Iraq’s Economic Woes Hit Harder Than U.S. Injustice

(Bloomberg Opinion) -- Outrage over President Trump’s decision to pardon four American mercenaries for the murder of 17 people in Baghdad may bring a perverse form of respite for Prime Minister Mustafa al-Kadhimi and Iraq’s political elite: For this news cycle, at least, people will be madder at Trump than at them.

But the insult and injustice of the pardon for the Blackwater guards will not long distract Iraqis from the injuries and indignities that their own leaders have inflicted on them. Minds dwelling on the gruesome Nisour Square massacre in the fall of 2007 will soon revert to today’s grim realities, and the coming year’s glum prospects.

An intimation of the ill winds heading their way came last weekend, when the government devalued the Iraqi dinar by about 20% against the dollar. The government can thereby eke out more dinars from its dollar-denominated oil exports, which pay for 90% of state expenditures. Kadhimi defended the devaluation — the first since the U.S.-led invasion in 2003 — by arguing that it was “a preemptive step” to control inflation. But most Iraqis now face a spike in the cost of living, because so much of what they consume, including essential food items, is imported in dollar-denominated purchases.

There were grimmer tidings still in the draft budget for 2021 approved this week by Kadhimi’s cabinet and pending parliamentary approval. The proposal bound to get the most attention was a new tax on the incomes of mid-level and senior public-sector employees. The prime minister sought to soften the blow by cutting his own salary by 40%, and those of ministers and members of parliament by 30%. But a population that regards the entire political class as irredeemably corrupt is unlikely to be mollified.

Public-sector employees face a triple-whammy: The government that struggles to pay their salaries has reduced the value of their income and, for mid-level and senior staff, is proposing to keep 15% in taxes. Remember that the state is the country’s biggest employer, with around 4 million people on government rolls and 3 million pensioners. Another million people are on welfare.

The anger swelling in the public sector has already spilled over into the public square, which has been crowded with anti-government protesters for more than a year. Earlier this month, security forces opened fire on government workers demanding their salaries in the Kurdish north, killing at least seven people.

The protesters had set fire to government offices and the headquarters of political parties. The leadership in Baghdad is now bracing for more such conflagrations across the country. Much of the anger will be directed at the prime minister, just when he needs support from the street to push through plans for vital economic reforms. A caretaker with no significant political base of his own, he can expect little solidarity from Iraq’s political parties, which rely on control of government ministries and agencies to maintain patronage networks.

Worse may be yet to come for Kadhimi if oil prices continue to soften amid fears that new strains of the coronavirus will prolong the pandemic’s economic pain. Iraq’s 2021 budget assumes oil at $42 a barrel. Even leaving aside the effects of the pandemic, that price may be hard to sustain if U.S. President-elect Joe Biden eases sanctions on Iran, allowing it to ramp up oil exports next year.

Heavily reliant on oil exports for revenues, and constrained by OPEC production cuts from exporting more, Iraq is already feeling the strain of lower prices. In desperation, the government is seeking upfront payments in exchange for long-term contracts. So far, only China ZhenHua Oil Co has proved game, agreeing to a $2 billion deal.

It won’t salvage the wreck of the Iraqi economy in 2020: The International Monetary Fund reckons it will have shrunk by 12% this year, and that the budget deficit will reach 22% of GDP. The United Nations expects Iraq’s poverty rate to double, to 40%.

With the political upheaval to come, the outlook for 2021 is, if anything, worse. And starting Jan. 21, Kadhimi will no longer have Trump to provide outrageous distractions.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Bobby Ghosh is a Bloomberg Opinion columnist. He writes on foreign affairs, with a special focus on the Middle East and Africa.

©2020 Bloomberg L.P.