Iraq pins hope on privatisation as oil price falls and war against ISIL takes its toll

December 28, 2014 Updated: December 28, 2014 07:22 PM

this is an opinion piece

Iraq plans to divest state-owned enterprises as part of a major privatisation push to diversify income and revenues in light of lower oil prices and the financing of a war against ISIL.

“A number of industries and manufacturing factories have been identified and will be offered to the private sector,” says Mudher Saleh, the newly appointed economic advisor to the prime minister Haider Al Abadi.

Mr Saleh, the former deputy governor at the central bank, faces a daunting task, providing recommendations on keeping the economy afloat when Brent has sunk from US$90 in October to about $60 a barrel last week, while ISIL militants are in control of swathes of land and a few oilfields in north-western Iraq.



“The goal is to maximise revenue and to minimise expenses,” says Mr Saleh, who has helped the premier with Iraq’s 2015 federal budget that was passed on to parliament last week.

“This was our priority and reflected in the budget either directly or indirectly,” he says.

The 2015 budget is set at 123 trillion dinars (Dh378.3 billion), based on a $60 a barrel price for oil. It factors in a deficit of 23tn dinars. Lower oil prices have affected the budgets of the oil-producing states of the Arabian Gulf that are equally spending money on the public sector.

Saudi Arabia followed Iraq last week, in announcing a deficit of $39bn.

The political wrangling and upheaval that forced Mr Abadi’s predecessor Nouri Al Maliki to step down in August prevented the 2014 budget from being passed this year. Iraq’s 2013 budget hit a record at 138tn dinars based on an oil price of $90 and average exports of 2.9 million barrels per day.

“The previous government used to waste a lot of money, so we’re having to re-engineer the expenditure and find alternative resources to finance the budget,” Mr Saleh says.

The IMF this month revised its October outlook for the country, in which it had forecast a contraction of 2.7 per cent, and now sees the economy shrinking by about 0.5 per cent to reflect higher oil production despite economic shocks from the ISIL insurgency.

With about 80 per cent of the budget spent on public-servant salaries in the absence of a viable private sector, there has been little room in the way of investment and infrastructure over the past eight years.

This year, the government is having to finance an unexpected war, hence fiscal discipline is the name of the game.

The finance minister Hoshyar Zebari complained of excessive spending on Shiite militias by the government, a decision made during the office of Mr Al Maliki. The government has spent more than $1bn on the volunteer army, Mr Zebari said in November.

The 2015 budget prioritises defence, oil, electricity and Iraq’s internally displaced population, with more than 2 million people having lost their homes in the past year.

Iraq secured a one-year reprieve on a $4.6bn payment in war reparations to Kuwait from the United Nations last week that will ease the pressure on the cash-strapped country’s budget.

The UN compensation commission said it had taken into account “the extraordinarily difficult security circumstances in Iraq and the unusual budgetary challenges associated with confronting this issue”.

Iraq’s central government struck a much-needed oil deal with the Kurdish Regional Government (KRG) last month, ending months of animosity between the two parties. As part of the deal, the Kurds have pledged to export 300,000 barrels of Iraqi crude from federally owned fields in Kirkuk to Ceyhan. In addition, the autonomous region will export an extra 250,000 of Kurdish crude with Iraq’s state organisation for marketing of oil (Somo) selling it using the same mechanisms used for selling oil from Basra or elsewhere in federally administered Iraq. In return, Baghdad has pledged a $500 million payment to the KRG.

While the oil sector applauded the deal, albeit a little too late, political analysts expressed weariness over the ramifications of this agreement.



“The attitude of the central government has been right on this front,” says Mustafa Alani, the senior advisor and director of the department of security and defense studies at the Gulf Research Centre in Geneva. “The Kurds are taking advantage of the problems in Baghdad, a weak government, coupled with terrorism.

By legitimising their direct sale of oil, they legitimise a lot of issues between Kurdistan and the central government. They should have a clear stand, either they are part of the state or not. They can’t get the benefits at the same time with no obligation,” he says.

Other analysts say the deal comes amid desperate measures.

“Any deal is better than no deal provided it is clear and constitutional. The recent “agreement” will undoubtedly close the gap between Baghdad and Erbil,” says Luay al Khateeb, the director of the Iraq Energy Institute and an advisor to the parliament.



“However, the announced terms are still vague, too political, less constitutional and have left many questions unanswered and vulnerable to negative speculation.”

Mr Alani is doubtful of Iraq’s ability to diversify its economy while the country is facing a war against ISIL.

“It is very difficult under the current situation, basically the whole country depends on oil,” he says.

“There’s no other possibility- absolutely none – it needs years and years to revive industrial, tourism and other sectors.”


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