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Iraq's Economy Battered by Islamic State War, Low Oil Prices

  • Associated Press

An Iraqi street currency exchanger counts banknotes in Baghdad, Iraq, Aug. 8, 2015.

An Iraqi street currency exchanger counts banknotes in Baghdad, Iraq, Aug. 8, 2015.

In business since the 1960s, Karim al-Aboudi's family has seen Iraq's economy boom with oil wealth and bust through wars and the 2003 U.S.-led invasion, but today marks the worst downturn he's seen in decades.

Forced to fire 65 percent of his staff and close two of his six aluminum and glass factories, al-Aboudi's troubles mirror those facing business owners across Iraq. As the country battles the Islamic State group on the ground, it faces massive budget deficits brought on by the lowest global oil prices in six-and-a-half years.

And while austerity cuts have helped Iraq fund its military effort against the extremists, it has slowed businesses like al-Aboudi's and construction firms that rely on government contracts.

Taking a deep puff of a cigarette, 65-year-old al-Aboudi said he and others don't see it getting much better soon: "The manufacturers and merchants are now only drinking tea and reading newspapers.''

Since early 2014, Iraq has suffered a serious economic decline after the Shiite-led government in Baghdad started losing territory to the Sunni militants of the Islamic State group. Low oil prices exacerbated the decline, wreaking havoc on Iraq's national budget, of which oil revenue makes nearly 95 percent.

As of July, Iraq's oil revenues stood at $31.5 billion, according to Oil Ministry figures, with an average daily export capacity less than a 3.3 million barrel quota set in this year's budget. Iraq's semi-autonomous Kurdish region now sells oil independently from the central government.

Iraq's $102.5 billion budget now runs a deficit of about $21.4 billion. Some $27 billion is earmarked for defense, but more could be needed.

"For sure the situation in dire and needs quick alternatives,'' lawmaker Haitham al-Jaburi said.

Iraq had a state-run economy under dictator Saddam Hussein, buoyed by its oil wealth. Back then, 1 Iraqi dinar was worth $3. But the economy began to suffer under economic sanctions after the 1991 Gulf War. By the time of the U.S.-led invasion, it was 3,000 dinars to $1. Today, it's about 1,166 dinars to $1. Annual inflation stands at about 2 percent.

A worker works to sustain a machine at an aluminum factory in Baghdad, Iraq, Aug. 15, 2015.

A worker works to sustain a machine at an aluminum factory in Baghdad, Iraq, Aug. 15, 2015.

Like other businesses, al-Aboudi's flourished after Saddam's overthrow, buoyed by authorities suspending most tariffs and import duties and starting nationwide government-funded projects. But sectarian violence in 2006 and 2007 damaged the country's economy. Meanwhile, Iraq's national power grid supplies only a fraction of the country's needs, forcing residents and business to rely on diesel generators.

Reeling from the Islamic State advance, Iraq's government now has stopped spending money on construction projects to fund its military.

"Since the deterioration in security situation, the fall of Mosul and the austerity measures, the [government] business has dropped to zero,'' said al-Aboudi, whose business was 65 percent government-funded projects.

Reacting the crisis, Iraq plans to issues bonds worth $7 billion - $5 billion in international bonds and $2 billion for domestic banks - to narrow the deficit. It introduced initiatives to impose new excise and consumption taxes. It also secured a $1.7 billion in loans from the World Bank and a $833 million loan with the International Monetary Fund.

Iraq also revived a long-delayed plan to redenominate the Iraqi dinar by knocking three zeroes off the nominal value of its banknotes, said Ihsan Shamran al-Yassiri, the head of Iraq Central Bank Issuing and Vaults Department. The plan is set to be implemented by 2017 after restructuring dinar by issuing two large banknotes - a 50,000 dinar note before the end of this year and 100,000 banknote next year - and canceling small ones.

This month, bond rating agency Fitch gave Iraq its first rating, calling it "B-'' with a stable outlook. The rating agency forecast a double-digit fiscal deficit for 2015 due to lower oil prices, higher military spending and war costs.

"Iraq scores the worst of all Fitch-rated sovereigns on the composite World Bank governance indicator, reflecting not only insecurity and political instability but also corruption, government ineffectiveness and weak institutions,'' Fitch said.

That doesn't surprise construction company owner Sahab Awad, who built a government housing project in Iraq's southern Maysan province, worth about $33.6 million. The government still owes him about $2.5 million for that, as well as millions of dollars more for a project his company had to abandon in the Islamic State-held city of Fallujah.

"We sold whatever properties and projects we have and laid off about 90 percent of the employees and debts are still accumulated,'' said Awad, 73. "We had high ambitions of developing the country, but unfortunately those who run it are incompetent and lack a real vision.''

Despite hundreds of billions in oil revenues and international aid since the 2003, Iraqis still suffer from shabby public services and weak economy due to endemic corruption and poor financial management, as many senior appointments are determined by party patronage and sectarian loyalties.

Fed up with the weak government, al-Aboudi joined thousands of Iraqis who have been protesting across the country. The protests forced the government to launch a plan to dismantle government posts, merge ministries, cut spending and fight corruption.

Last week, parliament's approval for the plan gave al-Aboudi a rare dose of optimism despite Iraq's many challenges.

"I'm optimistic ... and we will continue protesting until we have tangible reforms,'' he said.