BAGHDAD, 21 December 2005 — The Iraqi government has taken a risky step by cutting fuel subsidies, but its leap of faith, along with programs to spur the economy, should pay huge dividends for the country, officials say.
Oil Minister Ibrahim Bahr Al-Ulum said the International Monetary Fund asked Iraq to raise petrol prices because Baghdad is spending $6 billion a year to import petrol, at least a third of which is smuggled back abroad.
The move sparked protests in several cities, but an Oil Ministry spokesman said the money was needed elsewhere. Western officials say subsidies soak up funds that would do more medium- and long-term good in areas like agriculture or small business finance. Iraq, which sits atop the second largest oil reserves in the world, used to produce more petrol than it needed.
But demand has soared, with an estimated one million more Iraqi cars on the roads since US forces invaded in March 2003, in addition to tens of thousands of power generators.
The price of one liter (a quarter of a gallon) of Iraqi-produced petrol has now tripled from 50 dinars (three US cents) to 150 dinars, 10 days earlier than initially planned, spokesman Assem Jihad said.
“We are going to save $500 million each year, which will go towards funds for poor families, managed by the labor and social affairs and planning ministries,” Jihad told AFP. But Baghdad taxi driver Salah Mohammed angrily blasted the move.
“The ink on our fingers hasn’t had time to dry and the state has already put up the price of petrol,” he said in reference to a measure used against fraud in Thursday’s general election.
Despite low prices, Iraq has faced fuel shortages since the collapse of Saddam Hussein’s regime in April 2003.
A US congressional report has estimated that almost two million liters of refined oil products are smuggled out of the country daily and that more than $2 billion worth of gasoline and diesel fuel are stolen each year.
In neighboring Jordan and Turkey, a liter can cost up to 10 times as much as in Iraq.
“I think subsidy reforms is going to be a key issue for Iraq in the future,” said Dawn Liberi, program director in Iraq for the official US relief agency USAID.
“Implementing that is a challenge no matter where in the world you are,” she told AFP. Liberi said that switching subsidies to growth-oriented priorities like getting fertilizer and better seeds to farmers “will make a huge difference” to Iraq, which also imports food into the fertile Tigris and Euphrates river valleys.
Areas into which USAID has been pumping part of its massive $5.1 billion budget are financing for small and medium-sized enterprises, a national financial management data system and training ministries in fiscal control.
The first supports local activities, from beekeeping to tractor repair, that employ Iraqis and build local economies, while the second will track money entering and leaving local, regional and federal government coffers.
“Once that is put in place the amount and level of transparency within the budgets will change dramatically,” Liberi said.
“This is being spearheaded by the Ministry of Finance and the central bank and they are very focused on it.”
Officials at three ministries under former premier Iyad Allawi have been probed on allegations of corruption, and the man who might be the next prime minister told AFP Sunday that “nothing is working” in the country.
“The state administration is as corrupt as it is anything else,” Vice President Adel Abdel Mahdi added.
But USAID, which Liberi stressed “kept tabs” on its kitty, has nonetheless helped establish an investment promotion agency that in the last six months has registered more than 30,000 new Iraqi businesses.
“We have an average of 2,000 each month now,” she added, praising small business owners as “the people who actually promote growth and promote a middle class in most countries around the world.”
One is Abu Yahya, who took a $74,000 grant, bought a stone crusher and now employs 35 people producing construction materials in a northern Iraqi town from which his family was expelled by Saddam’s regime in 1986. “It’s the most wonderful feeling,” he said.