BAGHDAD: Iraq is planning painful cuts in social benefits relied on by millions of government workers. Saudi Arabia will likely have to delay mega-projects. Egypt and Lebanon face a blow as their workers in the Gulf send back less of the much-needed dollars that help keep their fragile economies afloat.
The historic crash in oil prices in the wake of the coronavirus pandemic is reverberating across the Middle East as crude-dependent countries scramble to offset losses from a key source of state revenue — and all this at a time when several of them already face explosive social unrest.
The economies of all the Arab Gulf oil exporters are expected to contract this year, as much as 5% in Iraq, according to the International Monetary Fund.
Iraq saw massive protests in the past months by a populace angry over the weak economy and rampant corruption — and the turmoil could erupt again. Cutbacks in spending will only add to the pain for a population struggling to get by under coronavirus restrictions. In the capital’s Tahrir Square, protesters are still camped out, determined not to let their movement die.
“Coming into summer the conditions are developing for a perfect storm for the government,” said Sajad Jiyad, an Iraq-based analyst.
Oil is currently trading at $20 per barrel, dipping even lower some days to levels not seen since 2001. Further constraints will be felt as an OPEC agreement to cut production levels by 23% to stabilize the oil market takes hold. May and June are expected to be particularly difficult as that is when oil storage space will be full, making it harder for countries to market oil, according to Robin Mills, CEO of Dubai-based Qamar Energy.
So far it’s early, and no one has reached a stage where the budget runs out, Mills said. “But that is inevitable — Iraq will probably hit first.”
In its draft 2020 budget, Iraq had been counting on revenues from oil prices at $56 a barrel to fund badly needed development projects and the bloated public sector, costing nearly $45 billion in compensation and pensions. Oil Minister Thamir Ghadhban said recently that revenue from crude exports has dropped by 50%.
Now officials are debating difficult salary cuts. One proposed idea would defer paying public sector workers part of their social benefits until the financial sector improves, according to three Iraqi officials. The question is how much to cut and from whom; one recommendation is that higher-end earners take a 50% cut. The officials spoke on condition of anonymity so as not to derail ongoing talks.
That would save Iraq hundreds of millions of dollars, but risks triggering unrest. Public sector workers receive a host of benefits that effectively add 50-70% to their take-home wages. They include family allowances and so-called danger pay benefits for security forces.
Still, experts said that won’t be enough if oil prices remain between $20-30 per barrel.
“Cuts need to be deeper to make a dent in payroll, and even then, if revenues are so low there comes a point where cuts are not enough,” Jiyad said .
On top of this, exp