than the Energy Information Administration’s forecast of $47 for the first quarter of 2021, and much lower than the $56 price tag earmarked in the 2019 budget.

– Unpopular decisions –

After the unexpected release of the budget plans, parliament’s finance committee scheduled an emergency meeting to discuss it.

“This is unacceptable,” committee member Ahmad al-Jubury told AFP after seeing the draft.

Political and technical wrangling over the fiscal plans are looming, piling new pressure on Prime Minister Mustafa al-Kadhemi and Finance Minister Ali Allawi.

Both have already faced resistance from parliament on smaller reforms proposed this summer, and with legislative elections due to take place in June the battle could be pivotal.

Political tensions prevented Iraq from passing a 2020 budget at all.

“Undertaking major economic reforms when you have elections just around the corner is never ideal for any government in any country,” said Mawlawi.

“It really undermines the willingness of a government to take unpopular decisions.”

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