Election Recount: Sadr Retains Victory

By John Lee.

Moqtada al-Sadr has reportedly retained his lead in Iraq’s parliamentary election following a full recount.

According to Xinhua, the results showed no change in 13 of Iraq’s 18 provinces, and changes in four provinces involving five seat-winners within their own coalitions.

The recount did not alter the initial results significantly, with Sadr keeping his total of 54 seats.

(Sources: Reuters, Xinhua)

Electoral Recount Completed – UN Congratulates IHEC

SRSG Kubiš congratulates the IHEC Board of Judges on completion of the electoral recount and looks forward to a timely conclusion of the remaining stages of the electoral process

The Special Representative of the United Nations Secretary-General (SRSG) for Iraq, Mr. Ján Kubiš (pictured), welcomes today’s announcement by the Board of Judges of the Independent High Electoral Commission of the completion of the electoral recount in all 18 Iraqi governorates and also out-of-country voting.

SRSG Kubiš said:

I congratulate the Board of Judges on this important milestone towards the conclusion of Iraq’s 2018 electoral process.

“The timely, transparent, well-organised, credible conduct of the recount was made possible by the hands-on impartial work of the Board of Judges, and the dedication and professionalism of all recount staff, including Independent High Electoral Commission staff and judiciary personnel. The manner in which they have handled the recount has increased public confidence in the electoral process, and election results.

“I now encourage the Board of Judges and relevant state institutions to devote their attention to the timely announcement of provisional results and the speedy resolution of any outstanding appeals.

“Throughout the recount process, an experienced team of United Nations electoral experts has followed the process, providing advice and assistance. The United Nations remains available to provide further expert advice and assistance to the Board of Judges as they supervise the tabulation of recount results and all subsequent stages in certification of the results by the Federal Court.”

(Source: UN)

Video: Coalition talks “still under way”

From Al Jazeera. Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

Negotiations are still under way to form a governing coalition in Iraq. No party won a majority during May’s national election, and the result is not yet confirmed, because a manual recount was called over allegations of vote rigging.

The parties trying to lead Iraq have major differences in their attitudes towards the United States and Iran.

But the big winner in Iraq’s contested election is expected to be Shia leader Muqtada al-Sadr, who confidently expects his party to lead the next government once the revised result has been confirmed by the country’s Supreme Court.

Meanwhile, protests, which began in the oil-rich southern city of Basra in early July, have spread to eight Iraqi provinces, leading al-Sadr to call on all the winning lists of Iraq’s May 12 parliamentary election to suspend government formation talks until the demands of protesters are met.

Al Jazeera‘s Imran Khan reports from Baghdad:

Anbar’s Would-Be MPs Still Owe Millions

This article was originally published by Niqash. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

By Kamal al-Ayash.

After Elections, Anbar’s Would-Be MPs Still Owe Millions

Candidates in the recent elections spent millions of dinars on their campaigns in Anbar. Or at least, they promised to. Many small businesses, including copy shops and butchers, are still waiting to be paid.

There were almost 7,000 candidates running for office in the Iraqi elections, held May this year. The central Iraqi province of Anbar had about 350 of their own – and many of those candidates spent big on their campaigns.

In some provinces, local authorities reported that candidates spent as much as US$350,000 and even as much as US$1 million on campaigning. That’s a huge amount of money for Iraq and local small and large business owners are well aware of the windfall the elections can bring them.

But there are also dangers, especially if a candidate didn’t win. Companies that print posters, provide required services for events, or host elector-pleasing conferences will often strike a deal with a politician.

Possibly the politician will only pay a deposit upfront and promise to pay the rest after the election. Or possibly they will work through a broker, who organizes the campaign materials and the deals around them. And sometimes, those promises of payment are not honoured.

Hamid al-Fahdawi, 48, knows all about that. The Ramadi print shop owner says he is still owed more than IQD5 million (around US$4,200) and he’s been trying to contact his creditors. But they appear to have used a mobile phone during the election campaign and then discarded that number afterwards.

“I am still trying to call the candidates who owe me money,” al-Fahdawi says. “I hate hearing that automated tone on the phone that tells me ‘this number is out of reach’.”

Local businesses are relatively savvy about this, says Khalil al-Mohammedawi, a 55-year-old who owns a small printing office in central Fallujah. “There are a lot of people making money during the elections,” he explains. “That includes brokers who act as contact persons between service providers and the politicians. But because of our previous experience, we also know who is going to pay his debts and who is not.”

Al-Mohammedawi also says that some businesses build this risk into the prices they charge and they still make a profit even if they don’t get paid the full amount.

The print shops and small advertising agencies are not the only ones suffering from political non-payers. Large restaurants have catered meals for hundreds of candidates’ constituents and colleagues, often at substantial cost.

“Most of us trusted these candidates and we allowed them to place large orders on their tabs, without asking for payment,” says Hikmat al-Hazimawi, a restaurant owner in Ramadi. “We knew many of them personally, that’s why. What we didn’t know is that things would change after the elections and they would not pay us and would try to avoid us.”

The debts cause a chain reaction, al- Hazimawi adds, because now he cannot pay the people from whom he bought his meat and so on.

Another copy-shop owner in Fallujah disagrees with some of the complaints though. “The people who are owed money are those who never did this before,” Hazem al-Mohammedi suggests.

“They’re new to the business and they don’t know how to deal with these people, or who to deal with. Most of the candidates are actually respectable people and if you deal with them directly, you will be paid. It is the brokers that cause the trouble. Most of the money in those cases is not being spent on goods and services, but on the broker’s margins.”

Market Review: “Of Banks and Budget Surpluses”

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Activity in the economy at large, and the market in particular, came to a virtual standstill at the start of the month as it coincided with last two weeks of Ramadan which ended with the Eid holiday’s in the middle of June.

The start of the summer heat in earnest further contributed to the slowdown of activity. However, the intense focus on the political activity around the election results took the spotlight over the major markers of economic recovery and the banks’ leverage to it.

Average minimum and maximum temperatures in Baghdad in degrees centigrade

(Source: World weather and climate Information)

The elections produced winners and losers who will eventually form a coalition government as reported last month, a process that should take a few weeks but could extend to a few months. Claims of fraud surfaced as in past elections, however this time there was an unusual action by parliament to force a manual recount of the whole vote and a wholesale annulment of certain types of votes (overseas, IDP’s and security forces votes). The parliament’s action was made possible by investigations that suggested that fraud was made possible by hacking the electronic readers of the ballot papers –introduced for the first time this year.

The potential disruption could have resulted in a delayed government formation until early 2019. However, objections to parliament’s action were raised to the Supreme Federal Court, whose ruling on 21st June was a master class response to the conflicting political reactions following the elections. The ruling, provided a framework for a workable compromise as evidenced by its wholesale acceptance by all of Iraq’s political parties.

The ruling is discussed in a recent article: in a nutshell it led to a manual recount of only of those election centres whose results were disputed, and thus should be concluded in a few weeks. The impact will likely be felt in a changed balance of power among the Kurdish parties and among some Sunni parties, but ultimately will not significantly change the balance of power of the main election winners. The process of government formation continued unabated during this period and the broad outlines of it are taking shape.

However, irrespective of how the upcoming government is formed, it would need to address the issues at the heart of the 2015 protest movement that had such a profound effect on how the election was fought and its results. These would be the provision of services and reconstruction, which require much needed overdue investments in the country’s infrastructure and the reconstruction of the liberated areas, estimated at USD 88bn over five years.

Prevailing negative perceptions of Iraq’s ability to fund this have not reflected the transformative effects of higher oil prices and the end of conflict on Iraq’s ability to self-fund the reconstruction of the whole country. These were discussed in detail in a recent article, the highlights of which are: By end of 2018, based on realized oil prices of 2017 and average year-to-date for 2018, Iraq is on its way to have a cumulative two-year budget surplus of USD 18.8bn instead of the initially projected cumulative deficit of USD 19.4bn. This would be equal to a stimulus of 14.5% of non-oil GDP once reconstruction projects are underway, thus further accelerating economic activity. The effects of this stimulus would be enhanced by a potential budget surplus of USD 9.3bn in 2019 or a further 6.8% stimulus to non-oil GDP.

The stock market’s action in June was a continuation of the same trends discussed here over the last few months. By end of June, the market, as measured by the Rabee Securities’ RSISUSD Index, was down -3.5%, bringing its year to date performance to -0.6. Average daily turnover was among the lowest of the last three years and most stocks, in particular the banks continued to decline.

The market’s focus continues to be the effects of the shrinking FX margins on banks’ earnings brought on, paradoxically, by the increasing signs of an improvement in liquidity in the broader economy. These were brought by the steady increases in the market price of the Iraqi Dinar (IQD) versus the USD, lowering its premium over the official exchange rate to 1.2% – the lowest point in a number of years from just under 6% at the end of 2017 and 10% at the end of 2016. FX spreads are one of many sources of revenues for the higher quality banks but constitute the bulk of earnings for the lower quality banks. However, almost all banks were caught in the group’s sell-off which accelerated in recent months.

However, valid as these concerns are, they fail to take into account the transformative effects of the expected budget surpluses of USD 28.5bn for 2017-2019 on the banks’ future earnings through the simulative effects the surpluses would have on economic activity. This same leverage worked in reverse during the double whammy of the ISIS conflict and the collapse in oil prices as government finances were crushed by soaring expenses and plummeting revenues.

The government resorted to dramatic cuts to expenditures by cancelling capital spending and investments which, due to the centrality of its role in the economy, led to year-year declines in non-oil GDP of -3.9%, -9.6% and -8.1% for 2014, 2015 and 2016 respectively. Ultimately, the government had a cumulative deficit of around USD 41bn during this period and accumulated significant arrears to the private sector in the process. The outstanding arrears are estimated by the IMF to be at USD 3.6bn as the end of 2017.

The effects were disastrous for private sector businesses at the receiving end of the cuts whose finances deteriorated, and which in turn affected the quality of bank loans as these businesses accounted for the bulk of bank lending.  As a result, the banks’ earning suffered from the increasing non-performing loans (NPL’s) coupled with negative loan growth, as well as from declining/negative deposit growth.

The changes for the worse for the banks during these years can be seen through the three charts below that look at loans/NPL’s, deposits and trade finance and their association with budget surpluses/deficits. The charts consider only loans/NPL’s, deposits and trade finance for the private sector but not those for the government as they conducted through state banks.

Loans and NPL’s 2010-2017

(Source: Central Bank of Iraq (CBI), Asia Frontier Capital (AFC))

Loan growth peaked in 2015 after slowing in the prior year and has declined since, while NPL’s soared in 2015-2016 as the effects of the capital spending cuts fed through to deteriorating loan quality. These negative effects were made worse by a flight to safety as more of the private sector borrowed from state banks instead, in the process increasing their share from 59% to 63% of all private sector lending. The ultimate effects of budget surpluses and deficits on loan growth and quality can also be seen from the above chart.

Deposits 2010-2017

(Source: Central Bank of Iraq (CBI), Asia Frontier Capital (AFC))

The same story is repeated with private sector deposits which for commercial banks peaked in 2013 and declined since then. The flight to quality was again evident in the slower decline in total deposit growth and its pick-up in 2017 as the expansionary effects of the recovery in oil prices and the ending of conflict were being felt. In the process, the state banks increased their share of total private sector deposits from 61% to 68%.

Trade Finance 2010-2017

(Source: Central Bank of Iraq (CBI), Asia Frontier Capital (AFC))

The only area where commercial banks increased their share was that of trade finance for the private sector- increasing from 71% to 87%. However, trade finance suffered significantly in this period as trade declined due to investment cuts and the slowdown in consumer spending. This further hurt the commercial banks as it was a major source of revenues and growth.

Its logical to conclude that the sea change which has taken place in the government’s financial health would reverse the trends seen in the charts above as the significant stimuluses to non-oil GDP should lead to sustainable economic activity, providing room for the banks to recover and grow again.

It should be noted that these are aggregate figures for the whole sector which hide significant variations in the performance of individual banks. The pains of 2014-2017, including the recent pressure on FX margins, would have exposed the structural weaknesses of many of the banks and will likely lead to failures among the weaker ones. However, the stronger banks that weathered the storm and addressed any structural weaknesses should benefit disproportionally from the expected benefits from a recovering economy.

Please click here to download Ahmed Tabaqchali’s full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets. He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS). He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

Video: Manual Election Recount to begin on Tuesday

From Al Jazeera. Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

The mandate for Iraq’s parliament has expired – with no new leadership confirmed.

The country’s still waiting for the results of a manual recount of suspect ballots from last month’s election.

That’s due to get under way in some regions on Tuesday and will take about two weeks – leaving Iraq in political limbo.

Al Jazeera‘s Mohamed Vall explains:

Iraq may soon be Without a Government

By Ali Mamouri for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Iraq may soon be Without a Government, as Clock Runs Out

The term of Iraq’s current parliament ends June 30, but a mandated manual recount of votes cast in the May 12 election hasn’t even begun, and disputes are deepening among some political blocs. This could create a constitutional vacuum, which would worsen an already-bad situation.

Parliament was slated to meet June 27 to vote on a bill to extend its term until the Federal Supreme Court confirms the election results. The court, however, was proactive and issued a decision June 26 rejecting an extension, citing the constitutional mandate that parliament serves four calendar years. The current parliament first convened July 1, 2014.

The court’s decision stated that any legislation passed after July 1 will be unconstitutional and “its consequences shall be null and void.”

The ruling sparked mixed reactions among Iraq’s political forces. Parliament Speaker Salim al-Jabouri and some political parties had supported the extension, and warned of a possible constitutional vacuum. Jabouri failed to secure a seat during the election.

Meanwhile, the winning political blocs, including the Sairoon Alliance headed by Muqtada al-Sadr, which won the largest number of parliament seats, condemned the idea of extending parliament’s term. Kurdistan Democratic Party (KDP) member Hoshyar Zebari called the proposed extension “a new trick.” Jamal al-Karbouli, head of the Iraq is Our Identity party, said it was an attempted “political coup.”

To speed up the recount process, the Federal Supreme Court decided the review will include only votes from areas where results were contested, whether within Iraq or abroad. The court also approved parliament’s vote to dismiss some senior members of the Independent High Electoral Commission and replace them with judges. Adel al-Nouri, the commission’s head, said the dismissed members were accused of election tampering.

After a storage unit containing ballot boxes was set on fire in early June, protection measures were tightened at stations where ballots are stored. More than 5,000 members of the police, army and counterterrorism forces have been deployed to 21 such stations across the country.

“All managers of polling stations and offices where there have been complaints are instructed to transfer the ballot boxes and the electronic verification devices to designated locations in Baghdad,” Electoral Commission spokesman Laith Hamza said in a statement.

“The recount will take place in the presence of representatives of the United Nations, political blocs, as well as representatives of the candidates,” he added.

Skeptics of the election results are trying to get more monitors involved in supervising the recount. Iraqi Vice President Ayad Allawi, who heads the National Coalition, called on the Arab League and judiciary to participate in monitoring.

As the controversy over the vote results escalates, political parties are still discussing how to form a majority bloc that will be entrusted to choose the next Cabinet.

Iraqi Prime Minister Haider al-Abadi, during a June 23 visit to Najaf where he met with Sadr, announced an alliance between his al-Nasr bloc and Sadr’s Sairoon.

In a joint press conference with Abadi, Sadr said, “The alliance between the two sides will lead to formation of a cross-sectarian, technocratic government representing all the Iraqi people.”

He added, “The agreement includes supporting the army, placing all arms and weapons under the control of the state, developing a program to reform the judiciary, activating the role of the general prosecutor to continue combating corruption and holding accountable those accused of corruption,” Sadr added.

He also stressed that foreign forces in Iraq should commit “to not interfere in Iraqi domestic affairs.”

Sadr forged some alliances earlier this month, first with the National Wisdom Movement led by Ammar al-Hakim and Allawi’s National Coalition, followed by another alliance with the Fatah bloc led by Hadi al-Amiri, which comprises several Popular Mobilization Units factions and is close to Iran.

He didn’t touch on his previous alliances in the latest announcement with Abadi. This raises the question, is he looking for the best alliance partners for the future government, only to renege on alliances with other forces? Or is he looking for a comprehensive alliance that will bring together the various forces under his electoral list?

Abadi, who would like to keep his position as prime minister, said his alliance with Sadr doesn’t conflict with the latter’s declared alliances and doesn’t mean Sadr is “against other coalitions.” It appears Sadr doesn’t oppose forming a comprehensive alliance, as long as the different blocs come under his list, which would lead the Cabinet selection.

As things stand now, it seems that selecting a Cabinet using a comprehensive coalition is a possible option. This would happen shortly after the commission finishes recounting the votes and the federal court confirms the official results. This would spare the country a lengthy constitutional vacuum or an extension of parliament’s term.

Will Abadi have a Role in Forming New Govt?

By Omar Sattar for Al Monitor. Any opinions expressed here are those of the author and do not necessarily reflect the views of Iraq Business News

On June 21, Iraq’s Supreme Federal Court ruled that parliament’s decision to cancel the votes of Iraqis living abroad, displaced people and members of the peshmerga forces was unconstitutional. The results of the elections are expected to remain as they are, and the formation of the next government is supposed to pick up speed in light of this recent judicial ruling.

Iraqi Prime Minister Haider al-Abadi, the leader of al-Nasr coalition, expressed his intent to host the leaders of the winning blocs before the end of this month to discuss the paths of forming the next government and outline the next phase.

“We launched a national initiative before Eid al-Fitr [June 15] for a broad national meeting that includes all political blocs to agree on the state administration programs, not just the government,” he said at a press conference on June 20.

He explained that the national consensus aims to speed up the proper formation of state institutions after the elections, noting, “Political blocs welcomed our national meeting initiative with arms wide open.”

Abadi called on “political blocs to cooperate to form an operation room, or as we call it, a preparatory committee to lay the foundations of any political agreement to set the next government program.”

Spokesman for al-Nasr coalition Hussein al-Adli told Al-Monitor, “We called on all bloc leaders who won in the recent elections to meet before the end of this month so we can all agree on the process of forming the government and general frameworks regarding state affairs, so as to avoid a constitutional vacuum.”

He added, “Al-Nasr coalition has not yet identified its direction when it comes to [potential] alliances, nor do we believe that the largest bloc, which is constitutionally mandated to form a government, has been formed yet.”

Adli pointed out that “Abadi would rather hold discussions with all blocs directly and collectively and draw out the upcoming phase, based on results of the elections.”

On June 12, Muqtada al-Sadr, the leader of the Sadrist movement and the Sairoon Alliance that won 54 seats in the recent elections, announced that it was allying with Fatah, a bloc led by Hadi al-Amiri that won 47 seats. This new alliance aims to form the largest parliamentary bloc.

According to a source from al-Hikma bloc, which secured 19 seats and is led by Ammar al-Hakim, the Shiite blocs have yet to confirm that they will attend Abadi’s national meeting.

The source told Al-Monitor on condition of anonymity, “Abadi tried to convince the Shiite blocs to attend, but they are not having it. They do not see why there needs to be a meeting before naming the new prime minister during parliament’s first session to discuss the next government.”

The source said, “Abadi will fail to hold this meeting unless he forms an alliance able to compete against the Fatah-Sairoon alliance.”

The Shiite lists believe that Abadi is trying to get around the idea of “the largest blocs,” after failing to ally with Sadr and Amiri. He has not yet decided whether he is staying or withdrawing from al-Dawa party, headed by Nouri al-Maliki, the leader of the State Law Coalition, with 25 seats.

Meanwhile, Maliki said he would participate only “if all forces attend the meeting and everyone commits to hard work to reach solutions to the serious crises plaguing the country.” However, a statement published by Maliki’s press office on June 16 announced that he will be attending.

The Sairoon Alliance decided to only attend if “Abadi sends a written invitation, not only calls on political blocs though the media.”

On the other hand, Kurdish and Sunni forces were pleased with Abadi’s initiative and confirmed their attendance.

On June 15, the National Forces Alliance, which includes the majority of Sunni blocs in parliament, issued a statement, saying, “We welcome Abadi’s initiative and we believe this is a step in the right direction toward an all-embracing national project.”

Leader of the Iraqi Decision Alliance, Ahmed al-Massari, told Al-Monitor that his alliance “supports dialogue between the winning lists for the purpose of solving the country’s many crises,” noting that his bloc “believes Abadi’s initiative is not limited to discussing the formation of the largest bloc, but also aims at setting a national program of action, regardless of sectarian differences.”

The coming days will reveal to what extent Abadi’s initiative can contribute to overcoming differences and discussing the future of the country while steering clear from the “largest bloc” project. This initiative is no more than a political “tactic” through which Abadi is trying to include Sunni and Kurdish blocs in the process of choosing the new prime minister.

This way, he might be able to make up for his inability to find a good parliamentary majority that guarantees him a second term. So far, no other Shiite alliance has as many members as the Sadr-Amiri alliance.

The broad acclaim Abadi’s initiative received among Kurdish and Sunni blocs indicates their desire to have a new prime minister, agreed upon by all forces instead of one imposed by the largest bloc. At the same time, the Kurdish and Sunni blocs do not necessarily want rapprochement with a Shiite bloc.

The true advantage of holding Abadi’s meeting is to spare the country from having a constitutional vacuum, hold the new parliament’s first session early next month and put an end to Abadi’s own “caretaker” government.

Supreme Court Confirms Election Re-Count

By John Lee.

Iraq’s Supreme Federal Court has reportedly upheld a law mandating a nationwide recount of the votes from May’s parliamentary election, which had been ordered following claims from Prime Minister Haider al-Abadi that there had been serious violations.

The court has also ruled that the cancellation of votes from people overseas, the displaced, and Peshmerga was unconstitutional.

Earlier this month, Iraq’s top judicial authority, the Supreme Judicial Council, took over the Independent High Electoral Commission (IHEC), replacing the local heads in each of the provinces with judges.

Last month’s elections saw a low turnout, and an unexpected victory for Shia leader Moqtada al-Sadr.

(Sources: Reuters, AFP)

(Picture credit: Essam-al-Sudani)

“Forget the Donations, Stupid”: New Dynamics in Funding Reconstruction

By Ahmed Tabaqchali (pictured), CIO of Asia Frontier Capital (AFC) Iraq Fund.

This article was originally published in the Marsh to Mountain blog. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

“Forget the Donations, Stupid”: New dynamics in funding the reconstruction of Iraq

Key Takeaways

In the months following the Kuwait Conference a sea change has taken place in Iraq’s financial health that has yet to be reflected in perceptions.

Higher oil prices, as a result of the changed dynamics of the oil market and the robust health of the global economy, has had a transformative effect on Iraq’s finances.

By end of 2018, based on realized oil prices of 2018 and average year-to-date for 2018, Iraq is on its way to have a cumulative two-year budget surplus of $18.8bn instead of the initially projected cumulative deficit of $19.4bn.  

This would allow it to start the reconstruction process on its own resources. Coupled with a potential surplus of $9.3bn in 2019 would give the country a great deal of flexibility to fund further reconstruction over the near-term. 

The surplus of $18.8bn by end of 2018 would equal a stimulus of 14.5% of non-oil GDP once reconstruction projects are underway, which would further accelerate economic activity. 

However, this three-year window of opportunity faces the twin headwinds of Iraq’s corrosive corruption and all of prior governments’ failures to spend oil wealth on  rebuilding the country’s infrastructure, spending it instead on expanding the state’s role in the economy.


A great deal has changed since the Kuwait Conference on the reconstruction of Iraq, which was marred by misconceptions of international observers who bemoaned that it failed to achieve its objective in raising enough donations. These were not helped by an Iraqi side that went to the conference looking for donations (investments in Iraqi speak) by focusing its efforts solely on presenting a shopping list of projects that needed $88bn in funding over five years.

These misconceptions were addressed in a prior article[1] which highlighted that over five years, Iraq should be able to fund $77bn out of this $88bn through a combination of $50bn from its oil revenues and $27bn in borrowings. Crucially, this level of direct funding and borrowing would be consistent with maintaining macroeconomic stability, which means that funding the reconstruction would not distract from the government fulfilling its traditional role in the economy, and so the reconstruction will contribute to sustainable economic growth.

This ability to fund the $77bn was derived from the IMF estimates for Iraq’s budget for 2018-2022 based on updated market-implied future Iraq oil prices, i.e. the implicit price of oil from the futures markets. In February, the implied price for Iraqi oil was $60/bbl for 2018, declining to $51 by 2022. These are in sharp contrast to the IMF’s estimates in August 2017 which used Iraqi oil prices of $45.5 in 2018, increasing to $47.2 by 2022. The 2018-2022 estimates made in 2017 would have made it impossible for Iraq to fund any portion of the needed funding as it would have needed to borrow to balance its budget during these years[2].

Iraq’s high dependence[3] on oil means that its budget and GDP are highly sensitive to the volume of oil it exports and to oil prices. The massive change in oil prices over the last few years, as seen from the five-year Brent crude price chart below, played havoc with Iraq’s budget during the ISIS conflict 2014-2017. They forced the government into a sharp fiscal retrenchment by cutting costs and cancelling all investment spending, while increasing military spending which had substantial negative knock-on effects on the economy[4]. The significant effects of oil price changes extend to planning for funding the reconstruction directly by Iraq, and indirectly by its stakeholders who need to take into account these effects in relation to their level of contributions and expected investment returns.

Brent Crude Jun 2013-Jun 2018, Source: Financial Times[5]

The fundamentals of the oil market went through major changes over the last four years, from expectations of supply scarcity versus increasing demand up to mid-2014; fears of increasing supply overwhelming decreasing demand from mid-2014 into late-2016; easing somewhat to hopes for a rebalance by mid 2017; and finally, into growing demand exceeding declining supply. Overlay the robust health of the global economy and it is expected the oil market will continue to tighten in the immediate future. This outlook is complicated by disruptive technologies such as those behind the Shale oil boom in the US, and by geopolitics affecting major suppliers such as Iran and Venezuela. These are balanced somewhat by OPEC’s actions and shifting perceptions of either its increasing dominance or increasing irrelevance. These perceptions came into sharp focus with the OPEC & non-OPEC supply cut agreement in late 2016 that started the recovery process. Recently there is news that talks have been underway to increase supply as prices have risen too high in response to threats to Iranian and Venezuelan supplies.

These would make budget planning, let alone long-term reconstruction planning, for Iraq an exercise in folly if it were to use the latest market implied future prices or to accept the prevailing wisdom at any given time as a basis for planning. This pretty much explains the conservative assumptions used by the IMF -which the world financial community depends on in assessing Iraq’s financial soundness and its credit worthiness. These assumptions served as the basis on which Iraq and the IMF identified creditors and donors for Iraq to cover its estimated budget deficits for 2017-2022 as part of the IMF’s 2016 Standby agreement.  Moreover, the IMF updated these assumptions with new estimates for forward oil prices as part of its Kuwait Conference presentation.

A recent article[6] noted “using realized prices of Iraqi oil of $49.1/bbl for 2017, and assuming Iraqi oil prices of $60/bbl for 2018, then declining to $51/bbl in 2022, would produce a cumulative surplus of $47.4bn for 2017-2022 instead of the earlier assumed cumulative deficit of $17.6bn”[7].  While using higher estimates for oil prices would result in a cumulative surplus of $78.2bn. In the first scenario Iraq could fund the reconstruction by a combination of $50bn from its oil revenues and $27bn from borrowings, and the final $11bn from aid/donations, which is in-line with the assumptions made by the IMF at the Kuwait conference.  While, in the second scenario Iraq could fund the reconstruction by a combination of $80bn from its oil revenues and $8bn from borrowings which is a vastly different proposition.

Given the impossibility of forecasting future oil prices, especially up to 2022, this article will consider the data for 2017-2019 given the higher degree of predictability in this short timeframe.

The IMF updated its global growth projections to +3.9% for both 2018 & 2019, up from its previous projections of 3.7% for both which was made in late 2017 as part of its World Economic Outlook (WEO) in April[8]. It believes that the upswing that began in 2016 has accelerated since then but it expects that it will taper off afterword’s. These coupled with changed dynamics in the oil supply/demand imply higher oil price assumptions for the period, which for the short-term has positive implications for oil exporting nations in MENA as outlined in its Regional Economic Outlook (ROE) May[9].

For Iraq, these would have huge implications for its economic profile for 2017-2019 and thus to its ability to start funding the huge reconstruction demands. The table below looks at the original IMF estimates for Iraq’s budget 2017-2019[10] versus updated estimates for 2017-2019 based on the latest actual data for 2017 and updated estimates for oil prices.

For sources & assumptions see endnote[11]

The updated assumptions for 2017-2019 imply a cumulative surplus of $28.1bn vs earlier assumptions of a cumulative deficit of $22.8. Although Iraq has identified funding sources for each year during the budget planning stages, it is likely that it would have not utilized them due to the higher revenues as a result of the higher than planned oil prices. These unused funding sources could be as high as $14.3bn[12].

Irrespective of the above, the upcoming government should have a cumulative surplus of $18.8bn by the end of 2018 which can be used to start the reconstruction process, which coupled with the likely surplus of $9.3bn in 2019 would give the country a great deal of flexibility to fund further reconstruction over the near-term. This flexibility would be augmented by $30bn, over five years, in investments and trade credit guarantees that Iraq received during the Kuwait Conference in February[13].

The effect of this spending flexibility on economic activity is enormous, in that should the surpluses be spent on reconstruction from 2019 over a two-year period, this would be equivalent to an economic stimulus of 14.5%[14] of 2019’s non-oil GDP over this period. This is a major economic stimulus by any account that would be magnified over the next five-years should the $30bn in pledges that Iraq received materialize.

However, the risk, and the likelihood, is that the upcoming government would succumb to public pressures to use some of this extra fiscal flexibility on populist measures. Such pressures have already been applied by parliament as it amended the budget by removing the 3.8% tax on salaries and pensions to appease an angry electorate in an election year. The elections marked by the continued pro-reform demonstrations since 2015, and the large active non-participation movement imply that the upcoming government would increase spending on populist measures to pacify the electorate and provide a visible peace divided.  In fact, the updated estimates for 2018 & 2109 in the table above reflect the expectations of higher expenditures, which would narrow the surplus for these two years, which in turn would detract from the funds available for infrastructure investment.

A further risk is the country’s corrosive corruption which would find breathing space as a result of higher oil revenues, especially if they are spent on populist measures, in the process relieving public pressures on the government to reform and to expose corruption. Moreover, the practice post-2003 of using state contracts as a means of reinforcing political influence on selected players in the private sector could continue, further entrenching corruption, with the government ability to fund the reconstruction and ability to award contracts.

Even, if the government would not succumb to populist measures, it would still need to resort to borrowing to continue funding the reconstruction. This is especially true given the high level of government expenditures, especially its public-sector payroll and social security spending. Moreover, higher oil prices for 2017-2019 will likely lead to the government to slow the pace of fiscal consolidation in response to public demands. This therefore means that budget surpluses will decline in time, especially as oil prices are likely to moderate in the coming years[15].

Borrowing, especially from the commercial debt markets, imposes a much-needed discipline on the government to adhere to sound fiscal policy and to continue the path of reducing its role in the economy and encouraging the development of the private sector[16]. Combined with the IMF’s 2016 Stand-By Agreement (SBA) this should help ensure sustainable macroeconomic stability.

Iraq’s ability to assume debt that is sustainable and within the confines of maintaining macroeconomic stability is much higher than assumed by many who merely look at the headline figure. An upcoming report by the author looks into the composition and background of Iraq’s debt[17]. The IMF estimates the total debt to be $122.9bn by end of 2017[18], made up of external debt of $73.7bn and domestic debt of $49.2bn.

However, $41bn out the external debt is to non-Paris Club creditors, mostly the GCC nations, that date back to the pre-2003 regime which are under negotiations to reduce them on the same terms as applied by the Paris Club of creditors. Should this happen they would likely be reduced by 90% to $4.1bn[19]. Therefore, including the unused borrowing for the 2017 deficit, this means that actual debt by end of 2017 is more likely to be $71.7bn[20] than the headline figure of $122.9bn. This would imply debt/GDP ratios of 37.3% for 2017 and 32.1% for 2018[21], giving Iraq plenty of scope to assume debts of up to $40bn and still keep debt/GDP ratio under 50% for 2018[22].

A sea change in Iraq’s position has taken place since the months leading up to the Kuwait Conference, but perceptions have not. Iraq’s position was that of a country with a debt/GDP ratio of 63.8%/65.3% for 2017/18, that needs to borrow to fund its budget deficit for the next few years and thus needs aid/donations to fund an urgent and massive reconstruction. The sea change, based on the IMF’s May REO, is that Iraq now has a debt/GDP ratio of 58%/54.7% for 2017/18, a budget surplus and can start to fund its reconstruction. This article further shows that Iraq can start funding its reconstruction in 2018 with $18.8bn in cumulative surpluses based on current oil prices. If the argument above on the underlying nature of its debt were to unfold then Iraq can add to this by accessing $40bn in the debt markets- which is far more than its immediate needs for reconstruction.

The underlying positive for Iraq that is fortunately to a large extent free from any government planning, or mismanagement, is that the reconstruction along the lines described by the joint study of the World Bank Group (WBG) and Iraq’s Ministry of Planning (MoP), on its own, will generate substitutional non-oil economic activity[23]. This activity can over the course of the next five years provide the non-oil economy with sufficient momentum for Iraq to escape its high oil dependence, which no government has attempted before. The silver lining of the trauma caused by the ISIS conflict, coupled with collapsing oil prices was that Iraq, in spite of all the improbable odds, united and climbed its way out of the abyss and of total disintegration. Given Iraq’s ability to start self-funding the reconstruction, a similar silver lining is that the recovery from the same trauma, in the form of reconstruction, could lead the country’s evolution away from pure oil dependence.


Ahmed Tabaqchali’s comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.


[1] http://www.iraq-businessnews.com/2018/02/22/its-not-the-donations-stupid-key-points-from-kuwait-conf/ – _edn3


[2] IMF’s estimates and presentation in the Kuwait conference are at:  Session 3 after clicking on the pdf icon of the presentation. Presentation starts at minute 8.20 on the youtube link on the link below: –


IMF’s earlier estimates are from Country Report No. 17/251


[3] 2017 estimates: Oil exports accounted for 99% of all exports, Oil revenues accounted for 87% of government revenues which in turn accounted for 32% of total GDP. Moreover, Oil GDP accounted for 38% of total GDP and indirectly accounts for the bulk on non-Oil GDP as the government’s orders drives non-Oil GDP (source: Country Report No. 17/251).


[4] A report by the author discusses this dynamic and the government response http://www.iraq-businessnews.com/2017/07/17/economic-consequences-post-mosul/. Some highlights of which are “The government maintained overall spending on salaries and pensions, but it introduced new and increased existing consumption taxes on a large number of consumables while it also increased utility prices, Non-oil investments bore the brunt of the cuts as the government sharply curtailed all capital spending and investments.”


[5] https://markets.ft.com/data/commodities/tearsheet/summary?c=Brent+Crude+Oil

Iraqi oil sells for about $5/bbl discount to Brent.


[6] http://www.iraq-businessnews.com/2018/05/23/market-review-elections-the-economy-and-the-stock-market/


[7] The deficit of $17.6bn was based on IMF estimates made in 2017 (Country Report No. 17/251). The IMF has since then updated its revenue estimates higher based on higher oil prices which imply a much lower cumulative deficit than the one used here, but these estimates were only up to 2019 and hence old estimates are still used. Updated data is at: World Economic Outlook April 2018 & Regional Economic Outlook May 2018 in the two footnotes below.


The estimates depend on IMF projections which assume that the government spending would continue to be constrained but this is unlikely given public demands for an ease as a result of higher oil prices. This will be balanced in this report’s higher oil price assumptions such that the surpluses would be the similar as will be seen later in this report and in the author’s other recent publications.


[8] https://www.imf.org/en/Publications/WEO/Issues/2018/03/20/world-economic-outlook-april-2018


[9] http://www.imf.org/en/Publications/REO/MECA/Issues/2018/04/24/mreo0518 (data only until 2019)


[10] IMF Iraq Country Report No. 17/251 (http://www.imf.org/~/media/Files/Publications/CR/2017/cr17251.ashx). The IMF assumptions are used throughout for assumptions made in 2017, instead of available Iraq budget figures for 2017 & 2018, to ensure consistency with other estimates used throughout. Moreover, the data from the IMF country report 17/251 are used instead of the IMF updated data (footnotes above) as the updated figures provide only headline numbers without specific details that are needed for a full analysis.

Note: figures are rounded, and so total figures might not add up fully.


Below are the main differences between IMF projections and those of Iraq’s budgets for 2017 & 2018, and Iraq’s actual 2017 budget spending.


Iraq’s budget vs IMF projections for 2017

  • Iraq’s budget
    • Total revenues of $66.8bn made up of oil revenues of $57.5bn based on oil price of $42/bbl, and total exports of 3.75mbbl/d. These exports include the KRG’s exports of 0.55mbbl/d.
      • The agreement with the Kurdistan Regional Government (KRG) was for it to export 0.55mbbl/d through Iraq’s State Oil Marketing Organization (SOMO). In return the KRG would receive 17%, less sovereign expenses, of the federal budget. However, neither have fulfilled their obligations, yet, both of Iraq’s budget and the IMF budget assumptions include the KRG’s oil exports and its share of expenditure.
    • Expenditures of $82.2bn, creating a deficit of $18.3bn.
  • IMF projections:
    • Total revenues of $69.2bn made up from oil revenues of $61.3bn based on oil price of $45.3/bbl and total exports 3.8mbbl/d, and non-oil revenues of $7.5bn
    • Expenditures of $79bn, creating a deficit of $9.8bn


Iraq’s preliminary budget vs IMF projections for 2018

  • Iraq’s budget
    • Total revenues of $77.5bn made up from oil revenues of $65.2bn based on oil price of $46/bbl, and total exports of 3.888mbbl/d. These exports include the KRG’s exports of 0.55mbbl/d.
    • Expenditures of $88.1bn creating a deficit of $10.6bn
  • IMF Projections
    • Total revenues of $73.9bn made up from oil revenues of $64.3bn based on oil price of $45.5/bbl, and total exports 3.9mbbl/d and non-oil revenues of $9.3bn
    • Expenditures of $83.4bn creating a deficit of $9.5bn


Iraq’s actual 2017 budget revenues and expenditures based on Ministry of Finance (MoF) data

  • Oil revenues of $55.3bn, which exclude the revenues from the KRG’s direct exports of 0.55mbbl/d (included in the IMF projections in the table used and in Iraq’s budget planning). These revenues would have been higher than planned by the government which assumed an oil price of $42/bbl total, including KRG, exports of 3.75mbbl/d vs the realized price estimated at $49.2. They are also higher than the IMF est.’s which assumed a $45.5/bbl on total exports of 3.8mbbl/d.
    • If the KRG’s exports of 0.55mbbl/d were sold at the same price, then total revenues would have been $73.6bn vs the Iraq budget plans of $57.5bn or the IMF’s estimate of $61.3bn. This reflects the budgets sensitivity of $1.4n to every $1 change in oil prices.
  • Non-oil revenues of $9.9bn for total revenues of $65.4bn (ex-KRG oil revenues).
  • Expenditures, which excluded the KRG’s share of the budget, were $63.8bn or showing a surplus of $1.6bn.
    • If the KRG’s planned $6.4bn expenditures were to be included, total expenditure would have been $70.2bn vs the planned $82.2bn, which would have resulted in a surplus of $3.4bn.



Note:  Revenues for 2017, and likely for 2018, benefited from higher than planned oil prices. But, expenditures in 2017, and likely in 2018, were lower than planned. The under execution of the budget expenditure, especially on capital spending, is an ongoing feature of Iraqi governments due to the country’s weak institutional capacity and which possess a risk to the reconstructing effort.


Sources for this footnote:








[11] Sources: IMF Iraq Country Report No. 17/251, IMF World Economic Outlook (WEO) April 2018 database, IMF Regional Economic Outlook (REO) statistical appendix, Iraqi Ministry of Finance (MoF).


  • Updated figures for 2017 are from MoF which show revenues and expenditures for 2017 excluding those for the KRG. However, MoF and IMF estimates and planed budget include those of the KRG (see details in footnote 9).
  • Iraqi oil price averaged $63.5 for Jan-Jun, while Jun’s average was $69.9. The YTD average is used as an estimate for the full year.
  • Total updated revenues for 2018 & 2019 include higher non-oil revenues as the IMF in May’s REO increased its growth rate for non-oil GDP to +4.4%/+5% for 2018/2019 up from 2.4%/3.7%
  • Revenues are estimates based on updated oil price assumptions while expenditures are the updated IMF’s estimates.
  • Updated Expenditures reflect expectations that the government will ease back on its tight fiscal consolidation, however, they might very well be off-set by the historic tendency for lower budget executions.


[12] The IMF (Country Report No. 17/251 P: 28) notes “The program is fully financed through the next twelve months, but there is a financing gap of $7.1bn in late 2018 and 2019. The authorities have contacted one donor to fill the 2018–19 financing gap, for which there is good prospect”. The financing gap is made up of $5bn and $2.1bn respectively 2018 & 2019. Which implies that Iraq has achieved full financing for 2017’s $9.8bn deficit, $4.5bn out of 2018’s $9.5bn deficit., and $1.3bn out of 2019’s $3.4bn deficit.


Since the actual budget achieved a surplus for 2017 and would likely achieve a surplus in 2018, then Iraq has borrowed $14.3bn ($9.8bn + $4.5bn see above) to fund a deficit that did not materialize and so the funds could either not be drawn which would lower overall debit or used to fund reconstruction projects.


However, it should be noted that “fully financed” does not imply that the all of the funds were delivered to Iraq but that funding agreements were made.


[13] https://uk.reuters.com/article/mideast-crisis-iraq-reconstruction/factbox-pledges-made-for-iraqs-reconstruction-in-kuwait-idUKL8N1Q55RY


[14] This would be about 8.4% of 2019’s updated GDP estimate, but as it would be spent on reconstruction it would be a stimulus of about 14.5% of non-oil GDP. It would have an added significance in that the planned for deficits would have been accompanied by restricted capital spending and continued fiscal consolidation by the government, the reversal of which alone would have expansionary effects.


[15] The major shortcoming of the successive governments since 2003, was to use most of the oil revenues on expanding the public payroll and social security spending as main vehicle for transfer of oil wealth. As a result very little of oil revenues went towards reconstructing and building the country’s physical capital that would contribute towards diversification away from oil and to economic sustainability. The upshot is high oil dependence with the resultant vulnerability to external forces, import dependence, weak/small private sector and a skewed labor market.


Without a fundamental change of track, such as that agreed by the IMF’s 2016 SBA, the fruits of the country’s expanding energy production profile as a result will perpetuate this process. However, this is unsustainable given Iraq’s large rapidly growing population whose needs for public sector jobs cannot be met under any optimistic scenarios for increased oil production or prices.


The upshot, is the fundamental change of track along the SBA guidance will take a number of years to unfold, and as such the public-sector payroll and social security spending will continue to account for the bulk of government expenditure and thus the need for accessing the debt markets to fund reconstruction down the road.


[16] As can be seen from the author’s report on Iraq’s debt (link on next footnote) that Iraq’s only debt on truly commercial terms are two Eurobonds worth $3.7bn: A $2.7bn bond issued in 2006, due in 2028 with a 5.8% interest rate; and a $1.0bn bond issued in 2017, due in 2023 with a 6.5% interest rate. However, the third $1bn bond issued in 2017, due in 2022, is guaranteed 100% by the U.S. government, with a 2.1% interest rate, and as such does not constitute debt on commercial terms.


Therefore, should Iraq access the commercial debt markets these would require fiscal discipline to assure the markets that debt would be serviced. Some of the requirements would take into account, debt repayments as a percentage of exports, currency stability and the level of foreign reserves in relations to months of imports, balance of payments, budget balance as a percentage of GDP. They would also take into account other liabilities and contingent liabilities such as the state guarantees discussed in footnote #22 below. All of these requirements will affect the amount of debt raised and the interest rate it would carry, which would place a much-needed significant fiscal discipline on the government. Coupled with the huge demands for reconstruction they should help ensure that Iraq’s governments pursue sound fiscal policies while following sustainable macroeconomic stability.


[17] Link to be provided in an updated version of this report.


[18] Updated figures in REO show that the updated figure for 2017 is $114.6bn of which foreign debt is $68bn. However, the older assumptions of 2017 are used as they are part of longer term projections, and crucially they served as the basis for Iraq securing finding for the expected deficits as explained in an earlier footnote.


[19] The IMF notes: “These arrears can be tolerated under the Fund’s policy on Arrears to Official Bilateral Creditors because the Paris Club Agreement was found to be adequately representative (i.e., Paris Club creditors provided most of the financing contributions required from official bilateral creditors in the context of that agreement) and the authorities have since been making best efforts to conclude agreements with non-Paris Club creditors on Paris Club comparable terms. Negotiations to implement debt relief on the same terms as with the Paris Club creditors, i.e. an 89.75 percent net present value reduction, are ongoing.”.


In the current environment of the rebuilding of the relationship between Iraq and the GCC it is very likely that these negotiations will lead to a grand bargain in which both sides agree to the same 90% debt reduction in exchange for investment opportunities and long-term agreements.


[20] $122.9bn less: (1) 90% of $41 or $36.9bn, (2) Unused deficit funding of $14.3


[21] The IMF’s updated GDP figures for 2017/2018 are $197.76bn/ $223.3 and GDP/Debt ratios of 58%/54.4%


[22] It should be noted that the government has issued 11 state guarantees that affect the total amount of debt that it can take as these are contingent liabilities. These are a total of $36bn made of which the largest is $32.4bn in guarantees of service payments to independent power producers (IPPs) in the electricity sector for the 14 years of the contacts.  This makes it essential for the government to continue with the electricity sector reform and ensure the collection of tariffs-the failure of which will make the state liable to fulfil its guarantees to the IPP’s which would add to the debt.


Separately, the IMF aware of all of the above liabilities, in its presentation in the Kuwait Conference, had argued that Iraq should be able to borrow up to $36bn over the next five-years while its debt to GDP would be around 50% by 2022-23. These were made under lower oil price assumptions, with more fiscal discipline in expenditures, over a longer time frame, but without the benefit of the 90% haircut to the $41bn in debt.

http://www.iraq-businessnews.com/2018/02/22/its-not-the-donations-stupid-key-points-from-kuwait-conf/ – _edn4


[23] The IMF has attributed reconstruction for increasing its non-oil GDP growth rates to +4.4%/+5% for 2018/2019 up from prior +2.4%/+3.7%.


These figures could be higher should the full $88bn in reconstruction spending be embarked upon over the next five years as that would be a stimulus equivalent to about 14% of non-oil GDP in each year over the five-year period. While, it is ambitious to assume that all of that amount would be properly spent, yet even half that amount would create the conditions for self-sustaining economic activity for the non-oil sector.

Please click here to download Ahmed Tabaqchali’s full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets. He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS). He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.