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Iraq, Struggling to Pay Debts and Salaries, Plunges Into Economic Crisis

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BAGDAD – Ahmed Khalaf sells the smallest luxuries in a stall on a narrow, winding alley of Baghdad’s oldest market: nail polish, plastic hair clips, colored pencils.

Even during the pandemic, the stalls in the Shorja market were usually overcrowded with shoppers buying basic groceries and housewares by mid-morning. But last week the hallways were almost empty.

“Our customers are mostly government employees, but as you can see they don’t come,” said Khalaf, 34.

Its problems are an indicator of what economists say is the greatest financial threat to Iraq since Saddam Hussein’s time. Simply put, Iraq is running out of money to pay its bills.

With the economy ravaged by the pandemic and falling oil and gas prices, which account for 90 percent of government revenue, Iraq was unable to pay government employees for months last year.

Last month, Iraq devalued its currency, the dinar, for the first time in decades, and immediately raised prices for almost everything in a country that is heavily dependent on imports. And last week, Iran cut Iraq’s electricity and natural gas supplies, citing the non-payment, and left large parts of the country in the dark for hours.

“I think it’s bad,” said Ahmed Tabaqchali, an investment banker and senior fellow at the Iraqi Institute for Regional and International Studies. “The expenditures are well above Iraq’s income.”

The financial crisis threatens to destabilize the country whose government was overthrown a year ago after mass protests against corruption and unemployment.

Many Iraqis fear that there will be further devaluations despite the rejection by the Iraqi government.

“Everyone is afraid to buy or sell,” said Mr. Khalaf, who turned to business when he couldn’t find a job with a degree in sociology.

In the Jamila wholesale market, near Baghdad’s sprawling Sadr City district, 56-year-old Hassan al-Mozani was surrounded by huge piles of unsold 110-pound sacks of flour.

He imports flour from Turkey in dollars and sells flour for around $ 22 a sack, but last week he raised the price to $ 30.

“I would normally sell at least 700 to 1,000 tons a month,” he said. “But we’ve only sold 170 to 200 tons since the beginning of the crisis.”

A restaurant manager, Karam Muhammad, when asked about the new flour price, said there wasn’t much demand for it. The restaurants were mostly empty because of the pandemic and the financial crisis.

While the currency devaluation surprised most Iraqis, the economic and financial crisis had been raging for years.

Public sector salaries and pensions cost the government about $ 5 billion a month, but monthly oil revenues have only hit about $ 3.5 billion recently. Iraq has made up the deficit by burning its reserves, which some economists believe is already insufficient.

The International Monetary Fund concluded in December that the country’s economy is expected to shrink by 11 percent in 2020. He called on Iraq to improve governance and reduce corruption.

For 18 years, oil revenues have propped up a system of government support by giving ministries to political groups that have almost a free hand to create jobs. The civil service in Iraq has tripled since 2004. Economists estimate that more than 40 percent of the workforce depends on government salaries and contracts.

Updated

Jan. 4, 2021, 6:25 p.m. ET

The financial crisis could mean the end of this corrupt system of patronage.

“Every government has managed to buy more and more, but the purchase of loyalty, the purchase of consent is over,” said Tabaqchali over the phone from London.

The high public wage bill has left little expenditure on infrastructure. The Iraqi economy has also been hit by the coronavirus pandemic, and many workers in the already weak private sector have lost their jobs.

Mr Tabaqchali and other economists said the devaluation is a difficult but necessary step to help Iraqi businesses. With rising import costs, Iraqi goods such as agricultural products can compete more easily.

Iraq’s limited ability to pay Iran for electricity and natural gas contributed to the misery. Iraq is not allowed to transfer cash to Iran, but sends food and medicines in exchange for natural gas and electricity. Iran says it owes the equivalent of more than $ 5 billion.

“Iraq cannot pay all of its debt to Iran,” said Abdul Hussein al-Anbaki, an economic advisor to Prime Minister Mustafa al-Kadhimi. “Iran is also facing an economic crisis and we cannot buy gasoline without paying for it.”

The lion’s share of Iraqi debt, about $ 3 billion, remains frozen in an Iraqi bank while Iraq struggles to comply with US sanctions against Iran, Iraqi officials said.

The sanctions, aimed at forcing Iran to accept stricter restrictions on its nuclear program and curb its support for foreign militias, have blacklisted its banking system.

“It is difficult for the Iraqis because the mechanism to pay them almost doesn’t exist, because the Americans are obviously watching the situation very closely,” said Farhad Alaaldin, chairman of the Iraq Advisory Council, an institute for political research.

The fact that Iraq, one of the largest oil producers in the world, cannot reliably supply its citizens with electricity and has to import electricity is symptomatic of the dysfunction that led to protests against the government last year and overthrew the previous government.

Mr Alaaldin and others said the financial crisis could spark renewed protests and fighting between armed groups to control Iraq’s increasingly limited resources.

Iraq’s energy infrastructure has suffered from three devastating wars since the 1980s. More than a decade of US-led sanctions imposed on the Hussein administration in the 1990s crippled the Iraqi economy. Air strikes in the American-led war to drive Iraq from Kuwait in 1991 destroyed refineries and power plants. And since the American-led invasion of Iraq overthrew Mr. Hussein in 2003, corruption and incompetence have prevented Iraq from fully restoring electricity.

For the millions of Iraqis who cannot afford electricity from private generators, blackouts and rising prices have been a double blow.

Haifa Jadu, 55, who came to the Shorja market to buy sesame seeds and walnuts, said she and her husband, a retiree who is blind, simply went without electricity for much of the day.

“We used to pay money to a generator owner, but we haven’t bought electricity in four months because it raised the price,” she said. She said the walnuts, which she bought a month ago for about $ 3.50 a pound, are now nearly $ 5 and out of reach.

The government proposed comprehensive measures to strengthen the economy, including tax increases, in a plan before parliament. However, many politicians anticipate the prospect of oil prices rising this year to delay the adoption of much-needed reforms.

By then, unemployment is expected to rise as around 700,000 young people enter the labor market each year. With few jobs left, they are likely to join a permanent underclass of the poor and dispossessed.

Near the Shorja market, Amar Musa, wearing a black military-style mask and olive green coat, had put up artificial Christmas trees and tinsel garlands to sell to his Orthodox Christian customers on the busy main street that celebrates the January holidays to celebrate.

Mr Musa, 45, graduated from a technical college with a mechanic diploma, but said he never found work in his field. Standing next to a white Christmas tree with a deflated Mylar Santa impaled on its metal branches, he said he had a shop that was no longer in operation and that he now drives a taxi.

Like many Iraqis, he also writes poetry. When asked to recite one of his poems, he pulled a cigarette out of a packet, broke it, and threw it on the floor.

“I’m like a cigarette,” he said. “I’m on fire and like a bum I would be thrown away. Don’t talk to me about home. We are poor and our home is the grave. “

Falih Hassan contributed to the coverage.

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