Islamic State war, oil prices take toll on Iraq’s economy

BAGHDAD – In business since the 1960s, Karim al-Aboudi’s family has seen Iraq’s economy boom with oil wealth and bust through wars and the 2003 U.S.-led invasion, but today marks the worst downturn he’s seen in decades.

Forced to fire 65 percent of his staff and close two of his six aluminum and glass factories, al-Aboudi’s troubles mirror those facing business owners across Iraq. As the country battles the Islamic State group on the ground, it faces massive budget deficits brought on by the lowest global oil prices in six and a half years.

And while austerity cuts have helped Iraq fund its military effort against the extremists, it has slowed businesses like al-Aboudi’s and construction firms that rely on government contracts.

Taking a deep puff of a cigarette, 65-year-old al-Aboudi said he and others don’t see it getting much better soon: “The manufacturers and merchants are now only drinking tea and reading newspapers.”

Since early 2014, Iraq has suffered a serious economic decline after the Shiite-led government in Baghdad started losing territory to the Sunni militants of the Islamic State group. Low oil prices exacerbated the decline, wreaking havoc on Iraq’s national budget, of which oil revenue makes nearly 95 percent.

As of July, Iraq’s oil revenues stood at $31.5 billion, according to Oil Ministry figures, with an average daily export capacity less than a 3.3 million barrel quota set in this year’s budget. Iraq’s semi-autonomous Kurdish region now sells oil independently from the central government.

Iraq’s $102.5 billion budget now runs a deficit of about $21.4 billion. Some $27 billion is earmarked for defense, but more could be needed.

“For sure the situation is dire and needs quick alternatives,” lawmaker Haitham al-Jaburi said.

Iraq had a state-run economy under dictator Saddam Hussein, buoyed by its oil wealth. Back then, 1 Iraqi dinar was worth $3. But the economy began to suffer under economic sanctions after the 1991 Gulf War. By the time of the U.S.-led invasion, it was 3,000 dinars to $1. Today, it’s about 1,166 dinars to $1. Annual inflation stands at about 2 percent.

Like other businesses, al-Aboudi’s flourished after Saddam’s overthrow. But sectarian violence in 2006 and 2007 damaged the country’s economy. Meanwhile, Iraq’s national power grid supplies only a fraction of the country’s needs, forcing residents and business to rely on diesel generators.

Reeling from the Islamic State advance, Iraq’s government now has stopped spending money on construction projects to fund its military.

“Since the deterioration in security situation, the fall of Mosul and the austerity measures, the (government) business has dropped to zero,” said al-Aboudi, whose business was 65 percent government-funded projects.

Reacting to the crisis, Iraq plans to issue bonds worth $7 billion – $5 billion in international and $2 billion for domestic banks – to narrow the deficit. It introduced initiatives to impose new excise and consumption taxes. It also secured $1.7 billion in loans from the World Bank and an $833 million loan with the International Monetary Fund.

This month, bond rating agency Fitch gave Iraq its first rating, calling it “B-” with a stable outlook.

“Iraq scores the worst of all Fitch-rated sovereigns on the composite World Bank governance indicator, reflecting not only insecurity and political instability but also corruption, government ineffectiveness and weak institutions,” Fitch said.

Fed up with the weak government, al-Aboudi joined thousands of Iraqis who have been protesting across the country. The protests forced the government to launch a plan to dismantle government posts, merge ministries, cut spending and fight corruption.

Last week, parliament’s approval for the plan gave al-Aboudi a rare dose of optimism despite Iraq’s many challenges.

“I’m optimistic … and we will continue protesting until we have tangible reforms,” he said.