World Economy

Iraq Economy Battered by IS War, Low Oil Prices

Iraq Economy Battered by IS War, Low Oil PricesIraq Economy Battered by IS War, Low Oil Prices

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 US-led invasion, but today marks the worst downturn he’s seen in decades.

Forced to fire 65% 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, AP reported.

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.

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

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.

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

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

Reacting to the crisis, Iraq plans to issue 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 $833 million loan with the International Monetary Fund.

 Re-Denominating Dinar

Iraq also revived a long-delayed plan to re-denominate the 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.