Iraq increases deficit to pay salaries

The Iraqi parliament voted on the funding deficit law so that it can borrow to pay salaries that have been in arrears for more than two months.

al-monitor Iraqis stand outside the parliament building, or Council of Representatives, in Baghdad's Green Zone on Feb. 27, 2020.  Photo by SABAH ARAR/AFP via Getty Images.

Nov 23, 2020

The Iraqi parliament approved Nov. 12 the funding deficit law, entitling the government to borrow 12 trillion dinars ($10 billion) from internal and external parties in an effort to pay state employees who have seen their salaries delayed for nearly two months. The loan value decreased from 41 trillion dinars ($34 billion) to 12 trillion dinars under the new law.

Iraq’s President Barham Salih said Nov. 13 that it was necessary "to approve the [funding deficit law] to ensure that employees' salaries are paid for the next three months, although borrowing is not a sustainable solution. The law alone is insufficient to end the crisis.”

The Kurds did not welcome the newly approved law. Kurdish members of parliament have actually withdrawn from the voting session because their request regarding a specific percentage of funds to the Kurdistan Region was not met. Former President of the Kurdistan Region of Iraq and leader of the Kurdistan Democratic Party Massoud Barzani described it in a statement as “a stab by the Shiite and Sunni blocs in the backs of the Kurdistan people.”

Ala Talabani, a Kurdish member of the Iraqi parliament, expressed an opinion that is different from that of Barzani and the Kurdish parties. She tweeted, “What happened today at dawn in parliament is not a sectarian or ethnic conspiracy against the Kurds. Rather, it is the result of the [non]transparent policy of managing the region’s resources toward the partners.”

The law has seemingly led Iraq into two crises. First is an economic crisis by adding additional debts whose repercussions will be seen by future generations. Second is a political crisis that would deepen the dispute between Baghdad and Erbil over financial dues, oil export revenues and the salaries of employees in Iraqi Kurdistan.

Mazhar Muhammad Salih, a financial adviser to Iraq's Prime Minister Mustafa al-Kadhimi, told Al-Monitor, “At present, Iraq's imports amount to nearly 4 trillion Iraqi dinars per month (1 trillion is nearly equal $800 million), while we need 7 trillion to cover expenses and salaries.”

He added, “The state is working on boosting its internal resources. The declining oil prices and lower OPEC production have caused us a great deal of damage. 2021 will provide regular finances more than the previous years, although the deficit is yet to be estimated.”

The newly approved funding deficit law had been amended. The Iraqi government submitted the draft law to parliament to borrow $34 billion, but parliament reduced the amount to $10 billion, which would cover the expenses and salaries of 4 million government employees until the end of this year.

A government source at the Iraqi Ministry of Finance revealed more details to Al-Monitor, stressing that “the situation at the government does not show that positive results are anticipated for the coming months.”

The source, who declined to be named, said that “borrowing will only work until the end of this year. After that, we will be facing a real problem in the wait for the budget law to be approved.”

He further added, “The Iraqi need ranges between $6 billion to $7 billion per month in operational and salary expenditures. This amount cannot be secured in light of low oil prices. There are no immediate solutions, to be honest. There are perhaps solutions in the long run, albeit painful.”

Iraq's economic situation is genuinely dangerous. Nearly 11% of citizens receive monthly salaries from the government estimated at $5 billion, which is a large sum given the quasi absence of productivity in state institutions except for oil, which contributes more than 95% to the state budget.

According to Iraqi Ministry of Planning stats released in early 2020, about 20% of the population live under the poverty line in Iraq. Moreover, 5.5 million Iraqis are expected to live in poverty in light of the economic crisis that resulted from dropping oil prices and the coronavirus restriction of world mobility, as the World Bank estimated.

The employment policy in Iraq has played a negative role in the country, as the Iraqi government is now paying 400% higher than what it used to pay 15 years ago, according to the World Bank. That confirms that the government pursued a policy of employment to achieve political purposes, while the Iraqi employee in some departments has shown zero productivity, Iraqi Finance Minister Ali Allawi previously said.

In addition to the salary crisis, 6,250 projects are at risk of being suspended due to the lack of funds in Iraq. Yet securing the salaries of 4 million employees remains the most important issue in the near term, as the government fears a wave of popular anger before the elections.

Nevertheless, Prime Minister Kadhimi still has a chance to ensure that these salaries are paid without having to borrow. That would be by tightening control over customs revenues, taxes, levies and debts to mobile phone companies. Yet all this requires government measures to prevent customs and tax revenues from being manipulated or stolen.

The deteriorating economic situation remains the biggest challenge facing the government, among others.

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