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Iraq is facing a moment of truth to reform its corrupt economic system

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Iraq is facing a moment of truth to reform its corrupt economic system

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Observers agree that the entry of Iraq into a comprehensive battle to reform the economy at all levels constitutes a pivotal moment in the history of the country mired in crises, and that the current attempts will serve the government's plans to put matters on the road to recovery from the repercussions, which destroyed the foundations of the growth of the second largest oil producer in the world.

In October of last year, the government of Iraqi Prime Minister Mustafa Al-Kazemi approved a document calling for a comprehensive reform of the corrupt economic system, and the "white paper" for economic reform is a roadmap for its implementation.

The Deputy Prime Minister and Minister of Finance, Ali Abdul Amir Allawi, considered that the document seeks to put the economy on a path that allows the state to take appropriate steps in the future to become diversified and dynamic.

The importance of implementing these recommendations is prominent and imperative, to reflect the government's ability to follow this path.

The Arab Digest consulting firm points out that the “White Paper” aims to continuously expand the role of the state, with the number of public sector employees tripling between 2004 and 2020, and in the same period the salaries and pensions of this sector’s employees have increased by 400 percent.

The consequences of an accumulated failure

The inability of the Iraqi state to confront the simplest crises from time to time, and the Corona pandemic is one example of that, the state of resentment against the political class, which took over the reins of power after the overthrow of the American invasion of the regime of former President Saddam Hussein, and which did not add anything to his achievements, some of which he achieved In difficult periods.

The ruling class, most of which owes allegiance to Iran, could not even preserve and protect these achievements, contenting themselves with criticizing the former regime, but the protests that erupted last year were a defining moment in the history of a country ravaged by the scourge of corruption since 2007.

In a research paper he wrote for the Atlantic Council, Ahmed Tabgali, a researcher at the Institute for Regional and International Studies in Sulaymaniyah, northern Iraq, said that "the main issue highlighted in the white paper is the information black hole resulting from the paper budget process."

And he considered that the matter is very critical, because the expenditures are above Iraq's financial capacity.

When Allawi took over the Ministry of Finance last May, he expected ten trillion dinars (6.8 billion dollars) of financial reserves in the treasury, and discovered that the funds do not exceed a fifth of this amount.

In a country suffering from a severe unemployment crisis, 40 percent of the workforce depends on government salaries, and on the other hand, Iraq has witnessed the shrinking of the private sector and its ability to provide jobs, in a country where the youth unemployment rate is 25 percent.

It also impeded the goal of diversifying the quasi-oil-dependent economy, with corruption multiplying in all sectors, and there was no active private sector that would enable it to be achieved.

The dependence on oil and the amount of its wealth that is pumped into the unproductive public sector is highlighted in government statistics, which pays $5 billion to government employees per month while it does not generate more than $3.5 billion in oil revenues, and the pandemic has exacerbated that problem, according to an assessment issued by the International Monetary Fund. Last month.

Real GDP growth is expected to decline to 11 percent in 2020, reflecting the contraction in the volume of oil production and the disruption of non-oil economic activity.

The sharp decline in oil revenues may also lead to an increase in the fiscal deficit and the external current account to 20 and 16 percent of GDP, respectively.

While the pandemic has contributed to calming public protests, the issues that have brought thousands of Iraqis onto the streets are still there, the most important of which is the failure of successive governments to provide basic services such as health, education, electricity and clean drinking water to citizens.

Things got worse as food prices continued to rise as a result of the depreciation of the Iraqi dinar at the end of last year, for the first time in decades, in response to economic pressures that include the decline in oil prices.

Iraq received a push last week after Iran raised its natural gas shipments from 3 to 5 million cubic meters per day after it was reduced by two million cubic meters due to Baghdad's failure to pay
about $2.7 billion to Tehran, according to Ahmed Moussa, a spokesman for the Iraqi Electricity Ministry.

It seems that Iran, which planted its arms in Iraq and swallowed its wealth, is tired of waiting, a situation described by Tabgali, in a comment carried by the New York Times, as "terrible."

He said, "The expenditures far exceed Iraq's income."

The discrepancy stems, according to Tabgali, from the deficiencies in the paper budget process that extends from planning to implementation and monitoring.

Iraq has continued on this old structure because it lacks a sound public financial management system.

At the core of PFM, analysts stress that there must be an automated information management system, known as an integrated financial management information system that connects all government units electronically, achieves the automation of basic budget implementation functions, and provides a dynamic and transparent process vision from start to finish.

The limits of the plan's success

Last month, Tabgli, an expert in capital markets and director of investment at the Asia Frontier Capital Fund, provided a full explanation of what is happening, using the graphs to clarify the fundamental imbalance that Iraq suffers from economically.

At the time, he said that his country possesses many wealth, but there is no proper employment for it because of mismanagement, which has led to the erosion of the economy, and it emerges with every drop in oil prices or the occurrence of a problem.

But moving towards this system will push to secure Allawi's road map for economic reform, equivalent to lighting a street plunged in darkness, but this matter directly contradicts the reality of the sectarian political structure in difficult Iraq, which is known as quotas.

The implementation of this system was launched under the direction of the United States after the overthrow of Saddam Hussein's regime in 2003.

It guarantees that many sects and tribal and ethnic affiliations have political representation in Parliament, guarantees their control over the ministries and gives them the power to spend money within those ministries as it deems appropriate.

Iraq thus witnessed a massive increase in public sector employees, with job distribution and contract awards for family, friends and supporters.

The establishment of an electronically interconnected financial system may deal a major blow to the quota system, and while many Iraqis want to end the quota system, political elites oppose this request as it targets their ability to spend money and resources within their sectarian and ethnic political circles.

Tabgali argued in his paper for the Atlantic Council that Iraq has no choice but to make the public financial management system bear fruit, and the economic crisis that has been exacerbated by the epidemic requires that, as "the severity of the current crisis and its potential long duration leave few options other than this implementation."

This may be the best time for that, as the numbers of people infected with the emerging coronavirus in Iraq increased in late September, but they have continued to decline since then. The price of oil also stabilized above $50 a barrel.

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