Iraq Faces A Perfect Economic Storm

Jan 24, 2016
Originally published on February 2, 2016 12:42 am

Let's start on the front line of every faltering economy: the grocery store. In a Baghdad shop lined with baskets of spices and rose petal tea, owner Osama al-Hassani is measuring out roasted, salted beans.

"Is that enough?" he says to a customer.

It's not very much. The customer says he'll actually take a bit less. And the shopkeeper complains that this is the situation now. He says he used to have 30 workers in his store and now he has only two. Business has been down for months. His customers are squeezed and worried

"My salary was cut 10 percent," says Alaa Aziz, a university professor. His wife, a schoolteacher, also had her salary cut. They're just belt-tightening for now, nothing drastic.

But they think it's going to get worse — and they're probably right.

Everything seems to be working against the Iraqi economy. The government is waging a costly war with the Islamic State while dealing with falling oil prices, millions of displaced citizens and staggering costs for reconstruction of cities ruined by fighting.

Dependent On Oil

Muzher Mohammad Saleh, top economic adviser to Prime Minister Haider al-Abadi, says Iraq is operating under extremely difficult conditions.

"As you know Iraq [is] under two constraints now, the constraint of war and the cost of war, and the cost of oil, because Iraq depends entirely on oil revenue," he says.

The International Monetary Fund calls this a double shock. In 2014 Iraq lost a lot of its territory to ISIS and had to start fighting back and looking after millions of civilians driven from their homes in the north and the west of the country.

At the same time, oil prices started to fall. Oil is now going for around $30 a barrel, down from about $100 when the prices began to crash in the summer of 2014.

Basically, all Iraq's government income comes from oil.

To help pay for the war, the U.S. has offered loans to cover defense equipment, but it doesn't cover salaries — either for soldiers or for the millions of Iraqis on the government payroll for jobs or pensions.

About 4.5 million workers are on the government payroll, with 3.7 million more receiving pensions. And people have come to expect other benefits like food rations and cheap gas.

Looking To The Government

Saleh, the adviser, says people are used to depending on the government.

"This is oil country, OK. A tax holiday, free lunch, everything free — even the electricity for free," he says. "This is the mentality of the Iraqi people at this moment. Believe me, it's very difficult to change them. We need time to educate them."

For now, the government is doing a complicated shuffle with money, essentially eating into its reserves of foreign currency just to keep paying those salaries. But Iraq will run out of savings by sometime next year at this rate.

Experts say Iraq needs reforms that would include large numbers of workers moving from the government payroll to the private sector. But Iraqis don't see it that way.

At a recent demonstration in Baghdad, protesters chanted against corruption. They say the country's economic problems aren't due to low oil prices but because the political class is made up of thieves.

Kadhim Faraj, a retired teacher, is asked what will happen if the government cuts salaries.

"I think that the demonstrations will continue and the government will be in a corner very tight," he says.

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Low oil prices are a big problem for Iraq. That's because Iraq is an oil producer and practically all the government's revenue comes from oil. So with the war against ISIS to fight, millions of displaced people to feed and a population dependent on government work, times are tough. NPR's Alice Fordham sent this report from Baghdad.

ALICE FORDHAM, BYLINE: Let's start on the front line of every faltering economy, the grocery store. In a shop lined with baskets of spices and rose petal tea, owner Osama al-Hassani is measuring out roasted salted beans.

OSAMA AL-HASSANI: (Foreign language spoken).

FORDHAM: "Is that enough?" he says. "It's not very much."

AL-HASSANI: (Foreign language spoken).

FORDHAM: The customers say "Actually, give us a bit less than that." And the shopkeeper complains, says this is the situation now. His business is bad.

AL-HASSANI: (Foreign language spoken).

FORDHAM: He says he used to have 13 workers in his store, and now he's only got two. Business has been down for months. His customers are squeezed and worried. [POST-BROADCAST CORRECTION: In the audio of this story, we say that Osama al-Hassani used to have 13 workers. It was actually 30 workers.]

ALAA AZIZ: (Foreign language spoken).

FORDHAM: "We're buying less because my salary was cut 10 percent," says Alaa Aziz, a university professor. So was his wife's. She's a schoolteacher. They're just belt-tightening for now, nothing drastic. But they think it's going to get worse, and they're probably right. I meet the prime minister's economic advisor, Muzher Salah, who tells me Iraq is straining under two enormous costs.

MUZHER SALAH: The cost of war and the cost of oil because we depend entirely on oil revenue.

FORDHAM: It's what the International Monetary Fund calls Iraq's double shock. In 2014, Iraq lost a lot of its territory to ISIS and has to spend on fighting back and looking after millions of displaced people. At the same time, oil prices started to fall. Basically, all Iraq's government income comes from oil, so it has less than a third of the revenue it had in 2014. To help pay for the war, the U.S. has offered loans to buy weapons, but that doesn't cover government salaries. Government jobs make up about half the employment here and people expect other benefits, too, like food rations and cheap gas.

SALAH: This is oil country, OK (Laughter). Tax holiday, free lunch, everything free, even electricity free, OK? This is the mentality of Iraqi people at this point. Believe me, it's very difficult to change them, OK? We need time to educate them, OK?

FORDHAM: For now, the government's doing a complicated shuffle-around of money, basically eating into its reserves of foreign currency just to keep paying those salaries. But they'll run out of savings by sometime next year at this rate. Experts say Iraq needs economic reform, people should move to the private sector. But Iraqis don't see it that way.

At a demonstration on a recent evening in Baghdad, people chant against corruption. Here, people say the country's economic problems aren't because of low oil prices but because the politicians are thieves. I asked demonstrator Kadhim Faraj, a retired teacher, what will happen with the demonstrations if the government cuts salaries.

KADHIM FARAJ: I think the demonstrations will continue, increase, and the government will be in a corner very tight.

FORDHAM: In a tight corner?

FARAJ: Yes. And I think the people will continue.

FORDHAM: He says the country needs to change. If Iraq goes broke, it's not going to have much choice. Alice Fordham, NPR News, Baghdad. Transcript provided by NPR, Copyright NPR.