Baghdad – With its financial outlook darkening by the day, Iraq is considering slashing its massive public payroll — an unpopular move likely to renew protests as a new government takes the helm.
The new premier Mustafa Kadhemi, Iraq's 53-year-old former spy chief, took office early Thursday in a step that could put Iraq on steadier ground as it faces a staggering economic crisis.
OPEC's second-largest producer has been hit hard by the double-blow of collapsed crude prices and the COVID-19 pandemic, which have hacked at its revenues from oil sales.
Iraq's GDP is set to shrink by 9.7 percent this year, say World Bank projections, the worst annual performance since the U.S.-led invasion that toppled Saddam Hussein in 2003.
Poverty rates may double, the World Bank has predicted.
Last month, Iraq raked in just $1.4 billion in oil revenues — less than a third of the $4.5 billion it needs each month to pay for public salaries, state pensions and government running costs.
Faced with this grim reality, officials may put the bloated public sector payroll on the chopping block, according to two senior officials involved in the talks.
That could spell trouble ahead. In Iraq's bloated public sector, lucrative posts are often handed out or traded based on cronyism and patronage, or created to take steam out of boiling popular anger.
While base salaries would remain untouched, the cuts would slash sizeable "allocations" packages, which made up two thirds of the $36 billion budget for salaries last year.
The packages include cash bonuses or perks like cars and houses, based on factors including seniority, education level, children — or, informally, political and family ties.
"The cuts we are exploring include slashing high-level public servants' allocations by more than half, mid-level by 50 percent, and low-level by about 30 percent," one top official said.
The Cabinet is also considering a freeze on new hiring and promotions, cuts to military spending and halting maintenance for government buildings.
Authorities may even print currency to pay salaries, which would force the central bank to dip into its $60 billion in foreign reserves to shore up the dinar-to-dollar rate.
The measures are part of an "emergency financing document" that would give the government just $54 billion to spend this year, a little over one third of a draft 2020 budget that was never passed.
"It's the first time we'll have to do something like this," the official said.
But with the deficit growing each month, "any kind of measures the government will take now to try to avoid economic disaster is really too little, too late," said Iraqi economic analyst Ali Mawlawi.
The government pays salaries to four million people, pensions to three million and welfare to another one million, meaning one out of five Iraqis gets some kind of state payment.
The former government of prime minister Adel Abdel Mahdi, like prior Cabinets, hired to please political allies, Mawlawi said.
"Oil prices were up when he took power, which lulled his government into a false sense of security. They expanded the public sector beyond control, and that has led to this serious fiscal crisis."
For 2019, the government budgeted a 13 percent increase in its salary expenses and a 127 percent jump in pensions, according to a World Bank analysis.
Late last year, it hired at least 500,000 staff in a bid to appease anti-government protesters angry over unemployment and corruption, swelling salary expenditures again by 25 percent.
Its public hiring is a holdover from the socialist era where university graduates are theoretically hired by a relevant ministry immediately upon graduation.
Lucrative government posts are sold for sums reaching hundreds of thousands of dollars depending on rank, while the private sector is woefully underdeveloped.
"This is an economy that doesn't create jobs," said Wael Mansour, the World Bank's senior economist on Iraq.
That spells trouble for a country that has one of the fastest growing populations, set to expand by another 10 million in the next decade to hit 50 million.
"If they really want to make a dent," Mansour said about state spending, "the only place where they could do that is wages."
But such austerity measures "could spark more social unrest, with already poor public services and high unemployment," the World Bank admits.
Kadhimi had hoped not to launch his tenure with the cuts, but the fear of a public backlash had kept Abdel Mahdi's caretaker government from executing them.
"No one wanted to take responsibility," said a second official involved in developing the emergency measures.
He described meetings where caretaker ministers were more focused on signing last-minute contracts that would earn them quick kickbacks, knowing their time in government was ending soon.
But given oil revenues are set to decline even further in May with prices and demand low, things may only get worse.
"If we don't agree on something fast, there will be no money in June," the official said.
"We will have to have a total government shutdown — and that's never happened before."