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has stated that any problems impacting his province are due to years of mismanagement, which have been driven by outdated practices.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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