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BAGHDAD – Saadi Abdul-Rahman was recently forced to pull his three children out of school in the Iraqi city of Mosul, where Islamic State militants have ruled with an iron fist since June. The cost of living has soared there, and the family is barely able to make ends meet, even after putting the kids to work.
"We are not able to pay for cooking gas, kerosene and food," the 56-year old retired government worker says. "The situation in Mosul is miserable."
The economy in the self-styled "caliphate" declared by the Islamic State group bridging Iraq and Syria is starting to show signs of strain.Prices of most staples have more than doubled as coalition airstrikes and ground operations make it difficult for products to move in and out of militant strongholds, leading to shortages, price-gouging and the creation of black markets.
Resentment has grown among residents under the rule of the extremists, who initially won support with their ability to deliver services.
In the early days of its rule, the Islamic State group subsidized food and gas prices through the wealth it accumulated from oil smuggling, extortion and ransom demands. They sold their smuggled oil at a discount — $25 to $60 for a barrel for oil that normally sold for more than $100, according to analysts and government officials.
But in recent weeks, prices have soared in militant-held cities. Items like kerosene, used for heating and cooking, are in short supply, while others, such as alcohol and cigarettes, strictly banned by the group, are making a comeback at higher prices on the black market.
Smoking is a punishable offense in militant-held Mosul. But at a warehouse on the outskirts of the city, cigarettes, as well as hard-to-come-by essentials like kerosene, can be found at hugely inflated prices on a black market run by the extremists. There, a pack of cigarettes sells for 30,000 dinars — the equivalent of $26 — more than double the pre-caliphate price, according to residents who spoke on condition of anonymity for fear of reprisals.
The militants "are developing an unsustainable economy," said Paul Sullivan, an expert on Middle East economies at the National Defense University in Washington. "Eventually the costs of keeping the subsidies and price controls going will overpower their smuggling funds, which are also used for offensive and defensive actions."
"ISIL cannot float government bonds like nations can," Sullivan added, using an alternate acronym for the group. "They can collect taxes, extort money, and so forth. But that will likely not be enough in the long run to keep such an unbalanced economic system going."
In the Syrian city of Raqqa, the extremists' so-called capital, the breakdown of security along the Syria-Iraq border in areas under Islamic State control has led to flourishing trade with Mosul. Trucks are also able to access the city from Turkey, residents said, allowing for a steady supply of fruit and vegetables, wheat and textiles. However, the cost of living has surged since U.S.-led airstrikes began in Syria in September, and power and water cuts grew more frequent, they said.
In addition, the strict social laws imposed by the group have been very bad for business, said Bari Abdelatif, an activist in the Islamic State-controlled town of al-Bab in Syria's northern Aleppo province. But, he said, foreign fighters were bringing with them lots of hard currency, making up somewhat for the shortfall.
Last month, Abu Bakr al-Baghdadi, the leader of the Islamic State group, decreed the minting of gold, silver and copper coins for the militants' own currency — the Islamic dinar — to "change the tyrannical monetary system" modelled on Western economies. However, trade in most militant-held cities continues to be in Iraqi dinars and U.S. dollars.
The start of winter has led to serious shortages of gasoline and kerosene in Iraq's militant-held territories. The official price for a liter of gas in government-controlled areas is 450 dinars (40 cents) — but in Mosul, it sells for four times that, or 1,700 dinars. Two hundred-liter barrels of kerosene are now sold in Mosul for 250,000 dinars ($220), versus the official price of 30,000 dinars.
In the western Iraqi city of Fallujah, under militant control for almost a year, residents have started cutting trees for firewood because kerosene is in such short supply. The city is surrounded by government troops and near-daily shelling often make parts of town too dangerous to visit.
Food and fuel prices have risen sharply as a result — a 50-kilo sack of rice costs 75,000 dinars ($65), up from 10,000 ($9) about three months ago. A cylinder of cooking gas goes for 140,000 dinars ($115).
A number of factors are driving the shortages and price hikes, according to residents in Mosul and Fallujah, the group's biggest Iraqi strongholds. The militants have imposed a tax on trucks and other vehicles entering their territory, which has led to a decline in business. Deliveries are also subject to militant theft, and coalition airstrikes and military operations make many roads impassable.
As a result, the trip from the Turkish border to Mosul took four hours prior to the militant takeover. Now, a delivery truck can spend as much as a week traveling the same road, and will ultimately pay a tax of as much as $300 for entry into Mosul, residents said.
According to Luay al-Khateeb, director of the Iraqi Energy Institute and a visiting fellow at the Brookings Doha Center, the population of the areas the Islamic State group controls in Iraq and Syria is 6.5 million to 8 million people.
"They need 150,000 barrels (of crude) a day just to meet local consumption," he said. "And that is the bare minimum to meet the demands for transportation, bakeries, power generation."
"That doesn't mean they have access to such supply," he added.
Last month, the militants shut down cell phone service in Mosul, claiming that residents were tipping off U.S.-led coalition airstrikes to their whereabouts. Cell signals have not been restored, causing the city to come to a virtual standstill. Workshops, factories and markets are closed and bitterness is growing among business owners.
"Most money-transfer operations are done by mobile calls," said Osama Abdul-Aziz, the owner of a money-transfer office in Mosul. "We have the option of using the Internet, but this method is very slow and sometimes the Internet does not work at all, which causes big delays to our work."
At Mohammed Abdullah's shop in Mosul, the pile of cell phone scratch cards is growing higher by the day. "Our business and means for living are in ruins now," he said.
Associated Press Writer Zeina Karam in Beirut and an AP reporter in Mosul contributed to this report.