Related Articles

• 
  Iraq economic revival faces headwinds

  10 May 2024

  

   

  The ambitious new $17bn Iraq Development Road project, linking Basra to Turkiye’s Mersin port, puts the country’s economic trajectory on a long-term geopolitical setting that will aim to take full advantage of Iraq’s position as a key link in trade routes between Asia and the Mediterranean.

  But before this vaunted plan takes root, Prime Minister Shia Al Sudani’s government faces a host of knotty economic challenges, not least a challenging fiscal position aggravated by the expansionary budget announced in 2023.

  Lack of parliamentary consent has largely insulated the country from the negative impacts of that $153bn budget. That has meant large amounts of planned state spending have not been disbursed, leaving the state finances in better shape than they would have been otherwise.

  Fitch Ratings expects that low execution of capital spending and limited transfers to the Kurdistan region will help limit the size of the deficit.

  “We expect growth to rebound in 2024 (1.2%), driven by public spending under the expansionary three-year budget and continued recovery in non-oil GDP. We expect non-oil growth to benefit from stronger private consumption, as inflation edges down,” says Mohamed Afifi, Fitch Ratings’ primary analyst for Iraq.

  Budget deficit

  Even so, reduced oil revenues have impacted Iraq’s economy, turning a budget surplus of 10.8% of GDP in 2022 into a deficit of 1.9% of GDP in 2023. Fitch sees the fiscal deficit widening, reaching 3.7% in 2024 as declining oil prices and Opec-imposed production cuts drive oil revenue down, while a heavier wage bill pushes expenditure.

  The government’s debt-to-GDP ratio is also likely to rise in 2024-25, from 43.4% in 2023 to 48.7%, with Fitch attributing this to larger budget deficits that will be funded from borrowing and deposit drawdowns. However, these figures include some $40bn of legacy debt that Iraq faces no pressure to service.

  The big concern is that the 2023-25 budget programme will add hundreds of thousands of workers to an already bloated public sector payroll, crowding out the private sector.

  “We estimate that the expansionary three-year budget will hinder the private sector’s development by providing a sharp increase in the public workforce,” says Afifi.

  “We estimate that the budget will add 600,000 employees, most of which are currently working under temporary contracts, to the public sector payroll. This would bring the public sector wage bill (salaries and pensions) to 25.8% of GDP by 2025, from 15% in 2022.”

  As the IMF warned in a March 2024 commentary, higher economic growth will be needed to absorb the rapidly expanding labour force, boost non-oil exports and broaden the tax base.

  In this context, urged the Fund, the Iraqi authorities should seek to enable private sector development, including through labour market reforms, modernisation of the financial sector and restructuring of state-owned banks, pension and electricity sector reforms, and continued efforts to improve governance and reduce corruption.    

  That is a hefty checklist for a country that is still facing myriad security, political and developmental challenges.

  Al Sudani can at least counter the gloomier prognoses with the revival in non-oil sector growth, and lower inflation. Real non-oil GDP is estimated to have grown by 6% in 2023. Headline inflation declined from a high of 7.5% in January 2023 to 4% by year-end, reflecting lower international food and energy prices, and the impact of the February 2023 currency revaluation, according to the IMF.

  International reserves increased to $112bn in 2023. Fitch sees FX reserves providing payment coverage above 12 months and a substantial financial buffer until the end of 2025.

  Other positives will come through increased foreign direct investment, notably from the Gulf states. Saudi Arabia’s Public Investment Fund allocated $3bn for Iraqi investments last year, while Qatar’s Estithmar signed a series of memorandums of understanding worth $7bn in June 2023, covering hotel, real estate and healthcare projects.

  Banking reform

  One area of focus for the government is its banking sector, which remains underdeveloped and largely unfit for purpose, dominated by state-owned banks with opaque finances.

  As Aysegul Ozgur, head of research at Iraq-focused Rabee Securities, says, 93.7% of currency issued was outside banks in Iraq at the end of 2022.

  But, says Ozgur, the Central Bank of Iraq (CBI) is looking to strengthen financial inclusion and increase the cash inside the financial system through a series of projects.

  “The salary domiciliation project of 2017 is the most prominent one among them, aiming for public sector employees to transfer their salaries to bank accounts by enabling them to receive and withdraw salaries easily through available payment channels (bank branches, ATMs and POS) and providing the ability to obtain credit facilities and bank loans by showing their salaries as collateral,” she says.

  A number of other developments underscore the CBI’s concerted efforts to modernise Iraq’s financial landscape and promote economic stability.

  “As a measure to control the FX flow into the banking system, the CBI now allows a limited number of banks to participate in the CBI foreign currency window and engage in US dollar transactions,” says Ozgur. “Due to the restricted number of banks permitted to engage in such activities, they benefit from an expanded market share in US dollar transactions.”

  The Central Bank has also moved towards tougher oversight of the country’s 61 commercial banking institutions, made up of 54 private banks and seven state banks.

  Since the CBI revised the guidelines for foreign currency transactions across borders to curb illicit financial flows in February 2023, says Ozgur, the banks that have direct correspondent banking relationships have played an active role in international money transfers and increased their commission and FX income significantly.

  “The outstanding growth in current account deposits with these transfers resulted in significant growth in assets. Bank of Baghdad, National Bank of Iraq and Al-Mansour Bank are among the banks benefiting the most from these developments due to having direct correspondent banking relationships,” says Ozgur.

  In February 2024, eight local commercial banks were banned from engaging in US dollar transactions, in a move to reduce fraud, money laundering and other illegal uses of the greenback. This followed a visit to Baghdad by a senior US Treasury official to Baghdad.

  Such moves should, over time, help restore confidence in the financial system and – crucially – help build local insinuations that are credible players in the local economy, able to facilitate Iraq’s private sector growth ambitions, whether domestically or as part of the Iraq Development Road projects.

  Al Sudani struggles to maintain Iraq’s political stability

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  James Gavin
• 
  Dubai reviews $22bn tunnel PQ applications

  10 May 2024

  Dubai Municipality is expected to provide feedback to engineering, procurement and construction (EPC) companies that submitted their prequalification applications for the contracts comprising the Dubai Strategic Sewerage Tunnels (DSST) project next week.

  According to industry sources, interested EPC contractors submitted their statements of qualifications (SOQ) for the contracts on 30 April.

  International, regional and local EPC contractors are understood to have sought to prequalify to bid for the contracts for the $22bn DSST scheme, which Dubai Municipality is implementing on a public-private partnership (PPP) basis.

  In addition to its size, the project is gaining significant interest due to its unique procurement approach, whereby EPC contractors’ prequalification precedes developers’ prequalification.

  Dubai Municipality is undertaking the prequalification process for EPC contractors ahead of prequalifying companies that can bid for the contracts to develop and operate various packages of the project.

  According to industry sources, the floods resulting from the April 16 storm that hit Dubai and other emirates have also made implementing the project more urgent. 

  The bidders for each of the PPP requests for proposals (RFPs) will be prequalified consortiums comprised of sponsors, EPC contractors and operation and management (O&M) contractors.

  MEED previously reported that the overall project will require a capital expenditure of roughly AED30bn ($8bn), while the whole life cost over the full concession terms of the entire project is estimated to reach AED80bn.

  The project aims to convert Dubai’s existing sewerage system from a pumped system to a gravity system by decommissioning the existing pump stations and providing “a sustainable, innovative, reliable service for future generations”.

  Dubai currently has two major sewerage catchments. The first in Deira is Warsan, where the Warsan sewage treatment plant (STP) treats the flow.

  The second catchment, called Jebel Ali, is in Bur Dubai, where the wastewater is treated at the Jebel Ali STP.

  DSST-DLT packages

  Under the current plan, the $22bn DSST project is broken down into six packages, which will be tendered separately as PPP packages with concession periods lasting between 25 and 35 years.

  The first package, J1, comprises Jebel Ali tunnels (North) and terminal pump stations (TPS). The tunnels will extend approximately 42 kilometres, and the links will extend 10km. 

  The second package, J2, covers the southern section of the Jebel Ali tunnels, which will extend 16km and have a link stretching 46km.

  W for Warsan, the third package, comprises 16km of tunnels, TPS and 46km of links.

  J3, the fourth package, comprises 129km of links. Once completed, Dubai Municipality will operate them, unlike the first three packages, which are envisaged to be operated and maintained by the winning PPP contractors.  

  J1, J2 and W will be procured under a design-build-finance-operate-maintain model with a concession period of 25-35 years.

  J3 will be procured under a design-build-finance model with a concession period of 25-35 years.

  J1, J2, W and J3 will comprise the deep sewerage tunnels, links and TPS (DLT) components of the overall project.

  MEED understands the project’s remaining two packages, the expansion and upgrade of the Jebel Ali and Warsan STPs, will be procured in a process separate from the four DSST-DLT components.

  The RFPs for the four DSST-DLT packages will likely be issued sequentially, staggered around six to 12 months apart.

  Dubai Municipality has appointed Abu Dhabi-headquartered Tribe Infrastructure Group as lead and financial adviser, UK-based Ashurst as legal adviser and US-based Parsons as technical adviser for the DSST project.

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  Jennifer Aguinaldo
• 
  Al Sudani struggles to maintain Iraq’s political stability

  9 May 2024

  

   

  Iraq’s Prime Minister Mohammed Al Sudani is now more than halfway through his term. While there have been some notable economic developments, such as the massive energy deal with TotalEnergies signed in July 2023, his main accomplishment may well be maintaining a fragile political settlement.

  When he took office in late October 2022, it ended a year of tense political infighting following the 2021 election. The next national poll is expected in October 2025, but while the government itself may appear secure, Iraqi politics is as turbulent as ever.

  The Council of Representatives has not had a permanent speaker since November, when Mohammed Al Halbousi was dismissed by the Federal Supreme Court and forced to step away from parliament. Mohsen Al Mandalawi was named acting speaker, but fierce debate continues over handing the job to anyone else on a more formal basis.

  The latest figure to be proposed is Salem Al Issawi, who is backed by three Sunni blocs but opposed by the largest Sunni group, Al-Halbousi’s Taqaddum (Progress) party.

  Under Iraq’s ‘muhasasa’ system of dividing the political spoils along religious and ethnic lines, the speaker’s job goes to a Sunni politician, while the federal presidency goes to a Kurd and the prime minister is Shia.

  Al Sudani is now also facing a fresh challenge on the domestic front in the shape of a mooted return to the political scene by rival Shia leader Moqtada Al Sadr, who announced his retirement from frontline politics in August 2022. Earlier that year, he had pulled all his MPs from parliament, effectively handing power to Al Sudani’s Coordination Framework.

  Al Sadr now looks set to change course. On 10 April, he renamed his organisation from the Sadrist Movement to the National Shiite Movement and further statements since then point to a possible return to the electoral battlefield. Given his past ability to mobilise large numbers of followers, he could have a significant impact on the next election and events leading up to it.

  “Al Sadr maintains strong support from parts of the street, but it may prove difficult for him to reassert himself after ceding control over powerful institutions to the Coordination Framework,” said Winthrop Rodgers, an independent analyst focused on Iraq. “However, his return will certainly complicate dynamics within Shia politics.”

  His likely return will also test Iranian influence on Baghdad. Tehran has been able to exert huge influence over Iraqi politics through its allied Shia politicians and militia groups, but Al Sadr has been the most prominent Shia figure to resist such ties in recent years.

  Al Sudani has, though, been reaching out to other neighbours, too. In April, he hosted Turkish President Recep Tayyip Erdogan, who was making his first trip to the country since 2011. The visit resulted in more than 20 agreements and memoranda of understanding, including one covering the contentious issue of cross-border water resources, as well as security and trade. However, there was no sign of progress on re-opening an oil export pipeline from Iraqi Kurdistan to Turkey.

  Trade route

  Under Al Sudani, Baghdad and Ankara have also managed to get Abu Dhabi and Doha on board with the Development Road initiative, a $17bn plan to develop a 1,200km trade route from the Gulf through Iraq to Turkey and, from there, on to Europe. The UAE had previously thrown its weight behind the India-Middle East-Europe Economic Corridor initiative, launched in New Delhi in September – but that plan involves using Israeli ports.

  “In light of the Gaza war, a trade route through Israel is unlikely to be something that many Gulf rulers want to be too closely associated with at the moment,” said one regional analyst.

  For the Iraqi trade route to build up real momentum, the security situation around the country will need to improve further. While the Islamic State has been largely defeated, other pro-Iran groups continue to be active, including several that have banded together as the Islamic Resistance in Iraq (IRI).

  Many of that umbrella group’s recent actions have been directed against Israel, including a cruise missile attack on 2 May, which targeted Tel Aviv. Such actions hold the potential for Iraq to be drawn into any expansion of the Israel-Hamas conflict, perhaps as a proxy battleground between Iran and Israel.

  Other apparent IRI attacks have been directed at local targets, such as a drone attack on the Khor Mor gas field in the Kurdistan region in late April, which killed four Yemeni workers and forced UAE-based operator Dana Gas to suspend operations for several days.

  Kurdistan election in doubt

  Kurdistan, meanwhile, has other all-but-intractable political problems. Most recently, the Kurdistan Democratic Party (KDP) insisted it will not participate in the regional parliamentary election planned for 10 June – two years after it should have been held.

  That stance was prompted by a Federal Supreme Court ruling in February that ended the practice of reserving 11 seats for minority groups including Turkmen, Christians and Armenians after ruling that the quota was “unconstitutional”. The MPs holding those seats had generally voted in step with the KDP – something that led its rival, the Patriotic Union of Kurdistan (PUK), and others to file a court case arguing that the communities were no longer properly represented.

  The KDP has emerged as the largest party from every election in the region over the past two decades and its pledge to sit out this election creates a thorny issue for Baghdad, which is now in charge of the process – after the Supreme Court also ruled in February that oversight of the elections should be handed over from the Kurdish authorities to the federal Independent High Electoral Commission.

  “If the KDP does not participate in the election, the Kurdistan Regional Government will effectively cease to function as a cohesive political entity; if Baghdad gives into the KDP’s gamesmanship, it sets a bad precedent that a single party can prevent an election if it feels it will be disadvantaged,” said Rodgers.

  No solution has been found as yet. Kurdistan region president Nechirvan Barzani was in Tehran on 6 May, where he held talks with Iranian President Ebrahim Raisi and Supreme Leader Ali Khamenei, among others. Trade and cross-border security issues were at the top of the agenda, but some reports suggested Barzani had also tried to persuade Tehran to put pressure on the PUK to agree to a delay to the June poll.

  On 8 May, a further element of chaos was leant to the proceedings when the High Electoral Commission suspended preparation for the Kurdish election in response to a lawsuit filed by the KDP over the distribution of constituencies.

  Together, the prospect of a major rival Shia bloc returning to Baghdad politics ahead of the 2025 Iraqi parliamentary election and the risk of the breakdown of the political process in Kurdistan threaten to disrupt the relative political calm that Al Sudani has worked to cultivate. Handling the shifting political landscape will require astuteness.

  Image: مكتب اعلامي لرئيس الوزراء, CC BY-SA 4.0, via Wikimedia Commons

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  Dominic Dudley
• 
  Iraq electricity sector makes slow progress

  9 May 2024

  Latest news from Iraq's power and water sectors:

  > Iraq plans new Baiji power plant
  > Decision imminent on Iraq waste-to-energy project
  > Iraq discusses nuclear projects with global watchdog
  > Siemens Energy and SLB sign Iraq flare gas-to-power deal
  > PowerChina in talks for Basra desalination plant
  > US seeks firms for Baghdad power plant package
  > Iraq plans green hydrogen project at refinery
  > Iraq approves long-term grid expansion

  ---

  

   

  In late March, Iraq’s Electricity Ministry struck a five-year gas supply deal with National Iranian Gas Company for up to 50 million cubic metres a day (cm/d), contingent on the needs of Iraqi power stations, in exchange for oil and gasoline.

  The deal offers a lifeline to Iraq’s deteriorating electricity sector and replaces an existing agreement whereby contractual volumes were theoretically set at 70 million cm/d for summer and 45 million cm/d for winter.

  The two countries signed the deal following nearly three months of longer-than-usual power outages in Iraq, and after Baghdad settled part of the multibillion-dollar debt it owes Iran. The power cuts occurred due to a drastic reduction in Irani gas supply, which dipped to 10 million cm/d and wiped out 4GW from Iraq’s grid.

  The deal is a compromise for both countries. It allows Iraq some breathing space to implement projects to reduce its dependence on Iran’s gas exports – a long-running and elusive objective among Iraq’s policymakers and its allies in the GCC states and the US.

  The crisis should prompt Iraq to push ahead with projects to boost domestic gas production and build solar power plants, according to the Electricity Ministry.

  Supply and demand mismatch

  There has been a persistent mismatch between supply and demand in Iraq’s electricity sector, with peak demand during the summer months outstripping available capacity by a sizeable margin.

  In recent years, the deficit has returned during the winter when heating requirements rise.

  With a few exceptions, however, the procurement process or negotiations for additional generation capacity have been proceeding slowly, leaving a gap that is typically addressed by diesel generators.

  Iraq aspires to build 12,000MW of solar capacity by the end of the decade, which is nearly half its known available capacity today.

  The Electricity Ministry has signed deals with several companies to develop sizeable solar photovoltaic (PV) capacity over the past two to three years in line with this objective. Yet, despite regular pronouncements that the construction phase for these projects is about to start, none have reached final investment decisions (FIDs) or the construction phase so far.

  The Electricity Ministry remains the dominant client for these projects, although the National Investment Commission (NIC) has been an active participant, particularly in bilateral or public-private partnership projects.

  For example, the UAE’s Masdar signed a deal to develop 2GW of solar capacity in Iraq with the NIC. The commission is also procuring a contract to develop the country’s first waste-to-energy (WTE) project in coordination with the Municipality of Baghdad, the Electricity Ministry and the Environment Ministry.

  Located in the Al Nahrawan area of Baghdad Governorate, the planned WTE project will have the capacity to treat 3,000 tonnes of waste a day and generate nearly 80 megawatt-hours (MWh) of electricity.

  Other companies that have committed to develop solar PV projects in Iraq include Power China, which has pledged to develop solar PV projects with a combined total capacity of 2GW, and France’s Total Energies, which has committed to build a 1,000MW solar farm in Artawi.

  The solar project in Artawi is a small part of a $27bn package that TotalEnergies is developing in partnership with QatarEnergy. The package involves the development of a common seawater supply project and oil and gas fields in Iraq.

  Awarded projects

  As earlier cited, there are some exceptions to the endemic start-stop mode for Iraq’s power generation and distribution projects.

  For example, Germany’s Siemens Energy and the US-based GE have ongoing projects that include retrofitting or upgrading existing gas turbine power stations or building new substations as part of agreements to help rebuild Iraq and support its goal of reducing carbon emissions.

  Earlier this month, the Electricity Ministry signed a preliminary agreement with Germany’s Siemens Energy and US firm SLB, formerly Schlumberger, to explore the development of a power generation plant using flare gas.

  According to Siemens Energy Middle East managing director Dietmar Siersdorfer, the planned flare gas-to-power project in southern Iraq will help reduce carbon dioxide emissions and capture value from gas that would otherwise be wasted.

  The planned flare gas-to-power plant could have a generation capacity of up to 2,000MW.

  In January this year, China-based Oriental International is understood to have signed a contract to convert a single-cycle unit at the Baghdad South power plant complex into a combined-cycle power plant.

  In April, the Electricity Ministry awarded another Chinese company, China Machinery Engineering Corporation (CMEC), a second year of operation and maintenance contracts for the Salah Al Din gas-fired power plant.

  CMEC was awarded the estimated $1bn contract to build the power plant in northern Iraq in 2011. After a series of delays and challenges, including the Isis uprising, the two 630MW capacity units began operating last year.

  In December last year, Siemens Energy also signed a contract to deliver five high-voltage substations on a turnkey basis in Iraq. The 400-kilovolt substations, each with a capacity of 1,500MW, will be installed in Baghdad, Diyala, Najaf, Karbala and Basra.

  Similarly, the US’s preoccupation with helping wean Iraq off Iran’s gas and electricity imports has spurred projects to interconnect Iraq’s grid with its neighbour Saudi Arabia through the GCC grid and Jordan.

  In October last year, the governor of Saudi Arabia’s Eastern Province, Prince Saud Bin Naif Bin Abdulaziz, inaugurated the GCC grid's Iraq connection, which had been under development for several years. The 295-kilometre power transmission network will have a total transmission capacity of 1,800MW, with an initial phase expected to supply 500MW of electricity to Iraq.

  Future projects

  In February this year, Electricity Ministry spokesperson Ahmed Mousa said the government had approved funds for the long-term plans to expand the country’s power transmission and distribution network with Siemens Energy’s help.

  Mousa said the ministry “received funds for long-term plans to develop the electricity sector in 2023 … the three-year budget approved in 2023 also includes funds this year and in 2025”. 

  In early May, it was reported that the Electricity Ministry held discussions with Qatar’s UCC Holding to develop a 2,100MW gas-fired power plant in Baiji. The plant will replace a power station that was damaged during the war.

  It is unclear if the project is part of a previous agreement between UCC Holding and NIC to develop two power plants with a capacity of 2,400MW in Iraq.

  A new 2,000MW gas-fired power plant is also being proposed in Basra, which is expected to receive gas from the nearby West Qurna 1 and West Qurna 2 oil fields.

  As it is, several projects are waiting for final approvals, such as the gas-fired 2,800MW Khairat independent power producer, which has yet to reach FID over two years after the contract was awarded.  

  Going nuclear 

  Project delays and indecision in Iraq do not appear to narrow down the options for future power generation expansion.  

  In March, it was reported that senior Iraq and International Atomic Energy Agency (IAEA) officials had discussed Iraq’s plans for a possible nuclear energy programme, including small modular reactors.

  According to the nuclear watchdog, discussions included maintaining strict adherence to non-proliferation norms.

  IAEA director general Rafael Mariano Grossi said his agency has committed to supporting the foundations of what should be an entirely peaceful programme in Iraq.

  Iraq, for its part, is considering nuclear energy to enable greater energy security and for water desalination projects as part of the country’s plans for a more sustainable future.

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  Jennifer Aguinaldo
• 
  Firms continue Baiji 1 and 2 power plant talks

  9 May 2024

  Discussions are continuing between Iraq’s Electricity Ministry and a team comprising Germany’s Siemens Energy and Egypt’s Orascom Construction for the contract to rebuild the Baiji 1 and Baiji 2 power plants in northern Iraq, both of which were damaged by the Islamic State in Iraq and Syria (Isis).

  MEED reported in 2019 that the ministry and Siemens/Orascom team had signed a contract to rebuild the two power plants.

  “There are ongoing discussions and there is progress, although obviously the discussions have been proceeding at a pace that is slower than expected,” a source close to the project told MEED.

  The project agreed upon at the time of the contract signing aims to restore and increase the plants’ capacities to produce 1.6GW of electricity.

  Construction of the plants was expected to begin after the contracts were approved by Iraq’s Council of Ministers and a financial agreement was reached with the Finance Ministry.

  Siemens Energy was to supply four new gas turbines for the plants as well as inspect and revamp six existing units.

  The project is part of the electricity roadmap implementation programme that Siemens Energy signed with the Iraqi government in May 2018.

  Earlier this week, it was reported that the Iraq Electricity Ministry held preliminary discussions with a Qatari company to build a greenfield power plant in Baiji with a potential capacity of 2,100MW.

  The two projects are unrelated, according to the MEED source.

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  Jennifer Aguinaldo