Thursday, May 21, 2009

Going Into Debt To Cover Budget Deficit

On April 3, 2009 the Presidential Council passed the $58.9 billion 2009 Iraqi budget. It was based upon 2 million barrels a day in oil exports at a price of $50 a barrel. In that month the country was only able to sell 1.82 million barrels a day at $47 a barrel. As a result, the country is expected to run anywhere from a $25 billion to $30 billion deficit. Parliament originally believed that this would be covered by the country’s large foreign reserves that had built up since 2005 due to rising oil prices and an inability of Baghdad to spend most of its money. The Finance Minister Baqir Jabr said this stands at $75 billion, $44 billion in the Central Bank of Iraq and $30 billion held by the Finance Ministry itself. On April 27 Minister Jabr however said that the government couldn’t use that fund. That was followed by the Central Bank announcing in May that it had turned down the government’s request to cover the deficit. That leaves Baghdad with only two means to make up the difference. One, it can hope that the Oil Ministry is able to boost oil production to bring in more money. That’s unlikely to happen anytime soon. The other option is for the government to get a loan from the International Monetary Fund (IMF). That’s the route Baghdad is currently following.

It seems that parliament was completely unaware of the rules governing the budget when it was passed or were misinformed about them. There were several reports that lawmakers expected the budget deficit to be covered by the country’s reserves. It was only after that it was passed that the Finance Minister let them know that they could not use this money. The legislature either never talked to the Ministry or the Central Bank when it was debating the budget or were misled. In the end, parliament ended up passing a budget, almost half of which it can’t pay for. To make matters worse, it will go further in debt, borrowing money from the IMF to cover the difference, despite the fact that it has a massive reserve. Hopefully that can be used to pay the loan back, otherwise the situation will get worse in the next fiscal year unless petroleum prices skyrocket up again.

For more on Iraq's budget see:

Falling Oil Revenues, and Uneven Production

Baghdad Failing To Invest In Its Future

Presidential Council Vetoes 2009 Budget

Ups and Downs Of Iraq's Oil Industry And Its Implications For The Budget

Iraq's Budget Stalled

How Are The Current Provincial Councils Doing?

Iraq Revises Budget Once Again

Iraq Cuts Budget

Are Budget Cuts Ahead For Iraq?

Iraq's New Budget Woes

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

NY Times Finds Iraq Spends Even Less Of Its Budget

GAO August 2008 Report On Iraq's Budget And Spending

SOURCES

Abdul-Zahra, Qassim, “Iraq passes sharply reduced budget for 2009,” Associated Press, 3/5/09

Agence France Presse, “Iraq presidency approves slashed budget,” 4/3/09

Aswat al-Iraq, “MP expects 50% deficit in 2009 budget,” 4/27/09

Azzaman, “Iraq’s hard cash reserves estimated at more than $70 billion, minister says,” 3/18/09

Cockburn, Patrick, “Collapse in Iraqi oil price shatters hope of recovery,” Independent, 3/20/09

Cordesman, Anthony, “The Changing Situation in Iraq: A Progress Report,” Center for Strategic and International Studies, 4/4/09

Hafidh, Hassan, “UPDATE: Iraq April Oil Exports 1.82M B/d, Up 0.33% On Month,” Dow Jones, 5/3/09

Al-Hashemi, Mostafa, “Iraq not to tap hard cash reserves despite fall in oil prices,” Azzaman, 4/27/09

Iraq Directory, “Central Bank of Iraq (CBI) declined government’s request to borrow from Reserved funds,” 5/5/09

Levinson, Charles, “Toll Rises as Iraq Slows Surge,” Wall Street Journal, 5/9/09

Sly, Liz, “Economic downturn finally hits Iraq,” Los Angeles Times, 5/11/09

3 comments:

Anonymous said...

Excuse my ignorance, but why can't Iraq use the foreign reserves? The link said it had something to do with adverse effects on the economy...but surely now is when the money is needed most?

motown67 said...

The Central Bank said by law they are independent of parliament and therefore are not obligated to cover the budget. They then turned down the parliament's request to use the reserves. The Finance Ministry told parliament the same thing.

motown67 said...

http://www.iraqdirectory.com/DisplayNews.aspx?id=9217

Central Bank of Iraq (CBI) declined government’s request to borrow from Reserved funds

The senior Consultant in the Central Bank of Iraq, Mudher Mohammed Saleh ... added that Iraq's stockpiles of reserved funds have been covered by cash during the past years, and so it is out of the financial authority of the Government.

...

Salih pointed out that the law prevents the government from imposing its policies on the Central Bank of Iraq, asserting that the Central Bank of Iraq Law No. 56 year 2004, has granted the Bank a full autonomy from the government, that not to provide any loans to the Government, and not to receive orders from the government in the formation of its policies, and its accounts comply to the international standards.

This is why this situation seems like a fiasco.

The budget was based upon 2 mil/bar/day in oil exports at $50 each. Parliament was told they wouldn't get near that mark anytime soon but passed the budget anyway. In the first 3rd of the year the Oil Ministry hasn't reached those marks so officials knew they were going to run a deficit, initially reported at about $15 bil.

Every single report I read said parliament just expected the surplus from previous budgets to cover this difference. Then the central bank and the Finance Ministry tells them they can't use the money after the budget's past

That seems like either parliament didn't know the rules on the money or didn't ask the bank beforehand whether they could use the money, or worse were misled by the bank and Finance into thinking that they could use it. Either way it seems like a major screw up.

Since the invasion reducing Iraq's debt has been a major goal of the U.S. and Baghdad so that as much money as possible could be spent on the budget and reconstruction. Now they're going to have to add new debt to cover the budget if they get an IMF loan.