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How does high oil prices affect the Iraqi economy?
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[You must be registered and logged in to see this link.]Ahmed Al-Suhail correspondent
Saturday 19 March 2022 5:36
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The crisis of rising prices globally as a result of the Russian-Ukrainian conflict has affected rapidly in Iraq (AFP)
Despite the rise in [You must be registered and logged in to see this link.] prices globally to record limits, economic crises are still ravaging Iraq, as prices have continued to rise in [You must be registered and logged in to see this link.] since the Corona virus crisis at the beginning of 2020 until now.
In addition to the Corona virus crisis, the crisis of [You must be registered and logged in to see this link.] globally as a result of the Russian-Ukrainian conflict quickly affected Iraq, which raised the level of claims to find solutions to this crisis by exploiting the additional revenues generated as a result of the rise in global oil prices.
Despite all the economic measures announced by the Iraqi government during the past two years, including raising the exchange rate of the dollar against the dinar and the economic paper, and attempts to diversify the sources of the economy, the rates of poverty and unemployment are still high, while the high prices of goods and services in the Iraqi market have not been controlled.
Iraqis hope that the rise in global oil prices will be an event that restores the legacy of the Corona virus crisis and its repercussions, but observers and economics specialists underestimate the possibility that actors in the country's economic file will take any measures that would invest that increase in oil prices.
Demands to establish a “sovereign fund”
Observers believe that the control of the power parties over the country's financial policy is what impedes the possibility of investing money generated from oil in development areas and restricting it to the political and electoral projects of those parties.
There has been an escalation of talk in Iraqi circles about the trends through which the financial abundance that Iraq is witnessing can be invested as a result of the high oil prices. While a spectrum of economists see the need to work on completing suspended and canceled projects, others renew the call for the establishment of a sovereign fund.
As for the third trend, it focuses on using those funds to fill the expected deficit in the current year 2022 budget and not to resort to borrowing again.
Mahmoud Dagher, former director of financial operations at the Central Bank of Iraq, believes that the money generated from the increase in oil prices globally “will not achieve any productive investments in Iraq,” describing the country’s general budget as “rigid and restricted and did not set a specific limit for it with regard to salaries.” and government wages.
Dagher adds to "The Independent Arabia" that "the investment part of the budget has become a monopoly on the public sector, which is full of corruption, and this matter represents the main reason that obstructs the investment of any additional money generated from oil sales."
Dagher points out that "the opportunity now seems appropriate to establish a sovereign fund, similar to the rest of the world, to invest the money achieved from an increase in oil prices globally and include it in the country's general budget," noting that "financial policy is captive to the desires of the authority, and this may represent the main motive in stimulating Politically motivated spending.
Iraq does not have a sovereign fund to invest the surplus oil revenues, while the demands of many prominent economists have continued over the past years in the country to establish a sovereign fund through which oil revenues are invested.
Regarding the increase in the prices of goods and services in the Iraqi market despite the rise in oil prices, Dagher points out that the project to change the exchange rate of the dinar against the dollar at the end of 2020 cut off about 23 percent of the purchasing power of citizens, which led to inflation by about eight percent, Noting that "these factors, in addition to the increase in the prices of imported goods as a result of global inflation, have weakened the purchasing power of Iraqi consumers."Dagher continues, "The Ukrainian crisis made matters worse, and in exchange for the increase in oil prices for the producing countries, there is an increase in the prices of imported goods, and with this volume of growth, the demand for resources increased, which led to global inflation and inflation in economies open to the world such as Iraq, and therefore it is natural That we see an increase in the prices of goods and merchandise.”
Consequences of returning to the previous exchange rate
The end of last February witnessed the hosting of Finance Minister Ali Allawi in the Iraqi parliament to discuss the country's financial situation, and the possibility of restoring the Iraqi dinar exchange rate to what it was before, after several demands from blocs and deputies led by the "Sadr bloc" deputies in an effort to restore The exchange rate to what it was before December 2020.
And the Minister of Finance said in a statement that reconsidering the exchange rate of the currency in an unthought manner "leads to financial chaos, like some countries." The Iraqi government had reduced the value of the Iraqi dinar against the US dollar in December 2020, as a result of the financial crisis that the country went through and its delay in disbursing employee dues and salaries.
The exchange rate of the dollar in the local markets is about 1500 dinars per dollar, after it was about 1200 dinars per dollar. Dagher believes that returning to the previous exchange rate at the current stage will lead to "disastrous results," noting that "the policy is capable of making the return process easy without paying attention to monetary policy or trusting the Iraqi dinar."
According to Dagher, the change in the exchange rate in 2020 caused a significant shake-up of confidence in the local currency, and local transactions are taking place in dollars.
And 2021 represented “the year of solving problems among traders as a result of changing the currency rate,” as Dagher points out, who believes that a return to the previous exchange rate will mean “an additional shock that will have dire consequences for Iraq and will cause a further loss of confidence in the Iraqi dinar.”
Government measures to overcome the crisis
Although several Arab countries have benefited from the rise in global oil prices, the situation appears different in Iraq, where the country relies almost entirely on imports to meet the local market’s need for goods and services, while industry and agriculture only interfere with about five percent of the total The country's general budget at best.
The Iraqi Oil Minister, Ihsan Abdul-Jabbar, announced that the country had achieved the highest monthly financial revenues from selling oil in more than eight years, with more than 8.5 billion dollars. In spite of all the funds achieved, the government's measures were satisfied with attempts described by observers as "useless" to support the poor classes.
The Iraqi government took a number of decisions to secure stocks of wheat, control local markets, and support vulnerable groups, while it decided to disburse a one-time cash grant of 100,000 dinars (68 dollars), in the name of a "high cost of living grant."
And the Ministerial Council of Economy, according to a statement by the Ministry of Commerce, had decided to allocate $100 million to purchase three million tons of imported wheat “urgently” with the aim of providing strategic storage, in addition to zeroing customs duties on basic goods such as foodstuffs, building materials and necessary consumables for a period of two months. In addition to the release of two rations of foodstuffs in the ration card.
In this context, Professor of Economics, Salam Sumaisem, says that mismanagement of economic resources prevents the realization of large revenues as a result of high oil prices, noting that the government will be satisfied with “prosthetic measures to absorb the crisis of high commodity prices in the market by launching aid packages and others without resorting to to real plans to manage the additional funds generated.
In an interview with The Independent, Sumaisem added that talking about investing in the increase in oil prices "cannot be achieved for technical reasons," noting that the country is governed by "bureaucratic mechanisms for managing economic resources, which prevents stimulating investments in the country."
On the other hand, it seems that the absence of a system of laws stimulating investment represents "the most important obstacles to the emergence of investments in the country," according to Sumaisem, who showed that the absence of these laws makes the government talk about investments "just a political talk."
The economic crises afflicting Iraq do not seem to be receding, in a country that does not produce anything and whose economy depends entirely on oil, in addition to the spread of corruption and bureaucracy in most of its joints.
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“The control of the political parties in the country’s financial policy impedes the possibility of investing money in development areas.”
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[You must be registered and logged in to see this link.]Ahmed Al-Suhail correspondent
Saturday 19 March 2022 5:36
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The crisis of rising prices globally as a result of the Russian-Ukrainian conflict has affected rapidly in Iraq (AFP)
Despite the rise in [You must be registered and logged in to see this link.] prices globally to record limits, economic crises are still ravaging Iraq, as prices have continued to rise in [You must be registered and logged in to see this link.] since the Corona virus crisis at the beginning of 2020 until now.
In addition to the Corona virus crisis, the crisis of [You must be registered and logged in to see this link.] globally as a result of the Russian-Ukrainian conflict quickly affected Iraq, which raised the level of claims to find solutions to this crisis by exploiting the additional revenues generated as a result of the rise in global oil prices.
Despite all the economic measures announced by the Iraqi government during the past two years, including raising the exchange rate of the dollar against the dinar and the economic paper, and attempts to diversify the sources of the economy, the rates of poverty and unemployment are still high, while the high prices of goods and services in the Iraqi market have not been controlled.
Iraqis hope that the rise in global oil prices will be an event that restores the legacy of the Corona virus crisis and its repercussions, but observers and economics specialists underestimate the possibility that actors in the country's economic file will take any measures that would invest that increase in oil prices.
Demands to establish a “sovereign fund”
Observers believe that the control of the power parties over the country's financial policy is what impedes the possibility of investing money generated from oil in development areas and restricting it to the political and electoral projects of those parties.
There has been an escalation of talk in Iraqi circles about the trends through which the financial abundance that Iraq is witnessing can be invested as a result of the high oil prices. While a spectrum of economists see the need to work on completing suspended and canceled projects, others renew the call for the establishment of a sovereign fund.
As for the third trend, it focuses on using those funds to fill the expected deficit in the current year 2022 budget and not to resort to borrowing again.
Mahmoud Dagher, former director of financial operations at the Central Bank of Iraq, believes that the money generated from the increase in oil prices globally “will not achieve any productive investments in Iraq,” describing the country’s general budget as “rigid and restricted and did not set a specific limit for it with regard to salaries.” and government wages.
Dagher adds to "The Independent Arabia" that "the investment part of the budget has become a monopoly on the public sector, which is full of corruption, and this matter represents the main reason that obstructs the investment of any additional money generated from oil sales."
Dagher points out that "the opportunity now seems appropriate to establish a sovereign fund, similar to the rest of the world, to invest the money achieved from an increase in oil prices globally and include it in the country's general budget," noting that "financial policy is captive to the desires of the authority, and this may represent the main motive in stimulating Politically motivated spending.
Iraq does not have a sovereign fund to invest the surplus oil revenues, while the demands of many prominent economists have continued over the past years in the country to establish a sovereign fund through which oil revenues are invested.
Regarding the increase in the prices of goods and services in the Iraqi market despite the rise in oil prices, Dagher points out that the project to change the exchange rate of the dinar against the dollar at the end of 2020 cut off about 23 percent of the purchasing power of citizens, which led to inflation by about eight percent, Noting that "these factors, in addition to the increase in the prices of imported goods as a result of global inflation, have weakened the purchasing power of Iraqi consumers."Dagher continues, "The Ukrainian crisis made matters worse, and in exchange for the increase in oil prices for the producing countries, there is an increase in the prices of imported goods, and with this volume of growth, the demand for resources increased, which led to global inflation and inflation in economies open to the world such as Iraq, and therefore it is natural That we see an increase in the prices of goods and merchandise.”
Consequences of returning to the previous exchange rate
The end of last February witnessed the hosting of Finance Minister Ali Allawi in the Iraqi parliament to discuss the country's financial situation, and the possibility of restoring the Iraqi dinar exchange rate to what it was before, after several demands from blocs and deputies led by the "Sadr bloc" deputies in an effort to restore The exchange rate to what it was before December 2020.
And the Minister of Finance said in a statement that reconsidering the exchange rate of the currency in an unthought manner "leads to financial chaos, like some countries." The Iraqi government had reduced the value of the Iraqi dinar against the US dollar in December 2020, as a result of the financial crisis that the country went through and its delay in disbursing employee dues and salaries.
The exchange rate of the dollar in the local markets is about 1500 dinars per dollar, after it was about 1200 dinars per dollar. Dagher believes that returning to the previous exchange rate at the current stage will lead to "disastrous results," noting that "the policy is capable of making the return process easy without paying attention to monetary policy or trusting the Iraqi dinar."
According to Dagher, the change in the exchange rate in 2020 caused a significant shake-up of confidence in the local currency, and local transactions are taking place in dollars.
And 2021 represented “the year of solving problems among traders as a result of changing the currency rate,” as Dagher points out, who believes that a return to the previous exchange rate will mean “an additional shock that will have dire consequences for Iraq and will cause a further loss of confidence in the Iraqi dinar.”
Government measures to overcome the crisis
Although several Arab countries have benefited from the rise in global oil prices, the situation appears different in Iraq, where the country relies almost entirely on imports to meet the local market’s need for goods and services, while industry and agriculture only interfere with about five percent of the total The country's general budget at best.
The Iraqi Oil Minister, Ihsan Abdul-Jabbar, announced that the country had achieved the highest monthly financial revenues from selling oil in more than eight years, with more than 8.5 billion dollars. In spite of all the funds achieved, the government's measures were satisfied with attempts described by observers as "useless" to support the poor classes.
The Iraqi government took a number of decisions to secure stocks of wheat, control local markets, and support vulnerable groups, while it decided to disburse a one-time cash grant of 100,000 dinars (68 dollars), in the name of a "high cost of living grant."
And the Ministerial Council of Economy, according to a statement by the Ministry of Commerce, had decided to allocate $100 million to purchase three million tons of imported wheat “urgently” with the aim of providing strategic storage, in addition to zeroing customs duties on basic goods such as foodstuffs, building materials and necessary consumables for a period of two months. In addition to the release of two rations of foodstuffs in the ration card.
In this context, Professor of Economics, Salam Sumaisem, says that mismanagement of economic resources prevents the realization of large revenues as a result of high oil prices, noting that the government will be satisfied with “prosthetic measures to absorb the crisis of high commodity prices in the market by launching aid packages and others without resorting to to real plans to manage the additional funds generated.
In an interview with The Independent, Sumaisem added that talking about investing in the increase in oil prices "cannot be achieved for technical reasons," noting that the country is governed by "bureaucratic mechanisms for managing economic resources, which prevents stimulating investments in the country."
On the other hand, it seems that the absence of a system of laws stimulating investment represents "the most important obstacles to the emergence of investments in the country," according to Sumaisem, who showed that the absence of these laws makes the government talk about investments "just a political talk."
The economic crises afflicting Iraq do not seem to be receding, in a country that does not produce anything and whose economy depends entirely on oil, in addition to the spread of corruption and bureaucracy in most of its joints.
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