Two years ago, Iraq was almost out of money. The country is the fifth largest oil producer in the world and it should be rich. But because almost everything Iraq earns comes from its oil sales, the Middle Eastern nation’s budget is at the mercy of world oil prices.
Already in 2015, the International Monetary Fund predicted that Iraq could run out of money within five years if it did not diversify its economy away from oil. In 2020, the prediction came closer to reality when, thanks to the COVID-19 pandemic, oil prices fell by more than a third and Iraq’s national income nearly halved.
It was a huge problem because almost all the money Iraq earns is used to pay for state services and the salaries of state employees. The country has one of the largest public sector workforces in the world, and the Iraqi government pays salaries or benefits such as pensions to around seven million Iraqis.
In the last months of 2020, the government found itself unable to pay salaries on time, sparking protests across the country.
In Iraq, civil servants, including teachers and doctors, protested against the non-payment of salaries
In October 2020, the Iraqi Ministry of Finance released a “White Paper for Economic Reforms” which spoke of the desperate need for economic reforms. Not only that, but it was clear that as the world shifted to more environmentally friendly energy, Iraq would need to find other sources of revenue.
But that equation may have changed recently. The Russian invasion of Ukraine saw oil prices soar to new heights. They are being pushed even higher as European nations consider an embargo on Russian oil as part of a new sanctions package.
And what is bad news for European consumers is good news for oil and gas producing countries like Iraq, Saudi Arabia, Qatar and the United Arab Emirates.
According to the World Bank, oil prices rose by 55% between December last year and March this year, after the start of the war in Ukraine.
This has translated into a huge increase in cash for energy producers in the Middle East. In March, Iraq’s oil exports amounted to just over $11 billion (10.5 billion euros), the most the country has earned for oil in a month since 1972.
Clearly, Iraq can afford to pay all its bills this month and next. But what does this mean for the reforms planned before these price increases? Is there even more reason for them?
money changes everything
Similar reforms have been planned in other energy-exporting countries in the Middle East. Since 2016, Saudi Arabia has been working on its ambitious and very expensive Vision 2030 project, which combines financial and social change with a move towards renewable energy.
The United Arab Emirates and Qatar have also tried to future-proof their economies against the inevitable day when the world turns to renewable energy, with the former attempting to diversify its income by becoming a regional hub for business.
“While an influx of revenue reduces various pressures on the leaders of these countries and facilitates the assumption of distributive responsibilities [like paying public sector salaries]rising energy prices aren’t a political game-changer,” said Robert Mogielnicki, senior fellow at the Washington-based Arab Gulf States Institute.
Until recently, progress on Saudi Arabia’s ambitious Vision 2030 had been slowed by low oil prices
But what he will do is facilitate the implementation of reforms that Mogielnicki says will not be abandoned. “There is no doubt that we are heading towards a greener future,” he told DW. “We don’t know when this will happen. That’s why states are making a huge effort to enter new energy markets, such as hydrogen.”
“Blood in the Water”
Karen Young, founding director of the economics and energy program at the Middle East Institute in Washington, agreed. The Gulf states in particular are benefiting from this moment, she said – and not just thanks to higher oil prices, but also general market volatility.
The prospect of rising inflation and food shortages, combined with rising oil prices, will exacerbate the differences between countries in the region, she said. Oil-producing nations will withstand crises better because they are full of money and can have an advantage over their neighbors.
Talks of an EU embargo on Russian oil have driven oil prices to new highs
“As part of their foreign policy, the Gulf states have directed foreign aid and direct investment to support certain governments at certain times,” Young explained. Now they have more resources to do so.
For example, Egypt was particularly affected by the repercussions of the war in Ukraine and was forced to devalue its currency at the end of March. At the end of this month, Saudi Arabia deposited 5 billion dollars (4.75 billion euros) in the Egyptian central bank to support its economy. The increasingly wealthy Saudi public investment fund will also invest more in Egypt.
And gas producer Qatar, whose energy exports will reach $100 billion (95 billion euros) for the first time since 2014, has also pledged investments of around $5 billion in Egypt.
“There’s blood in the water,” Young explained. “They’re basically shopping. It’s opportunistic, but it also makes financial sense.”
However, experts do not believe that having more cash will encourage Gulf states to adopt undesirable foreign policy adventurism.
“While this windfall creates opportunities for interventions, the Gulf states may be more looking for return on investment and focusing on their national programs and future positions, including their own security,” Young said. “We are more likely to see investments in national defense and technology at home.”
It’s a different story in Iraq though, said Renad Mansour, project director of the Iraq Initiative at UK think tank Chatham House. Here, the problem is not necessarily the price of oil, but the country’s various persistent problems with governance, competing political interests and corruption.
Mohammed bin Salman of Saudi Arabia ‘will now have more money to play’ says Robert Mogielnicki
In the short term, having enough cash to cover all state costs could bring competing political elites together because they aren’t under as much pressure to fight for a share of the federal budget, Mansour told DW.
But rising oil prices are unlikely to speed up or slow down reforms in Iraq. While the country’s economic “white paper” contained good ideas for economic reform, it ignored political realities, Mansour added.
“So yes, logic suggests there is less incentive to try to reform when oil prices are high,” he concluded. “However, even when the price of oil is low, we still haven’t seen much reform in Iraq.”
Edited by: Sonia Phalnikar