Iraq Is Rapidly Becoming the Region’s Next Failed State

Economic collapse is imminent and the political class is incapable of doing anything about. It’s Lebanon all over again, but on a much bigger scale

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Hisham Abdulkhaliq, a disabled volleyball player who was injured during the war against Islamic State militants in Iraq's Mosul, sits near his destroyed house in the old city of Mosul, Iraq December 28, 2020
Rubble: Hisham Abdulkhaliq, a disabled volleyball player injured in the war against ISIS militants, sits near his destroyed house in the old city of Mosul, Iraq December 28, 2020Credit: ABDULLAH RASHID/REUTERS
David Rosenberg
David Rosenberg

It’s been teetering dangerously close to the edge for some time now, but the day seems to be rapidly approaching that Iraq will descend into the status of a failed state.

Squeezed between low oil prices and the fallout of the COVID pandemic, the country is careening toward financial collapse and no one in charge is showing much interest in preventing it.

If this sounds to you a lot like the situation in Lebanon, you aren’t wrong. The two have followed distressingly similar roads to ruin: political systems that revolve around divvying the public coffers and a spectacularly self-interested political class incapable of acting even when disaster is looming. Meanwhile, the countries’ economies are left to shrivel and die.

But there is an important difference. Iraq is many times bigger and more important than Lebanon. It has six times the population, it’s the world’s third-largest oil exporter and it is strategically located at the top of the Gulf. If Iraq’s economic woes morph into political unrest and violence, which seems highly likely given the general anarchy and the presence of so many militias, Iran, Saudi Arabia and Turkey may all have to step in, with unforeseeable consequences.

That Iraq has managed to stay afloat so far is thanks to one thing and one thing only, and that is oil. Since the U.S. invasion nearly 20 years ago, the country has lurched from one crisis to the next, most notably the ISIS insurgency starting in 2014. But Iraq managed to keep pumping oil through it all and even doubled output.

That’s because oil production is managed in mostly splendid isolation entirely by foreign companies. For years the government failed to approve a petroleum law and when it did, it seemed designed to let the corrupt political class strengthen its grip on the industry.

As the World Bank has noted, oil has enabled Iraq to appear on paper as a middle-income country, a classification based on the simple math of taking its oil-inflated GDP and dividing it by population. But by almost every other measure, Iraq is a barely managing Third World economy.

Poverty rates are very high, the average Iraqi at age 18 has gotten just 6.2 years of schooling (four, if you measure actual educational achievement) and basic services, such as regular electric power in a country drowning in fossil fuels, are lacking.

That’s because the oil revenues were not being spent on economic development or even distributed as largesse to ordinary Iraqis as they are in places like Saudi Arabia. Instead, it all went into a ballooning government workforce – or, to be more precise, into jobs for the boys (few girls, since even by Arab world standards, the female labor force participation rate in Iraq is very low). Like in Lebanon, ministries are assigned to political factions so they can provide patronage jobs.

As long as oil prices were high enough and/or production kept growing, the system could survive. But since 2014 oil prices have almost never risen above the $60 a barrel Baghdad needs to support its bloated government.

Still partying: Fireworks on New Year's day, Baghdad, January 1, 2021Credit: KAWA OMAR/REUTERS

The COVID pandemic has made things worse. The government needs $5 billion a month just to cover salaries. It doesn’t really collect taxes, so 90% of its revenues come from oil profits and those have shrunk to between $2.5 billion and $3.5 billion a month. To cover the difference, the government has been printing money, borrowing, drawing down on foreign currency reserves, devaluing the currency and even signed a deal with the Chinese to get a cash advance on future oil sales.

All of this is achieving nothing but buying time, but there isn’t much on sale for Iraq. Prime Minister Mustafa al-Kadhimi has warned that the government may not be able to pay public-sector salaries this month, which could be the spark that kindles unrest. By the summer, Iraq may have run down its foreign reserves.

Yet any kind of fundamental reforms have been rejected by the political establishment, which is hoping to be saved by a miraculous recovery of oil prices.

Like Lebanon, Iraq’s problem is that it doesn’t have the right friends. Iran, of course, is in no position to help it and has even cut off energy supplies due to unpaid bills. (It’s a testament to Iraq’s dysfunction that it flares off most of the natural gas it produces while pumping oil, and importing gas from Iran to fuel its gas-fired power plants.) The West and/or the Gulf could help Iraq through its cash crunch, but Baghdad’s record on reform is so poor that it would be perceived as throwing good money after bad.

Iraq’s condition should be setting off alarm bells across the region. Its political system is rotten and its economy is a shambles. Yet it isn’t a lot more rotten and shambolic than those of many other Middle East countries. Egypt, Jordan, Algeria and maybe Tunisia suffer many of the same maladies. It wouldn’t take an awful lot to push them into the same downward spiral.

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