The Iraqi government says Iraq faces an immediate challenge caused by the decline in oil prices and the impact this has had on the economy and fiscal liquidity.

Officials say that the impact of the fall in oil prices is compounded by other weaknesses caused by decades old policies of a command economy, and by the approach to the economy by successive Iraqi governments over the past seventeen years.

These policies, they add,  have led, amongst other things, to an exponential increase in the size of the public sector, low levels of private investment, mismanagement and administrative corruption.

According to official figures, salaries and staff allowances in the public sector constitute approximately 60% of public spending, and this does not include other expenditure on daily activities of ministries, while spending on investment projects represents 2% of the budget.

The figures show that the number of people employed in the public sector in 2005 was around 850,000, but the number of state employees has risen to more than 3 millions now, and this figure does not include contract employees or those on daily rates, costing Iraq US$36 billions annually, a ten-fold increase from US$3.6 billions annually a few years ago.

The new Iraqi Cabinet announced the establishment of the Emergency Cell for Financial Reform to lead the response to the crisis, under the chairmanship of the Prime Minister, and with the membership of the Ministers of Finance, Foreign Affairs, Planning, the Governor of the Central Bank, the Secretary General of the Council of Ministers, and other officials as nominated by the Prime Minister.

The Cell’s mandate is to ensure financial liquidity, agree measures to rationalise public spending, diversify resources, and propose finance mechanisms for reconstruction and investment projects from outside government funding streams.

As well as rationalising public spending, the new Iraqi government says it will embark on an economic reform programme in Iraq that includes:

• Supporting the expansion of the private sector and encouraging investment
• Introducing automation and simplifying procedures in the public sector
• Adopting a single budget account to monitor spending by ministries to reduce waste and corruption
• Expanding the electronic payment system for salaries, and pressing ahead with the e-government project
• Rebalancing Iraq’s economic relations with all neighbouring countries

Earlier this month, the Minister of  Finance, Ali Allawi, said that cutting spending was essential, and that this will include reductions to the the benefits and allowances of state employees, including those of senior officials, but he stressed that the basic salaries of employees will not be reduced, and that any cuts will not include employees or pensioners who earn 500,000 dinars or less a month.