Iraq’s cash crisis forces salary squeeze

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Iraq has begun withholding the salaries of senior government officials in a measure meant to free cash and underscore the severity of the country’s growing economic crisis to its elite.

Faced with plummeting oil prices and soaring expenses to meet the costs of the war against the Islamic State of Iraq and the Levant, or Isis, Iraq has burnt through its excess cash and begun imposing a series of austerity measures, Hoshyar Zebari, Iraq’s finance minister, told the Financial Times.

“It’s gone,” said Mr Zebari, who served as foreign minister for nine years, of the Development Fund of Iraq, worth $18bn in 2013. “We no longer have that cushion. All of that was misspent because of poor governance and poor financial management. This was fuelled by dropping oil prices and the rise of Isis.”

Iraq’s economy, although riddled with corruption and mismanagement, flourished in recent years on the back of high oil prices. Now the country is suffering an unprecedented crisis brought on by its worst security challenge since the toppling of Saddam Hussein in 2003 coupled with financial mismanagement and the fall in global oil prices.

“This year will be a difficult year,” Mr Zebari acknowledged, adding that he is paying Iraq’s bills month by month.

The situation underscores what Mr Zebari described as the deep structural problems of the Iraqi economy.

“We need an overall reshuffling and restructuring of the economy,” he said. “First we need to diversify the economy. You need new sources of revenue.”

Despite the crisis, there are signs that the Iraqi government under prime minister Haidar al-Abadi is trying to get its finances in order. For the first time in years, the 2015 budget was approved on time. The 119tn dinar ($99bn) plan is based on an estimated oil price of $56 per barrel, above the current $50 per barrel, bringing in $65bn in revenues.

The budget anticipates $13bn in other income, some raised from new taxes on mobile phone SIM cards, cigarettes, alcohol, motor vehicles and internet service. The levies are meant as much to change mindsets as to raise revenue. “People are not used to taxes,” Mr Zebari said. “They see everything as free. The whole idea was to break the mental logjam. This crisis is representing an opportunity for us to look deeper into the state of our economy and find where the structural defects are.”

The government has also agreed a deferment of this year’s war reparations payment to Kuwait — Baghdad is paying the Gulf state $4.6bn for its 1990 invasion and occupation.

Baghdad hopes to plug the remaining $21bn budget shortfall with $7bn loans from commercial and state banks, and $1.8bn in special drawing rights from the IMF.

Mr Zebari said the country was also in talks with the World Bank for $2bn in development grants for electricity and agriculture projects. He ruled out withdrawing from the central bank’s $67bn reserves for fear of eroding the value of the dinar but said the government would consider borrowing from abroad.

The minister said the country’s top priority — other than holding the line against Isis — was maintaining salaries for the country’s 3.5m government employees.

“The most important priority for us is the salaries in order not to create a backlash against the government,” said Mr Zebari. “If salaries are delayed even five or 10 days, it’s a problem.”

Still, Baghdad has suspended or slowed payments to many of the 550,000 public sector workers at 176 mostly unprofitable state-owned factories. “They were supposed to work to produce, to sell their products to finance themselves,” he said. “They are not doing that.”

The state has also failed to pay salaries to some of the highly motivated volunteer armed forces confronting Isis around the country, although Mr Zebari conceded “the government is responsible for paying their salaries and arming them and feeding them”.

In an effort to free cash, wages for senior government employees with monthly expense accounts of at least $400 have been delayed.

“We need to buy time. The idea was, ‘We will pay them but let’s delay,’” Mr Zebari said. “We are withholding some of the salaries for lack of cash flow. We will pay them back. We will not take the money away.”

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