Friday, April 3, 2009

Baghdad Failing To Invest In Its Future

Iraq's Presidential Council just vetoed the 2009 budget, and then passed it. Each year spending has increased, and Baghdad has been able to expend about the same percentage, but almost all of this is on operational costs like salaries, pensions, goods and services. The capital budget, which includes investing in infrastructure, vehicles, etc., is hardly spent at all. After decades of war, sanctions, and the U.S. invasion, Iraq needs billions to rebuild and move forward. The government has largely failed at this task, and cannot expect American or foreign funds to make up for their lack of diligence anymore.

Each year since 2005 when Iraq was given back its official sovereignty its revenues and spending have increased. In 2005 Iraq earned $24.1 billion and spent $17.6 billion of it. By 2008 income had increased to $67.8 billion thanks to the skyrocketing price of oil, while expenditures had gone up to $49.5 billion. The 2009 budget is at $58.5 billion.

Iraq Revenues, Spending And Surpluses 2005-2008


2005

2006

2007

2008

Total 2005-2008

Total Revenues

$24.1 bil

$32 bil

$39.9 bil

$67.8 bil

$163.7 bil

Expenditures

$17.6 bil

$22.8 bil

$26.6 bil

$49.5 bil

$116.5 bil

Surplus

$6.5 bil

$9.2 bil

$13.3 bil

$29.0 bil

$47.3 bil


From 2005-2007 90% of Iraq's spending has been on its operational budget, and only 10% on capital projects. In 2007 for example, Baghdad spent 80% of its $29 billion operational budget, but only 28% of its $12 billion capital one. This is the major reason why Iraq has ended up with large surpluses, which by 2008 stood at around $29 billion. The situation is even worse when broken down by ministry. The main ministries that bring in revenues and provide services such as oil, electricity, and water, only spent 11% of their $8 billion capital budget in 2007. In 2008 they were able to more than double their spending to 23%, but that's still a miniscule amount. The major causes are lack of trained staff, a weak procurement process, the inability to plan and carry out strategies, and violence.

Capital Spending By Iraq 2005-2007



Appropriated

Spent

% of Total

2005

$6.3 bil

$1.4 bil

23%

2006

$8.3 bil

$1.6 bil

19%

2007

$12.1 bil

$3.4 bil

28%


The U.S. has also far outspent Iraq in reconstruction. The Americans have expended 87% of the money it has allocated for rebuilding Iraq, totaling about $9.5 billion of $10.9 billion since 2003. Iraq on the other hand has only spent 12%, approximately $2 billion, of $17.2 billion. Iraq has also not maintained projects the Americans have built and turned over to them.


Comparing U.S. and Iraqi Allocations and Spending For Reconstruction


U.S. Fiscal Years 2003-2008

U.S. Fiscal Years 2003-June 2008

Iraqi
2005-2008

Iraqi
2005-2008

Sectors

Allocated

Spent

Allocated

Spent

Oil

$2.7 bil

$2.5 bil

$10.8 bil

$700,000

Electricity

$5.3 bil

$4.8 bil

$5.2 bil

$800,000

Water resources

$2.9 bil

$2.2 bil

$1.3 bil

$600,000

Totals

$10.9 bil

$9.5 bil

$17.2 bil

$2.0 bil


The reason why Iraq's inability to invest in its infrastructure is important is because the country desperately needs billions of dollars to develop. Oil is Iraq's main source of revenue. In 2008 it earned $68 billion, $62 billion of which came from petroleum. According to the State and Defense Departments not enough money is being spent on the industry to sustain output. In March 2009 Iraq produced 2.36 million barrels per day, but that's still below the estimated 2.5 million barrels per day average before the U.S. invasion. Production has also fluctuated up and down each month. According to the Oil Ministry it needs $25-$75 billion to reach its target of 6 million barrels per day. Last year the Ministry only spent $421 million of its capital budget, a mere 19% of the total. Electricity production only meets 52% of demand. There are still blackouts and access to power varies greatly from city to city, neighborhood to neighborhood. Like oil, electricity production is up overall, but the Electricity Ministry estimates it needs $27 billion to meet the entire country's demand by 2015. The U.S. thinks it may need twice that much. The same goes for the water system. 8.1 million Iraqis have access to potable water, but that's short of the American goal of 8.5 million. The U.N. says that 40% of children do not have safe drinking water. The country's treatment plants are also only operating at 17% of capacity. The lack of clean water led to cholera outbreaks in 2007 and 2008. The World Bank estimates that Iraq needs $14.4 billion to fix the water system. In total, that amounts to $66.4-$143.4 billion in investments.

Iraq's ability to spend its overall budget has improved each year, but its capital expenditures remain anemic. Almost all of the government's money has gone towards salaries, pensions, and services. It has spent more and more of its capital budget, but it's still a small percentage of the total. This comes at a time when the U.S. is almost finished transferring reconstruction to Iraqi control. No more major American or foreign aid is expected for Iraq in the future. The billions of dollars needed to improve the oil business and improve services will have to be largely self-generated, borrowed from international financial institutions, or gained from foreign companies. This will pose serious barriers to raising the standard of living for the average Iraqi as it will probably take several years for the government to ever learn how to spend its capital budget and work out successful deals with international corporations.

SOURCES

Aswat al-Iraq, “PB turns down federal budget,” 3/26/09

O’Hanlon, Michael and Campbell, Jason, “Iraq Index,” Brookings Institution, 2/26/09

Department of Defense, “Measuring Stability and Security in Iraq,” March 2009

United States Government Accountability Office, “IRAQ Key Issues for Congressional Oversight,” March 2009

4 comments:

AndrewSshi said...

I'm curious. How exactly do they access the unspent money if they want to make up for budget shortfalls? There's got to be a way.

motown67 said...

The government has several different accounts. Their oil revenues are kept in an account in the NY Federal Reserve. They also have funds in the Central Bank of Iraq, and commercial Iraqi banks. Before they were allowed to roll over unspent money from previous budgets into the new one, but the Finance Ministry, fearing the deficit for the 2009 budget has stopped that so it can control the surplus which will be used to cover the difference this year.

The Finance Ministry recently claimed that the country has $70 bil total in reserves.

The problem is they just don't have the capacity to spend that much money. The paper work is so slow, they don't have the personnel, etc. Last year they passed a supplemental budget because they were flowing in so much cash from oil prices, but they could barely spend it, and it over whelmed most ministries. Only two of them, education and higher education, ended up spending much of it.

Anonymous said...

Good post, this is certainly one of the most important matters facing Iraq in the long term. Oil provides an incredible opportunity for this country to get out of a ruined economy, but the government does not seem to be diversifying it's industries in any major way. Do you think it's because of the difficult current situation, or simply that the leaders really are too incompetant to think ahead?

motown67 said...

Iraq's oil infrastructure has been in disrepair since the Gulf War. A lot of the money the U.S. spent on the industry got wasted and has only really brought up production to what it was for most of the 1990s, although not as much as right before the invasion when there was a big increase. There was also massive corruption and stealing going on.

The Oil Minister may be over his head, and all of his policies have failed so far. Like many other oil economies the huge amounts of money generated have seduced politicians into thinking that they don't have to do anything else with the economy. It didn't help that the wars, sanctions, invasion, and two years of drought have wrecked most of the other sectors as well. The government also works at a snails pace.

It's just a huge mess.