Iraqi Economy between Rental Revenue and Reformations: What Achievements were accomplished of the White Paper that was adopted by the Government of Mr. Al-Kadhemi?

Jul 26, 2021

 

17 July 2021

The first session: 11:00 - 12:00

 

After welcoming and introducing the speakers, the facilitator, Mr. Majid Abu Kalal, the head of Ther Developmental Center, opened the session with an introduction in which he said: "the government issued a white paper in October- 2020, with a timeline ranging from 3 to 5 years. The white paper included two axes; the first one is to achieve sustainable financial stabilization, while the second one is to achieve strategic reformations and provide sustainable job opportunities". Then, he asked Dr. Mudhher Mohammed Salih a question: "after 8 months from issuing the white paper, what has been achieved?"

 

Answering the question, Dr. Mudhher Mohammed Salih's, Financial Advisor to Prime Minister said that: "The paper provided by the government carried noble, good and long-term intentions, but was created during an exigency, as the previous year has witnessed a financial and health crisis. I will focus on an essential item, which is the salaries rate of the GDP, as the paper aims at reducing the rates of government salaries from 25% to 12.5% of the value of GDP. In order for you to get the picture, last year, with the outbreak of Corona pandemic and the closure in the global economy and the fall of oil prices, one day, Iraq has sold its oil at a price of ($ -3) a barrel, and the share of salaries from Iraq's revenues amounted 110% of the value of oil and non-oil revenues, including borrowings".

 

He added that: "In 2021, Iraq's non-oil revenues were supposed to reach 30%, but did not exceed 11%, despite the lapse of the first half of 2021".

 

He indicated that: "Iraq's dilemma is great with the existence of 4 million employees, 3 million retirees and a million and half citizens covered by social welfare, Etc., as the share of the employee's salary constitutes the double of the share of the per capita of the (GDP). During the past 20 years, the country has exchanged the salaries with the infrastructure. Thus, it neglected school, education, health, infrastructures and good roads, as the state has increased the salaries and neglected infrastructures ... The main logical question under the fact that the salaries constitute 60% of the budget, is it possible to be reduce them to 12.5% of GDP instead of 25%? I tell you, the salaries cannot be reduced, but we can improve the career system, national income ... etc."

 

He indicated: "that there is an entry called (the difficult entry budget) which is calculated by subtracting non-oil revenues from total expenditure with the removal of services and debts divided by non-oil GDP, and the result will be a negative number, which was (-45) in 2017, while it reached (-65) in 2021, when it was supposed to reach (-19), and that is considered a serious decline which means the lack of non-oil revenues and the domination of oil revenues that leads to weakness in GDP growth".

 

About the obstacles facing the implementation of the White Paper, Dr. Abdulrahman Al-Mashhadani, Professor at the College of Administration and Economics at Al-Iraqia University, said: "we can call the white paper (Goodwill Program) that is unsuitable to be an action plan for a short-term government, as this program requires more than 3 courses, it is an exaggeration to say that it requires 3 or 5 years. The evidence is that despite eight months passed since the formation of the of paper, nothing changed except for the exchange rate, besides that we disagreed on the rate of the implementation of the government program, as government programs and the Ministry of Finance have a lack of transparency".

 

He declared that: "There is an annual increase in the amount of the salaries from 8 to 10 trillion Iraqi Dinars, without justification, nor with the development of new employment grades. I imagined that the increase was caused by the allowances and promotions, however, after the declaration of the Ministry of Finance about the annual allowances and promotions which is a very small amount that may reach (8) billion Iraqi dinars, I do not have any answer about the cause of the rising salary allocations in the budget. Second thing is that all the international economic institutions including World Bank, International Monetary Fund, international classification institutions and international experts have pointed out that there will be an economic crisis by 2020, while it was mentioned in the white paper that we were surprised by the economic crisis. On the other hand, the stated statistics show that the total expenditure until November 2020 did not exceed 75 trillion Iraqi Dinars, while in December reached 111 trillion Iraqi Dinar without knowing the reasons, adding that we were surprised that the speculations of 2021 budget were based on the speculations of 2020 which amounted to (148) trillion Iraqi Dinars, when the speculations supposed to be based on real and actual numbers.

 

He added that: "The white paper included ambitious programs that were not limited to reformations of the financial situation, but included the economic and legal situation, as it included 20 laws required legislation or amendment, including the oil and gas laws, which have been transferred since the first parliamentary session to the following session, in addition to other laws".

 

"There must be a study of exchange rate to measure the effects, whether they were positive or negative on the change of the exchange rate. According to the Ministry of Planning, the poverty rate rose to 31%, besides that World Bank said that the exchange rate change will lead to make from (2.5) to (5) million Iraqis be within the poverty line when there are no actual remedies to the problem of poverty, stressing that it is easy to reduce the price of the Iraqi dinar against the dollar, but it is difficult to return to the previous price gradually".

 

- Mr. Majid directed a question to Dr. Ali Nima on the rate of actual contribution of the oil sector to the general budget? Can Iraq get rid of the trap of the rental economy?

 

Dr. Ali Nima, an oil expert, said that: "The actual oil exports reached 98% of the planned value of the budgets for the period from 2006 until 2020, while 2% remained of the non-oil imports and imports caused by selling oil products. If Iraq remains on this direction, the economy will remain rental".

 

He explained that: "even the planned deficit in Iraqi budgets has not been properly invested. The aim of the planned deficit must be to stimulate and develop productive sectors, therefore the amount of the deficit will be paid through these sectors, while the planned deficit in Iraq is covered by borrowing, which is mostly used to establish the infrastructure and reconstructions which is very far away from revitalizing other productive and economic sectors. Therefore, the deficit and external debts accumulate, as Iraq's debts reach more than (100) billion, and the burdens on the revenues caused by selling oil will increase once start paying the benefits of these debts in early 2022, since Iraq does not have alternatives. About revenues of imports of border crossings, costumes and taxes, laws governing the collection of these revenues are still very weak".

 

About the government program, "Nima" said that the problem of Iraq and the majority of the third world countries have developed plans without implementing them, as we noticed more than one five-year plan or a strategic plan and more than one government program. When we try to match the government program with the five-year plan for the same time, we find that there is an incompatibility between them, as the government program is in a direction, while the plan is in another direction. The government program itself is implemented in another direction. Therefore, there are various and inconsistent directions resulting in a large waste of public funds, thus we keep depending on the rental economy and failing to revitalizing other sectors. He added that "domestic production elements are significantly available in Iraq that can be invested in a thoughtful actual plan in a manner proportionate with the local need and this can be achieved within a period from 5 to 10 years to leave the rent of economy. In other words, the government has to be subjected to a periodical and seasonal following up, and identify the deviations and bring things back to the right path. In the current situation, it is not hard and does not commensurate with the time limit and the potentials currently available, as there is employment inflation while oil prices are collapsed, thus, no solutions chaining the economy should be submitted".

 

Dr. Mudhher answered a question asked by Mr. Majid Abu Kalal about the effects of the change of exchange rate and the extent of its contribution to the Iraqi economy reformation, saying that: "The exchange rate change that aims at improving production is doubtful. The purpose of the change is purely financial. After government and parliamentary issuance of decisions of returning more than 400,000 people to their public-sector jobs, it was necessary to provide financial coverage for their salaries, at a time when the white paper indicated that salaries should not increase to 25% of GDP. Thus, the change of the exchange rate contributed to save more than (12) trillion Iraqi Dinars, and therefore, their salaries have been covered." He added that: "There is no financial tax, but an inflationary tax has been imposed and some of its effects are to increase imported goods prices to what equals 23% of their value, while government services prices remained constant. Therefore, the average of increase in prices ranges from 5-6%".

 

Al-Mashhadani pointed out to the targets that the government was seeking through changing exchange rate, saying that: "The first goal was to prevent carrying dollar outside Iraq, as 175 million dollars were sold daily through currency selling auctions, while now, up to (240) million dollars will be sold per day. The second goal is financial represented by the provision of (12) trillion dinars, but this is incorrect, as there are purchases done by the Iraqi government in dollars and their value reach (28) billion dollars for the purpose of equipping the Defense and Interior Ministries with arms and military equipment, and are paid to oil companies. When I calculated the actual amounts that will be provided through changing exchange rate, I found out that they range from (6-8) trillion Iraqi trillion. The third goal is to support agriculture and industry, when the contribution of agriculture constitutes 1.5% of the value of GDP, while the contribution of industry constitutes 2.5%. Thus, these sectors cannot be depended on for the purpose of meeting the local need".

 

Al-Mashhadani added that: "We have mismanagement and poor planning regarding industry and agriculture, although Iraq has manufacturing capabilities that could be exploited, but the Iraqi citizen forgot the words "made in Iraq" and "the national product" and depended on importation. Thus, all the owners of crafts turned to traders, because of the factories that have been suspended since 20 years ago, while the only thing those factories need is evolution so that they can compete imported products".

 

And about what the world is witnessing of the shifting to clean energy utility, Dr. Ali Nima said that: "There is a shift in the energy use in the developed countries. Despite the expected decline of the rate of the use of oil and gas worldwide, the quantity will increase and oil and gas will remain demanded for beyond 2050, but markets and importing countries may change. To talk about the possibility of Iraq to have energy transformation, we must indicate that countries that carry out the transformation should have the basis for establishing it, as well as the possibilities for achieving it. For example, transportation sector constitutes 50% of the world's energy demand, but after 2035, there will be many countries that use electricity to manage this sector when Iraq will be unable to provide its need of electricity as the alternative solutions that provide electricity through water or wind will be unavailable in Iraq. Therefore, only solar and nuclear energy will remain for us to depend on. Regarding solar energy, a contract was signed with an Emirati company, but in the best cases, it will only cover 5-10% of electrical energy need, so we must focus on turning our stations into gas stations".

 

About the role of the National Oil Company in economic reformation, "Nima" said that: "The positive impact of the existence of a national oil company is to achieve integration in management and centralization to activate greater oil sector. Each company outside Iraq, such as Aramco, outside has independence and investment of its revenues and export quantities, aiming at increasing profitability, revenues and maneuvering when demand is declined. Iraq currently has laws that cripple this subject. There are partnerships that promote revenues, but with large losses affect Iraq currently due to the absence of a national oil company that would prevent political interference in oil investment and limit the intersections of laws and instructions that lead to limiting Iraq's revenues".