Iraqi Prime Minister Mustafa al-Kazemi has a stability problem.

Catapulted to power this year amid an outcry over the predecessor government’s mass killing of street protestors agitating against corruption, unemployment and poor state services, Kazemi now faces his own crisis as the nation teeters precariously on the edge of financial and economic collapse.  

A former journalist and Saddam Hussein-era exile who returned to Iraq after America’s 2003 invasion and occupation, Kazemi’s political career was fast-tracked when he was appointed to administer the country’s intelligence services in 2016.

That surprise appointment opened the door for Kazemi to enter the political scene, where he quickly found himself in the delicate and difficult position of trying to balance relations between the United States and neighboring Iran.

While that balancing act is as ever fraught with risks, it is the economic and financial demands of Iraq’s own rival political forces that could ultimately be his government’s undoing. To appease the populace, the government has overseen a major expansion of public sector jobs, pensions and transfers. 

On one political side is the Iraqis Coalition alliance led by Shiite cleric Ammar al-Hakim, which holds 41 seats in the 329-member legislature. The bloc is loyal to Kazemi and believes he can reform the political system, control spending and end endemic corruption.

Hakim’s coalition also wants a new agreement with Washington to regulate the presence of its forces in the country and reduce Iranian interference. The bloc is also looking to Kazemi to conclude a “final settlement” agreement on oil imports and border crossing resources with the country’s semi-autonomous Kurdistan region.

At the same time, the Iraqis Coalition expects the prime minister to rout the remnants of the Islamic State (ISIS) jihadist group, which began re-launching attacks in areas where security forces previously retook from the extremist militants in 2016 and 2017.

Iraqi Prime Minister Mustafa al-Zamei looks at a map with a member of his security apparatus while flying to the restive northern city of Kirkuk on June 2, 2020. Photo: AFP/Iraqi Prime Minister’s Office.

The pro-Kazemi bloc is cognizant that confidence in Iraq’s political process has been shattered, evidenced in last October’s nationwide protests. They were only quelled by a violent security crackdown and the spread of Covid-19 beginning in February.

As the Iraqis Coalition and their supporters see it, Kazemi is Iraq’s best hope and the only person capable of halting the country’s descent into new rounds of chaos, bloodshed and economic catastrophe.

On the other political side are the bulk of the Shiite parties, ranging from the pro-Iran Fatah alliance of Hadi al-Amiri to the nationalist Saairun alliance of Muqtada al-Sadr. Sunni forces that would prefer Kazemi serve as a one-term prime minister while they regroup are also in the camp of somewhat strange bedfellows.

This broad faction is racking up national debts to build up its patronage networks ahead of parliamentary elections, dangerously at a time when the economy is in dire straits, critics contend. Elections are expected to be held within the next 12 months.

Iraq’s political system still rests on a bloated and hidebound bureaucratic apparatus – a holdover from the Saddam era – that either employs one in every five Iraqis or assists them in the form of retirement and financial aid.

The total budget for state employee salaries in 2004 was US$2 billion. A decade and a half later, raises and new bonuses have ballooned that figure to over $43 billion, according to government data. It’s a bill the post-conflict state can ill-afford, say economists.

In May, the World Bank estimated that Iraq’s economy would contract by 5% in 2020. With global oil prices at around $30 per barrel and in the absence of any fiscal consolidation, the budget deficit could surge to a “staggering” 19% of gross domestic product (GDP) by the end of 2020, the World Bank said.

Oil prices have recovered somewhat after collapsing due to the double whammy of the Covid-19 pandemic and a massive supply overhang. Photo: Facebook

It predicts the government will face a “severe financing gap” this year that will postpone vital infrastructure, delay needed human capital programs and reduce its ability to respond to post-Covid-19 recovery needs.

Iraq’s systemic largesse was built on an undeclared pact between authorities and the population to share the proceeds of oil revenues, which currently constitute more than 93% of Iraq’s financial income. That has meant the creation and distribution of positions in various government agencies and nominally independent institutions. 

At present, Iraq needs an estimated $4.5 billion per month to sustain salaries and retiree payments, according to government data. This amount does not include funds required for critical imports such as medicines, electricity and construction materials.

The Kazemi government thus now faces a yawning deficit to pay these bills. Oil revenues hit hard by the recent collapse in global prices currently hover around $2.5 billion per month. That compares to the first half of last year when monthly oil profits ranged between $6 to $7 billion, according to government data.

Oil revenues are not expected to rise as the global economy slips into a coronavirus-induced recession and fuel demand remains in the doldrums. Meanwhile, a “second wave” of the virus infections threatens a recent mild recovery in oil prices. 

That puts Kazemi between multiple rocks and hard places. He has been entrusted to rein in Baghdad’s bloated and costly bureaucracy, but he does not have majority support in Parliament to pass new laws to reduce corruption and control spending.

In early June, the legislature failed to back the premier when he tabled a motion to reduce employee salaries by 10% to 15% to ease the fiscal deficit. Instead, Parliament voted on June 10 to obligate the Kazemi government to disburse salaries to employees and retirees without any cuts.

Iraqi Hadi al-Amiri (C), attends a condolences meeting following the killings of Iranian commander Qassem Soleimani and Iraqi paramilitary commander Abu Mahdi Al-Muhandis, on January 6, 2020 in Karrada in central Baghdad. Photo: AFP/Ahmad Al-Rubaye

There are legitimate reasons to fear belt-tightening. Political camps vying for electoral office fret losing their support bases if they are seen as responsible for any cuts to wages or benefits. They also fear widespread unrest and a repeat of last year’s massive demonstrations that threatened to bring down the entire system.

Iraq witnessed huge demonstrations in 11 of its 19 governorates last October. The protests crippled the country and led to the overthrow of the Adil Abdul-Mahdi government earlier this year. More than 500 protesters were killed and 7,000 others wounded during the unrest, according to the United Nations Assistance Mission for Iraq (UNAMI).

Notably, government employees did not participate in the October protests in any coordinated or large-scale manner. But with a deepening financial crisis in the oil fields in southern Iraq, and the layoff of about 15,000 workers due to low oil prices, strikes and sit-ins threaten to disrupt oil production and by association the state’s revenues.

Low oil prices have not only exacerbated Iraq’s financial crisis but have also hit Baghdad’s commitment to reduce production and hence raise prices as per an OPEC+ agreement reached in April.

Iraq, which produces more than 4 million barrels of oil per day, was obligated in the first phase agreement to reduce production by more than one million barrels per day (bpd).

The cash-strapped Kazemi government was only able to deliver on a 42% of that reduction in May, however, followed by an improved but still lagging 60% compliance in June. The failure to adhere to promised cuts has earned Baghdad negative attention from Saudi Arabia and Russia, which lead the alliance. 

Baghdad has responded by blaming the Kurdistan Regional Government in the north of the country for allegedly failing to adhere to its share of the production cuts.

An employee turns a valve at the Nahr Bin Omar natural gas field, north of the southern Iraqi port of Basra on April 21, 2020. (Photo by Hussein FALEH / AFP)

“The failure of the (Kurdistan) region to reduce its production to the prescribed percentage has affected the percentage of Iraq’s commitment to the OPEC+ agreement,” said Asim Jihad, a spokesman for the Iraqi Ministry of Oil.

In an interview with Asia Times, Jihad said he hoped that “the OPEC+ agreement will contribute to absorbing the oil surplus from global markets.”

He added, however, that a recovery in oil markets can only begin in earnest once the coronavirus is globally brought under control and restrictions on transportation and travel are lifted.

“The goal now is to export smaller quantities than before, but at a bigger and better price,” Jihad told Asia Times.

Meanwhile, Iraq faces issues with the foreign energy companies operating in its oil fields. Multinationals ranging from BP to ExxonMobil are contracted to receive production fees ranging from $4 to $10 for each barrel of oil.

Since the oil price collapse began and Iraq agreed to the OPEC+ production cut agreement, those sums are now cutting deeply into Iraq’s badly-needed oil revenues. In response, the government has launched negotiations with foreign companies to reduce their per-barrel share.

Jihad told Asia Times that “rate reductions were agreed” but declined to specify numbers. He noted that “negotiations are ongoing”, suggesting that Baghdad is not yet satisfied with the multinational companies’ offered terms.

A government advisor told Asia Times he likened the economic reality in Iraq to an “overloaded ship.” “This ship cannot bear the financial burden and we are waiting for it to sink at any moment,” he said.

To retain loyalty and survive a vote of confidence held in March, Kazemi appointed ministers across the spectrum of leading parties and figures close to them. He now appears to be buckling broadly to their economic demands.

A gas affected Iraqi demonstrator is carried away after security forces’ interventions during an anti-government protest at Al-Khilani Square in Baghdad, Iraq on February 22, 2020. Photo: AFP via Anadolu Agency/Murtadha Al-Sudani

Kazemi’s supporters are still publicly optimistic about his ability to overcome the crisis by working with parliamentarians to implement “reforms.” However, the government advisor said on condition of anonymity that “no one wants to fix the economic reality.”

“The political forces are ready to shackle many Iraqi generations in debt in exchange for not losing their supporters, who receive salaries from the government,” he told Asia Times.

Indeed, on June 24, Parliament passed a law that allows the government to borrow internally and externally to cover its ever-expanding fiscal deficit. Borrowing will ensure that state employee salaries and government contractors are paid in full.

At the same time, the World Bank said in May that by financing the budget shortfall through central bank reserves and state-owned banks, the government is “increasing the country’s vulnerability in the near-term.”   

That doesn’t speak to beleaguered private companies, many of which are linked to the oil industry. “No one thinks about the private sector, which employs about 8 million Iraqis,” the government advisor said. “The workforce in Iraq is not just state employees.”

Falling oil prices and the global pandemic have caused an estimated 40% of private sector workers to lose their jobs, according to the International Migration index. There is little to no relief in sight as the pandemic shows few signs of abating.

Those unemployed workers could provide fuel to a renewed protest movement that perceives, as previously, the political class is coasting at the people’s expense. Such a scenario, the government advisor says, will only hasten the “sinking of the ship” called Iraq.