Over the past month, Iraq has confronted two severe challenges: an economically-crippling oil price war between Russia and Saudi Arabia and the spread of the coronavirus epidemic from contacts in Iran. Of all the countries negatively impacted by the recent collapse in oil prices or the viral outbreak, Iraq is particularly ill-prepared in terms of fiscal and institutional capacity. These obstacles hit Iraq amid a political crisis that arose following the October 2019 protests. While becoming a near-constant feature of public life, protests over socio-economic and public service-related grievances were relatively muted through most of 2019 until abuses from security services in late September and October provoked a renewed wave of demonstrations in the country. Before being shut down by the pandemic, initially peaceful protests began to result in major disruptions blocking roads, damaging infrastructure, and the deaths —at the hands of security services— of close to 400 civilians. The protests drove prime minister Adel Abdel Mahdi to resign in late November. Although he stayed on in a caretaking capacity, the country has been operating without a central government with the authority to pass a budget or sign contracts since December 1. Yet on March 16, Iraqi President Barham Salih appointed former governor Adnan al-Zurfi to form a government as the country’s new prime minister-designate.

Under constitutional guidelines, the designation of a government should take no more than 45 days –15 days to designate the candidate of the largest bloc as premier and 30 days to select and present a cabinet to parliament for approval. Parliament waited until December 4 to request that President Salih designate a new premier, extending the deadline to December 19. Over the course of December, a series of candidates were put forward, most of which fell aside not only due to the lack of political consensus, but also because they stirred protests, with activists often chanting against specific candidates by name. The political crisis received a brief respite in early January as a result of the intervening crisis and exchange of military attacks on Iraqi soil between the United States and Iran. This led to a non-binding parliamentary vote—without quorum—demanding the removal of U.S. troops from Iraq. Abd al-Mahdi’s unusually strong speech during that January 5 session led to a renewed effort by Iran-aligned blocs to have him remain in office. But a mixture of political and protester opposition foiled that effort.

Late January and all of February revolved around finding a new candidate, and the nomination and failed effort to form a new government under Muhammad Tawfiq Allawi, a former communications minister. A Shia cross-party committee established in early March never reached a consensus, and with the deadline for appointing a new candidate approaching, President Salih chose Zurfi. His political views are closer to President Salih’s than any of the previous nominees. As governor of Najaf for nearly seven years over three terms, Zurfi promoted a political vision based on encouraging economic ties with the industrialized West while sidelining Iran-backed militia factions. He is not only perceived as pro-American on military issues but is an American citizen himself, having lived in the United States before 2003. Precisely for this reason, the main opposition to him has come from the Iran-aligned factions and Shia factions independent of Iran. Yet the pro-Iranian groups’ militia wings give his opponents greater weight than they otherwise would have. In addition to Badr Organization under Hadi al-Amri’s leadership, Asaib Ahl al-Haq (AAH) has been outspoken in his opposition to Zurfi. At the moment, these factions do not have the seats to deny Zurfi election, assuming he obtains Kurdish and Sunni support, which he will likely receive if the implied threat of instability from Iran-backed groups does not intimidate parties into backing down.  

If elected, Zurfi will face two other immediate crises in addition to the country’s ordinary political dysfunction, The first is a fiscal crisis fueled by the collapse in oil prices stemming from the pricing war between Saudi Arabia and Russia. Iraq’s foreign debt is relatively low, but the greater threat to Iraq comes from what one might call “internal default.” Iraqi society is deeply dependent upon direct salaried employment, pensions and other payments, including the social security system and the state food aid system which both subsidizes the agriculture industry and provides nutrition aid. Were the state to default on these internal payments, much of Iraq’s population would go hungry.

The Iraqi government’s lack of reserves and modest non-oil revenue means it would default quickly were it not for its ability to borrow from the Central Bank’s hard currency reserves. These reserves—while significant at over $80 billion due to oil sales—are not infinite. Baghdad needs oil prices to reach $60 to 65 per barrel to keep state institutions running with no capital investment. Based on publicly-disclosed figures available funds, in a worst-case scenario with oil prices remaining under $30 per barrel, Baghdad could be insolvent within 12 months.1 If oil prices gradually rise this year and average around $50 next year, it could stretch available funds through 2021. However, by then, the country would have gone several years with no meaningful development, leaving it vulnerable to widespread public sector cuts if oil prices dropped again.

The second immediate crisis is the COVID-19 pandemic. Iraq’s health system was already overwhelmed when the epidemic started, and it lacks testing capacity to estimate the outbreak’s reach in the country. The government has restricted movements in Baghdad and other major cities while also closing some mosques and banning other gatherings. The Health Ministry’s count of confirmed cases has yet to reach 1,000, but with a multitude of contacts with highly-infected Iran and very limited testing, it will be unclear how effective these measures have been until the ultimate death total is clear.

It is not yet clear whether Zurfi will be able to form a government or not, but if he does, it will be tasked with a multitude of hurdles.  The newly-formed government will lack a working majority in parliament, face both a fiscal collapse and a likely health crisis, and need to navigate a hostile and well-armed Iranian-backed opposition. Even more, the government will need to deliver its mandate to bring out early elections as protesters have demanded. With the COVID-19 pandemic serving as a good reason not to hold votes, the new elections will probably be the easiest of these challenges to dismiss. Managing fiscal, political, security and health crises all at once will be the Zurfi government’s real test. 

Kirk H. Sowell is the publisher and editor of the biweekly newsletter Inside Iraqi Politics (www.insideiraqipolitics.com). Follow him @uticarisk.

Notes

1. Author’s calculations based on the amount Iraq is short each month versus how much the Central Bank could loan the government without inducing a currency crisis. This calculation corresponds with a statement by the prime minister’s senior economic advisor, Matthar Salih.