Economic Consequences post Mosul

The government maintained overall spending on salaries and pensions, yet the composition shifted significantly towards military and security spending starting in 2014 with the re-allocation of human resources towards the war effort and later on by the incorporation of the Popular Mobilisation Units (PMU) into the state.

The effect, while necessary, had a negative consequence on consumer spending as the process was far from smooth and involved significant delays in the payment of salaries and pensions and the imposition of a levy on salaries, initially 3% increasing to 4.8%, as a contribution for the war effort and IDP’s.

Moreover, the government introduced new and increased existing consumption taxes on a large number of consumables while it also increased utility prices further denting consumer purchasing power.

Non-oil investments bore the brunt of the cuts as the government sharply curtailed all capital spending and investments, as the table above shows, with 2016 non-oil spending at 12% of peak spending in 2013. The process involved non-payment of finished and ongoing contracts and projects with the government accumulating significate arrears in the process (estimated in 2016 at USD 4 billion or 2.4% of GDP) and cancelling planned spending and investment.

The effects were disastrous for the private sector businesses at the receiving end of the cuts whose finances deteriorated which in turn affected the quality of bank loans as these businesses dominated bank lending. An unintended consequence of the declining quality of loans was the inability of a number of illiquid banks to honour consumer withdrawal of deposits further hurting consumer purchasing power.

Although oil investment spending declined meaningfully in 2015 and 2016, oil production/exports experienced significant growth of 20%/30% and 21%/12% respectively in 2015 and 2016 which came at the cost of accumulating significant arrears to International Oil Companies (IOC’s). While these arrears are being paid, constraints on government finances will affect future production growth.

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