Iraq’s New Budget Woes

Iraq’s Finance Minister Bayan Jabor recently said that Iraq needed to boost its oil exports if it wants to have a balanced budget in the future. On November 11, Iraq’s cabinet approved the country’s $67 billion 2009 budget. Originally the government planned on an $80 billion amount, but because of falling price of oil, it had to trim $13 billion. That was still $19 billion more than the 2008 budget. The problem is that the final budget was based upon a $62 a barrel price for crude. On December 2, the price stood at only $47 a barrel. According to the Finance Ministry 94% of the budget is based upon petroleum profits. To solve this problem Jabor called on increasing exports, but production has actually dropped recently, and Iraq may not have the ability to fix it any time soon.

Finance Minister Jabor said that with the declining price of oil, Iraq would run into a budget deficit by 2010. For now the government will rely upon a $15 billion surplus to make up the difference next year. In addition, Baghdad has plans to increase taxes, tariffs, and the tax base, along with selling a mobile telephone license, but Jabor noted that those would not fix the country’s huge dependence upon petroleum to finance its public spending. The Minister said the solution is to boost oil exports to 2.5 million barrels a day. Iraq is currently selling 1.7 million barrels a day to foreign markets. This is a problem already because the 2009 budget is based upon a 2 million barrels a day rate. The problem is Iraq lacks the infrastructure and know how to increase, let alone maintain a steady production of petroleum. In fact, an oil official recently said that oil exports and pumping would drop next year because old and aging equipment can’t be replaced and the country’s brain drain has deprived it of many skilled workers for maintenance.

As noted earlier, the other sectors of Iraq’s economy are facing major problems. That will mean the country will remain dependent upon oil for the foreseeable future. Minister Jabor claimed Iraq needs a $70 a barrel price to maintain its budget, but an earlier International Monetary Fund study said that Iraq needed a $111 a barrel price. That compared to other Arab states in the Persian Gulf that only needed $47 a barrel for a balanced budget. With oil prices nose-diving that will imperial more of Iraq’s spending. This is at a time when the country still needs massive reconstruction funding, and the U.S. is winding down its spending for that purpose. It will also mean the oil industry will not be improved, which is what is needed to boost production to make up for the declining prices. Iraq seems to be caught in a Catch-22 as a result.

For more on Iraq’s budget see:

United Nations Humanitarian Report On Iraq

Special Inspector General for Iraq Reconstruction’s Quarterly October Report

Iraq Cuts Its 2009 Budget, But Still Can’t Spend It

NY Times Finds Iraq Spends Even Less Of Their Budget

GAO August Report On Iraq’s Budget And Spending

SOURCES

Abbas, Mohammed and Ibrahim, Waleed, “Iraq fears budget crisis, urges oil export boost,” Reuters, 12/3/08

Alsumaria, “Iraq Cabinet approves 2009 budget,” 11/12/08

Associated Press, “Iraq plans to cut 2009 budget by $13 billion,” 10/31/08

Chon, Gina, “As Crude Falls, Iraqi Leaders Scramble to Plan Budget,” Wall Street Journal, 10/22/08

Special Inspector General for Iraq Reconstruction, “Quarterly Report to the United States Congress,” 10/30/08

Swartz, Spencer, “Iraqi Oil Exports Could Fall Amid Maintenance Problems,” Wall Street Journal, 12/2/08