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"Now, because of the rise of the dollar and the pensions people aren't receiving, there are two classes of people," says Saad Salman, the owner of a Baghdad sweet shop. "A poor class and a rich class." Alice Fordham/NPR hide caption

"Now, because of the rise of the dollar and the pensions people aren't receiving, there are two classes of people," says Saad Salman, the owner of a Baghdad sweet shop. "A poor class and a rich class."

With the gold domes of the famed Kadhimiya shrine as a backdrop, nearby streets full of shops, markets and tea-sellers in Baghdad look bustling and vibrant, even at night. Tempting windows display sparkly clothes and cascades of candy in rainbow colors.

But shopkeepers say no one has been buying much since Iraq devalued its dinar against the dollar last year.

"Regarding the economic situation and the rise of the dollar it destroyed the people," says Saad Salman, the owner of one of the sweet shops. "Purchasing power has fallen. Someone who used to buy a kilogram, now they buy half a kilogram, you know?"

Around the world, economies have been crushed by the pandemic. The International Monetary Fund reported in October that most Mideast economies plunged into recession. But some places are especially vulnerable, among them Iraq. Its economy depends overwhelmingly on oil exports, and as travel halted and demand for fuel dwindled, government revenues tumbled along with oil prices.

Protesters block a road leading to an oil complex during anti-government protests in Basra in December. Nabil al-Jurani/AP hide caption

Protesters block a road leading to an oil complex during anti-government protests in Basra in December.

The finance ministry estimates 7 million Iraqis (out of about 40 million citizens) receive government salaries or pensions. But government revenues plummeted by 47.5% in the first eight months of last year, the World Bank reports. With drastically less oil revenue, the government has been paying its salaries and pensions intermittently or not at all. Economists say Iraq's poverty rate may have shot up from 20% in 2018 to 30% or more last year.

To try to make it easier to pay those salaries, as well to encourage people to buy domestically instead of relying on imports, the government devalued the dinar against the dollar by about 20% in December. But as Iraq produces very little, people have little choice but to buy imported goods which are only more expensive now.

In the sweet shop, Salman gestures around the store. The price of a bag of sugar has gone up by a third, walnuts have almost doubled in price. As the millions who depend on government salaries and pensions have seen their income become precarious or nonexistent, he says inequality is on the rise.

"Now, because of the rise of the dollar and the pensions people aren't receiving, there are two classes of people," he says. "A poor class and a rich class."

Iraq's burdens

"Iraq's economic situation can probably best be described as being dire," says Ali al-Saffar of the International Energy Agency.

He covers the whole region, and finds the situation in Iraq "the one that really is probably most alarming" in terms of its potential for destabilization.

"The roots are that the structure of the economy has been wonky for decades," he says. Iraq depends on oil for as much as 98% of its revenue, he explains, almost all of which goes to the state. "It basically means that the state has grown larger than it needs to be, that the private sector hasn't grown as large as it should be, and that the government is relied upon for creating jobs."

People shop in October for used clothes at the Baghdad market selling them. Khalid Mohammed/AP hide caption

People shop in October for used clothes at the Baghdad market selling them.

Iraq is not unique in this respect. Many oil-exporting countries have been bruised by low oil prices, and many have centralized economies with lots of state employees.

But some, like the United Arab Emirates, have diversified their economies with manufacturing, travel or tourism sectors. Others, like Saudi Arabia, have vast reserves.

Iraq, on the other hand, is depleted by burdens including rebuilding cities ruined by its shattering fight against the Islamic State.

For years, if not decades, economists have insisted it is imperative for Iraq to have a more diverse economy and a larger private sector, so that so many people's livelihoods do not depend on a high oil price. But despite international development initiatives large and small, the private sector is still dwarfed by the state economy.

The government's reform plan

Finance Minister Ali Allawi does have a plan. "There has to be really an entirely different approach to the way that the government funds itself and the way that resources are allocated between various sectors," he tells NPR.

His ministry unveiled a white paper last year to do things like encourage investment by improving Iraq's infrastructure, bump up tax revenues, stimulate agriculture and manufacturing and tailor young Iraqis' education to the global labor market.

Allawi concedes that many of these ideas are not new. In the past, he says, "most of these plans foundered because there wasn't the will to sustain them." Oil money was flowing, and the government "chose the line of least resistance."

Now, he says, there is political and popular recognition that reform is necessary. The white paper contains hundreds of concrete steps to be enacted over three to five years the first being the currency devaluation.

"There'll be a number of people who will lose and a much greater number who will benefit," he says of the disruption.

But the benefits will take time to materialize. Meantime, Iraq is seeking billions of dollars in loans from the International Monetary Fund to soften the present pain and avert political challenges.

"If the current situation continues," warns Sajad Jiyad of the Century Foundation, "and if oil prices are low, there is a real possibility that more and more people will go on strikes or protests, and things could become more difficult."

Protests have rocked Iraq over the past year and a half. The largest have been in Baghdad, but the southern city of Nasiriyah has also seen large demonstrations and a months-long sit-in. A forceful crackdown has dampened the protests, but anger continues to simmer and activists say growing poverty is one factor that keeps it going.

"The economic situation of all of the people in Nasiriyah and Iraq is getting worse day after day. We will see more demonstrations," says Ziyad al Asaad, who has participated in many demonstrations against the government. "More protests in the streets, in the square."

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In Iraq's 'Dire' Economy, Poverty Is Rising And So Are Fears Of Instability - NPR