Public Sector Reform: A Way Forward for Iraq?

By Faisal Al-Suhail

The public sector in Iraq accounts for the majority of employment in the oil-rich country.Plummeting oil prices and the COVID-19 pandemic have resulted in economic crisis and an ever increasing budget deficit. Where there is crisis however, there is opportunity: will 2021 bring a much needed reform of the public sector in Iraq?

When the Iraq anti-government protests erupted in 2019, the protesters demandedheavy reforms. Their request was threefold: provide basic public services, reduce unemployment, and tackle the corruption that has been rampant throughout the country. The corruption of the ruling political class, and resulting economic mismanagement, is widely considered as the root cause of the aforementioned issues.

The country has been confronted with two major developments outside of its control, namely the COVID-19 pandemic and plummeting oil prices. In a nation where petroleum accounts for 90% of the state revenue, such developments prove to have catastrophic consequences. As a result, the Iraqi Government was faced with a liquidity crisis which led to a severe budget deficit. Action needed to be taken to avoid an economic collapse.One of the largest challenges to tackle in this crisis will be public sector reform.

A bloated public sector

Due to the liquidity crisis, the majority of Iraqi civil servants had their monthly payments delayed in 2020. In a nation where the public sector is responsible for the majority of employment, such a scenario poses a considerable challenge for the Iraqi state. The UN estimates that public sector employment provides for nearly 60% of all employment,  leading to a bloated public sector that totals a yearly spend of approximately 25 % of the nation’s GDP. The recent decline in oil-revenue has hindered the government’s ability to pay these wages, without descending into economic ruin and large debts. Protests from civil servants in response to the government’s inability to make these payments highlights the current state of political fragility within the nation.

The Iraqi Government recognised this problem and, in October 2020, published a whitepaper outlining its intention to shift from a centrally planned economy towards a market economy. It suggests a significant reduction of civil servants, together with a push for more private sector employment. However, a closer look into this document shows us that there are no exact details on how to achieve this.

In order to pay the salaries of the civil servants, the Central Bank of Iraq decided to devalue the Iraqi Dinar by 23 % against the US Dollar. This currency devaluation caused a high inflation in the country’s economy. From an economic point of view, this austerity programme was inevitable, but the Iraqi people highly criticised this move. The prices continue to rise  on almost every good and service in a country which imports the majority of its products. As a pre-emptive measure, the Iraqi state deployed security forces near important financial offices in Baghdad in fear of protests. A move which portrays the political sensitivity of this decision.

The patronage system of Iraq

The political elite of Iraq has utilised the public sector as a patronage system: support the political elite and receive a job in the public sector in return, is the rationale. This system is unsustainable and it is a matter of time before it fully implodes, since the Iraqi economy is not diversified enough to maintain such public expenditure.

The spoils of the oil-revenue have also raised the issue of the so-called “ghost” employees. High level political figures employed fictional employees towards their payroll. This is done for personal financial gain. For instance, these wages are often part of a fraud scheme where they get sold for a high amount of money to the public. Another example is simply receiving these wages towards their own monthly income through the use of different bank accounts. Estimates put the number of ghost employees at around 300 000, a clear indication of the mismanagement of the public sector.

Unsurprisingly, even amidst an economic crisis, the Iraqi Government showed no intention of decreasing its public expenditures and reforming the public sector. The 2021 Federal Draft Budget maintains a high level of spending largely dependent on oil-revenue with no indication of meaningfully reducing the budget deficit. From a political point of view, it is understandable: with the upcoming 2021 October elections, reducing the number of civil servants could be considered  political suicide. Furthermore, the political class is seemingly sticking to its patronage system as it intends to increase jobs for young people in the public sector in response to the anti-government protests. In the long-term, this is bound to fail. The public sector cannot sustain this strategy, considering that 700 000 young Iraqis come on to the job market every year.

Forecast

The risk of further destabilization or political unrest is a realistic possibility. An important factor to pay attention to will be the 2021 Federal Budget, which is currently being discussed in the Parliament to vote. If the budget remains unchanged from the draft, another large devaluation will most likely be needed. Simply devaluing the Iraqi Dinar will not be enough. It must be accompanied by significant public sector reforms, which the Iraqi political powers are not willing to push through. There is recognition among policy makers that reform is needed, however the reform required would have a significant impact on the Iraqi population through the reduction of large amounts of civil servants.Therefore, it is highly unlikely that the Iraqi government will push towards public sector reform. As a result, no matter what decision the Iraqi leadership will take, it is likely that political unrest and widespread protests will remain prevalent against a backdrop of economic insecurity.

The October 2021 elections will be a decisive event for Iraq’s socio-economic outlook.With new electoral laws passed, there are reasons to be optimistic as the young Iraqi’s who formed the backbone to the protests begin to form their own, new parties and participate in the elections themselves. More political participation from the Iraqi people can certainly be seen as a step in the right direction towards a new start for the land of the two rivers.