Research from Brown University’s Watson Institute estimates the cost of the Iraq War at about $2.9 trillion. Although it is more difficult to estimate the cost to the Iraqi economy – the approximately 300,000 dead civilians and combatants and 3 million internally displaced people were a trauma from which it is difficult to recover – it is easy to see how much it has affected the Iraqi economy conflict was thrown back.
It seems a long time ago, but in the 1980s Iraq was considered one of the most advanced Arab economies, with one of the best infrastructures and the highest per capita income in the region. Because the country is so dependent on oil revenues, which still make up around 87% of the national budget, the oil crash of the 1980s hit the Iraqi economy hard; The Iran-Iraq War also cost billions of dollars and hundreds of thousands of lives, and the international sanctions that followed Saddam Hussein’s invasion of Kuwait in 1990 were the death knell for this period of relative prosperity.
After the US-led invasion of Iraq in 2003, the economy contracted by up to 50%, largely due to the widely criticized destruction of the Iraqi state apparatus. As flawed and morally bankrupt as the Ba’athist regime may have been, it provided a measure of stability that no longer existed after the fall of Saddam Hussein, and the chaos of internecine fighting that followed enabled the rise of the Islamic State .
Huge resources for a slow reconstruction
The US invested significantly in the country in the following years, but much of it went to security – with the need to replace the disbanded Ba’ath security forces – and the rest of the infrastructure spending was wildly inefficient due to corruption and a fragmented social order. As a result of all this, GDP per capita is now at roughly the same level as it was in 2003. A once-leading regional power had reached a dead end.
Given the hardships that the Iraqi population has endured in recent decades, one can only be relieved that the authorities are making efforts to modernize the economy, but the road to economic recovery is long and full of potholes.
While it is true that Iraq finally appears to be on the mend, its economy remains extremely fragile and largely dependent on oil revenues. In fact, a recent IMF mission concluded that a decline in oil prices could seriously threaten the country’s macroeconomic stability and its ability to implement necessary reforms. Therefore, it is worrying that OPEC is forcing Iraq to cut its oil production in 2023, which will lead to a loss in oil revenues.
The IMF estimates that growth was stagnant in 2022, although real GDP is expected to grow by 3.7% in 2023, but as Moody’s Investors Service said in its latest report on Iraq’s credit fundamentals: “Iraq is in a negative position due to “Its economic, tax and external dependence on the hydrocarbon sector is heavily exposed to significant risks in the CO2 transition.”
The problem is that major investments are still required in Iraq. The new three-year budget passed this spring provides for part of this; It was certainly crucial to enable the government to continue its work after several years of deadlock due to Parliament’s inability to agree on a budget and, according to Prime Minister Mohammed Al Sudani, the budget will enable the government to do so “To begin implementing the infrastructure projects and make Iraq one of the largest workshops in the region.”
Al Sudani also believes that the budget “prioritizes the basic needs of Iraqi citizens and families and aims to meet their expectations for government services, construction and infrastructure projects.” But critics disagree: “The budget contains no real capital expenditure,” says Sajad Jiyad, analyst and fellow at the Century Foundation, “it just focuses on expanding what was provided for in previous budgets and leaves very little in.” a few billion – left over.” Investment.”
In any case, as IMF mission chief Tokhir Mirzoev says, Iraq’s structural imbalances mean that even budgeted government spending, as it stands, “could re-stimulate inflation and volatility in foreign exchange markets.” Inflation is a chronic problem for Iraq, not helped by the fact that the country has a massive trade deficit: “Iraqi society buys everything from abroad, from agricultural materials to food and medicine to industrial goods,” said the Iraqi Foreign Minister Fuad Hussein gave a recent interview with the Kurdish Service of the VOA. “If you look at Iraq’s trade or its balance of trade with other countries, you will see that everything comes from abroad,” he added.
This is one of the topics discussed by Hussein during his recent visit to Washington. Since the dinar collapsed after the invasion in 2003, many Iraqis chose to use the dollar for their everyday purchases, but the Iraqi Interior Ministry has banned trading in U.S. dollars to prevent runaway inflation. The recent sharp fall in the Iraqi dinar against the dollar is causing further exchange rate volatility, which the IMF said has had an “adverse impact on import-dependent non-oil sectors.” One way the Iraqi government is trying to combat this is through a system of monitoring American dollars entering the Iraqi economy and tracking when they leave the country, which has the added benefit of preventing terrorism financing.
The Central Bank of Iraq in action
The measures taken by the Central Bank of Iraq (CBI) appear to be bearing fruit in this regard: the foreign exchange market is stabilizing, supported by the growth of real non-oil GDP, which is expected to reach 3.7% in 2023. Inflation peaked at 7% in January 2023, has begun to decline and is expected to average 5.6% this year.
Meanwhile, in May 2023, CBI Governor Ali Mohsen al-Allaq unveiled a new state-owned financial institution, the Social Development Bank (SDB), aimed at promoting inclusive economic progress in Iraq. The SDB will “diversify the non-oil economy by promoting small and micro-scale projects, thereby boosting the private sector and reducing unemployment and poverty rates,” al-Alaq said. “The bank will be the first in Iraq to cater to low-income people, offering preferential loans and simple guarantees to support vulnerable groups,” he added. The CBI also plans to open a center for finance and economics, which will “accommodate the securities market, corporate sector and financial institutions,” according to al-Alaq.
The CBI has also signed an agreement with British banknote manufacturer De La Rue to produce polymer notes. This decision appears to be somewhat at odds with the Iraqi government’s other recent positive initiatives to modernize its economy. In fact, polymer banknotes have not proven to be a prudent fiduciary choice, and certain countries that had previously adopted polymer banknotes because they were considered more robust have backed off because the banknotes began to show signs of wear much more quickly than originally thought. Because the lifespan is shorter than expected, it becomes more difficult to recoup the additional acquisition costs of polymer banknotes and the expected savings are not achieved.
Many of the central banks around the world that have switched to polymer banknotes also point to their greater security, but again polymer banknotes offer little added value in this regard; Modern printing techniques mean that paper banknotes, such as the Euro banknotes made from cotton fibers, have numerous state-of-the-art security features such as raised ink, security threads and holograms. Because some of these security features are woven into the very fabric of the paper, modern paper banknotes may be even harder to counterfeit than polymer banknotes, where security features are simply applied to the substrate. It is easier for counterfeiters to obtain polymer material and attempt to mimic the security features printed on the surface of banknotes than, for example, to accurately reproduce the embedded threads used in banknotes such as the new Euro series. According to the European Central Bank, the number of counterfeit euro banknotes withdrawn from circulation reached a record low in 2021 and, in fact, one of the largest counterfeit operations in recent times involved polymer banknotes in Romania. Likewise, it is worth noting that the US dollar – the world’s main reserve currency and the world’s most widely used currency – is still printed on paper. The US dollar is subject to a high level of regulation and supervision. So if the Federal Reserve does not consider switching to polymer banknotes, it must be agreed that paper provides sufficiently strong protection against counterfeiting.
Given the hardships suffered by the Iraqi population in recent decades, one can only be relieved that the authorities are making efforts to modernize the economy, but the road to economic recovery is long and full of potholes; To maintain the credibility of Iraq’s fiscal policy, the government should continue to focus on more productive measures rather than falling victim to fads that do nothing to promote real economic stability.
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