Wednesday, February 11, 2009

Iraq’s Budget Stalled

Iraq’s 2009 proposed budget is still in limbo. It was recently revised a third time with a $2 billion increase after two successive cuts. It may also be based upon unrealistic predictions about the oil industry that provides the lion’s share of Baghdad’ revenue. The budget also cannot be passed because there is no speaker of parliament since Mahmoud Mashhadani resigned on December 23, 2008. This is a familiar process for Iraq where major legislation is often delayed because of political bickering.

The original 2009 budget was set at $79.8 billion, but now is at $62.8 billion, a $17 billion reduction. The budget has been changed three times. After the second time it was cut to $59.5 billion. $2 billion was recently added to cover government salaries and benefits however. Even with the reductions Iraq is still predicted to have a 31% budget deficit according to a member of parliament’s Finance Committee. The Ministry of Finance says that they have a $25 billion surplus that will cover the difference. The Ministry also announced at the end of January 2009 that it would issue government bonds for the first time. Finance Minister Bayan Jabar hopes that this will raise up to $5 billion. He gave no date on when this will happen.

80% of the 2009 budget is for operational costs, while the other 20% is for capital improvements. So far $12.2 billion has been set aside for the capital budget, $1 billion less than the previous year. The operational costs are also up from 2008 largely due to a salary increase. When the country was awash in oil profits Baghdad decided to raise pay, but not it is coming back to bite them. Wages are the biggest cost to the government. Of the $36.2 billion Baghdad has spent from January to October 2008, 38.1% was on salaries.

The reduction in the capital budget will have wide ranging effects throughout the government. The security forces are just now beginning to plan for this contingency. The National Police for example, want to add twelve new brigades to cover all of Iraq’s provinces, but now will only be able to add one more this year. The Defense Ministry has plans to buy new armored personnel carries that might go on hold as well. The food ration system is going to eliminate wealthy families from its rolls. A hiring freeze is also supposed to go into affect. The budgets for the provinces are due for a 50% decrease in spending. Other services are expected to be cut, but few Iraqi politicians are willing to sign off on them because parliamentary elections are expected at the end of the year.

An even bigger problem than the costs and cuts in the 2009 budget is the fact that it is based upon assumptions of the oil industry that may not come true. The revised budget estimates that world oil prices will be at $50 a barrel, and the country will export two million barrels a day, a long time goal of the Oil Ministry. In 2008 Iraq only produced 2.42 million barrels a day on average. For the last three months of 2008 it was down to 2.37 million barrels a day, almost the same amount as the last quarter of 2007. Exports averaged 1.79 million barrels a day at the end of 2008, a 3% increase from the previous quarter, but a 6% decrease from 2007. In January 2009 Iraq increased its exports to 1.89 million barrels a day, but the average price per barrel was only $37, a lower price than the world average of around $40. As the numbers show, oil production and exports have been largely stagnant since the U.S. invasion. They are also below the 2.58 million barrels a day mark set before the invasion. If the price and production goals are not met, Iraq will end up with a larger deficit than already expected.

A lot of things have changed since 2008. Last year Iraq was riding high off of record oil prices, and increased spending and salaries in response. Because of a paper-based bureaucracy, untrained staff and incompetence, Baghdad has never been able to spend all of its budget. This turned out to be a good thing for once as that left over money is now available to make up for the planned deficit. At the same time the budget cuts come at a time when U.S. reconstruction aid is coming to an end, and the country still needs billions to rebuild. As Planning Minister Ali Baban told the Special Inspector General for Iraq Reconstruction, Iraq has little foreign investment and a small business community, which means government spending is the only real source of jobs and growth. When the budget will actually be passed is not known either, as it is taking a back seat to the disputes and competition over naming a new speaker of parliament.

SOURCES

Associated Press, “Iraq’s oil exports inch up in January,” 2/1/09

Aswat al-Iraq, "2009 budget faces 31% deficit - legislator," 2/8/09
- “No decrease in salaries because of oil prices – planning minister” 12/19/08

Al-Hashemi, Mostafa, “$25 billion surplus staves off financial crisis – Iraqi minister,” Azzaman, 2/2/09

Reuters, “UPDATE 1-Iraq to issue 1st post-Saddam bonds for $5 bln,” 1/28/09

Ryan, Missy, "Falling Oil Price Could Hamper Iraqi Military," Reuters, 2/9/09
- “Iraq must focus on reconstruction upkeep, U.S. says,” Reuters, 2/4/09

Special Inspector General for Iraq Reconstruction, “Quarterly Report and Semiannual Report to the United States Congress,” 1/30/09

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