The Iraq Economy: Crises and Development,

اﻻﻗﺘﺼﺎد اﻟﻌﺮاﻗﻲ : اﻷزﻣﺎت واﻟﺘﻨﻤﻴﺔ

Ali Khedher Merza (2018)

Beirut/Lebanon: Arab Scientific Publishers, Inc.SAL, 527pp.,

ISBN:  978-614-01-3537-7(pbk), Price: not provide

Reviewed by Ahmed Mousa Jiyad, Independent Scholar and Consultant, Development Consultancy & Research, Norway.

Email: mou-jiya@online.no

Books authored by Iraqi scholars on the contemporary "Iraqi Economy” are few compared with the numerous contributions through books, articles, reports and studies among others on various Iraqi issues, particularly post 2003 invasion era; the same also valid during Sadam era 1979-2003.[1]     

Kadhim Al-Eyd book of 1979 addresses, qualitatively, the absorptive capacity restraint on the growth of the Iraqi economy and utilization of oil revenues.[2] Abbas Alnasrawi 1994 book on "The Economy of Iraq…” is an outstanding contribution to understanding the links between oil, wars and the development prospects.[3]  Similarly, Mohammad-Ali Zainy’ "Iraqi Economy..” edition 1995[4] and then his 2010 (mostly an updated edition of 1995 book)[5]. Different from the Al-Eyd, Alnasrawi and Zainy books, Kamil Mahdi edited, in 2002, an important addition to better understanding the predicament of developing the Iraqi economy.[6]

The recently published book by Ali Merza is undoubtedly timely and very significant addition to the library of the Iraqi economy. The invaluable contribution of the book is attributed to the following factors; the author, Dr. Merza, is a well-known respected Iraqi economist with long working experience in Iraq, primarily with the Ministry of Planning, and outside Iraq, with the UN agencies.  The methodology followed throughout the book, the wealth of data and the used quantitative approach produced informative extensive annexes to most chapters of the book. Finally, the structure, contents and analysis offer comprehensive and well-articulated research of the contemporary Iraqi economy.

[1] Sadam Hussain era is considered here when he became the president of the republic in 17 July 1979 though he had powerful position in the Bath régime government since July 1968.

[1] Kadhim A. Al-Eyd, Oil Revenues and Accelerated Growth- Absorptive Capacity in Iraq. Praeger. New York, 1979.

[1] Alnasrawi, Abbas (1994), The Economy of Iraq- Oil, Wars, Destruction of Development and Prospects, 1950-2010. Greenwood Press. Westport, Connecticut. London.

[1] Zainy, Mohammad-Ali, (1995), Iraqi Economy: Under Saddam Hussein Regime- Progress or Retreat (in Arabic). Alrafid Publishing and Distribution, London.

[1] Iraqi Economy: Past, Present and Future Options, Mohammad-Ali Zainy (2010). Baghdad: AlMalak House, (in Arabic). See also my review of the book in Ahmed Mousa Jiyad, "Global, national and local perspectives on Iraqi oil”, International Journal of Contemporary Iraqi Studies, 5:1, 2011, pp. 152-159.

[1] Kamil Mahdi (ed.,), Iraq’s Economic Predicament, Ithaca Press, UK, 2002. Both, late Abbas Alnasrawi (pp. 343-348) and I (pp. 85-137) were among the contributors in the book.

This review falls in two parts; since this important book is written in Arabic and probably it is difficult to obtain it from all bookshops, it is very well justifiable to provide first a brief of the book structure and its contents for the benefit of the wider readership of IJCIS with or without a proficiency in Arabic language and then make a few analytical remarks. 

The book begins with an introduction and long abstract summarizing its chapters and a few main conclusions. The first chapter (pp. 27-42) deals with the "formation of the modern/contemporary Iraq” by addressing the "societal interaction” since mid-thirteenth century! Chapter two (pp. 43-100) is about "population and water resources”. Here, the author identified the problem of rapid population increase coupled with deficit in employment opportunities. The situation, he argues, is aggravated by the deterioration of the agricultural sector due to shortage and wasteful use of water resources; shortage of water was primarily attributed to external factors (water policies in Turkey, Iran and Syria), while the wasteful use of water resources is due to domestic factors: traditional farming and lack of national water policy.

A long third chapter (pp. 103-213) is about "Oil in Iraq and the Impacted International Variables” since 1921; it begins by old concession system and its demise by the rise of "national management” after Law 80 and the formation of Iraqi National Oil Company-INOC, oil nationalization, the effect of Iran-Iraq War, leading to 2003 Invasion. In this part, the author asserts that "oil dominance era and strengthening of rentier state premises” began during 1952-58 when oil revenues’ importance to gross foreign currency revenues increased to 79% due to the known 50:50 profit-sharing agreement with the dominated oil cartel (p. 115).

The rest of the chapter addresses post 2003 oil issues divided between domestic maters (specifically Federal Oil and Gas Law-FOGL, INOC Law and made comparative assessment of upstream petroleum contracts arriving at a qualified preference to the Ministry of Oil service contracts over the Production Sharing Contracts-PSCs of the KRG (p. 173)). Finally, he addressed OPEC dilemma between market share and production setting, with emphases on "OPEC +” decision of November 2016 and its likely impact on Iraq (pp.183-213). 

Chapter four is devoted to "Non-Oil Commodity Sectors and Rent Trap”, where the author first returns to and provides further insights on agriculture-water-population  nexus and how the sector becomes incapable of meeting population needs particularly due to the dominance of the rentier state from 1958 onwards. He concludes that the expansion (or shrinking) of agricultural production depends on availability of water, which as he expects, to decline in the future, on one hand and the continuation (or deterioration) of inefficient low utilization of water, on the other (p. 230) 

He then analyze the deteriorated industrialization, which started modestly during the twenties of the last century reaching its peak during 1970-80 when processing industries production increased by 13.5% while GDPs growth rate was 10.1% (p. 243). But that decade, he mentions, witnessed the "emergence of absorptive capacity limitations” that contributed to serious delay in project executing (p. 244). Wars, sanctions and post-2003 invasion pro-market liberal policies had their heavy toll as well resulting in low (1.6%) contribution of processing industries’ value added to GDP during 2006-14 compared with 5% during 1981-89 (p. 257).

"Sharing Oil Rent” is covered in chapter five (pp. 265-321). The author begins by conducting detailed computations for analyzing income-expenditure disparity among the provinces and their consequences on local standard of living; he then discusses the centralized and decentralized modalities for sharing financial resources and concludes by providing remarks on a proposal for distributing oil revenues on the entire population.

The author concludes that rentier state practices have led, during the last four decades to "trap or vicious circle of bad governance, societal disputes and low standard of living that, in turn, strengthen oil dependency” (p.305)

The longest chapter (p.325-480) in the book is about "Management and Economic Policies”. In this sixth chapter the author provides excellent assessment of the planning experience in the country, then discusses the involvement of IMF in shaping the economic policy, analyzes inflation and the effectiveness of the monetary policy and finally foreign trade and trade policies.

As expected the author attempts, in the last chapter, to look into the future and answer the fundamental question on whether it is possible and how to achieve economic structural diversification that permits Iraq escaping the rent trap.

The book comprises extensive annexes rich in data, lengthy time-series and graphs, using mostly quantitative approach; it has two lists of consulted references in Arabic and English.

The above brief narratives that outlining the structure and main components of the book testify the good efforts and skillful approach adopted by Dr. Merza in authoring this important contribution to understanding the complexities of and the challenges encountering the Iraqi economy.

However, there are a few remarks that worth highlighting particularly those relating mostly to oil issues.

First, the comparative assessment of the "service contracts” with the Production Sharing Contracts-PSCs

The author conducted elaborated assessment, through making a series of assumptions and calculations, between the service contracts concluded by the Iraqi Ministry of Oil-MoO and a "hypothetical" PSC based on Libya’ s EPSA-III (p.154-155) and the PSCs concluded by KRG (pp.164-180); in both cases he concludes the superiority of MoO service contracts.

His conclusion concurs with those arrived at by many Iraqi oil professionals who had conducted such comparison between the two contractual modalities.

But what is surprising are his views, when addressing 2016 IMF memo, that Iraq might be compelled to take measures including "amending current MoO oil agreement to PSCs” (P. 418)[7]

Such views could indicate inconsistency with his above mentioned findings, particularly those under different oil price scenarios, since the realities of 2017/18 have exceeded the foreseen, until 2021, thresholds of IMF’ two variables- oil prices, of $50 a barrel, and total oil production, including KRG, of 4.5 million barrel per day-mbd. Moreover, his views could motivate wrong and costly policy shift towards PSCs.

Second, building refineries outside Iraq

One of the strong, and correctly so, propositions that are highlighted throughout the book is the importance of structural diversification for sustainable development and to combat rent trap. Needless to say that for Iraq, structural diversification is both horizontal, i.e. across the commodity production sectors and vertical, i.e. along the sector’s value chain.  

But again, the author proposes a complete opposite policy initiative by calling to construct refineries outside Iraq for using Iraqi crude oil in the consumption centers (p. 22 and p. 472), citing Kuwait and Libya as examples!

Apart from the fact that his call for such a proposal is hardly convincing and contravening his own good analysis for structural diversification, his coverage of the refining sector is, surprisingly, very thin and insufficient (p. 365 and p.439). Moreover, such a proposal could lead, again, to wrong policy initiative taking into consideration that lack of domestic modern refineries is one of most serious policy failures of post 2003 Iraq[8] despite the apparent comparative advantages for such vertical diversification, as highlighted forcefully and convincingly by INES.[9]  Due to Daesh effect, as discussed next, Iraq lost significant part of the refining capacity post June 2014. Finally, his reference to Karbala refinery (p. 439) probably needs updating footnote.   

Third, Provincial disparities

The author concludes, based on value added estimation and state budgets, upstream petroleum development had contributed to provincial disparities in standard of living in favor of provinces "south of Baghdad to Basra” and in "Kurdistan Region” against the "upper-middle” provinces (pp. 277-280)

In this regards, it appears the author had overlooked important matters that had contributed to this state of disparities. First, security conditions due to Daesh effects had impacted negatively the execution of petroleum project in the "upper-middle provinces”, e.g. Najma and Qayara in Ninawa; Mansuriya and exploration block 8 in Dayala and Akash in Anbar. Seconds, Daesh also destroyed oil, refining and power generation facilities in these provinces and, particularly Baiji complex, in Salahuldeen province; thus wiped-out almost the capacity of the North Refineries Company-NRC; Third, up to 2014 KRG used to receive its share from annual budget and keeps the revenues generated from its export of oil.

Incidentally, July-September 2018 demonstrations and dramatic event, in the southern-oil producing provinces, due to scarcity of basic services e.g. clean drinking water, health and power, and spreading unemployment question the validity of the author’s above mentioned disparities.

 [1] He expressed such views when addressing the IMF memorandum of November 2016, which is incorporated in IMF, Iraq: Letter of Intent. Memorandum of Economic and Financial Policies and Technical Memorandum of Understanding. 15 December 2016

[1] On the refineries in Iraq see my article in this issue and the references therein.

[1] Council of Ministers, Integrated National Energy Strategy 2013–2030, Baghdad, June, 2013.

Fourth, Contractual provisions

The author makes frequent reference to contracts governing both MoO’ service contracts and KRG’ PSCs, particularly when he makes calculation and quantitative analysis and comparison. These contracts are legal governing frameworks that have to be examined thoroughly and understood accurately, especially those provisions of critical fiscal importance. The followings are a few remarks on contractual maters referred to throughout the book.

The author asserts that, "except gross remuneration fee amount, the same conditions apply, approximately, to the then service contracts” (p.154).

Actually, this is not the case as there are three different types of service contracts, concluded by the MoO, with very different fiscal parameters in addition to the "bid remuneration fee” not "gross remuneration fee”; these are cost recover cap from the "deemed revenues”, the signature bonus, the values of R-factor, annual allocation for the Fund, overhead charges, the spread over LIBOR and the stabilization clause regarding corporate income tax-CIT.

When the author updated a previous sensitivity analysis (p. 175) on the service contracts based on a 2014 he increased IOCs share in the remuneration fee from 75% to 95%.

Again, this is not the case. In fact at that time, only two contracts were subjected to that increase.[10]  Obviously, applying that change to the contracts is bound to shed doubt on the quantitative analysis, its assumptions and its conclusion. 

Needless to say that increase in the IOCs share in the remuneration fee would, while reducing the "State Partner-SP” share in the remuneration fee, increase the amount of CIT; thus the net fiscal impact would be the differential in government takes through reducing income generated by SP share and increasing CIT collection. 

In this regard and considering the mentioned remarks above, the Rumaila analyses and the comparative assessment between MoO’ service contracts and KRG’ PSCs (pp. 164-182) are undoubtedly well articulated quantitative intellectual exercise but, for practical and policy implications purposes, they needs careful and cautious considerations.

The author considers "bonuses” as recoverable supplementary cost (p. 153).

There are three remarks worth making on this matter: I- there are no bonuses in the MoO service contracts; there is only one-time signature bonus; II-this signature bonus is contractually non-recoverable; III- probably, the author relied on old pre-signing information on first bid round contractual terms when signature bonus had very different specifications (in magnitude and status) that generated, at that time, tense parliamentary debate, known publications and even a legal case was filed before the Federal Supreme Court, all that eventually led to significant changes when contracts were signed.

[1] See IEITI annual report, Extractive Activities in Iraq 2015, KPMG, Baghdad, December 2016.

The importance of the R-factor was undermined (though the author admits this is a flaw that should be avoided) since the author thinks including R-factor will not impact the comparative assessment since that would apply to all contracts covered by the comparison (p. 155 and p. 176).

It seems the author thinks R-factor is the same for all types of contracts covered in his exercise; they are actually not. And, moreover, even for MoO service contracts, the IOC’ take from "bid remuneration fee prior to state partner share and income tax deductions”, depends on the specified, in the related contract, value of R-factor, which range from 100% to 50% for one contract to 100% to 20% for a set of other group of contracts. And when these fiscal values apply to billions of barrels produced over 20+ years would results in billions of loss of revenues for the government of Iraq to the coffers of the IOCs.

This is an outcome that deserves considerable attention due to the fact that R-factor works, technically, to IOCs side during development phase while it works for Iraqi side from the beginning of production plateau period onward until the end of the contract period.[11] And for clarity purpose, R-factor is a progressivity measure, works similar to that applied in income tax systems, not as the author considers it as escalating clause, which is a form of indexation measure applies (particularly in project) as safeguard against cost inflation.

Finally, for comparative assessment of MoO’ service contracts with KRG’ PSCs it is vital to remember the significant difference in the "applicability base” of R-factor; for the former it is the remuneration fee while for the latter it is the IOC fiscal revenues from "profit oil”. And oil price matters most for profit oil but close to none for remuneration fee.

The book mentions natural decline of 5% on the baseline production (p. 153). It is important to mention that this condition applies only to the brown fields concluded under first bid round, and the rate increased to 7.5% as from 1 January 2014 for Rumaila oilfield only, giving related IOCs i.e. BP and CNPC further concession with significant fiscal advantages.

Two important developments have implication on both, government take and the weighted average of remuneration fee; these are the relinquishments of Majnoon oilfield and Oxy share in Zubair oilfield. Both cases were not addressed in the book despite their significant fiscal implications.

 [1] R-factor is contractually (as provided in Rumaila oilfield contract) defined as "the ratio of cumulative Cash Receipts to cumulative Expenditures in the conduct of Petroleum Operations as defined in Article 19.5(d)”. For further analysis and calculation of the impact of R-factor on other fields see Ahmed Mousa Jiyad, Remuneration Fees Are Measured In Cents, Not Dollars!, MEES 53:11 15 March 2010.

The author claims that Iraq is, contractually not obliged to compensate IOCs for "production curtailment” effects (p. 205).

Actually, the signed contracts refute such claim and, on the contrary, provide clear modalities on how to address the consequences of such sovereign prerogative on the related IOCs.

Fifth, rechecking and updating

There are some information and data that need rechecking, correction or updating since all of the identified items occurred prior to the book date of publication; the followings are some of them and, again, relating to petroleum issues.

A reference was made to "Petrodollar Law” of 2010 and its amendment in 2014 (p. 141).

I believe there is no such law or its amendment; what there was a proposal regarding petrodollar that was incorporated in Budget Law 2010 onwards. Moreover, probably the author was mixing the issue with the second amendment dated 2013 on Law of Provinces not Organized in a Region-known as Provinces  Law  21 of 2008, which prompted the government to protest the second amendment before the Federal Supreme Court.

Petrodollar allocations according to the second amendment on Provinces Law increased significantly through offering three thresholds each has $5 a barrel of oil equivalent.[12] But budget laws from 2016 onwards limit petrodollar allocations by giving the province the option to choose one threshold only.[13]

The author mentions that oil production in Iraq increased higher than any other OPEC members during 1970-79 (pp. 122-3).

But the data in the referred to Table 2 (p. 125) does not support that claim.

It is mentioned on (p. 141) that Refinery Investment Law 64 of 2007 offers 1% discount on the international price of oil.

Again, that was old information; the said law was amended twice by increasing the discount to 8% provided it is not less than $5 and no more than $10 a barrel.[14]  Needless to say the implications of these amendments are very significant and, thus, should be highlighted and assessed.     

 [1] See Law 19 of 2013, particularly Article 44-Second-8.

[1] See budget laws numbered: 1 for 2016; 44 for 2017 and 44 for 2018. Moreover, for 2017 and 2018 the allocation was changed from $5 a barrel of oil equivalent to 5% of the related revenues from one base only (crude oil or refinery or natural gas produced in the related province)

[1] See Law 10 of 2011 for first amendment and Law 35 of 2016 for second amendment; both amendments are published on the Official Gazette. For in-depth assessment of the refinery law as adopted on the second reading on 30 July 2016 by the Parliament see, Ahmed Mousa Jiyad, "Remarks on the Second Amendment of Oil Refining Investment Law 64 of 2007”, http://www.iraq-businessnews.com/2016/09/28/jiyad-refining-investment-law-should-be-rejected-or-redrafted/

The author mentions that a PSC was concluded in 1995 with Lukoil and CNPC regarding the giant West Qurna field (p. 123).

That was not accurate. The year was 1997; Lukoil’ PSC was related to West Qurna 2 only; CNPC’ PSC had nothing to do with West Qurna, it was for Al-Ahdad oilfield. Moreover, both PSCs were ratified by two separate laws published on the Official Gazette, Al-Waqae Al-Iraqiya more than twenty years ago. 

Also the author mentions (p. 152) that ExxonMobil decided to sell part of its "share” in West Qurna 2, which it acquired in the "first/second” bid round.

Actually, that company has only "West Qurna 1” oilfield and that was offered under first bid round.  

The author mentions that "State Partner” in Rumaila oilfield contract is South Oil Company (p. 154 and p. 175)

Not correct; the state partner, which is usually a contracting party within the IOCs consortium- the "Second Party”, in Rumaila contract is SOMO not SOC is the state partner (now Basra Oil Company); South Oil Company is the contracting "First Party” or the employer representing the Republic of Iraq. 

Three provinces were not mentioned in the "South Provinces” (p. 294); these are Missan, Wasit and Basrah though they are listed in Table 3 (p. 279). 

The author relies on the second amendment of Provinces Law when discussing decentralization issue (p. 300).

I believe, the third amendment answers many of his concerns and, thus, it is imperative to consider this third amendment when debating decentralization issues.

To sum up, Dr. Merza delivered excellent meticulous book; a contribution that would enhance our understanding of the complexity and predicament of the Iraqi economy. And due to its analytical style and wealth of data, it becomes a must-read by decision makers, particularly with regards to the needed coherent sound planning to attain desirable structural changes and diversification. The book is well-received already[15] and I think it is essential and strongly recommended reference for all interested in the development and prospect of the economy. Addressing the above mentioned remarks is manageable matter and adds substance to and consistency of the book.  

[1] Sadam Hussain era is considered here when he became the president of the republic in 17 July 1979 though he had powerful position in the Bath régime government since July 1968.

[2] Kadhim A. Al-Eyd, Oil Revenues and Accelerated Growth- Absorptive Capacity in Iraq. Praeger. New York, 1979.

[3] Alnasrawi, Abbas (1994), The Economy of Iraq- Oil, Wars, Destruction of Development and Prospects, 1950-2010. Greenwood Press. Westport, Connecticut. London.

[4] Zainy, Mohammad-Ali, (1995), Iraqi Economy: Under Saddam Hussein Regime- Progress or Retreat (in Arabic). Alrafid Publishing and Distribution, London.

[5] Iraqi Economy: Past, Present and Future Options, Mohammad-Ali Zainy (2010). Baghdad: AlMalak House, (in Arabic). See also my review of the book in Ahmed Mousa Jiyad, "Global, national and local perspectives on Iraqi oil”, International Journal of Contemporary Iraqi Studies, 5:1, 2011, pp. 152-159.

[6] Kamil Mahdi (ed.,), Iraq’s Economic Predicament, Ithaca Press, UK, 2002. Both, late Abbas Alnasrawi (pp. 343-348) and I (pp. 85-137) were among the contributors in the book.

[7] He expressed such views when addressing the IMF memorandum of November 2016, which is incorporated in IMF, Iraq: Letter of Intent. Memorandum of Economic and Financial Policies and Technical Memorandum of Understanding. 15 December 2016

[8] On the refineries in Iraq see my article in this issue and the references therein.

[9] Council of Ministers, Integrated National Energy Strategy 2013–2030, Baghdad, June, 2013.

[10] See IEITI annual report, Extractive Activities in Iraq 2015, KPMG, Baghdad, December 2016.

[11] R-factor is contractually (as provided in Rumaila oilfield contract) defined as "the ratio of cumulative Cash Receipts to cumulative Expenditures in the conduct of Petroleum Operations as defined in Article 19.5(d)”. For further analysis and calculation of the impact of R-factor on other fields see Ahmed Mousa Jiyad, Remuneration Fees Are Measured In Cents, Not Dollars!, MEES 53:11 15 March 2010.

[12] See Law 19 of 2013, particularly Article 44-Second-8.

[13] See budget laws numbered: 1 for 2016; 44 for 2017 and 44 for 2018. Moreover, for 2017 and 2018 the allocation was changed from $5 a barrel of oil equivalent to 5% of the related revenues from one base only (crude oil or refinery or natural gas produced in the related province)

[14] See Law 10 of 2011 for first amendment and Law 35 of 2016 for second amendment; both amendments are published on the Official Gazette. For in-depth assessment of the refinery law as adopted on the second reading on 30 July 2016 by the Parliament see, Ahmed Mousa Jiyad, "Remarks on the Second Amendment of Oil Refining Investment Law 64 of 2007”, http://www.iraq-businessnews.com/2016/09/28/jiyad-refining-investment-law-should-be-rejected-or-redrafted/

[15] See commentary by Walid Khadduri on the book posted on "almasalah”, 16 September 2018, http://almasalah.com/ar/news/150404/%D9%88%D9%84%D9%8A%D8%AF-%D8%AE%D8%AF%D9%88%D8%B1%D9%8A-%D8%A7%D9%84%D8%A7%D9%82%D8%AA%D8%B5%D8%A7%D8%AF-%D8%A7%D9%84%D8%B9%D8%B1%D8%A7%D9%82%D9%8A-%D8%A7%D9%84%D8%A3%D8%B2%D9%85%D8%A7%D8%AA-%D9%88%D8%A7%D9%84%D8%AA%D9%86%D9%85%D9%8A%D8%A9  accessed 18 September 2018