Iraq enters parlous fiscal territory

31 May 2020
The contraction in Iraq’s oil-led GDP is constricting government spending

Rebooted Baghdad faces uphill struggle

Iraq’s new prime minister, Mustafa al-Kadhimi, must navigate through not only the Covid-19 crisis, but the results of decades of poor decision-making

Iraq's confirmation of a new prime minister and the sitting of a new cabinet with a new parliamentary mandate is the first cause for optimism over the political process in Baghdad for some time.

One positive to come out of the lengthy process of internal debate and political jostling over the final selection of Mustafa al-Kadhimi is that there is no doubt that he is a consensus candidate.

The result of the deadlock between, on the one side, the array of pro-Shia and pro-Iran factions, and on the other, primarily Sunni and Kurdish factions within the government, is the first government in years without a religiously sectarian flavour.

This shift alone – away from staunch sectarian politics and towards a more secular position – is cause for significant optimism that the new government may be able to break some of the habits of Iraqi politics.

It particularly promises to begin healing the rift between Baghdad and the Kurdistan Regional Government (KRG), which has hindered both the export of oil and the stabilisation of the security situation in the country.

There are nevertheless an array of difficult challenges that confront the new Iraqi government. Front and centre is the direct impact of the Covid-19 pandemic on global oil prices and the oil receipts that are the lifeblood both of the Iraqi government and the wider economy.

In the face of the country’s precipitous decline in fiscal health, the only solutions available to Al-Kadhimi will be tough measures, including the possibility of cuts to government salaries and public sector wages, if not a more drastic trimming of government public sector employment.

Iraqi people demonstrating in Public Square against the government

The other key imperative for Baghdad is reform of the power sector, where issues such as the non-payment of illegal off-taking and the non-payment of bills have accumulated to become a major public finance headache.

In the background, but equally problematic for the stability and security of the country, are the ongoing protests on the streets over the paucity of unemployment, government services and support, as well as an ominous uptick in the rate of attacks by Islamic State in Iraq & Syria.

The outgoing government of Al-Kadhimi will have to deal with all of this, in addition to the challenge of Covid-19 itself. What he has that no other recent Iraqi government has had is a non-sectarian mandate. The hope is that he can make good use of it.

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More from this month's Iraq special report

Government: Protests and proxy wars undermine stability
Defence: Islamic State steps up attacks in Iraq
Economy: Iraq faces financing blackhole after Opec cut deal
Oil: Project activity in Iraq’s oil sector stalls
Subsidies: Lower oil prices force power subsidy rethink
Power: Crisis sets back power programme
Infrastructure: Iraq reconstruction faces familiar challenges
Water sector: Water crisis threatens to deepen



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