Thursday, October 22, 2009

Iraq’s Budget Problems Will Continue Into Next Year

Iraq’s cabinet has passed a new preliminary 2010 budget. It stands at $67.29 billion, an $8.4 billion increase from 2009. Like previous budgets, the overwhelming majority of the spending will go towards operational costs. Of the $67 billion, 73%, $49.17 billion will be for salaries, pensions, etc. That leaves only $17.83 billion for the capital budget that goes towards development and infrastructure. That’s nowhere near what the country needs.

Just like the 2009 budget, it will also have a deficit. Iraq is currently running a $19 billion deficit, and the new budget is expected to be $15 billion short. The cabinet said that it will sell bonds and get loans from the International Monetary Fund (IMF) and World Bank to come up with the difference. That’s unlikely. This year, the Central Bank has only authorized the sale of $3 billion in bonds, and that went to paying for electrical projects with General Electric and Siemens. Baghdad however, is currently negotiating with the IMF for a $5.5 billion loan that will go to the budget. An official from the Central Bank said that he doubted whether the government could meet the IMF’s conditions. Already, Prime Minister Nouri al-Maliki said that he would not go along with cuts in government spending that the international group might ask for if it involved salaries.

The deficit is caused by several factors. For one there’s the expectations for Iraq’s oil industry, which provides almost all of the government’s revenue. The 2010 budget is based upon 2.15 million barrels of oil exports per day and a $60 price. The 2009 budget called for 2 million barrels at $50. It took months for Iraqi crude to reach $50, and Iraq has only achieved 2 million barrels for two months so far in 2009. While Iraq has recently signed some new oil deals, they are not expected to boost production for at least a year.

Another major factor is that the previous provincial and national governments signed dozens and dozens of development deals when the country was flowing in money. This has led almost every province to report a deficit this year.

Iraq has the resources to be a rich country. Years of wars and sanctions however, have left the country with little means to develop its oil industry, and the other sectors in the economy have declined. That makes Iraq increasingly dependent upon petroleum that is in turn, based upon the global economy. Until the rest of the world recovers from the current recession, it’s unlikely that Iraq will make enough to cover it’s basic costs, let alone have the money to invest in its infrastructure and diversify. That means Iraq will continue to run deficits, and will have to incur a new debt in the meantime.

SOURCES

Agence France Presse, “Iraq made ‘good progress’ in IMF loan talks: IMF,” 10/6/09

Dow Jones Newswire, “UPDATE: Iraq Cabinet OKs $67.29B 2010 Budget, To Issue Bonds,” 10/13/09

Reuters, “Iraq PM Says Cannot Cut Public Pay To Suit IMF,” 10/7/09
- “Q+A-Iraq’s oil contracts, scale and obstacles,” 10/16/09

Salaheddin, Sinan, “Iraq Cabinet approves $67 billion budget for 2010,” Associated Press, 10/14/09

Zawya, “Iraq Central Bank Opposes Issuing Treasury Bills To Finance Projects,” 9/27/09

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