[size=45]Economic Development and the Future of the White Paper in Post-Election Iraq Zeinab Shuker | 27 Jan Economic [/size]
[ltr][You must be registered and logged in to see this link.][You must be registered and logged in to see this link.]|27 Jan 2022
In the summer of 2020, the Iraqi government introduced a roadmap and an economic constitution, known as the White Paper, with the [You must be registered and logged in to see this link.] support and blessings. The document sought to re-visit and re-evaluate the future of the Iraqi economy, re-think economic and financial sustainability in the short and long term, and most importantly, start a conversation toward changing the culture and the public perception around the country’s economic structure, the role of the state, and natural resources dependency. This paper briefly examines some of the main projects introduced in the White Paper and the obstacles in implementing them. It also discusses what has been achieved after more than a year since this economic roadmap was introduced and what possible pathways the new government must take to address its economic and environmental fragility.
The Context and Objectives
While the White Paper has been a project in [You must be registered and logged in to see this link.], the economic and political legitimacy issues and health crises of 2019 have exposed the fragility of the Iraqi economy and the dire need for short and long-term reforms and structural changes. Popular protests that erupted in central and southern Iraq in October of 2019 reflected the collapse of the legitimacy of the ruling elites, the deterioration of services, and the high levels of poverty and unemployment. It also highlighted the state’s inability to address demographic changes, chiefly as the population grew by 53 percent from 26.3 million in 2004 to an estimated 40.2 million in 2020. [You must be registered and logged in to see this link.] The crises escalated as Covid-19 brought the global economy to a screeching halt, impacting crude oil consumption levels and bringing down the price of Brent crude to a low of US$ 25.57 in April 2020. [You must be registered and logged in to see this link.] A collapse in oil price had a devastating impact on the Iraqi rentier economy as oil revenues constitute more than 99 percent of exports, 85 percent of the budget, and 42 percent of the GDP[You must be registered and logged in to see this link.] [You must be registered and logged in to see this link.] Covid-19 also exposed the weakness of the country’s infrastructure and the depth of corruption, especially in the healthcare and education systems, leading to a tragic loss of human lives [You must be registered and logged in to see this link.] and years of development. [You must be registered and logged in to see this link.] The combination of these crises and the state’s lack of ability to respond effectively to them caused Iraq’s GDP to [You must be registered and logged in to see this link.] percent during 2020, leaving around 5.5 million Iraqis [You must be registered and logged in to see this link.] at risk of poverty and a youth unemployment rate of [You must be registered and logged in to see this link.] percent. Amid these events, the Iraqi government adopted a roadmap of economic reforms, known as the White Paper, prepared by the Crisis Cell for Financial and Fiscal Reform. The White Paper introduces 64 projects [You must be registered and logged in to see this link.] and suggestions. Instead of a detailed plan with clear steps, it suggests short, and medium-term objectives completed between 3-5 years to create financial sustainability for a long-term economic change. The White Paper seeks to finance the budget deficit and address the severe fiscal crisis due to the oil price collapse in the short term. The White Paper suggests several steps to reduce the deficit from 20 percent to 3 percent of GDP and salaries from 25 percent to 12.5 percent. These suggestions include collecting electricity tariffs, recovering Iraq’s stolen money, reforming Pensions Fund, increasing revenues from customs and taxes, and re-examining the dollar’s exchange rate against the dinar.
The second objective is to create a medium and long-term sustainable path to address the economy’s structural issues. These include modernizing and rehabilitating the financial sector, developing the non-oil sectors, diversifying the economy by supporting agricultural development, supporting local industries, and creating a welcoming environment to attract foreign investment. It also includes addressing issues of limited human capital by developing education and health institutions and basic infrastructure. The White Paper also addresses climate change, water management, clean energy, population growth, and natural resource management.
In short, these combined policies seek to address the crisis of the burgeoning public sector that is draining Iraq’s budget and diversifying the state revenues away from oil dependency. If adopted, these suggestions can protect the country from external economic shocks due to changes in the energy market. They can develop a long-term sustainable economic structure that can withstand changes in the global economy and climate change while also addressing human rights, quality of life, and access to resources for the larger population. They are necessary for economic stability and essential for political stability.
Where Do We Stand?
Since the White Paper was introduced, comments from [You must be registered and logged in to see this link.] seem to indicate that it achieved impressive results during its second year. They emphasized the short-term goals, such as overcoming the financial collapse and achieving a cash surplus by reducing the price of the Iraqi dinar for financial liquidity. The decision strengthened the government’s financial position, reducing the deficit in the general budget, and helping the Central Bank raise its foreign exchange reserves. Yet, the government doubled[You must be registered and logged in to see this link.] to protect the country’s most vulnerable, [You must be registered and logged in to see this link.] argued, that devaluating the dinar against the dollar only reduced the deficit and did not create any form of protection for the poor and middle classes. On the contrary, the devaluation of the dinar has affected low-income groups, increased prices for imported goods and other services, and increased inflation rates, especially for food supplies, construction, and real estate. Another sign of the White Paper’s success is the optimistic prediction by different financial institutions of [You must be registered and logged in to see this link.] in 2021 compared to 2020. The World Bank predicts a 2.6 percent growth; the IMF gave a more optimistic 3.6 percent. In comparison, Iraq’s Ministry of Planning went as high as 14 percent, considering the economy’s overall improvement due to policy changes.
However, none of these numbers are a good indicator of a healthy economic recovery, nor is it a sign of the effectiveness of the White Paper. In reality, these numbers reflect the increase in oil prices globally to nearly US$ 70 a barrel after it hovered around US$ 38 a barrel last October, the slow global economy, and the energy market recovery. An increase in Iraq’s economic growth for 2021 is primarily due to external factors outside state control.
Furthermore, added revenues from the oil price rise are still primarily used for essential goods and services to close the demand gap within the country. These resources are not being used to grease the investment and industrial development wheel, as the White Paper suggested. A closer look at the non-oil sector reveals that the main non-oil sector contributors to the country’s overall GDP are related to the financial and services sector, all of which can’t be exported. As a result, there was no significant progress toward diversifying the economy away from its oil dependency.
The New Government’s Priorities
If the objectives of the White Paper were implemented correctly, the current increase in revenues can lower unemployment and poverty levels and help diversify the economy. Such a shift would protect Iraq from future external market shocks like the global economy witnessed in 2019 and 2020. Even though these are long-term objectives, there are no clear signs of steps taken since the summer of 2020 to achieve progress in that direction. Devaluating the Iraqi dinar has caused outrage among the population and triggered debates among experts. Iraq’s economic system requires fundamental re-thinking around its fragility and dependency on oil prices and developing better institutional mechanisms that can functionally address possible changes in the energy sector and climate security.
This can be done in several ways, and the new government must prioritize three objectives. Many resource-rich and oil-driven economies have developed Sovereign Wealth Funds, which take advantage of natural resource revenues, especially during an oil price boom, beyond unproductive operational spending to create a post-rent productive economy. However, institutional capacity must be developed for a project of this level to be effective. This includes, but is not limited to, addressing the question of corruption and bureaucratic inefficiency on the state level and within the legislative system, which requires cooperation and transparency.
However, given the hybridity of the system, the localization of authority, and the current [You must be registered and logged in to see this link.], in which political elites are more pre-occupied with short-term gains and monopolizing access to resources and power, how effective the new government can be in ensuring accountability and centralizing a consolidated effort toward economic development remains to be seen. Another urgent priority for the new government is climate and water security, a primary obstacle hindering the roadmap detailed in the White Paper. As temperatures rise in the region – also in Iran and Turkey, where the Tigris and the Euphrates generate – and the Iraqi state’s limited ability to negotiate with neighboring countries effectively, Iraq faces a water crisis of unprecedented magnitude. For example, a United Nations report [You must be registered and logged in to see this link.] stated that in 2020-2021 Iraq experienced the second lowest rainfall in 40 years, leaving tangible effects across the country. The water flow rate in the Tigris and Euphrates rivers decreased by 29 percent and 73 percent, respectively, due to the construction of dams in neighboring countries and climate change.
The report warned that water resources are heading for a decline of up to 20 percent by 2050. This water crisis led 37 percent of wheat farmers and 30 percent of barley growers to suffer a crop decline of at least 90 percent of the expected harvest, and 37 percent of households lost their livestock in the past six months. Furthermore, Iraq has approximately 44 million dunams suitable for cultivation. As a result of water scarcity this season, only 9 million dunams were invested, all of which have a significant negative impact on the agricultural sector. However, one of the primary goals of the White Paper is economic diversification and the development of the non-oil sector, such as agriculture. Yet, with a worsening water crisis and no apparent solution from the government, the amount of usable land for farming decreases each day.
As the access to land and water gets more challenging, many families seek job opportunities in cities in a wave of climate-motivated mass migration. However, these unplanned and unregulated migration patterns are putting further strain on the already bloated public sector and the collapsing infrastructure of cities. The situation is aggravated by families moving to cities without a support system, and a safety net further puts vulnerable groups like children even more at risk. There are limits to their access to a support system, proper education, and healthcare, which is counterproductive to the goals and aims of the White Paper to invest and develop human capital.
An essential step for the next Iraqi government is to negotiate with neighboring countries to invest in new agricultural technologies that can incorporate new methods that address temperature rise, water shortage, and land rehabilitation. The new government will also need to manage the climate immigrants’ challenges, such as access to education, healthcare, and housing. Moreover, the climate crisis cannot be addressed without addressing its root cause. The third priority is gas flaring, which significantly worsens the climate and increases temperatures. It also forces Iraq to depend on Iranian gas and puts the country under its neighbor’s economic and political whims.
The government’s goodwill cannot overcome some structural issues. There are issues such as the lack of cooperation or awareness among the larger population, localizations and lack of communication between different institutions and centers of power, institutional weaknesses, and lack of resources and expertise. There is a shortage of people in the country who are aware of the social dynamics and the inner working of Iraqi society and its needs. There is a need to implement these plans to change officials and political leadership, which often disrupt economic strategies. Most importantly, there seems to be a lack of political will to move Iraq beyond rent dependency, even as political hybridity, kleptocratic networks, and corruption have been part of the fundamental nature of its system since 2003.
The White Paper does not account for the structural issues associated with the country’s hybrid regime that divides the state and its institutions among competing ethnic, sectarian, and tribal groups rather than expertise. This political system benefits from an established network of patronage and corruption embedded within the rentier economy. Thus, while these economic suggestions can direct the country toward a positive direction, restructuring the Iraqi economy requires re-visiting and reforming of the political structure as well, something that Ali Allawi, Iraq’s Deputy Prime Minister and Finance Minister, acknowledges.[You must be registered and logged in to see this link.]The White Paper is a collection of recommendations and a roadmap toward economic restructuring. Even with the 3-5 years deadline, there are no clear strategies or timeline for each step or project to be achieved.
Adding to this, the 2022 federal budget was not passed last year due to political fragmentation, and other economic reforms are more likely to be placed on the backburner for the time being. Without an approved budget, the government spending will be limited to providing public sector salaries and essential services rather than implementing any new projects. It can be said that the previous government laid the cornerstone for economic reform through the White Paper for subsequent governments to complete.
With the political will lacking, the current oil price rise is not expected to be sustained in the long term, as the global energy sector is likely to shift toward clean energy soon. This would be a disaster Ali Allawi recently [You must be registered and logged in to see this link.]. The steps that the next Iraqi government will take to address economic, political, social, and climate security challenges will be essential in tackling inevitable economic and political crises. That could mean a humanitarian crisis felt beyond the region.
This paper dealt with the Iraqi government’s roadmap, the White Paper. It addressed the chances of this paper’s success in the Iraqi economy’s radical reforms, its oil-dependent structure, and whether the next government will continue implementing the White Paper-recommended reforms, which international financial institutions supported. The White Paper has two main objectives. The first one is financial and relates to financing the budget deficit. The second objective is to create a long-term sustainable path to address the Iraqi economy’s cumulative structural issues, especially diversifying the economy and limiting its dependence on the oil market and the impact of its fluctuations.
It seems that progress has been made in achieving short-term goals, mainly by devaluing the Iraqi dinar compared to the US dollar, besides the rise in oil prices that reduced the deficit. However, structural solutions still face strong opposition as the political structure is based on political parties’ domination over resources. It is also based on adopting a wide range of policies of clientelism to finance their networks and limit social discontent without providing long-term solutions suitable for enormous challenges such as overpopulation. Other factors such as rampant corruption, bureaucratic obstacles, weak law enforcement institutions, and the mafia-like character of economic and resource management add insult to injuries. They are attributed to the multitude of power centers and the state’s inability to contain violence.
The paper concludes that the lack of political will to deal with these structural flaws is the biggest obstacle facing the implementation of the White Paper. Moreover, the behavior and discourse of the political forces, based on short-term interests, don’t show any seriousness to move in this direction. It is more so considering the political price resulting from liberal and structural reforms due to the weak legal structure and the domination of populist perceptions. While the White Paper needs revision, especially in dealing with the impact of fiscal policies on the poor, its abandonment by the next government without providing an alternative reform map might worsen the existing problems and prevent structural reforms.