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The Roots Of Iraq's Looming Financial Crisis
Submitted by David Wille via GlobalRiskInsights.com,
Low oil prices and the battle against Islamic State (IS) are pushing Iraq toward a financial crisis. Only fundamental reforms, especially decentralization of power, can resolve the challenges facing Iraq today.
Oil exports are by far the most important segment of Iraq’s economy, making up about half of the country’s GDP and 90% of government revenue. Given the state’s reliance on oil, investors pay careful attention to the conditions of the industry. And today those conditions are mixed.
On the positive side, the country appears to be pumping and exporting more oil than expected, almost four million barrels a day, thanks to investments in production. And the government in Baghdad appears to be on better terms with semi-autonomous Kurdistan—neither were upholding the terms of the 2015 budget agreement, with the former paying less money than promised and the latter providing less oil than promised.
But Iraq’s oil industry, and the government’s budget, is being squeezed by low oil prices. As a result, the nation’s finances are being hit hard: the market price is now half that needed to break even, expanding the budget deficit, forecast to return to balance until the rise of IS, to a projected 9% of GDP.
In the past, Iraq’s leaders approved budgets without seriously taking into account a drop in the price of oil. Now the severe revenue shortfall is forcing leaders to cut back on new investments. Russia’s Lukoil, Royal Dutch Shell, and Italy’s ENI are also cutting back, eyeing neighbouring Iran’s pending economic opening as a safer investment.
Despite improving its finances after the US troop withdrawal, the drop in oil prices and the rising costs of battling IS have pushed Iraq’s economy into a state of near-crisis. According to the IMF, the nation’s GDP shrank by 2.7% in 2014 and unemployment is estimated to be over 25%.
The World Bank rated Iraq one of the worst places in the world to do business in 2015: 156th out of 189 countries. The government is in talks with the IMF for a loan worth over $800 million to finance some of the budget shortfall. However, the country requires more fundamental reforms if it is to achieve long-term economic stability.
The link between violence and economic instability
Iraq’s latest economic problems are linked to the increasingly costly battle with IS, now in control of much of Anbar province and Mosul, the nation’s second-largest city. To stop the insurgency, many analysts have called on Iraq’s Shia-dominated government to reach a reconciliation with the Sunni minority. But Sunnis have a long list of grievances, stemming from the atrocities committed during the civil war under US occupation and the intense political conflict after the US withdrawal.
Iraq’s Sunnis claim that they are targeted by security forces as punishment for collusion with insurgents like al-Qaeda in Iraq and IS. Reports of detentions without evidence, the use of de-Baathification laws to keep them out of lucrative government jobs, and forced eviction from their homes may have contributed to IS’s rise. Many Sunnis see the extremist group as preferable to the Shia-led government and current security forces.
But Iraq’s Sunni-Shia divide is a symptom of a more fundamental problem in poor governance. Writing for the Brookings Institution, Luay Al-Khatteeb explains how power in Iraq has been highly concentrated with the executive branch and bureaucrats, who have wide discretion to implement policy without legislative or judicial oversight.
The judiciary, already at a disadvantage after years of irrelevance under Saddam, is subject to executive pressure and does not adequately enforce property rights. Corruption has also worsened after the US withdrawal in 2011.
Rather than being the cause of Iraq’s poverty, persistent violence has become part of a cycle that feeds off the country’s weak institutions, in what Stanford economist, Barry Weingast, calls the “violence trap”.
The key problem is that reducing violence in the long term requires alternative opportunities, and those opportunities tend to require reforms that respect the rule of law, protect property rights, and promote trade. Yet, those reforms rarely arise absent the kinds of opportunities that reduce violence in the first place, and so poorly governed states like Iraq are trapped in a cycle of violence.
Partition: the least bad option?
The long-term threat that violence poses to Iraq’s future is illustrated by the increasing role that Shia militias, often trained and funded by Iran and unconnected to the central government, now play in combating IS. Financial Times correspondent, Borzou Daragahi, argues that the Shia domination of the security services “will have the deepest and most lasting impact on Iraq.”
This deepening sectarianism is convincing some analysts that the best option, or perhaps rather the least bad option, is for Iraq to divide along ethnic or denominational lines. Iraqi Kurdistan is already largely self-governed, and is even planning to issue semi-sovereign bonds to help finance oil industry development and its own fight against IS. Writing for Foreign Affairs, Marina and David Ottoway describe how the Kurdish example is prompting other provinces to seek greater autonomy from Baghdad.
Not all agree, but most arguments against partition do not put enough emphasis on Iraq’s poor governance. In Iraq, imperfect partition or poorly-executed federalism may be preferable to the current regime, despite the fact that conflicts over state finances, especially access to natural resources, would pose huge challenges.
Solving Iraq’s financial crisis requires fundamental reforms to how Iraq is governed, not just the defeat of IS and a sectarian reconciliation. But the slim prospects of reform from within the central government may drive some in Iraq’s periphery to push for more independence from Baghdad.
Frederic Hof, a senior fellow at the Atlantic Council, describes the growing movement for self-government among the victims of Syria’s civil war. It is likely that minorities in neighbouring Iraq, stung by years of corruption and abuse by their leaders, have similar designs.
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Iraq doesn't have a financial crises.
They have oil and no debt.
No welfare.
Their currency is better than any in the west.
More propaganda bullshit.
Maybe I'm not as smart as some of the genius contributors here with articles . . . . . . . . but with crude heading to the 30's and perhaps below and in my view for an extended period of time low cost of production might make a little bit of sense. Market forces should eventually force production from Iran and iraq through the roof and oh why do you think the Saudis are not letting up?
ISIS only a "threat" as long as the CIA keeps sending the "soldiers" their FRN stipends.
This is all about competing with China for control.
I would date the beginning of the Iraq financial crisis to when that foreign army with it's coalition partners (I forget their names) invaded and killed over 1 million Iraqis and forced millions more to flee for their lives to safe havens like Syria.
Let's see, who benefits in a financial crisis?
a) People who work for a living
b) People who print as much money as they want, use a small amount to buy politicians, buy stuff on the cheap with the rest, and call it "monetary policy"
Meanwhile what isn't being reported in the lamestream media: British Special Forces "Dressing Up" As ISIS...What Could Go Wrong? @corbettreport http://bit.ly/1HrfJu3
I can't see the bit.ly link but british forces putting on dresses looking all pretty for the ISIS fighters sounds about right to me.....
Let ISIS take over and they can go bankrupt. Then move back in!
Everything is pushing everyone toward a financial crisis. Only fundamental reforms, especially decentralization of power, can resolve the challenges facing the whole world today.
FIFY
"Make it a hundred years"
John McCain 2008
https://www.youtube.com/watch?v=vf7HYoh9YMM
I LUV ISLAMIC STATE!
I know the solution to this -
Let's invade and take their oil!
Ha! That'll teach 'um!
And, "they can pay for it".
The shia population, should prosecute, banish, hang all sunni muslims that sympathises with isis/americans, only then they will have a proper country, untill then, their government is american controlled vassels, that will corrupt the country for atleast 10-30 years, they should be hanged for treason
Finance is a fictional creation of the State. What a coincidence that so many political targets have financial troubles.
Bush41 bombs ME, invites muslims to US, we get 9/11 - Dumb USG MF
Hussein was allowed to plunder Iraq as a foil against Zion's enemy, Iran. That is, until Zion desired to cut out the middle-man and plunder Iraq directly.
The fruits of Zion's plundering of Iraq are very apparent.
What is Zion: "Zionism is a fifth-column colonial like system of organized plunder and murder that operates on a national and international level via fraudulent-reserve banks, dependent governments, and connected and derivative firms." A victimized country, society, and people will exhibit either much division, plunder, and murder followed by tyranny, or tyranny followed by much division, plunder and murder.
Liberty is a demand. Tyranny is submission..
Zion uber alles!
I read this article just after I stopped by http://dinardetectives.com/updates/ for my daily laugh. These people actually think the Iraqi Dinar is going to "RV" "any day now" and have been saying that for years.
As for the solution to Iraq's problems, I see division in its future. Iraq isn't even a real country.
Saddam should have never crashed all of those planes all by himself and bailed out of each one just in time on 9/11.
by Oded Yinon, translated by Israel Shahak | KIVUNIM / Palestine with Provenance | February 1982
"Iraq, rich in oil on the one hand and internally torn on the other, is guaranteed as a candidate for Israel's targets. Its dissolution is even more important for us than that of Syria. Iraq is stronger than Syria. In the short run it is Iraqi power which constitutes the greatest threat to Israel. An Iraqi-Iranian war will tear Iraq apart and cause its downfall at home even before it is able to organize a struggle on a wide front against us. Every kind of inter-Arab confrontation will assist us in the short run and will shorten the way to the more important aim of breaking up Iraq into denominations as in Syria and in Lebanon. In Iraq, a division into provinces along ethnic/religious lines as in Syria during Ottoman times is possible. So, three (or more) states will exist around the three major cities: Basra, Baghdad and Mosul, and Shi'ite areas in the south will separate from the Sunni and Kurdish north. It is possible that the present Iranian-Iraqi confrontation will deepen this polarization."
http://www.monabaker.com/pMachine/more.php?id=A2298_0_1_0_M
Eretz Israel
http://www.ahavat-israel.com/eretz/future
The Ethnic Clique That Sold US The Iraq War
http://zfacts.com/node/297
Did they keep Saddam's brain and mustache alive? It is the only hope for a unified and ISIS free Iraq!
Iraq will be alright if all foreign meddling stops. Including such articles as above.
Iraq has an ineffective Government basically because it is still being occupied by foreign elements. Oil is being stolen in many ways.
Strategic bombing by foreign forces seems to be helping ISIS rather than Government forces. In some cases Iraqi forces were bombed by foreign air forces.
Regions are given advice and funds by foreign elements to steal oil and other resources.
Tribal forces are being used by foreign elements. To instigate actions against government.
The foreign element is of course USA.
There is NO Iraq. Why are we still referring to that teirritory as a single country. The reality on the ground is there is independent Kurdistan, a sunni Islamic State and the southern province around Basra that is now part of Iran. That place not going to be "unified". I imagine there are still some mutual financial and other arrangements between Kurdistan and Iranian Iraq, but when push comes to shove, they will go their own ways. As for the Islamic State, how their cash from oil and other enterprises is being moved around the world, one wonders.