Breaking the political deadlock in Iraq

06 April 2010

Political stalemate means Iraq’s reconstruction will be slower than expected

After seven years of violence, Iraqis were hoping for a strong, decisive government to push ahead with the planned infrastructure development that its politicians have so far failed to deliver.

In the months leading up to the March elections, it looked like this might happen as the country enjoyed a rare period of optimism. The Oil Ministry finalised 10 production licensing contracts with international oil companies (IOCs), and the government prepared plans to build $150bn of new infrastructure developments, including affordable housing schemes.

Development pipeline

By November 2009, the value of construction schemes planned and under way in Iraq overtook the total for its gas-rich Gulf neighbour, Qatar, according to regional projects tracker, MEED projects, and in April, Iraq had more than $230bn worth of projects in the pipeline.

But despite the initial optimism, political stalemate now means that Iraqis will have to wait for their dreams to be realised. More than a month has passed since Iraqis went to the polls and although the Iraqi High Electoral Commission (IHEC) has announced the final vote count, no clear leader has emerged.

We just need a stable government that can push ahead with legislation and developement

Source at IOC

So far Ayad Allawi appears the most likely candidate to be Iraq’s new prime minister. His Iraqiya Party won 91 seats, just ahead of the current prime minister, Nouri al-Maliki whose State of Law party took 89 seats. Out of 325 parliamentary seats, 163 are required to form a majority government. The result brings an end to much of the suspense surrounding the election, but the narrow margin opens a period of tense negotiations between the main parties hoping to form the next government.

“The new prime minister will certainly be weak with his power shaped by the coalition he strikes,” says Mustafa Alani, security and terrorism director at the Dubai-based Gulf Research Centre.

Both candidates will have considerable difficulty forming a workable coalition. Each bloc comes with its own set of demands and will seek to extract the highest possible price from negotiations before they join any coalition. Rumours of deals struck between the groups abound, but details remain opaque and contradictory.

Another round of legal challenges and de-Baathification is expected, say political observers. The issue of disqualifying winning candidates on the basis of alleged ties to the former president Saddam Hussain’s Baathist regime is potentially explosive. Iraq’s Sunni Muslims, who formed the majority of the Baath party, view the Justice and Accountability Commission as a purge of Sunnis from power.

Over the past seven years, Iraqis have tended to vote along ethnic or religious lines – broadly Shiite, Sunni or Kurd. After years of violence, many now say the non-sectarian former prime minister, Allawi could be the right leader for the country. Like Al-Maliki, Allawi is a Shiite, but his cross-confessional and cross-regional politics pushed him ahead in the polls. But more importantly, voters see Allawi as the man to drive the country’s reconstruction. “The majority of Allawi votes were a protest against Al-Maliki and the perception that he did nothing on infrastructure redevelopment,” says Alani.

Balancing act

The Kurds have been alienated by Al-Maliki, says Mohammad Amin Baban, an Erbil-based adviser to the Kurdish prime minister’s office. Their main issues such as the status of Kirkuk and the Kurdish militia, oil revenues and contracts, have not resolved after four years of
Al-Maliki’s rule. With 41 seats allocated to the Kurdistan Region provinces, Kurds will play a major role in the outcome of the election, but Allawi will need more to get the majority to stake a claim to form government.

“If Allawi gets the Kurds, then that is 41 seats. He will need another two or three groups to join him to form a government. But the Kurds have their own demands, which are not popular with some of Allawi’s allies,” says Baban.

It is a delicate balancing act. Allawi must find a way to attract Kurdish support without losing his Sunni allies and this will not be easy. His Sunni support includes advocates of a strong centralised state with anti-Kurdish rhetoric common. He must also attract part of the Iraqi National Alliance, a mostly Shiite bloc which includes Moqtadr al-Sadr, the fiery young cleric with an enormous following among Iraq’s poor.

Allawi’s job has been made slightly easier by the fact that Al-Maliki has made plenty of enemies during his premiership. Iraq’s Sunnis see him as too close to Tehran, while pro-federalist Kurds have been irked by his strong central government stance, echoed by his Oil Minister, Hussain al-Shahristani.

While observers outside Iraq have lauded Al-Maliki’s achievements as the principle architect of the oil licensing rounds, he has been hounded by Iraqi nationalists who claim he was too eager to bring in IOCs and too generous in the terms of the contract awards. For his efforts, Al-Shahristani was rewarded with just 6,364 votes. Al-Maliki received almost 400,000 votes in comparison.

Some segments of the Shiite community have also been hurt by Al-Maliki, chief among them Al-Sadr. His armed fighters faced a massive crackdown on militants in Basra under Al-Maliki in 2008. Al-Sadr will not forget this as he is courted by Allawi and Al-Maliki alike.

Regardless of who forms the next government, Iraq needs to move quickly to push ahead with development. The country has faced back-to- back deficits since the 1990s. The International Monetary Fund (IMF) expects Iraq to face two more years of budget shortfalls before stronger oil prices and production lift it back into surplus in 2012. In a March review of the country’s economy, the IMF said it expects Iraq’s economic growth in 2010 to average 7.3 per cent, significantly stronger than the 4.2 per cent seen in 2009. However, there is still a lot of work for the new government to do.

Iraq still requires additional financing to fill a $5bn hole in its 2010-11 budget. The IMF approved a $3.6bn loan at the end of February to help Iraq manage the shortfall.

Iraq is in dire need of revenues and the development of oil resources will be the central to future economic prosperity and both candidates have said they will stand by the signed oil contracts, despite persistent challenges to their legality.

“Al-Maliki and Al-Shahristani drove a hard bargain, but have done well for Iraq,” says a source at an IOC. “We just need a stable government that can push ahead with legislation and development.”

The ratification of the signed contracts under a new oil law is less likely, according to one source based in Baghdad. However, the IOCs themselves appear comfortable with this and do not appear to have a favoured candidate, says a source at one company.

“The [proposed] oil law has been outstanding for four years. There are lots of objections to it, and I don’t think he [Allawi] can pass it. I am not sure if he will have the power or the freedom to move ahead,” says Alani.

Sharing oil wealth

Iraq’s legislative process is slow at the best of times. All new legislation will be set aside until the next government is formed as politicians focus on striking agreements to form a workable coalition. The hydrocarbons law, a crucial piece of legislation for regulating Iraq’s oil sector, and the role of regional and foreign oil companies, will have to wait.

Although the winner of the election is not a major concern for the IOCs, security remains an issue. In August, the US will begin the withdrawal of 70,000 troops, bringing an end to formal combat operations in Iraq. In their absence Iraq’s political and internal stability will depend on its ability to increase export revenues to pay for economic recovery and development. Sharing the revenues among Iraq’s provinces will also be crucial. So far Sunnis have been excluded from enjoying much of the country’s oil wealth, which originates mainly in Shiite and Kurdish regions.

Some 80 per cent of Iraq’s oil is produced in Shiite-dominated Basra, from four out of Iraq’s five largest fields. The province voted in favour of Al-Maliki and provides a glimpse of the potential development oil revenues bring. With a population of 3 million, Basra has gone from being one of the country’s most troubled regions to a centre for foreign investment.

If the rest of country is to follow Basra’s lead, a coalition government capable of distributing Iraq’s oil wealth must be formed quickly. But for now this seems unlikely. “Unless there is a miracle, Al-Maliki will be a powerless caretaker for months,” says one Baghdad source.

Allawi and Al-Maliki have both shown over the past seven years they will not be rushed. Investors in Iraq will have to wait.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications