Sunday, March 29, 2009

Presidential Councils Vetoes 2009 Budget

On March 26, the Presidential Council made up of President Jalal Talabani, Vice President Adel Abdul Mahdi, and Vice President Tariq al-Hashemi turned down the 2009 budget. The $58.5 billion bill was approved by parliament on March 5. No reason was given for not passing it, but it was probably because the legislature had not cut enough spending while oil prices, which accounts for almost all of Iraq’s revenue, were so low.

The budget has gone through a series of revisions, but everyone includes a large deficit. When it was first proposed in October 2008 it stood at $78.8 billion, and was based upon an $80 a barrel price for Iraqi oil and 2 million barrels a day in exports. As the price of oil drop however, the budget cuts began. The first was in November when it was reduced to $67 billion, and a $62 a barrel price. At the time Iraqi oil was selling for $47. A member of the Finance Committee in parliament estimated that would mean a 23% deficit. By December it was down to $58 billion and $50 a barrel estimate, even though Iraqi crude was selling for $34.57 that month, while exports were at 1.815 million barrels a day. That would still mean a deficit, and government officials told reporters that they were expecting to cut government spending by 33%, reconstruction by 40%, and implement other austerity measures as a result. In January the Finance Minister began talking about selling bonds to raise more money, and the next month mentioned spending most of its surplus to cover the deficit that was now expected to stand at 31%. Finally in March parliament passed a $58.6 billion budget. It was still based upon $50 a barrel and 2 million in exports. Exports in February stood at 1.8 million barrels/day at $38.06 a barrel. The lawmakers didn’t touch salaries, pensions, food rations, or health care, which account for 80% of spending. Salaries were actually increased in 2008, and there has been a dramatic increase in government employees from 1.2 million in 2005 to 2.8 million in 2008, along with a vast increase in the security forces from 250,000 in 2007 to 609,000 in 2009. Paying for them is now the largest single expense at 35% of all spending.

The strain on the government’s funds was probably the reason why the Presidential Board did not pass the budget. Parliament was unwilling to make serious cuts to balance the budget, probably because in December the country is going to hold parliamentary elections. With an expected 27% deficit Baghdad would have to dip heavily into its reserves, and perhaps go into debt selling bonds to cover it. The lawmakers will now have to make some serious decisions about what to fund and what to cut when it reconsiders the legislation. A similar delay occurred last year when the budget wasn’t passed until February 2008. This time it won't be passed until April at the earliest. There are also the larger problems of the government’s inability to spend most of its money, and that it is almost completely depend upon oil. The U.S. is trying to help with the former, but nothing really is being done about the latter.


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

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

Abedzair, Kareem, “Oil price drop forces government to tighten belt,” Azzaman, 12/14/08

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

Arraf, Jane, “As war winds down, will Iraq’s progress hold steady?” Christian Science Monitor, 1/8/09

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
- “Budget cut lessons deficit to 27% - MP,” 3/5/09
- “Deficit in 2009 budget may reach 50% - MP,” 12/9/08
- “Iraq’s oil exports exceeded 54 million barrels in December – Oil Ministry,” 1/6/09
- “PB turns down federal budget,” 3/26/09

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

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

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Department of Defense, “Measuring Stability and Security in Iraq,” September 2008

Karouny, Mariam, “Iraq reviews 2009 budget due to falling oil price,” Reuters, 10/23/08

Lando, Ben, “Iraq oil exports drop in February,” Iraq Oil Report, 3/25/09

Mawloodi, Aiyob, “Iraq’s 2009 budget reduced three times to reach $ 58 billion,” Kurdish Globe, 12/19/08
- “Iraqi government sharply cuts its expenditures,” Kurdish Globe, 1/22/09

Reid, Robert, “AP: Iraq forced to cut spending as oil price falls,” 1/22/09

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

Roberson, Campbell and Glanz, James, “Falling Revenues Threaten Rebuilding and Stability in Iraq,” New York Times, 2/26/09

Rubin, Alissa, “Oil Revenues Dropping, Iraq’s Parliament Cuts the Budget,” New York Times, 3/6/09

Sheridan, Mary Beth, “As Iraq’s Oil Flows Freely, Profits Are Stuck in Bureaucracy,” Washington Post, 10/17/08

Special Inspector General for Iraq Reconstruction, “Quarterly and Semiannual Report to the United States Congress,” 7/30/08
- “Quarterly Report to the United States Congress,” 10/30/08
- “Quarterly Report and Semiannual Report to the United States Congress,” 1/30/09


Anand said...

Good article. As I told you, I live in the Bay Area. What is your e-mail address?

PS. What number of barrels of oil are you assuming the GoI sells in 2009? In 2010?

What is the implicit average cost to sell a barrel of oil (extraction costs, transportation costs)?

Joel Wing said...

The Oil Ministry is desperately trying to drill wells, sign deals, etc. to get production up this year because of the drop in prices. Will it work? Who knows. They may be able to get exports up to 2 mil/bar/day by the end of the year. Most of these are largely non-bid which makes them easier. The larger deals the Ministry wants with major oil companies are a long way off.

I have no idea what the costs are in Iraq, I would assume pretty high since the infrastructure is so old and breaking down, along with the costs of operating in a war zone. I don't think Iraqi oil is the highest quality either.

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