The Dutch Disease that plagues Rentier Iraq

The Dutch Disease that plagues Rentier Iraq

 

  • Some of the symptoms of Dutch disease are that it creates very rich countries but poor citizens, and high financial revenues with few job opportunities.
  • Oil export increase raises the value of the local currency but it makes the national industry less competitive with goods of other countries.
  • To worsen the situation, the government of oil-producing country is not linked to citizens as it does not need them, because it receives its vast resources from oil industry. 
  • Getting rid of the resource curse that has hit the economy of Iraq and infected its political system requires several solutions including the diversification of the country’s exports to be free of the single-source economy, which depends on oil. 

Iraq seems to be hit by many curses. Among those, the most serious is the resource curse, or what is so called (Dutch Disease).

This word was first used as a term in 1977 and can be defined as a set of negative effects that badly influence the establishment of proper economy. Some of the symptoms of Dutch disease are that it creates very rich countries but poor citizens.

It also provides greater financial revenues with few job opportunities. That’s applied in Iraq. This disease has previously struck other countries in addition to Netherlands, such as Spain, Australia and Nigeria.

Oil export increase raises the value of the local currency but it makes the national industry less competitive with goods of other countries. On the other hand, the oil market is unstable with volatile prices. Also this industry is one of those, which doesn’t absorb unemployment, requires intensive and immense capital and labor at professional level of skills.

Perhaps the most serious symptoms of Dutch disease are those related to the side effects of the disease, as the crisis transit from the field of economics to the field of political practice. Rentier states and those countries, whose economy depends entirely on oil, suffer from some governments that give all their efforts to the perpetuation of the existing political regime at the expense of the fundamental goals of the state.

In addition to this, the government of oil-producing country is not linked to citizens as it does not need him, because it receives its vast resources from oil industry. When citizens do not pay taxes, they have that feeling of separation along with their government, especially when the state/ Government turned into a shop that sells oil.

The government, then, is not afraid of citizen accountability, because citizen does not supply the country’s economy. Thereof, it is reflected in the political performance of the governments of such Rentier states. That actually leads to a political climate in which the authoritarian tendencies and dictatorial aspects are vivid in addition to mating between wealth and power.

So Dutch disease contributes to the creation of a more centralized state, through which the government spending is doubled. Moreover, it makes the citizen’s capability of formulation of public policies shrinks and that generates an atmosphere of discontent among those who are marginalized- the people, and helps the government to enhance its repressive means to keep the situation unchanged. This situation has plagued Iraq since several decades when oil was discovered. Current and previous governments of Iraq have abused the oil fortunes to create regimes and to ensure their stay in power as long as possible. These governments are used to distributing donations to those who are close and loyal to them neglecting the vast majority who is getting crumbs in their rich country.

Although the new political system in Iraq, after the fall of the former regime, is based on a democratic basis and a constitution, which guarantees the independence of the three powers (Legislative, Executive and Judiciary) and allow those powers to derive their legitimacy from the people as the source for all authorities, influential political blocs are formed. Those blocs collected fortunes through their political status, and acquired huge privileges concerning oil, as well as the exploitation of public money in the purchase of consciences especially in the election season to get the votes of the electorates, in addition to widespread administrative and financial corruption.

Getting rid of the resource curse that has hit the economy of Iraq and infected its political system requires several solutions including the diversification of the country’s exports to be free of the single-source economy, which depends on oil. It also requires a policy of decentralization in the organization of the oil industry and the applying the principle of transparency in handling this industry, in addition to the establishment of an oil fund that ensures a fair distribution of oil profits to the citizens along with developing a tax system in order to re- link the citizens to their government.

The article is written by Falah Mousa for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

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Overview of Banking System in Iraq

Overview of Banking System in Iraq

 

  • With 80% of population without a bank account, Iraq has one of the least developed banking sector in the MENA region.
  • The banking sector reform, which started in 2006, has provided solutions, in terms of new capital, but the implementation has been very slow.
  • Increasing the dialogue between the Iraqi authorities and the banking system, associated with the restructuring process, in terms of human resources, audit framework, accounting and performance is vital for the sustainability and solidity of this sector.
 

The reform of the Iraq banking system is a challenge, in the light of political and security environment issues, but the evidence from recent years has shown that the results are consistent and many of the solutions have already been implemented.

The banking sector of Iraq is the most underdeveloped banking system in the Middle East North Africa. According to the statistics, more than 80% of the population does not have a bank account (Sansar Capital, 2013).

Accounting for 75% of the financial system, in terms of assets and 77% of GDP, the Iraqi banking system is dominated by the state-owned banks (7) (IMF, 2013). The main issues of this segment are related to low capitalization, especially in the case of Rafidain Bank and Rasheed Bank. The banking sector reform, which started in 2006, has provided solutions, in terms of new capital, but the implementation has been very slow. The private banks (50) are small and their activities are short-term orientated to retail trade and wholesale. The professionalism of private banks is questioned by the Central Bank of Iraq officials, in regard to their real potential in supporting economic growth.

The regulation related to capital requirements, which must be met by the private banks favours public banks to monopolize the banking sector. The decision has the role to protect private banks funds but in the same time will slow down the activity. Also, forcing large banks to lend more and small banks to merge with other financial institutions is an attempt to implement central planning.

Additionally, the effectiveness of banking supervision is questioned and the audit standards are lax. The general mistrust of the banking system is driven by the lack of deposit insurance, the bankruptcy case of Warka bank and the losses registered by the two main banks in the system. There is a real need for transparency and reliable financial media.

 Other internal issues experienced by the Iraqi banking systems can be stated as follows:

  • Gaps in data collection on banking transactions in the northern region (Iraqi Kurdistan)
  • Party transactions role and actions – the majority shareholder family are using bank funds for projects of their own
  • Low financial infrastructure associated with shortages of skills and technology (The World Bank, 2012).

According to the Iraq Banking Reform Strategy – Action Plan (2008-2012), the actions designed to improve the overall situation are orientated to organizational structure, IT infrastructure, risk management and banking supervision. Increasing the dialogue between the Iraqi authorities and the banking system, associated with the restructuring process, in terms of human resources, audit framework, accounting and performance is vital for the sustainability and solidity of this sector.

We consider that the reform towards a modern banking system has to change the mentalities as well. The traditional way of holding cash at home becomes a real challenge for the banking development. The restrictions imposed on government agencies, state-owned companies and employees, to deal with private banking represent a drawback of growth.

However, we truly believe that the restructuring of the banking system of Iraq has determined positive results not only in terms of numbers, but also in the general perception over the role and potential of the banking activity on the economic growth. Many steps in overcoming the actual problems have been made. …Because adaptation to the internal and external conditions is crucial for the future.

 

The article is written by Falah Mousa for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review