Iraq

Iraqi Dinar devaluation and the price of the food basket [EN/AR]

Format
Analysis
Source
Posted
Originally published

Attachments

Macro-economic Situation

Significant decline in oil revenues, a history of expansion of the state’s role in the economy and competitive currency exchange rates from neighboring countries pushed the Iraqi Government into a budget deficit by the end of 2020. This led to the Government taking a firm measure for policy reform to mitigate risks and restore the economy.

Throughout, WFP has been monitoring food and market prices. This report presents an analysis and findings of the effects of the recent currency devaluation on food prices, including on the most vulnerable households. Towards the end of 2019, Iraq and other members of the Organization of the Petroleum Exporting Countries (OPEC) witnessed a decrease in oil prices and struggled to reach a speedy consensus on production cuts to boost demand and stem the price decline. The demand for oil was further hampered by the COVID-19 pandemic and resultant world-wide lockdowns in 2020. Iraq, the world’s third biggest oil exporter, remains heavily dependent on oil which contributes to 90 percent of the government’s revenue, a dependency much higher than other oil exporting countries in the MENA region. This twin shock of decreased demand and price of oil has impacted Iraq’s economy and Government budget the most.

The average price of oil in 2019 was USD 68/barrel, which dropped to USD 21/barrel by mid-2020 before a slight improvement to USD49/barrel at the end of 2020. The average price per barrel in 2020 has decreased by 38.7 percent when compared to its price in 2019. According to the International Monetary Fund’s latest estimates, Iraq’s economy contracted by 11 percent in 2020; leaving Iraq as the worst affected country among other OPEC members in terms of a contracted budget due to a decrease in oil revenues. When compared to other MENA oil exporters, Iraq has the lowest non-oil based revenue as a percentage of GDP, which means that the government is unable to rely on other sources of revenue to compensate for the oil-driven budget deficit.

Oil revenues are critical for Iraq. They largely fund the government’s universal food subsidy program, the Public Distribution System (PDS) that includes four essential commodities (wheat, rice, sugar and vegetable oil) distributed to Iraqi people every month. Also, due to the budget deficit the Iraqi government has faced challenges in paying salaries of civil servants as well as pensions for its citizens.

As a result of decades of expansion, Iraq’s public sector is the largest employer for the country’s workforce. Expanding the public sector’s role in the economy was a two-factor policy, expanding the number of individuals employed in the sector, and increasing the salaries and pensions of these individuals.

The increase in salary and pension expenditure has placed a burden on the government resources amidst a shrinking oil driven budget. From 2014 to 2020, payroll expenditure increased by 60%, from IQD 40.2 trillion to IQD 64.2 trillion. It is predicted that the draft 2021 government budget of IQD 164 trillion will not cover payroll expenditures, putting in consideration that the current budget deficit is IQD 80 trillion.

As the percentage of public sector labour force employment increased in the past decade, studies have noted a decline in the productivity of the Iraqi labour force. The decrease in productivity resulted primarily from a lack of competition. This lack of productivity has caused a decrease in the level of public sector service provision along with a stagnation in overall government output.

The graph below shows the gap between the productivity of the local labour force and the increase in salary and pension expenditure by the government, which is one of the root causes of the government budget deficit.

The decrease in government revenue has been compounded by an uncompetitive Iraqi Dinar vis-à-vis currencies of the country’s main trading partners, which has lead to a decreased demand for Iraqi national products. Market demand for imported products has shifted to countries that have a lower exchange rate; leaving Iraq with a decrease in its non-oil export revenue. The financial crisis of 2020 pushed the government to consider revising the salaries and benefits of the public sector employees.