Iraq’s Crumbling Economy is Becoming a Threat to OPEC

From his third-floor office in eastern Baghdad, Iraqi Oil Minister Ihsan Abdul Jabbar can see the rowdy protesters below as they march toward Tahrir Square, the symbolic heart of Iraq’s latest uprising.
On Sunday, thousands of Iraqis again gathered with national flags at the square, across the Tigris river from the heavily-fortified Green Zone, where the U.S. has its embassy. Their list of grievances was long: corrupt politicians, daily power cuts, dilapidated hospitals, crumbling roads and a lack of jobs. “We want our country back!” they chanted.
Iraq may be the world’s third-biggest oil exporter, but its economy is cratering after the coronavirus pandemic sapped global demand for energy and caused prices to collapse. The state’s finances are so dire it can’t pay teachers and civil servants on time, threatening a repeat of the upheaval that last year brought down the government and saw hundreds of protesters killed.
That’s created a dilemma for 46-year-old Abdul Jabbar, a chemical engineer and career oil man who’s now caught between the demands of an angry population and the pledges made to allies in OPEC. The cartel of oil producers is trying to bolster a fragile market by reining in supply and it needs major producers like Iraq to toe the line. For Iraq, restraining supply carries a massive economic — and political — cost. But breaking ranks is risky too: it could mean lower prices for everyone.
Some Iraqis want the government to put them first by simply pumping more oil, a move that could unravel the finely calibrated output agreement; if a producer as significant as Iraq flouts the pact, there’d be little to stop smaller ones doing the same.
“I waited more than 45 days for my so-called monthly salary,” said Ziyad Al-Mustansir, a 44-year-old secondary school teacher in Baghdad. “The government should have looked after the country’s interests when it came to OPEC. If such deals mean losses for the country, we shouldn’t go with them.”
Under a deal reached in April between Iraq and other members of OPEC+, a grouping of the Organization of Petroleum Exporting Countries and others such as Russia, Baghdad had to curb its daily production by around 1 million barrels — worth roughly $40 million — to 3.6 million.
The idea was that supply cuts would raise crude prices enough to make up for lost exports. While prices have more than doubled since the agreement was struck to $40 a barrel, they’re still down almost 40% this year, languishing at levels far below what Iraq needs to finance its budget. The government’s monthly revenue, at $3 billion, is less than half what it was last year.
Iraq has already breached its output limit on several occasions and angered OPEC+’s de facto leaders, Saudi Arabia and Russia. The danger for them is if Baghdad starts to push even more barrels onto the market to eke out every last dollar it can.
Iraqi officials have repeatedly said they’re committed to the agreement, that they’re pumping in line and will compensate for over-production. But after earlier breaches, traders are watching closely for signs it will surpass the cap again.
“It will become increasingly difficult for OPEC+ to maintain discipline as countries, especially Iraq, become more desperate,” said Tarek Fadlallah, the chief executive officer of Nomura Asset Management’s Middle Eastern unit.
All nations within OPEC+ have been stung by oil’s crash. Russia’s ruble has lost almost a fifth of its value, Saudi Arabia tripled value-added tax to make up for shriveling oil income, and more than 60 people died this month during protests in Nigeria.
But Iraq, where oil accounts for almost all government revenue, is in about the worst position. Its gross domestic product will contract 12% this year, more that of any other OPEC member under a production quota, according to International Monetary Fund forecasts.
It’s been in chaos for much of the period since the U.S.-led invasion of 2003 that toppled Saddam Hussein, suffering civil war, an insurgency by Islamic State and a push by the Kurds for independence in the north, a major oil-producing region. And while OPEC+ includes all of Iraq’s production in its calculations, the Kurdistan region has its own say over oil policy.
The latest crisis is causing divisions between lawmakers and Prime Minister Mustafa Al-Kadhimi, who only came to power in May. His administration says it won’t be able to pay Iraq’s roughly 7 million public workers and pensioners next month unless parliament approves a law allowing the government to borrow an extra $35 billion.
Opposition politicians say the country’s debt load is already too high and its leaders can’t be trusted to take on more. Iraq’s dollar-bond yields have surged almost 300 basis points since early September, an indication investors are fretting. At more than 10%, they’re the highest in the Middle East.
“The borrowing could lead to the collapse of our economic system,” Mohammad Saheb Al-Darraji, a member of parliament’s finance committee, said.
Kadhimi, who traveled to France, Germany and the U.K. this month to try to woo money from oil and gas investors, is also struggling to restrain militias backed by neighboring Iran. Iraq’s a hotbed in the proxy war between the Islamic Republic and the U.S., which has threatened to close its Baghdad embassy unless the government stops the militias from firing rockets on it.
Lockdowns to stop the spread of the coronavirus, meanwhile, have hammered businesses across the country, which has recorded more cases and deaths than anywhere in the Middle East aside from Iran. Unemployment has soared to 14%.
The latest protests are a test for Kadhimi, who’s tried to present himself as a champion of the demonstrators’ demands. It was mass demonstrations a year ago that forced his predecessor, Adil Abd Al-Mahdi, to resign.
Pressing for Aid
As one of the five original members of OPEC, which was founded in Baghdad in 1960, Iraq’s unlikely to quit the organization. If it did, it would risk Saudi Arabia retaliating by increasing production and sending oil prices even lower.

About Parvin Faghfouri Azar

Check Also

Iran Opens 1st specialized Nuclear Industry Innovation Center

The First Specialized Nuclear Industry Innovation Center was inaugurated in Tehran on Monday in the …

Leave a Reply

Your email address will not be published. Required fields are marked *