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Iraq is devaluing its currency. On Monday, Iraq Oil Report broke the news of the dinar’s impending devaluation, which comes as the government desperately searches for income to cover basic costs. Because oil is sold in dollars, and because the value of the dinar is pegged to the dollar, a decision by the Central Bank of Iraq to decrease its currency value will give the government more dinars to spend. A provisional draft of the 2021 budget, leaked on Thursday, is based on an assumption the exchange rate will be 1,450 dinars per dollar, compared to 1,182 dinars per dollar currently. It's a huge drop in value. The last time the CBI adjusted its exchange rate was in 2015, when the peg moved 1.37 percent, from 1,066 dinars per dollar. This time, the value set to drop by nearly 23 percent.

The devaluation amounts to a pay cut for almost everyone. For most Iraqis, who are paid in dinars but buy goods that are imported using dollars, their purchasing power is going to fall. As Maya Gebeily reports for AFP, there is significant concern that a devaluation will send even more people into poverty. It's also raising fears that — despite the government's plan to make the devaluation a one-time event, and maintain a steady dollar peg going forward — the dinar's value will continue to slide. "Our salaries will be worthless," Mohammad, a doctor at a Covid-19 ward in Baghdad, told AFP.

Despite the devaluation, the 2021 draft budget still includes a record-setting deficit. The provisional budget would authorize 150 trillion dinars ($103 billion) in spending — including 123 trillion dinars ($85 billion) in current spending and 27 trillion dinars ($19 billion) in investment spending — while counting on just 92 trillion dinars ($63 billion) in revenue. It is by far the highest dinar-denominated spending ever proposed, and the $40 billion deficit would shatter previous records. Those plans stand in contrast to the "white paper" released by Prime Minister Mustafa al-Kadhimi's government, which showed bluntly how Iraq cannot afford to maintain its current levels of spending, especially on government salaries. That said, Kadhimi's aspiration to cut expenditures is politically difficult. Any serious attempt to streamline the public sector would also threaten the patronage structures from which most political parties draw their funding and power — and Kadhimi might not be strong enough to take on the system. His draft budget certainly looks like an admission of defeat.

The new budget has big implications for Kurdistan. The Kurdistan Regional Government (KRG) is suffering from its own financial crisis and increasingly depends on money from Baghdad to make ends meet. Like the past few national budget laws, the provisional 2021 budget sets an expectation that Kurdistan will contribute 250,000 bpd to federal oil exports as a condition for receiving its full federal budget allocation, which is set at 12.5 trillion dinars ($8.6 billion). The law also contains several provisions that could be used to justify reducing or eliminating the KRG's transfers. Read the full analysis on Iraq Oil Report.

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The Geopolitical Equation

Iraq’s economic woes should sound alarm bells for U.S. President-elect Joe Biden. In a piece for Foreign Policy, Farhad Alaaldin and Kenneth Pollack warn that financial collapse could lead to a worst-case scenario of civil war that would draw in regional neighbors. If Iraq's government continues to lose legitimacy in the eyes of the people, "armed groups and tribes, including the armed militias backed by Iran, would try to fill the vacuum and usurp the role of the primary security forces in Iraq.... These same groups would also fight for territory to control. They might try to take control of revenue-generating resources such as oil fields, ports, border crossings, large businesses, agricultural land, and private properties." Alaaldin and Pollack propose the U.S. should step in to shore up Iraq’s finances before it gets to that stage, by offering up to $1 billion as part of a wider international aid package, with strict conditions for security reform.

International aid is likely to come with more strings attached. In response to Iraq's previous financial crisis, which began in 2014 and 2015, the IMF offered more than $5 billion in financing — a vote of confidence that helped the Iraqi government raise billions more in sovereign bond offerings. As a condition for that help, the IMF also insisted on reduced spending, helping chart a path for then-Prime Minister Haider al-Abadi's government to pass slimmer budgets. That positive trend did not last long. Abadi's successor, Adil Abd al-Mahdi, oversaw a massive increase in spending that Iraq couldn't pay for even with relatively high oil prices bolstering revenues. Now, the IMF is singing a familiar tune. In a report published this week, it predicted that Iraq’s economy would shrink by 11 percent in 2020, and that the 2021 budget needs to reverse “unsustainable expansion of wage and pension bills,” reduce “inefficient” energy subsidies, and raise non-oil revenues. Rapid population growth adds extra urgency. “Comprehensive” civil service reform would strengthen public sector effectiveness, while reducing fiscal costs, the report said, suggesting a need for spending and job cuts among government employees. It also urged an international audit of Iraq’s large state-owned banks, which it said is needed to “inform options for their restructuring.”

Neither Iraq nor western decision-makers can ignore Baghdad’s long history with Iran. Writing for the Century Foundation, Sajad Jiyad argues that, while there is significant will in Iraq to improve ties with Washington, Iran is ultimately a closer and more consistent partner, especially as the value of bilateral trade is estimated at $1 billion per month. Arab states have largely avoided Iraq for years, partly because of Tehran’s influence, although that trend could be shifting as Iraq rekindles relations with other regional neighbors like Saudi Arabia. Jiyad encourages the incoming Biden administration to frame its Iraq policy less in terms of countering Iran than in promoting a strong, sovereign Iraq. "The sooner the Biden administration recognizes Iraq’s true needs — and that forcing Iraq into a binary choice is the wrong approach — the better,” Jiyad writes. “Baghdad might cooperate with Washington, but it cannot repudiate or break ties with Tehran. That is simply the geopolitical reality."

Washington’s main ally in Syria risks being pulled into an intra-Kurdish conflict. Writing for Al Monitor, Amberin Zaman reports that Syrian fighters from the YPG, aligned with the Kurdistan Workers’ Party (PKK) separatist group, clashed with Iraqi Kurdish Peshmerga late Tuesday evening near the Syrian border. The fighters from the YPG, which dominates the U.S.-backed Syrian Democratic Forces, appeared to be trying to enter Iraqi Kurdistan to return to the PKK’s Qandil mountains stronghold. The incident comes in the context of Turkish pressure on the KRG to stop the PKK and aligned forces moving between northeastern Syria and Qandil, and follows several skirmishes in recent weeks that resulted in the death of at least one Peshmerga.

The PKK was high on the agenda during Kadhimi's first official visit to Turkey on Thursday. Ankara has carried out major military operations against the PKK this year on Iraqi soil, and Turkish President Recep Tayyip Erdogan has tended to ignore Iraq's complaints that unauthorized Turkish military bases and operations in Iraq constitute a violation of sovereignty. “We have agreed to continue our struggle against our common enemies IS, PKK and FETO,” Erdogan reportedly said, according to the Associated Press, in a joint press conference with Kadhimi in Ankara. Kadhimi issued a reserved and carefully worded statement, that it was “not possible for Iraq to show tolerance toward any [group] that threatens Turkey.” As a practical matter, however, federal Iraqi forces have little ability to intervene in Iraqi Kurdish territory.

More National News

Iraq's commander in chief is proving shockingly weak in his efforts to rein in the country's many paramilitary groups. Kadhimi took office vowing to provide justice for protesters who were assassinated and kidnapped, but he has not been able to enforce any accountability, effectively reassuring powerful armed groups of their impunity. The latest consequence of Kadhimi's failure is the kidnapping of Arshad Haibti al-Fakhry, a media producer, event organizer, and civil activist. He was taken by unidentified men from Baghdad's Ishtar Hotel in late November by unidentified men; suspicion falls on myriad Iran-aligned armed groups, including paramilitary formations that operate under the Iraqi government's al-Hashid al-Shabi (Popular Mobilization) program, according to Liz Sly and Mustafa Salim, reporting for The Washington Post. Belkis Wille of Human Rights Watch says that promises by Kadhimi’s government to investigate and punish disappearances, including a new mechanism to locate victims, have born little fruit.

Arshad Haibti al-Fakhry. (Photo credit: Cengiz Yar)

Protests continued in the Kurdistan Region of Iraq over delayed salary payments for public-sector workers. The death toll now stands at 10 – eight protestors and two members of the security forces – while scores of people have been injured, and hundreds detained. The attitude of security forces highlights the dangers for journalists working in Iraq, writes Rebaz Majeed for Voice of America. He recounts how he was threatened while covering events in the city of Sulaimaniya, which is often praised for its liberal attitudes and relaxed atmosphere. “One member of the security forces spotted the camera in my hand, pointed a baton at me and shouted, ‘Move that camera or I will cut your throat!’" Majeed recounts. “In many parts of the world, threatening to cut the throat of a journalist might sound like dark humor, but where I report, it is a dark reality.”

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