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The following is a Joint Statement issued by Prime Minister Mustafa Al-Kadhimi and the President of the United States of America, Donald Trump, following a bilateral meeting at the White House on Thursday 20 August 2020:

The strategic partnership between Iraq and the United States is based on a mutual desire for security and prosperity.

Together, the United States-led Global Coalition to Defeat ISIS and the Iraqi Security Forces destroyed the ISIS physical caliphate, and we continue to work in close coordination to ensure that ISIS is rendered incapable of posing a threat to Iraq and every other nation. We reaffirm our commitment to long-term security cooperation to build Iraq's military capability and address threats to our shared interests.

Our security collaboration strengthens the foundation of our efforts to expand economic, humanitarian, political, and cultural cooperation. The COVID-19 pandemic further underscores the importance of working together to build a prosperous and stable Iraq that provides jobs and services to the Iraqi people and serves as a stabilizing force for the Middle East.

(Sources: Govt of Iraq, White House)

By Dr Amer K. Hirmis, Capital Business Strategies Ltd. - UK.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Iraq's PM meets the President of the United States...
What outcome...for the Iraqi economy?

 Introduction

This Thursday, August 20th, the "President Donald J. Trump will welcome Prime Minister Mustafa Al-Kadhimi of the Republic of Iraq to the White House...As close partners, the United States and Iraq will look to expand (their) relations across a range of issues, including security, energy, health care, and economic cooperation." [1]

The question is: what does each side expect, indeed wish, the outcome of the talks and negotiations should be?

Here, some aspects of the potential for 'economic cooperation' between Iraq and the U.S., in the near/medium term are covered.

A likely U.S. perspective

Contextualising the US perspective, one could speculate that its strategic interests in Iraq, and the Middle East generally, can no longer be secured by exchanging oil for political support and the export of arms. The last 100 years have shown that this is not a sustainable position, and it must change. Stability in Iraq, though, is critical for securing US's strategic interests. Having invested enormous human, financial and political capital in Iraq, the US would encourage the establishment of a diversified, "free-market", economy based on increased employment in productive sectors (thus alleviating poverty), good governance and rule of law. The US could help in tackling pervasive corruption (a major economic cost and hazard to doing business in Iraq) in part by deploying advanced technology.

More specifically, The US recognizes the existentialist economic challenges facing Iraq in light of these three crises: the post-2003 disastrous economic policies that nurtured widespread corruption, increased the economic power of (Iran-backed) influential personnel within/without the state apparatus and the (armed and well-financed) Hashd militias; the COVID-19 pandemic; and, finally, the severe decline in oil prices, in March/April of this year.

The US also recognizes that Iraq should enact fundamental economic reforms, which, from a US view point should consider:

1. The 2008 Strategic Framework Agreement (SFA) with Iraq. The fourth point in the Preamble emphasizes "the building of a diversified and advanced economy that ensures the integration of Iraq into the international community." This is echoed in Section V of the SFA. Section V (point no. 7) which goes further to say "Facilitate the flow of direct investment into Iraq to contribute to the reconstruction and development of its economy." The US would assert that the 2008 SFA is a reasonable and rational vehicle to do so, providing there is a strong political will, and public acknowledgement of the constructive part both parties should play, without which democracy in Iraq will not take root in the long-run;

2. Making use of US economic advisors to work directly with the Government of Iraq to help advance international support for Iraq's reform efforts, including from the international financial institutions. They know that Iraq may not concur on all parts of this point; there is already a wealth of research by economic experts pointing to what needs to be done to initiate economic development in Iraq. The time now is for action - i.e. policy implementation, and soon. Iraq might argue that this (al-Kadhimi's) government needs to demonstrate its worth for the people of Iraq, given the planned general elections in June 2021;

3. The enactment of 'firm plans for fundamental economic reforms' soon; the enactment of these plans by parliament is a pre-requisite for US involvement in investment projects in Iraq. Arguably, Iraq must soon create the conditions for foreign investment to take place on a wider scale, and reverse the recent decline of FDIs in Iraq, as the 2019 UNCTAD report indicated. The conditions for doing business in Iraq must change soon, and become favourable - these, as the 2020 World Bank's 'Doing Business in Iraq' report shows, are diverse. To pick one example, the US side might point to the weakness of the banking system, let alone its near-impossible conditions for extending credit to potential investors. These huge problems facing investment in Iraq are also well-known to, and appreciated by, the Minister of Finance, Ali Alawi, and senior civil servants, including those working at the PM Office; and,

4. Petrochemicals and electricity might be priority investment fields from a US perspective, as they might be able to make a swift impact on the domestic market, though this would require dealing with reported corruption within this sector including in the areas of illegal connections to the grid, and contracts awarded for distribution/transmission of electricity. This means that Iraq would need to swiftly deal with the 'deep state' that engenders corruption in this and other sectors of the economy.

Finally, the US side might argue that its support must not be one-sided. It must be reciprocated by effecting tangible changes in the economy and political system, amongst other things. Otherwise 'the potential for investment projects involving world-class U.S. firms in the energy and other sectors' might not proceed.

To survive, it is imperative for any economic/political relationship to be based on some common ground - in this case, a real commitment for change to initiate economic development in Iraq must be demonstrated by Iraq and the U.S. So what would Iraq's government hope to get out of the negotiations?

A likely Iraqi perspective

The Iraqi Prime Minister, Mustafa al-Kadhimi, and the team accompanying him are fully aware of the challenges they face: be they political, economic, social or environmental.

Soon after being appointed, al-Kadhimi set out his 'Government Programme' on May 6th, in which Article 3.1 states that in the short term, the government intends to handle the ramifications of the oil price crises by rationalizing public expenditure and stemming unnecessary expenditure. It also intends to develop the tax and tariff collection system. (see: https://www.pmo.iq/press2020/6-5-202002.htm). The Programme goes on to say (in Article 3.2) that a 'Development and Investment Board' would be established, this will provide a comprehensive plan for investment in infrastructure etc. al-Kadhimi's team might also point out that since his government is fully aware of the weaknesses of the banking system, the CBI (Central Bank of Iraq) has been asked to handle this problem within a specific timescale! Finally, the Programme also points out that a comprehensive reform of the administrative system will be undertaken, youth employment in the private sector will be encourages, etc.

More recently, on August 3rd, al-Kadhimi has pointed out that a 'White Paper' is being prepared dealing with the wider economic issues. His Finance Minister, Ali Alawi, had in several occasions indicated the government's awareness of the problems and promised that these will be dealt with appropriately! (see: https://www.france24.com/en/20200622-without-urgent-reform-iraq-economy-will-face-irreparable-shocks-minister-to-afp).

So the Iraqi side has a number of aspirational objectives to cover in their talks with the American side. They will, however, be well advised to be open about the long term problems Iraq's economy has been suffering from (what is called 'structural problems' to do with the GDP's composition). They should declare their vision/solutions which they might have in mind and the extent to which they think the U.S. side could, in the long-run, assist in transforming/diversifying the economy.

1. One such chronic problem that the Iraq economy has been afflicted with is the historically acute negative balance of trade (when excluding the export of crude oil), as shown in the Figure below.

2. Although inextricably linked to various (structural) aspects of the Iraqi economy, especially the recurrent deficits in the 'Federal Budget', the government might be well advised to bring this issue in the talks with the U.S. This provides a glaring example why it is imperative for Iraq to diversify its economy and why it will need U.S. assistance deploying the 2008 SFA, though the SFA itself might itself need to be reviewed, to be more specific in the capital investment field.

3. The Iraqi delegation might be candid enough to go as far as admitting that the recurring budget deficit is not entirely due to excessive reliance on oil exports, it is perhaps mainly because Iraq hardly exports anything else of high-value-added that other countries might have a comparative disadvantage in and would otherwise import goods/services from Iraq.

4. Now that is has been acknowledged by many experts that both the high rate of increase of Iraq's population and the likely decline in oil prices as it becomes less in demand as an energy source, in the coming few decades, al-Kadhimi's wisdom (or perhaps his survival instinct) might lead him to believe that this is a strategic priority for Iraq, and that if the U.S. is genuine in its desire to assist Iraq, this is where the emphasis should be - rectify the balance of trade (excluding oil) over the next 20-30 years, driven by the private sector with an enabling public sector.

Would al-Kadhimi opt for this direction of travel, and, if he did, will he adjust his thought process to make this the major strategic economic objective for Iraq?

The Joint-Statement

It is anticipated that the 'joint Statement' it issues will be drafted in the most diplomatic, courteous, and respectful manner. It is likely to postulate the existence of good relations between the U.S. and Iraq, with the former offering support and assisting to the Iraqi people to achieve their aspirations in establishing democracy, rule of law, good governance, and alleviating poverty, amongst other things (to be said in the Statement). It will probably acknowledge that the coming months will be critical in deciding the short-to-medium-term events in Iraq, given the depth of the resentment to al-Kadhimi's government in some quarters whose interest are seen to be seriously threatened.

The Joint Statement doubtless will touch on the security partnership, the anticipated elections in June 2021, humanitarian aid, the significant progress made towards eliminating the ISIS threat, over the coming months, etc.

The two sides will reaffirm the 'importance of the strategic relationship and their determination to take appropriate steps to enhance it in the interest of both countries and to achieve security, stability, and prosperity in the region.'

The time-honored dictum, though, will ring loud - that a combination of polity and economics that serves the people will thrive, and so will the country that upholds it. The polity and economics that does not serve the people will soon perish. The long history of Iraq, since early Mesopotamia, provides witness to the truthfulness of this dictum.

Both the current Iraqi and U.S. governments have now a new opportunity to choose one path or the other. We should find out soon!

Please click here to download Dr Hirmis' full report in pdf format.

* Amer K. Hirmis, August 17, 2020

Dr Amer K. Hirmis is Principal at UK-based consultancy CBS Ltd. (2008-present). In October 2009, Amer began a 20-months assignment as Senior Development Planning Advisor to the Ministry of Planning in Iraq (funded under the DANIDA programme for 'peace and reconstruction' in Iraq). The posts Amer has assumed include Chief Economist and Head of Policy at the London Chamber of Commerce and Industry (1992-5), Economic Advisor to UK South West Regional Development Agency (1996-8) and Associate Director and then Head of Consulting and Research (Middle East) at the global firm DTZ (1998 to 2007).

Dr Amer K Hirmis is the author of 'The Economics of Iraq - ancient past to distant future' [https://www.amazon.com/Economics-Iraq-Ancient-distant-future/dp/1999824105] [Chapter 6 of the book is entitled 'Monetary and Fiscal Policies'].

END

[1] (https://www.whitehouse.gov/briefings-statements/statement-press-secretary...-iraq/. The Press Statement was issued on August 7th).

In their June 2020 meeting, the respective teams preparing for the visit jointly stated that "The two countries reaffirmed the principles agreed upon by the two sides in the Strategic Framework Agreement (SFA), as well as the principles in the exchange of diplomatic notes and the letters of the Republic of Iraq to the United Nations Security Council...The United States reaffirmed its respect for Iraq's sovereignty, territorial integrity, and relevant decisions of the Iraqi legislative and executive authorities."  (see: https://www.state.gov/joint-statement-on-the-u-s-iraq-strategic-dialogue/ This was released on June 11, 2020).

By Omar al-Jaffal for Al Monitor. Any opinions expressed here are those of the author and do not necessarily reflect the views of Iraq Business News.

What trump cards is Iraq pulling against Turkey to secure water quota?

While temperatures have risen to 50 degrees Celsius (122 degrees Fahrenheit) in a number of regions of Iraq, the water level in the Tigris and Euphrates rivers have declined recently, which instills a fear of depletion of these two rivers.

Click here to read the full story.

By John Lee.

Iraqi Prime Minister Mustafa al-Kadhimi is to visit the United States later this month.

In a statement, he White House said:

"President Donald J. Trump will welcome Prime Minister Mustafa Al-Kadhimi of the Republic of Iraq to the White House on August 20, 2020.

"The visit comes at a critical time for both the United States and Iraq as we continue our collaboration to ensure the enduring defeat of ISIS and address the challenges from the coronavirus pandemic.

"As close partners, the United States and Iraq will look to expand our relations across a range of issues, including security, energy, health care, and economic cooperation."

(Source: White House)

By Albert B Wolf, for Foreign Policy. Any opinions expressed here are those of the author(s) and do not necessarily reflect the views of Iraq Business News.

To Stop a U.S.-Iran War, Finlandize Iraq

A the coronavirus pandemic rages around the world and Americans remain divided on reopening the economy, lawmakers in the United States seem united on one issue: an overwhelming bipartisan majority in the House of Representatives agrees that the conventional arms embargo on Iran, due to expire in October, should be renewed.

While it is indisputable that Iran supports terrorism and should have its access to conventional weapons curtailed, U.S. President Donald Trump's administration's so-called maximum-pressure campaign carries a bigger danger:

The United States could get caught in another war of choice in the Middle East.

Click here to read the full story (subscription required).

By John Lee.

The Iranian parliament, the Majlis, has approved a government bill to redenominate its currency, dropping four zeros.

According to Tehran Times, the proposal came from the Central Bank of Iran (CBI), and will result in a new currency, the "toman", which will equal 10,000 rials.

Reuters reports that the bill must now be approved by the clerical body that vets legislation before it takes effect.

The rial has lost more than 60 percent of its value since US President Donald Trump abandoned the 2015 nuclear deal (JCPOA) and reimposed sanctions.

(Sources: Tehran Times, Reuters)

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund. This article was originally published by the LSE Middle East Centre.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Between a Rock and a Hard Place: Iraq's Political Class' Dilemma between Budget Realties and Protestor Demands

The twin shocks of the effect of coronavirus on the world economy and the current oil price war will stress Iraq's budget to the limit, and lead to an economic crisis if it continues for an extended period.

While as extraordinary shocks they were unforeseeable, the Iraqi budget's structural imbalance would have inevitably led to such an economic crisis - the only question being when and not if.

A low oil price environment exposes the structural faultiness of the budget with projected revenues not covering current spending, which is mostly composed of salaries, pensions and welfare spending. These have increased from 50% of current expenditures in 2004 to an estimated 81% in 2019, and likely to more than 85% in 2020.^[1] As such the default choice for the government would be to cancel all investment spending, especially non-oil investment spending, and resort to borrowing.

Such measures have allowed the government to continue functioning, but these come at a huge cost to the economy as Table 2 below shows. Global debt markets are not as accommodating as they were in 2014-17 given Iraq's estranged relationship with the US and the change in the IMF's stance toward Iraq. As such the government would have to resort to domestic sources, which ultimately means indirect monetary operations by the CBI at the expense of the its foreign reserves as happened in 2014-16.

Moreover, these measures would only postpone and not resolve the crises, needing much higher oil prices to contain or mask it like in 2017-19. Medium-term oil prices would probably (for Brent prices) settle within a range of $50-60/bbl, which should partially relieve the stress on the budget, but not the need to address its imbalance.

Iraq's 2019 budget, initially proposed by the prior government, submitted with minor changes by the current government and approved by the current parliament, perpetuated the same deficiencies and weaknessess of all Iraq's budgets since 2003. Crucially, it deepened the structural imbalance between the budget's current and investment expenditures, in which public sector wages consumed an ever-increasing share of government revenues.

Moreover, it undermined and reversed most of the small, but essential, fiscal reforms agreed with the IMF in the 2016 Stand-By Agreement (SBA) to address this structural imbalance; and which needed considerable follow-up reforms over the years to put the country on a sustainable path to growth  and reduce the economy's vulnerabilities to the volatile oil market. The extent of these vulnerabilities came to the fore during the collapse in oil prices in 2014, and coupled with the cost of the ISIS conflict, this led to a sharp contraction to the non-oil economy in 2014-17.

Undeterred by these memories, the budget's planners, buoyed by the bounty of higher oil revenues, from late 2017 embarked on an expansionary budget that magnified these very vulnerabilities. This was achieved by simultaneously reversing the growth of non-oil revenues and by increasing current spending. Non-oil revenues decreased in both absolute terms and as a percentage of total revenues: -18% and -29% respectively in 2019 and 2018.

Additionally, 25% of these non-oil revenues were in fact oil-related in the form of taxes on foreign oil companies and the budget's share from profits from the state's oil companies. Current spending increased by 15% with the salary and pensions component growing by 7.5% instead of decreasing continuously.

The budget's trumpeted increase of 29% in investment spending hides the fact that only 43% of this total spending for 2019 was earmarked for non-oil investment, which would nevertheless increase by 43% in 2019. However, historically this spending is on paper only, with an execution rate of under 65%. The performance in 2019 was much worse than normal with non-oil investment spending at about IQD 3.3 trn as of November 2019 from a planned budget of IQD 14.0 trn, or about a 24% execution rate.

The budget planners' aims for 2020 were for a continuation of the expansionary budget of 2019, which dismayed the IMF enough for it to issue a critical country report (19/248) - the first since 2004. Adding to the dismay was the fact that the government's plan for fiscal probity was based on expectations of continued high oil prices, as well as sticking to its historic under-execution of the budget. Essential budget reforms to address the structural imbalance were delegated to an expression of interest for inclusion in medium term fiscal strategy planning.

The IMF then modelled for a 2020 budget with revenues estimated at IQD 113.1 trn based on oil price assumptions of $55.8/bbl. Expenditures were estimated at IQD 123.2 trn, made up of current expenditures at IQD 99.1 trn, while oil investment spending was estimated at IQD 15.5 trn and non-oil investment spending at IQD 8.6 trn. This would have needed debt financing of IQD 10.0 trn to balance the budget. Since it's almost impossible to cut the bulk of current spending, the government must have been anticipating a better budgetary situation through Iraqi oil prices higher than $55.8/bbl and from under-executing much needed non-oil investment spending and reconstruction.

By October, plans for budget expenditure ballooned by 31% to IQD 162.0 trn, necessitating debt financing of IQD 48.9 trn. While there are no details apart from spending and deficit figures, the political paralysis following the failure of the prime minister-designate to form a government in early March has put a halt to these runaway expenditure plans.

As long as the political class' existential fear from the five-month long youth-led countrywide demonstrations continues to ebb and flow, this political paralysis is likely to continue. However, the main economic consequences would be the same whether a new government forms under a new prime minister-designate, or if the current caretaker government continues to limp on. The outcome either way will be that no new budget will be passed, with the government continuing to implement the executed parts of 2019's budget throughout 2020 according to the '1/12^th rule'.

Essentially, this means the government will continue to spend (per month) 1/12th of the actual spend in 2019 - effectively extending the current spending component for 2019 in addition to the increased spending of IQD 10.5 trn as a result of government measures to appease the demonstrators in October 2019. The government will likewise continue with the investment projects initiated in 2019.

Estimating the effects of the current events on the Iraqi budget is fraught with uncertainty. Current predictions on the extent of the decline in oil prices mirror those made following the 2014 oil price war, which then assumed a continuation of the decline into the future. This in time proved to be overly pessimistic, as will the current 'worst-case' prognoses. Moreover, though the effects of the new coronavirus on the world economy will be profound in Q1/2020, the extent and the continuation of these effects for the rest of the year remains uncertain.

However, these negative effects would be compounded for oil prices by a sharply increased supply in an environment of weakened demand. The upshot would be an extended period of lower oil prices. The table below looks at the budget for 2015-19 and estimates for 2020 based on different realised oil prices for 2020 as whole (please see footnote 2 for notes and assumptions used).

Past policies of spending oil revenues on expanding the public payroll and welfare spending, in the process depleting the country's wealth without building its infrastructure, has resulted in an economy dependent on imports of goods and services, a stunted private sector and a labour market skewed towards public employment. This development has been at the root cause of successive countrywide demonstrations. The need to urgently restructure the budget's structural imbalances will require painful reforms and a long adjustment period, and thus would need a buy-in by the population at large.

This, given the extent of the current anti-political elite protest movement and the scale of the repression of this movement, is unlikely without significant political reform.

^[1] The percentage figures are made up of salaries, pensions and transfers. Transfers are mostly composed of welfare spending and transfers to State-Owned Enterprises (SOEs) which in turn are primarily for salary payments and support to SOEs. Source: IMF Iraq country reports 2004-19.

^[2] Revenues and expenditures for 2015-19 sourced from Ministry of Finance (MoF). These figures constitute revenues and expenditures actually received/made at the time and not booked. As such they differ, sometimes significantly, from those provided by the IMF. The crucial difference being that they resemble an actual cash flow statement and not an income statement. This can be seen from the difference between the Ministry of Oil's (MoO) revenue data which show sales made and the MoF's data which how funds received which can lag actual sales.
Iraqi oil sales and average Iraqi oil price are taken from MoO website, while average Brent prices can be found here. CBI foreign reserves are as of end of 2019 and are found here. 2019 budget numbers are as of November 2019 and projected to continue into end of 2019. Oil revenues are based on MoO data which are available as of the end of December 2019. The 2020 budget numbers assume a continuation of the budget spent for 2019. It is assumed that Iraq would maintain market share through aggressive pricing and thus that the discount to Brent would increase from $3.35 for 2019 to $4.50.

Disclaimer: Ahmed Tabaqchali's comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

By Robbie Gramer, for Foreign Policy. Any opinions expressed here are those of the author and do not necessarily reflect the views of Iraq Business News.

Fears Mount as Trump Administration Guts USAID's Iraq Presence

The United States' top aid agency is dismantling its presence in Iraq, leaving a skeleton crew ill-equipped to oversee over $1 billion in aid programs aimed in part at staving off the return of terrorist organizations such as the Islamic State, officials and lawmakers say.

An internal U.S. Agency for International Development (USAID) document obtained by Foreign Policy confirms that major cuts in staffing were made late last year and highlights the stark difference between the agency's footprint in Iraq and other countries that receive foreign aid funding: In fiscal 2019, Egypt received roughly one-fifth the amount of U.S. foreign aid as Iraq, but it has more than seven times the number of staff to oversee it.

Click here to read the full story (subscription required).

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund. This article was originally published by the LSE Middle East Centre.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Demands for the expulsion of US troops following the killing of Iranian general Qassem Soleimani, have scaled down considerably since the initial strident calls. What started as high theatrics in parliament demanding an end to US presence, ended with a typical Iraqi fudge in that parliament passed a resolution requiring the government to cancel the request for global coalition support made in 2014, and for it to work towards ending the presence of all foreign troops.

These were further rolled back as reports emerged that the government’s vision of implementing the withdrawal of foreign forces was for the withdrawal of combat forces only and did not include those conducting training and logistical support. Threats of US sanctions have undoubtedly played a role in deflating the illusions of power, especially by those in the axis of resistance, and contributed to this climbdown.

Iraq’s economy is not only vulnerable to US sanctions, but to any disengagement from the US dollar-based global financial and economic system. In fact, the US could affect far worse damage to Iraq than it did to Iran without the need to implement sanctions, let alone sanctions that would ‘make Iranian sanctions seem somewhat tame’. This vulnerability stems from the failures of successive Iraqi administrations from 2003 to reconstruct the country following decades of conflict, or to create the foundations for a diversified economy driven by the private sector, and not by the state.

Instead, successive administrations have deepened the country’s dependence on oil, pursued policies that fostered a structural imbalance between the government’s current and investment expenditures, in which the public sector consumed an ever-increasing share of government revenues. The sole dependence on oil income for these revenues, and the dreadful twins of a dominant public sector and stunted private sector, are the primary reasons why the country is vulnerable to external shocks.[1]

The extent of the damage to the Iraqi economy would depend on the three broad categories of a US response to a hostile Iraq. The first category would be the imposition of primary US sanctions, and secondary sanctions on non-US entities that conduct commercial or financial dealings with Iraq. Their effects would be along the lines to those suffered by Iran due to the imposition in 2018 of similar US sanctions.

For Iran, these included a major drop in oil exports, a severe economic contraction, a significant drop in the value of the currency, a substantial rise in inflation, a lowering of living standards, and a rise in unemployment especially among the youth and the most vulnerable segments of society.

However, the consequences for Iraq would be on a much worse scale than those suffered by Iran. Firstly, because oil exports constitute the bulk of the Iraqi budget’s revenues (about 90 percent of the 2019 budget) unlike those for Iran’s budget (about 30 percent of its fiscal 2019–20 budget). The loss of this income for Iraq would severely restrict the government’s ability to pay for salaries and pensions, social security, goods and services, in addition to reducing any funds available for the reconstruction of the country, the development of its oil sector or the development of its power generation.

Secondly, Iraq depends almost completely on imports for its consumption of goods and services, unlike Iran which has a well-diversified economy, and a more developed industrial, agricultural and financial sectors. Iraq’s small industrial and agricultural sectors cannot meet even a small percentage of its domestic demand, while its under-developed financial sector cannot provide the financing for the development of these two sectors.

Thirdly, Iraq’s cash-reliant economy depends on access to physical USD notes for it to function. Such a disruption in the supply of USD notes would raise the price of the USD against the IQD, and with it a rise in the value of imported goods. In 2015 the country felt some of these effects due to a restriction in the supply of USD notes from the US Federal Reserve as a result of the US Treasury’s concerns that sanctioned entities (Iran & Daesh) had access to these notes. Any effects of a sizeable loss of access to USD notes would be significantly worse than in 2015. Making things worse is that Iraq cannot access USD notes from a third country, unlike Iran, whose need for notes is met through Iraq.

The second category of US responses would be the loss of waivers for the purchase of Iranian gas, which presents Iraq with a Sophie’s choice. Continue with the purchase of Iranian gas and suffer the consequences of US secondary sanctions, which would be only marginally less painful than any possible imposition of full sanctions, discussed earlier. Or, discontinue buying Iranian gas, lose about a third of Iraq’s domestic power supply and enrage a population that is already incensed over a chronic inadequate supply of power.

A less discussed point is that these waivers were granted on the conditions that Iraq develops a credible plan to reduce its dependence on Iranian gas, and in the long term end those imports. The US could still grant these waivers, but impose more stringent conditions on plans to reduce dependence and a tougher monitoring regime with associated penalties for failures in making progress.

The third category, and the most likely US reaction, would be to gradually end its treatment of Iraq as a close ally and therefore subject to increased US treasury scrutiny its financial system, which would negatively affect the functioning of the Iraqi Central Bank and the banking system. The most obvious result would be a disruption of Iraq’s cash-heavy economy, which relies on the access of physical USD notes for the conduct of commercial and financial transactions as discussed earlier.

Unlike the fictional Duchy of Grand Fenwick, in Leonard Wibberley’s satirical cold war novel The Mouse That Roared, Iraq cannot expect any sort of victory from a conflict or strained relationship with the US.

[1] An upcoming piece by the author examines the structural imbalances in the economy as a inevitable consequence of successive post-2003 political system, i.e, the “Muhasasa Ta’ifia”. This imbalance was first explored in: https://auis.edu.krd/iris/latest-iris-publications/iraqs-investment-spending-deficit-analysis-chronic-failures and subsequently in a series of tweets: https://twitter.com/AMTabaqchali/status/1181559159453564928?s=20 and https://twitter.com/AMTabaqchali/status/1182253543144771584?s=20