BRUSSELS, 24 June 2005 — War-torn Iraq is working to reduce state handouts that consume more than 80 percent of its gross domestic product in its drive to qualify for debt relief and IMF support, the central bank’s chief economist said. Mudhir Salih Kasim said in an interview Iraq is committed to phasing out subsidies built-up over decades as the oil-based economy became more centralized, especially under the rule of former President Saddam Hussein.
“These levels are unheard of in the rest of the world. The government realizes the issue is very sensitive and could spark uprisings,” Kasim said yesterday, referring to the potential for popular unrest as subsidies especially on food, fuel and electricity, were reformed.
Discontent over high unemployment and low standards of living and tensions between the majority Shiite and minority Sunni sects have already raised concerns that daily attacks may turn into civil war. “Iraq has agreed to restructure the subsidies system, not scrap it altogether, in meetings with donors and creditors. The reform will move the economy, even if there is no fall in the level of violence,” he said.
Kasim was speaking after a conference organized by the United States and the European Union to discuss ways to stabilize Iraq and activate billions of dollars of international aid promised two years ago. More than 95 percent of the $15 billion non-American aide pledged, mainly from Japan and Europe, had not been committed because the level of violence had prevented work being done. Disagreements between donors and slow economic reforms in Iraq making project management difficult had also stemmed the aide flow.
Iraq expanded handouts and subsidies to help people cope with crushing sanctions imposed by the United Nations from 1990-2003, which contributed to the economic collapse of the country with the world’s second largest world reserves. This came on top of $120 billion of debt mostly accumulated in the 1980s to finance an eight-year war with Iran.
A group of countries known as the Paris Club agreed to scrap around $37 billion of the debt last year in return for Iraq taking steps to liberalize the economy. Subsidies have also drawn criticism in Iraq over alleged corruption and mismanagement. For example, pricing petrol at one cent a liter has created oil shortages in Iraq by fostered the smuggling of petrol out of the country, oil officials say.
Heavily subsidized electricity also costs the government billions of dollars a year to provide, diverting investment from the failing supply network and resulting in frequent power cuts. Electricity output has barely improved since the 2003 US-led invasion to remove Saddam. The government also continued to pay salaries to 500,000 employees after the war, although they have not worked in two years because their 169 state firms have been looted or bombed. “This is an indication of the problem. These people have families and support over three million others,” Kasim said.