Ozgur Altug Comments: Iraq: Costs of ISIL war, recovery

December 23, 2014, World Bulletin

Iraq’s per capita welfare is down 14 percent due to the conflict with the Islamic State of Iraq and the Levant, a World Bank study released this week said.
 

The war has also forced the country’s GDP into a 28-percent decline.
 
“Stated differently, Iraq’s average per capita income could have been nearly a third larger had the country managed to avoid conflict and liberalize its economy,” the report says.
 
Iraq’s service sector, one of the least developed in the region, suffered an 11 percent decline, the report added.
 
And trade disintegration has worsened the economic effects of the conflict, hurting especially the prospects for commercial services which are heavily protected. Sectors hit hardest are business services, communications, finance, insurance and real estate.
 
Overall, Iraq’s GDP is expected to contract by about 0.5 percent this year, according to research from the International Monetary Fund, largely because of the economic effects of the ISIL insurgency.
 
“We estimate non-oil growth to have deteriorated since the start of the conflict due to the destruction of infrastructure, impeded access to fuel and electricity, low business confidence, and disruption in trade,” the IMF said. “In contrast, as most of the oil infrastructure is in the south of the country and beyond the reach of ISIL, and taking into account the output of Kurdish Regional Government, oil wwwuction should reach 3.3 million barrel per day in 2014, up from 3.1 million barrels per day in 2013, with exports remaining at 2013 levels of 2.5 million barrels per day."
 
Iraq’s economy is 90-percent dependent on oil, a report by the Heritage Foundation said.
 
“With its economic growth highly volatile, Iraq’s ongoing economic reconstruction, though facilitated by the oil sector and foreign economic aid, has been fragile," the report added. "Political instability and corruption continue to undermine the limited progress made in past years.”
 
– To achieve a recovery?
 
The most important priority for Iraq’s government in moving toward recovery is the passage of a budget.
 
“The 2014 budget was never passed, due to ex-Premier Nouri al-Maliki’s disputes with his political rivals, and this is crippling in a state-run system like Iraq’s,” explains the Iraqi Economists Network in a note. “The lack of a budget meant that projects have come to a halt, public workers, the largest group in the economy have not been paid, which has trickled down to increased unemployment and cash shortages.”
 
The government of Prime Minister Haider al-Abadi is struggling to pass the 2015 budget, as the sharp drop in the price of oil obliges a reduction in spending. Abadi’s cuts have reduced the budget to 137 trillion Iraqi dinars ($117.9 billion) from a projected outlay of 171 trillion ($147.16 billion).
 
As a report by Business Monitor International explains, domestic expansion will be sluggish and uneven; consumer spending and capital formation will be hit hard by political instability, and declining oil prices will hinder the government’s ability to prop up spending.
 
The Iraqi government has already built up a substantial national debt, so further borrowing may not be possible. The national debt was already at 31.34 percent of the country’s GDP in 2013. 
 
Still, spending is necessary to kickstart the economy. Austerity is the wrong thing, warns Emad Mostaque, an expert on Middle East economics and politics.
 
The cash crisis in Iraq is also expected to delay the country’s ability to make its last war reparations payment of $4.6 billion to Kuwait, Finance Minister Hoshyar Zebari recently told Reuters.
 
– Turkey and Iraq
 
The disruption of Iraq’s economy has hurt the Turkish economy, because Iraq is Turkey’s second most important export destination, accounting for 8 percent of the total.
 
According to Turkish economics writer Suleyman Yasar, the troubles in Iraq have cost the Turkish economy $12.5 billion.
 
Turkish Energy Minister Taner Yildiz recently said that Turkey cannot remain irresponsive to developments in Iraq, as that country’s share of the world oil supply by 2040 will be 4 million out of 14 million barrels — the exact amount that is expected to be added to the global oil supply by that time.
 
Turkey is already importing oil from northern Iraq and Yildiz announced last week that “new deals” are under discussion.
 
If Iraq can emerge from the current crisis, prospects for Turkish trade are rich.
 
Ozgur Altug, an economist at BGC Partners in Istanbul, predicts that as Iraq increasingly succeeds in selling its oil, demand for Turkish exports will increase as well – by more than $2 billion a year.
 
It is possible that the government can pass a budget in 2015, which would undoubtedly lead to improvement in the Iraqi economy in the near term.