Protests Force Iraq to Deepen Its Debt Undertaking

Iraq’s prime minister, Haider Al Abadi, has had it hard lately. A poor electoral showing for his party at national elections in May was followed by allegations of shambolic electoral organization, with fraud alleged across the field. Now, protests that already have resulted in over a dozen dead have marred his previously clean record for a light hand. With protesters demanding that the public sector provide not only better services but also more jobs, Al Abadi faces the reality that even with oil prices having rebounded, the government’s inability to stop the expansion in state expenses means Baghdad continues to face a fiscal crisis. This, in turn, means that even if Al Abadi manages to hold on to power following a protracted election recount and the usual horse trading, his second term would start with a deficit of credibility.

This is how it all unfolded. Gripes over poor services are not new, and were at least one reason Al Abadi’s party came in at a surprising third place in the elections. But the usual summer demonstrations accelerated as the country faced a dual crisis over shortages in water and power. Turkey’s cutback in flows from the Tigris River exacerbated Iraq’s water crisis at the worst possible time. Then, the country’s already overextended electricity grid came under further strain from increased use as temperatures rose. Iraq depends not only on its own generating capacity, but also on electricity from Iran. Together, at the best of times, they can supply power for about 20 hours each day. But, suffering its own usage spikes, on July 3 Iran cut off four major lines through which it supplies Iraq.

As air-conditioners cut off and temperatures rose, protests escalated the next week. In Basra, people began to demonstrate not only over electricity and water, but also about unemployment. This was the moment the protests turned. Then, at a demonstration on July 8, security forces killed the first civilian in the current wave of violence. This escalated the tempo of protests, and in the days that followed there were attacks on government buildings, political-party offices and oil facilities. The only serious threat to an oil installation, however, was to Lukoil’s Qurna 2 site, where there was a violent clash between security personnel and protesters attempting to enter the facility. Nevertheless, this led to a temporary evacuation of some of Lukoil’s expatriate staff and raised the prospect of a threat to the country’s economic lifeline. This, then, was the second moment of change in the protests.

Al Abadi reacted swiftly. He reinforced protection for vital facilities, using the army and the famed Counter-Terrorism Service that had played such a vital role in liberating Mosul. Yet, the more “forward” stance by the security services led to even more clashes, more arrests and more bloodshed. At last count, Iraq’s Human Rights Commission reported that 14 Iraqis had died and nearly 300 had been injured.

Combined with a failed effort to break the protesters’ momentum by temporarily cutting off the internet, the government response has damaged the reputation Al Abadi earned in his first term for being tolerant of demonstrations. As to his other, supposedly more proactive, responses, few Iraqis have invested any faith in them. Al Abadi appointed the oil minister, Jabbar Al Luaibi from Basra, to head a ministerial committee to meet protesters’ demands. No one thought he could achieve anything in this regard. Then, Al Abadi promised to create 10,000 jobs for Basra residents, though private companies would be responsible for coming up with the positions. How this would happen was left unsaid, which added to further public unhappiness.

On his return to Baghdad on July 13 from this year’s Nato summit in Brussels, Al Abadi created a new “crisis cell” executive structure, involving the cabinet down to the administration in each province. It remains to be seen how nimble this structure would be in handling the crisis. For now, however, the results are not encouraging. Take for example Al Abadi’s attempt to elaborate on his earlier proposals. The only one he managed to frame with any precision was a grant of nearly $3 billion to Basra to improve electricity, drinking water and health services. Yet this one substantive initiative in fact involved money that Basra was already supposed to receive under existing laws for its oil production and customs-revenue collection.

Worse, Al Abadi later admitted that state finances were in a perilous state. Iraq needed, he said, $67 per barrel of oil to cover baseline costs. Iraqi crude sells at a discount to Brent, so its break-even price would be about $75. This is a level where Brent prices currently hover, which means there is no margin for extra spending. However, the new expenditures promised and implied will raise the break-even price even higher. This means more debt.

Al Abadi took office in 2014 at a low point in Iraq’s recent history. The country was on the verge of collapse in both security and economic terms. It is true that all the large problems Iraq faces today were accumulated before 2014. So one might be tempted to concur with Al Abadi that these weren’t of his making. For example, he claims that public-service failures were partly due to legal mandates toward decentralization, and that provincial authorities had misused the powers devolved to them; in other words, there was very little he could do. Yet, it is equally fair to say that after four years in office, the fact that these issues remain intractably unresolved is a measure of his failure. If Al Abadi manages to form a new government, he will start his second term with a crisis of credibility and questions of how Iraq is ever to dig itself out of its morass. But even before then, it is unclear how he will first convince all Iraqis to stop their protests and return home.

Kirk H Sowell is a political risk analyst and the publisher of the biweekly newsletter Inside Iraqi Politics. Follow him @uticarisk.