Mismanagement Is Killing Iraq

Image: Gas flaring. US Military photo, public domain.

Forget corruption. Waste, inefficiency and economic distortion have brought Baghdad to the brink.

Ever since Stuart Bowen led the first attempt to account for Iraqi reconstruction funds in mid-2004, it has been clear that Iraq hemorrhages money through corruption.

Since then, things have got worse as last year the late Ahmed Chalabi found twenty-nine companies who were stealing over $4 billion with fake contracts. Stories of phantom projects and ghost employees abound, even after the last scandal in 2014 where fifty thousand names were found on the Ministry of Defense payroll, men no longer turning up to work. Commanders pocketed their salaries.

But Iraq has another silent economic killer: years of mismanagement, which have seen around $700 billion in mostly oil revenues produce little beyond a staggering seven million government employees, but not enough schools and infrastructure.

And while every administration promises to end corruption, many politicians in Iraq are oblivious to the financial black hole of mismanagement. This includes generous subsidies for anything that moves and the propping up of a host of failed state-owned companies, as well as absurdly bloated ministry payrolls and high politicians’ salaries. In fact, ministry payrolls have become a kind of jobs-for-votes scheme.

Therefore, $60 billion of Iraq’s $99 billion budget goes to state wages, blank checks for political hiring schemes. The Kurdish region has been no different, with over 70 percent of its budget going on government jobs.

In Iraq, mismanagement is driving the country off a cliff edge because of the oil price collapse. This phenomenal waste could give ISIS (who are rapidly falling back) one last chance. That chance may come some time towards the end of this year, when Iraq faces possible bankruptcy.

Meanwhile overspending endures, tied to a legacy of petrodollar-fueled socialism that would make Maduro blush. Even in the last oil price crunch in 2008, the state still expanded 30 percent.

Lamentably, a member of the parliamentary finance committee recently said that the obvious course of action (cutting state salaries) was a red line. Prime Minister Haidar al-Abadi is now seeing his call for reforms shot down, because few have the will to admit what needs to be done. As such, Abadi has managed to cut civil-servant salaries by a pathetic 3 percent. Iraq’s government revenues fell 60 percent, so salary reform should reflect that.

Ironically, this lack of strategy fosters corruption. It hinders the aim of successive Iraqi governments to attract private enterprise. Housing developments are often reserved for government employees, while other land is held back for state-owned enterprises.

Private investors that Iraq desperately needs find themselves walking into a minefield of political interests. Iraq is now ranked 161 out of 189 countries in the World Bank’s ease-of-doing-business ratings.

So for a long time, foreign companies have said the confusing business environment is actually worse than security concerns. Meanwhile, Iraqi officials have become masters of self-inflicted economic injury.

Take natural gas. Iraq’s oil and gas fields already produce enough to keep power stations running and electric lights on every summer, when demand peaks at 21,000 MW, 8,000 MW higher than what is generated. This gas could keep factories humming with plenty left over for export. There is one problem: most of this gas is burned or “flared.” Iraqi National and International Oil Companies have failed to invest in the right technology to capture it, costing Iraq billions.

Therefore, the plan to eliminate flaring is now years behind schedule. Iraq burns away 1.9 billion cubic feet of gas, enough to keep power stations running and electric lights on in four million homes. However, gas flaring will triple at the current rate if the oil production goal of seven million barrels per day is reached.

To make up for the shortage in gas, Iraq now imports up to $4 billion a year of it from Iran, while burning millions of dollars of it each day.

Gas isn’t the only thing Iraq has been short of. Refined fuel has run out in the past too. Iraq doesn’t have enough refineries, despite saying for years that enough will be built. Worse, the massive Baiji refinery has been destroyed in the anti-ISIS campaign, knocking out over a third of Iraq’s refining capacity. To make up the shortfall, Iraq spends up to $5 billion a year importing fuel, but this has caused absurd shortages due to subsidies at below-market prices. In 2011, these subsidies took up 14 percent of GDP, close to $10 billion now.