By John Lee.
The Government of Iraq has issued an English-language summary of its recently-approved white paper on economic reforms:
The Iraqi government has formally adopted the White Paper for Economic Reforms prepared by the Crisis Cell for Financial and Fiscal Reform.
The White Paper seeks to put Iraq's economy on a path that allows the state to take appropriate steps in the future to develop it into a diversified, dynamic economy. Dr. Ali Allawi, Deputy Prime Minister and Minister of Finance
The White Paper is a comprehensive programme that sets out a clear roadmap to reform the Iraqi economy and address the accumulated, decades-old serious challenges that confront it.
Iraq's Deputy Prime Minister and Minister of Finance, Dr. Ali Allawi said that the White Paper seeks to put Iraq's economy on a path that allows the state to take appropriate steps in the future to develop it into a diversified, dynamic economy that creates opportunities for citizens to live a decent life.
And although the current severe fiscal crisis that Iraq is going through is related to the recent sharp decline in oil prices and to the repercussions of the Coronavirus pandemic, the White Paper makes it clear that the causes of Iraq's economic and financial woes date back several decades.
The White Paper identifies the expansion of the role of the state as a key cause of the crisis.
The roots of the crisis
The White Paper provides a detailed outline of the factors that have distorted the Iraqi economy, undermined its capacity to provide a decent life for large number of Iraqis, and its failure to keep pace with the economic developments that the world has witnessed.
The expansion of the role of the state
The White Paper identifies the expansion of the role of the state and emergence of a command economy in Iraq as a key cause of the crisis.
From the nationalisation of vital economic sectors in 1970s, to the commandeering of all economic levers by the state to support the war effort in the 1980s, through the period of sanctions imposed on Iraq in the 1990s, these shocks, as well as the absence of strategic planning, mismanagement, maladministration, patronage and misguided political ideology, all led to an expansion of the role of the state in all aspects of economic life in Iraq.
The Iraqi economy continued to be directed by the state after the events of 2003 because of the failure of the new political system to create a free and diversified modern economy as outlined in Iraq's Constitution, and instead continued to rely on the state as the almost only driver of economic activity in the country.
The expansion of the role of the state, and the associated increase in the number of those employed in the public sector and the cost to Iraqi exchequer of their salaries and pensions, came at the expense of the government's ability to invest in basic infrastructure in Iraq.
To illustrate the point, the White Paper points out that from 2004 to 2020, state expenditure on the salaries of civil servants and on public sector pensions increased by 400% in real terms, as the total number of public sector workers during the same period increased by threefold.
The cost of salaries and pensions of public sector workers is expected to be around 122% of Iraq's oil revenue in 2020. The White Paper for Economic Reforms
And between 2006 and 2018, average public sector salaries increased by 134%, more than the increase in labour productivity, which rose by only 12%, or the cost of living, which rose by 28% during the same period.
Over the past 17 years, government spending on the salaries of state employees, and on public sector pensions became the fastest growing expenditure item in Iraq's successive federal budgets during this period.
There are currently around 4,500,000 public sector employees and 2,500,000 pensioners.
Decline of the private sector
The expansion of the state's role, in addition to the complex administrative system and the state's weakness in imposing the rule of law, the militarisation of society, and the influence of non-governmental actors in public institutions, led to the decline of the Iraqi private sector.
With the exception of a number of small and medium-sized companies operating in the oil and telecommunications sectors, and very small companies operating in the fields of trade, retail, transport, construction, hospitality and textiles, there is almost a complete absence of private sector companies in manufacturing.
In addition, most of the larger private sector companies depend on providing services to the state and on government contracts.
The White Paper also identified other factors that led to the deteriorating economic situation in Iraq is, most notably:
- The collapse of oil revenues
- The impact of Covid-19
- Mismanagement and lack of planning
- The weakness of financial institutions
- The absence of modern coherent systems for managing state revenues
- An ineffective and outdated banking sector
- Complex and antiquated government procedures
- Destruction of infrastructure and the costs of the war against Daesh terrorists
Two strategic goals
The White Paper identifies two overarching strategic objectives.
- The first is to initiate an immediate reform programme to address the budget deficit to create a fiscal space to give time for the process of implementing the other wider reforms over the medium term.
- The second objective is to put the economy and the federal budget on a sustainable path, after which Iraqis can decide and choose the economic direction of the country.
The White Paper anticipates that the short and medium-term objectives and associated reforms will require between 3 to 5 years to implement.
The reform pillars
The White Paper identified five key pillars for the reform programmes:
1- Achieving sustainable financial stability
Key reforms include:
- Reducing the deficit from 20% to 3% of GDP and expenditure on salaries from 25% to 12.5% of the federal budget
- Collecting electricity tariffs from all users based on the real price of fuel on global markets
- Recovering and returning Iraq's smuggled and stolen money
- Increasing revenues from customs and taxes
- Reforming Iraq's Pensions Fund and move to gradually end federal budget support
- Reforming financial management systems
- Reviewing the current exchange rate of the dollar against the dinar
2- Implementing strategic reforms and creating sustainable job opportunities
Key reforms include:
- Modernising and rehabilitating the financial sector
- Modernising and rehabilitating the banking system, supporting the development of private banks, reforming government banks and introducing and activating the Core Banking System in Al-Rafidain and Rasheed Banks
- Expediting the development of e-banking services
- Establishing new trading markets, such as a commodity market and a currency exchange market (Forex)
- Supporting the sectors that drive the economy, such as agriculture, oil and gas
- Introducing a private sector support fund, simplifying procedures, and providing other non-financial aid
- Creating job opportunities in the private sector and supporting small and medium enterprises
- Adopting a national strategy for education and training that links educational outcomes with the future need for the labour market
3- Improving basic infrastructure
Building Iraq's digital infrastructure is a key aim of the White Paper.
Key reforms include:
- Increasing the effectiveness and improving the performance of all parts of Iraq's electricity sector
- Developing Iraq's digital infrastructure, including the introduction of advanced technology (4G) at the beginning of next year, and preparing for the introduction of (5G) technology
- Modernising the legal and regulatory framework of the transport sector, and encourage private investment in transport
- Developing industrial cities and free zones in Iraq
4- Providing basic services and protecting vulnerable groups during and after the reform process
The reforms aim at establishing a unified and financially sustainable pension system for all Iraqis whether they are working in the public, private, cooperative or mixed sector. The White Paper for Economic Reforms
Key reforms include:
- Improving water supply for both drinking and irrigation and complete sanitation projects and networks
- Building 1,000 new schools during the period of the reform programme
- Reforming the social security system
- Establishing a unified and financially sustainable pension system for all Iraqis whether they are working in the public, private, cooperative or mixed sector
- Completing and implementing the draft health insurance law to ensure that all Iraqis have access to essential health services
5- Improving governance and introducing changes to the legal framework to enable institutions and individuals to implement reforms
- Reviewing and amending the official guidance in relation to government contracts
- Introducing e-governance systems to strengthen oversight of government contracting and the collection of taxes and customs
- Working with specialist investigative international organisations to return the large sums of money smuggled out of Iraq
- Introducing an electronic governance system in the field of government contracting and tax and customs collection
- Completing the project establishing the National Information Centre to facilitate the introduction of government e-services to citizens, and automate the procedures for obtaining key documents such nationality and passports and accessing pensions and social security
- Introducing electronic signature and transactions throughout the public administration system and phasing out paper transactions
A detailed implementation plan of White Paper will be published later to outline the required process, identify key stakeholders and establish timelines and monitoring mechanisms.
(Source: Govt of Iraq)