Political and economic instability in Iraq and its Effect

The Middle East and particularly Iraq continues to be a hot spot of unrest. Political tension in Iraq continues to grow as followers associated to the Shiite cleric are raising new questions associated to the extent of the United States influence over the Iraqi government. The United States remains a key and critical ally in the ongoing battle against the Islamic State. Recently, protesters who are loyal to Moqtada al Sadr stormed into the Iraqi parliament occupying the parliament for hours. Eventually, the protesters withdrew but indicated that they would return in the near future. Also, the Islamic State claimed responsibility for additional suicide attacks within the Baghdad area during the weekend which left dozens of civilians dead.

The issues/troubles surrounding Baghdad and Iraq are not uncommon. American influence over Baghdad which grew after the elimination of Saddam Hussein has diminished considerably after the entire withdrawal of American military forces in 2011. During the beginning months of 2014 after Islamic State spread though Iraq, the United States White House orchestrated Mr. Maliki’s exit from power and the implant of Prime Minister Haider al-Abadi. The United States still strongly backs Mr. Abadi but is gravely concerned that his presence is being weakened by his political opponents. In recent weeks Vice President Joe Biden, Defence Secretary Ash Carter and Secretary of State John Kerry have all visited Baghdad amplifying their support for Mr. Abadi. However, many believe that the United States is beginning to view its support for Mr. Abadi in a different light and diminishing.

Iraq’s political shortcomings are as great as its economic woes. Roughly ninety percent of Iraq’s revenue is generated from Oil. While the price of oil has fallen by almost one half over the past year, the export of oil has dropped by roughly one fifth. In the beginning of the year Iraq passed its budget of 119 trillion Iraqi dinars which is the equivalent of $105 billion USD. The budget equates to a 16 percent cut in spending and funds to numerous departments were slashed. Although the Iraqi government did put in measures to attempt to raise revenue though items though sales taxes on items such as airline tickets, motor vehicles, cigarettes and alcohol it projects a deficit of 25 trillion dinars or 9 percent of GDP.

Many believe that the present budget seems optimistic. The present budget is directly based on an oil price of $56 a barrel and that exports will reach 3.3m barrels per day. In January of 2016 crude oil exports were 2.4m b/d. While the number of exports has increased over the last several months, Iraq will have to continue their export output with minimum room for a decrease (to maintain its budget goals). In addition, the price of a barrel of oil is far lower than reflected in Iraq’s projected budget which will only exacerbate its financial matters.

The real issue with Iraq is it still represents instability and the ability to generate large swings in commodity prices. Not only will oil prices be effected by instability in Iraq, but currencies such as the Canadian dollar will be affected as well. Higher oil prices generally translate into a higher Canadian dollar which in turn will alter the path of export growth in Canada.

In closing, Iraq continues to experience both political as well as economic hardship. After years of fighting and outside military assistance they have not been able to stabilise their country. Without the proper leadership within their government along with a stable military leadership they will continue to experience a weak currency and economic hardship. Presently, just a fraction of Iraq’s known oil fields are in development and conceivable one of the last few places on earth with unproven and vast resources exist.

Post by Konstantin Rabin of iForex