Corruption Rules in Battle to Profit from Iraq’s Oil

November 23rd, 2019 - by Foreign Relations Bureau Iraq

Iraq’s Protests Raise Question: Where Does the Oil Money Go?

Foreign Relations Bureau Iraq

BAGHDAD (November 15, 2019) — Waves of violent protests have engulfed Baghdad and Iraq’s southern provinces, with demonstrators chanting for the downfall of a political establishment that they say doesn’t prioritize them.

Fueling the unrest is anger over an economy flush with oil money that has failed to bring jobs or improvements to the lives of young people, who are the majority of those taking to the streets. They say they have had enough of blatant government corruption and subpar basic services.
At least 320 people have died, and thousands have been wounded since the unrest began on Oct. 1.

“We are jobless and poor, but every day we see the flares of the oil fields,” said Huda, an activist in Basra, the province that accounts for the lion’s share of Iraq’s crude exports. She spoke on condition she be identified only by her first name for security reasons.

“Where do the millions go?” she asked.

It’s a good question. Oil accounts for roughly 85-90% of state revenue. This year’s federal budget anticipated $79 billion in oil money based on projected exports of 3.88 million barrels per day at a price of $56 a barrel. Iraq’s economy improved in 2019 due to an increase in oil production, and GDP growth is expected to grow by 4.6% by the end of the year, according to the World Bank.

The fruits of these riches are rarely seen by the average Iraqi because of financial mismanagement, bureaucratic inefficiency and corruption, experts and officials told The Associated Press. Overall unemployment is around 11% while 22% of the population lives in poverty, according to World Bank estimates. A striking one-third of Iraqi youth are without jobs.

“One of the main problems is that the oil wealth is spent on the public sector, and especially on salaries,” said Ali al-Mawlawi, head of research at al-Bayan Center, a Baghdad-based think-tank.

Iraq’s brand of sectarian power-sharing — called the “muhasasa” system in Arabic — effectively empowers political elites to govern based on consensus and informal agreements, marginalizing the role of parliament and alienating much of the Iraqi population in the process.

On the ground, this dynamic has played out through a quota system whereby resources are shared among political leaders, with each vying to increase networks of patronage and build support. To do this, leaders have relied on doling out government jobs as a foolproof method to preserve loyalty.

This tactic has bloated the public sector and drained Iraq’s oil-financed budget, leaving little for investment in badly needed social and infrastructure projects.

“That has been the approach,” said al-Mawlawi, “Patronage is based primarily on the provision of jobs rather than anything else. It’s the primary way to distribute resources — through the public sector.” In the 2019 budget, public sector compensation accounted for nearly 40% of state spending.

Iraq’s public sector grew in parallel with the development of the country’s oil industry following the 2003 US-led invasion that toppled dictator Saddam Hussein. With major international oil companies flocking to develop the country’s oil fields, the number of government employees grew three-fold in the last 16 years, according to al-Mawlawi’s research.

Offering jobs is also a recourse used by Iraqi politicians to quell protests in the past. Prime Minister Adil Abdul-Mahdi included thousands of hires in a reform package introduced last month. Experts said this approach only perpetuates the problem.

The trend is not unique to Iraq; oil-rich Gulf countries have experienced the same. But the oil sector’s inextricable link to Iraq’s muhasasa system has created a “Frankenstein version” of a typical phenomenon, said Ahmed Tabaqchali, a senior fellow at the Sulaymaniyah-based Institute of Regional and International Studies and Chief Investment Officer at Asia Frontier Capital Iraq Fund.

Because of muhasasa’s multiple, decentralized networks, “instead of one single authoritarian doing the hiring, we have many hiring as if on steroids,” Tabaqchali said.

Following the money trail of how ministries spend their budgets is difficult even for well-meaning reformers because there is little transparency and accountability.

The national budget has allocated increasing amounts every year for “goods and services,” which can vary from public service projects to mundane expenses like maintaining a ministry building. But many complain little progress can be seen on the ground. In some cases, the money is simply not spent because of poor planning and management, said al-Mawlawi.

Last year’s budget ended with a surplus of around $21 billion “not because we had too much money, but because we didn’t know how to spend it the right way,” he said.

Often, money earmarked for service projects by the government or international organizations gets spent by ministry officials for expenditures, said an Iraqi official, who requested anonymity because of regulations. Officials lump all the budgets together for spending and then “they always prioritize petty things and claim the money isn’t enough for the project,” the official said.

Or the funds are used to pay debts accumulated from previous years, the official said. “So when it’s time to sign the contract, they say ‘no money’ because what they have isn’t enough.”

“There are thousands of ways bureaucrats can siphon it off,” the official added. Crucial projects, meanwhile, remain incomplete.

School buildings in Basra, the province that accounts for the lion’s share of oil exports, are crumbling and overcrowded with multiple-shift programs.
On a recent visit to the Al-Akrameen school in the Abu Khaseeb neighborhood, headmaster Abdulhussain AbdulKhudher said he had asked the Education Directorate for funding to refurbish the school building erected in 1972 but was told there was no money.

“I rely on parents and volunteers to give furniture, keep the place clean for students so they can get an education,” he said.

Nearby, another school stood desolate. A young girl walked by and explained that it was empty and the students had been moved to another pre-existing school. “It will collapse any minute,” she said.

Iraqi leaders have been unwilling so far to reform the system, which experts said is unsustainable because of limited resources and overreliance on volatile oil markets.

Serious attempts were made following the 2015 financial crisis, when unpopular austerity measures were introduced by former Prime Minister Haidar al-Abadi’s administration. But when oil prices recovered, political pressure trumped strict spending measures.

Abdul-Mahdi’s government saw a 25% increase in spending compared to previous years.

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