The Iraq Report: Energy politics cripple hopes for economic recovery

The Iraq Report: Energy politics cripple hopes for economic recovery
Iraq is heavily reliant on the goodwill of its neighbours for both energy and investments, meaning Baghdad has very little leverage to stand up to other powers.
7 min read
05 June, 2020
The global pandemic and economic downturn could lead to domestic instability and mass protests. [Getty]
Iraq is facing unprecedented economic pressures arising from twin crises of a glut in the oil market depressing prices and the global coronavirus pandemic that has sharply curbed international demand for Iraq's only exportable commodity. 

This is compounded by the fact that Iraq is heavily reliant on the goodwill of its neighbours for both energy and investments, meaning Baghdad has very little leverage to stand up to other powers and is at their mercy, with the Iraqi people suffering the worst of the crises.

The spread of coronavirus in Iraq, itself the centre of much media attention about the government's handling of the health crisis, is now once again a major concern as fears of a second wave after a spike in infection rates has rattled the population.

This has led to an outbreak of violent protest leading to the resignation and subsequent reappointment of a government health official, setting the stage for perhaps another round of protests that have already toppled one prime minister.

Iraq desperate for oil sales, electricity purchases

An oil price crisis that has been ongoing since before most of the world went into coronavirus-related lockdown has sent Iraq's fragile economy into a tailspin, as exports and the extremely low price per barrel threatens to topple Iraqi economic plans.

A drop in oil prices and the global coronavirus pandemic have sharply curbed international demand for Iraq's only exportable commodity

Bloomberg reported on Thursday that the Organization of the Petroleum Exporting Countries (OPEC) was expected to come to a breakthrough deal on stabilising oil prices this weekend after forcing Iraq to concede to Russian and Saudi Arabian demands to cut oil production.

Iraq was asked to not only cut production, but to compensate with further cuts for failing to adhere to OPEC quotas in previous months.

Baghdad had only recently been given a $3 billion lifeline by Riyadh, in addition to extensive investment in Iraqi natural gas fields. Saudi Arabia's position as a leader in oil production and its economic aid packages to Iraq therefore placed them in an advantageous position to pressure its neighbour into taking its share of the cuts.

Read more: In Iraqi Kurdistan, plunging oil prices raise
fears of economic collapse

While Moscow and Riyadh are currently showing a united front on the issue of oil prices, it was their price war that occurred despite both their commanding presence within OPEC that sent the price of crude to historically rock bottom prices.

At one point, the price of American oil went negative for the first time in history as demand dried up due to the pandemic and Russia's and Saudi Arabia's price war prior to the coronavirus had already hammered prices to near unprecedented lows.

Iraq is facing much worse problems than the developed economies of the world, however, as its only export is oil. 

According to the 2020 budget draft proposed by the government when oil prices were at $56 per barrel, the budget stood at $135 billion while the deficit was $40 billion. But oil prices have almost halved to $30 per barrel, placing the government's budget in serious jeopardy.

Making matters worse is the public sector's wage bill which stands at approximately $7-8 billion, while Iraq is only expected to earn $4 billion from oil sales. Even with the Saudi loan, the oil sales will not be enough to cover the wage bill of civil servants, let alone service the rest of the Iraqi economy, development projects, infrastructure regeneration, and other vitally important economic projects. 

On the subject of Iraq's failing infrastructure, and despite being energy-rich, the country is still incapable of satisfying its own domestic energy needs.

An ongoing oil price crisis has sent Iraq's fragile economy into a tailspin

Iranian state media confirmed Thursday that a deal had been signed between Tehran and Baghdad for Iranian electricity exports to continue for two years. While it is unsurprising that Iraq has chosen to purchase Iranian energy, as it is something that it has been doing for years now, the length of the contract could pose problems.  

Due to the American sanctions regime against Iran as part of President Donald Trump's "maximum pressure" to force Tehran to renegotiate a new nuclear and ballistic missiles deal with Washington, countries doing business with Iran need waivers from the White House or else they risk being ensnared in sanctions.

The United States has repeatedly granted Iraq sanctions waivers to allow it to conduct business with Iran, with the latest waiver being granted as a welcoming gift to incumbent Prime Minister Mustafa al-Kadhimi after he formed his government last month. The waiver will be in effect for 120-days, far less than the two-year deal inked with the Iranians. 

Read more: Less than zero: Saudi Arabia's role in crushing the US oil industry

It is still unclear whether or not the Iraqis worked in a clause that only bound them to the contract subject to the United States continuing to grant waivers. However, considering Iraq's recent history as becoming essentially a rump state to Iranian expansionist ambitions, this will continue to be a cause for concern.

Fears of second wave of coronavirus infection 

Iraq registered the biggest 24-hour increase in coronavirus cases since the beginning of the crisis in February, fuelling fears of a second wave of infection that could bring the country to its knees.

The figures from the Health Ministry showed 781 new cases on Wednesday, bringing the total to 8,168 infections across the country. About 60 percent of the new cases were in the capital Baghdad. The ministry also recorded 21 new deaths, bringing the death toll to 256. There have been 4,095 recoveries.

The new figures indicate a growing rate of infection since May and doctors and medical experts in Iraq have repeatedly expressed fears that the country's healthcare system may be unable to cope with a major increase in cases. 

The collapse in oil prices and a budget dispute with Baghdad has crippled the Kurdistan Regional Government's ability to offer economic recovery packages

The spike in cases led to an outbreak of demonstrations, with protesters in Iraq's Dhi Qar province storming the office of a local health ministry official on Wednesday, forcing him to resign over his handling of the coronavirus outbreak.

The incident was caught on camera and uploaded to Twitter. The video footage showed Abdul Hussain Al-Jabri signing his resignation letter after protestors barged into his office. Protests have been taking place in the province since Tuesday with several demonstrators injured and arrested.

However, it has since been reported that the Ministry of Health and Environment will seek legal action over the incident. The Dhi Qar governorate court and the ministry have also rejected Al-Jabri's resignation as it was ruled that it was submitted under duress. 

Read more: The Iraq Report: Pro-Iran MPs demand
Saudi 'reparations' for suicide bombers

Iraqi fury was also replicated further north in the autonomous Kurdistan region as government officials were forced to back down on a reimposition of lockdown on Tuesday after demonstrators took to the streets in protest. 

Kurdish demonstrators claimed that the quarantines and lockdown measures were harming their job security and economic opportunity and said they would no longer tolerate further restrictions.

It took a single day for protests to force the Kurdistan Regional Government to back down to protester demands, highlighting the economic fragility of the autonomous region – a feature it shares with the rest of Iraq.

The collapse in oil prices and a budget dispute with the federal authorities in Baghdad has crippled the KRG's ability to offer economic recovery packages, further riling the population who have not been paid salaries for months.  

This even led to a protest by schoolteachers in May who claimed they had only been paid twice this year and were suffering financial hardship.

Iraqis across the demographic spectrum are swiftly losing their faith and patience with government officials who never seem to be able to address their problems. 

They have been in a constant state of instability since the collapse of the Baathist dictatorship in 2003, punctuated by periods of violence. It is unclear just how long the established post-2003 order can continue in the face of these recurring and ceaseless crises, and further pressures resulting from a global pandemic and economic downturn could lead to domestic instability and mass protests.

The Iraq Report is a fortnightly feature at The New Arab.

Click below to see the full archive.