Thursday, August 21, 2008

GAO August 2008 Report On Iraq’s Budget And Spending

In early August 2008, the Government Accountability Office (GAO) issued its latest report on Iraq’s budget. Its major conclusion was that while total spending by Iraq has increased from its first budget in 2005 to the present, the vast majority of this money has gone to operational costs such as salaries and pensions, rather than investment in infrastructure. The main causes are the lack of qualified staff, the war, and sectarianism that still hinder the government’s operation.

The GAO begins with a breakdown of Iraq’s revenues. From 2005-2007 Iraq has earned $96 billion. 94% or $90.2 billion of that has come from oil. The remaining $5.7 billion came from taxes, interest, and other revenues. The GAO estimates that in 2008 Iraq could earn between $73.5-$86.2 billion depending upon the price of oil. Oil could account for between $66.5-$79.2 billion of that total, twice the average amount from 2005-2007 thanks to the skyrocketing price of crude.

From 2005-2007 the Iraqi government spent $67 billion of its budget. The Iraqi Finance Ministry said that 90% of that went into operational costs such as salaries, pensions, goods, services, social benefits, and interest payments. The remaining 10% went into capital spending on investment in infrastructure. Only 1% went into maintaining that infrastructure. While the total amount of money Baghdad was able to spend has increased each year, it is still not able to spend all of its’ budget, especially its capital budgets. In 2007 for example, Iraq spent 80% of its operational budget, compared to only 28% of its capital one. There has been a 42% increase in capital spending from 2005-2007, but most of that was due to Kurdistan increasing its capital budget in 2007. Capital spending by Iraq’s ministries, actually decline last year. Most of the recent increase in total expenditures has also been on the security forces that jumped from $2,992 million in 2006 to $4,617 million in 2007

Defense and Interior Ministries’ Spending

  • 2005 total spent $2,109 million, $1,971 million operational, $138 million capital
  • 2006 total spent $2,992 million, $2,697 million operational, $296 million capital
  • 2007 total spent $4,617 million, $4,441 million operational, $176 million capital
  • January-April 2008 total spent $1,910 million, $1,898 million operational, $12 million capital
  • Annual Average Growth Rate 2005-2007 in Iraqi dinars: 36% increase in total spending
  • - 38% increase in operational spending
  • - 3% increase in capital spending

Note: While spending is given in U.S. dollars, the averages are in Iraqi dinars because the GAO considers that more accurate due to a large appreciation of the dinar against the dollar in 2007.

In 2008, the GAO predicts that Iraq will spend between $35.3-$35.9 billion of its $49.9 billion budget. That would be a 21% increase in dinars compared to the 2005-2007 annual average of 13%. Iraq’s parliament is also trying to add a $22 billion supplemental budget that would add $8 billion more to the capital budget.

Iraq’s Budgetary Spending

  • 2005 total spent $17,583 million, $16,151 million operational, $1,432 million capital
  • 2006 total spent $22,788 million, $21,173 million operational, $1,615 million capital
  • 2007 total spent $26,599 million, $23,164 million operational, $3,434 million capital
  • January-April 2008 total spent $10,796 million, $9,537 million operational, $1,25 million capital
  • Annual Average Growth Rate 2005-2007 in Iraqi dinars: 13% increase in total spending
  • - 10% increase in operational spending
  • - 42% increase in capital spending
While the government’s budget has increased from 2005-2007, the percentage spent has actually declined during that time. In 2005 Iraq spent 73% of its budget. That went down to 67% in 2006, and down again to 65% in 2007. The cause was a decrease in operational spending that went from 91% in 2005 to 80% in 2007. Capital spending has gone up and down from 23% in 2005, 19% in 2006, and 28% in 2007.

Spending by Iraq’s main ministries that are responsible for bringing in revenues and providing services has also gone down from 2005-2007. In 2005 Iraq’s oil, water, and electricity ministries spent 14% of their budgets. That went down to 13% in 2006, and 11% in 2007. All three witnessed a decrease in their capital budget spending, especially oil and electricity that went down 92% and 93% from 2005-2007. In 2005 and 2006 the ministries spent far more on their capital, rather than operational budgets, but that trend was reversed in 2007.

Oil, Water and Electricity Ministries’ Spending

  • 2005 ministries appropriated $5.7 billion, spent $825 million
  • 2007 ministries appropriated $8.1 billion, spent $896 million

Capital Budget Spending:

  • 2005 appropriated $3,482 million, $373 million spent
  • 2006 appropriated $4,473 million, $502 million spent
  • 2007 appropriated $4,034 million, $110 million spent
  • Total: appropriated $11,990 million, $985 million spent, 8% increase

Oil Ministry Spending:
  • 2005 total spent $160 million, $49 million operational, $111 million capital
  • 2006 total spent $191 million, $48 million operational, $143 million capital
  • 2007 total spent $36 million, $35 million operational, $1 million capital
  • January-April 2008 total spent $52 million, $13 million operational, $39 million capital
  • Annual Average Growth Rate 2005-2007 in Iraqi dinars: -56% decrease in total spending, -22% decrease in operational spending, -92% decline in capital spending

Water Ministry Spending:
  • 2005 total spent $163 million, $42 million operational, $120 million capital
  • 2006 total spent $145 million, $54 million operational, $91 million capital
  • 2007 total spent $236 million, $128 million operational, $109 million capital
  • January-April 2008 total spent $69 million, $35 million operational, $34 million capital
  • Annual Average Growth Rate 2005-2007 in Iraqi dinars: 11% increase in total spending, 59% increase in operational spending, 13% decline in capital spending

Electricity Ministry Spending:
  • 2005 total spent $147 million, $5 million operational, $142 million capital
  • 2006 total spent $281 million, $13 million operational, $268 million capital
  • 2007 total spent $78 million, $77 million operational, $1 million capital
  • January-April 2008 total spent $15 million, $15 million operational, $200,000 capital
  • Annual Average Growth Rate 2005-2007 in Iraqi dinars: 33% decline in total spending, 277% increase in operational spending, 93% decline in capital spending

From 2005-2007 Iraq has been able to accrue a surplus of $29.4 billion, which is held in the Iraq Development Fund in New York City, Iraq’s Central Bank, and other financial institutions. The 2008 budget surplus could grow to between $38.2-$50.3 billion depending upon the price of oil. If the $22 billion supplementary budget is passed, that will obviously reduce the surplus. Iraq also owes $50-$80 billion in outstanding debt, as well as $29 billion it owes to Kuwait for war reparations. The possible $79 billion surplus caused a controversy with American politicians and the press when this report was released.

Finally, the GAO compares U.S. and Iraqi reconstruction funding. Since the 2003 invasion, America has appropriated $48 billion for reconstruction and Iraq’s security forces. $42 billion or 88% of that has been appropriated, with $32 billion or 68% actually spent. $23.2 billion went into the oil, electricity, water, defense and interior ministries. In comparison, Iraq has appropriated $28 billion for reconstruction and security, with only $3.9 billion spent. That’s 14% of the total. The U.S. Treasury Department believes that Iraq has enough money to maintain all of its reconstruction projects, provide services, and help the economy grow. That’s what editorials and some American politicians called for when the GAO report was released at the beginning of August. The major impediments to this happening are a lack of trained staff, weak procurement and budgeting procedures, violence, and sectarianism, which have hindered Iraq from being able to effectively spend its budgets. The U.S. has various programs to improve Iraq’s bureaucracy, but it will be a long and arduous process to get them to effectively work.

SOURCES

DeYoung, Karen, “Iraq Banks Billions in Surpluses, GAO Says,” Washington Post, 8/6/08

Glanz, James and Robertson, Campbell, “As Iraq Surplus Rises, Little Goes Into Rebuilding,” New York Times, 8/5/08

Jelinek, Pauline, “GOA: Iraq could have $79 billion budget surplus,” Associated Press, 8/5/08

Juhi, Bushra, “Iraqi official defends spending, surplus,” Associated Press, 8/7/08

Kukis, Mark, “Who Gets Billed for a New Baghdad?” Time, 8/7/08

New York Times, “Time for Iraq to Pay the Bill,” 8/7/08

Reid, Robert, “US officials defend Iraq’s oil-fed budget surplus,” Associated Press, 8/6/07

Ryan, Missy, “U.S. diplomat rejects criticism of Iraqi spending,” Reuters, 8/6/08

United States Government Accountability Office, “Iraqi Revenues, Expenditures, and Surplus,” August 2008

USA Today, “Awash in oil money, it’s time for Iraq to pay its own way,” 8/13/08

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