Iraqi Economy Get Affected By Their New Hurdles in August

The Iraqi government faced two major hurdles in August –social unrest in  Basra and an ongoing decline in the global oil market. However, new  reports indicate that officials are starting to make headway resolving  them. Political and economic stability should improve in Iraq if these  problems are resolved by the end of the year.

Iraq News – Baghdad Officials Push for Reforms in Basra
Iraqi Government Pursues Reforms in Basra

Problems in the province of Basra have created uncertainty for the  rest of the country. Governor Majid al-Nasrawi faces the possibility of  impeachment after a slew of corruption allegations were made against  him. Nasrawi has responded to the accusations by insisting that the  alleged improprieties are baseless and renewed his pledge to turn the  province around.
The governor has stated that any problems impacting his province are  due to years of mismanagement, which have been driven by outdated  practices. He said that citizens of Basra will need to vote for new  reforms if they hope to resolve these challenges. Nasrawi is also  requesting additional assistance from the central government.
Part of the challenge that Basra faces is the burdensome regulations  imposed by the central government. Baghdad recognizes their national  policies don’t seem to be helping Basra, so they are considering easing  some of them. The Independent High Electoral Commission recently  announced that the citizens of Basra have collected 46,212 signatures for a petition to provide more autonomy to the region, which would mean  that Basra officials could enact some of the policies needed to grow  the economy and provide more relief to their citizens.
“The percentage required by law has been achieved,” wrote the HEC.
Nasrawi is likely to endorse any reforms that would give Basra more  control over its future. He said that he has pursued long-term solutions  over the immediate fixes brought by his predecessors, but will have  more power to implement these changes if the central government backs  down a little.

Abadi Proposes New Rules to Curtail Corruption
Corruption among government officials was a serious problem while  former Prime Minister Maliki was in power. Abadi has introduced new  reforms to mitigate corruption, but feels that additional measures are  still needed. According to a review from Uticensis Risk Services, Abadi  remains the only Shia leader to introduce a detailed plan to address the  issue.
Abadi’s proposals have given the Shias more favorable attention in  the media. His party will gain a stronger lead over the State of the Law  party, which was formerly led by Maliki. While the proposals are  helpful to his party, the country is the ultimate beneficiary of these  changes. Reducing government corruption will unify Iraq and improve  social sentiments, which are key to improving the long-term direction of  the economy. The value of the Dinar will be affected if citizens are  more confident in the role of their elected officials and government  waste is reduced.
Oil and Energy –Officials Wait for Oil Prices to Rebound
Falling oil prices have taken their toll on government revenues over the  past year. The outlook for the coming year is still pessimistic, but  officials are still confident that the long-term direction of the oil  industry is positive. Higher oil production should offset declining  prices for the foreseeable future.
Oil Prices May Start to Rebound in 2016
Oil is currently trading under $45 a gallon, which is less than half  the value it was trading in 2010. Collapsing oil prices have reduced  revenue for local oil producers and the central government as the  decline has accelerated. Experts doubt they will make a solid recovery  in the next year, but expect prices will at least start to rebound  somewhat in 2016.

Oil Exports Should Rebound in September
According to the State Oil Marketing Organization, Iraqi oil exports  dropped noticeably in August. A number of factors appear to have played a  role, but one of the most profound was sabotage of a pipeline in Kurdistan.

Kurdish officials have stated that the setback has temporarily  hampered the region’s ability to export oil to Turkey. They also  announced that thieves on the other side of the Turkish border attempted  to steal oil from the reservoirs. Nevertheless, KRG officials are  confident that they will be able to improve security and will continue  to directly export oil to their partners in Turkey.

A report from the KRG stated the region “continued its direct oil  sales in Ceyhan to compensate the Region for the budget shortfalls from  the federal government in Baghdad and to continue to pay down debts  accumulated in 2014 from pre-payments for direct oil sales.”

Exports also declined due to security challenges in Basra. However,  Basra officials are also taking measures to address the problem, which  should help elevate oil exports in the coming year.

The central government has been able to mitigate the effects of  declining oil prices by boosting production over the past year. They  appear confident that production will pick up again in the next couple  of months, which will help lift government revenue.

Declining U.S. Output Likely a Boon for the Global Oil Industry
U.S. oil outputs are starting to fall.  This is leading to speculation that the global oil supply is beginning  to contract, which would create upward pressure on oil prices. This  would be a boon for OPEC members, because they would probably be able to  maintain output better than other nations.

Iraq in particular would benefit from lower oil exports from the  United States, because they still have a strong supply of oil and are  bound by more lenient restrictions from OPEC. Iraq is also discussing  proposals to lift sanctions that limit its exports, which would allow  the country to make up for reduced output from the U.S. and OPEC  members.

Business and Foreign Investment – Iraq Pursues New Trade Routes to Grow Local Trade
Improving trade with other regions remains one of the central  government’s chief priorities. They have recently taken several  initiatives to improve business activity throughout the country,  including borrowing money from the Islamic Development Bank to finance  some of their new endeavors.
New IDB Loan Will Increase Business Activity
The Iraqi Economy is seeking a $500 million loan  from the Islamic Development Bank. An estimated $250 million of the loan  will purportedly be used to build a new trade route with neighboring countries.  Few details of the proposal have been released, but the new route is  expected to boost business activity between Saudi Arabia, Iran and other  neighboring countries. Improved trade relations with other Middle  Eastern countries has boosted activity in Iraq as more countries launch  startups or form partnerships with local businesses.
Baghdad hasn’t specified how it plans to spend the remaining half of  the loan. Simon Kent of Iraq Business News speculates that the rest of  the money will be used to fund the salaries of government employees and  contractors that are currently working on ongoing infrastructural  projects.
Foreign Direct Investment in Basra Improves
Both Baghdad and regional government officials have taken new  measures to encourage foreign businesses to establish a presence in  Iraq. A large number of businesses have signed contracts with the  Kurdistan Regional Government over the past year. There are a number of  reasons that this region has received the most interest:
 

• The KRG has reached a resolution with Baghdad over a dispute regarding taxation of local oil fields.
• Kurdistan has one of the fastest growing oil industries in the  country, which is driving economic activity throughout the region.
• Kurdistan is gradually earning more freedom from the authority of the central government.

Kurdistan has led the way in foreign direct investment, but other  provinces are starting to attract business as well. G4S Risk Management  has recently signed a $187 million contract to provide security services for the Basra Bas Company. More businesses are likely to establish a  presence in Basra in the coming year as some of the problems the  province faces are addressed.

Economy – Job Creation Efforts Extend to Remote Areas of Iraq

Job creation has remained one of the top priorities of the Abadi Administration. Since 2006, the joblessness had dropped sharply from its peak of 18%. However, the rate increased slightly to 16% last year. The  higher unemployment rate is likely due largely to austerity measures the  country had to implement over the past year. The central government is  more committed to job growth as fears of economic stagnation start to  abate.

While employment is fairly in Baghdad and other established regions,  more remote areas of the country are facing more challenges. Citizens in  Basra have staged protests over the past few years. They have  previously stated that improving access to electricity was their chief  priority, but have recently changed their emphasis to job creation.  Improved employment in Basra and other could improve social sentiments  throughout Iraq.

Baghdad has pledged to take necessary measures to stimulate job  growth in the coming year. However, a large part of the job creation  effort hinges on regional governments’ efforts to improve economic  activity. The problems in Basra stem largely from local shortcomings and  would probably be best served through their own reforms rather than  financing from the central government. Baghdad is likely to provide some  resources, but may be more likely to help Basra and other remote  provinces by responding to demands to remove corrupt or ineffectual  government officials.

Dinar Value and Exchange Rate – CBI Dismisses Rumors of Dinar Devaluation
Since recent economic and political reports have been mixed, experts have questioned the direction of the Buying Iraqi Dinar.  However, the Central Bank of Iraq (CBI) has emphasized that it does not  plan to devalue the currency in the months ahead. In fact, it is  possible that the CBI will strengthen the currency, according to one  official.

CBI Reluctant to Pursue Devaluation
The CBI has said that the risk of devaluation is minimal, in spite of  the war with ISIS. CBI Governor Ali Mohsen Ismail said that the country  has enough dinar reserves to maintain a decent pairing with the dollar.  A small devaluation is possible if oil prices plunge further and the  government struggles to raise the capital needed to finance the war  against the Islamic State.

“There is no fear for the dinar,” said Ismail. “If the pressure  remains, we could marginally change the exchange rate to increase  revenues of the finance ministry. This is just an option that needs to  be carefully studied because we don’t want to give away what we have  achieved in terms of the inflation rate, which is perfect now.”

Ismail’s comment indicates that the government wants to peg the value  of the currency to the rate of inflation. There is a possibility that  the dinar could be changed if aggregate demand causes inflation rates to  rise in the future, but it is too early to be sure.

The governor’s announcement comes a month after Bloomberg analysts  warned that declining dollar reserves could place added pressure on the  dinar and force devaluation. The CBI report indicates that those fears  may have been overblown.

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