Wednesday, June 17, 2009

Iraq’s Lack Of Budget Execution

In April 2009 Iraq passed its latest budget. It is larger than the 2008 one, but not as big as originally planned. The increases that individual ministries have received are largely for operational costs that go towards things like salaries and pensions, rather than for investing in the future. Another problem is that the major ministries responsible for revenues and services are still incapable of spending most of their capital budgets. This comes at a time when Iraq desperately needs to boost its growth.

Iraq’s 2009 budget is for $58.6 billion. That’s a 25.8% cut from the original amount of $79.8 billion, but still a 17% increase from the 2008 budget of $49.9 billion. Both Prime Minister Nouri al-Maliki and the Finance Minister Bayan Jabr were against the cuts saying that it would hamper services and the development of the economy, which is still mostly state run. It would have been impossible for Iraq to cover that original amount however. Even with the lower figure, Iraq is still expected to have a $20 billion deficit.

Most of the 2009 budget is for operational costs, with a cut in capital spending. The operational budget is for $45.9 billion, 78% of the total. The capital budget went down from $13.1 billion in 2008 to $12.7 billion in 2009, a 3% cut. In 2008 oil revenues were so large that a supplemental budget was passed, which increased the overall capital budget to $21.1 billion.

With U.S. reconstruction funding coming to an end, Iraq’s capital spending is the largest source of funding for rebuilding the country. Appropriately than, most of this year’s money will go to the Oil, Electricity, Finance, Water, and Industry and Minerals Ministries. Iraq’s Oil Ministry’s capital budget went up slightly from $2 billion in 2008 to $2.2 billion in 2009. The Electricity Ministry on the other hand, will face a 17% decrease in its capital spending from $1.3 billion in 2008 to $1.08 billion in 2009. The Ministry is worried that it won’t be able to increase capacity with that amount, as they originally asked for $7 billion. The Health Ministry will have the largest capital increase at +489%, going from $83.3 million to $408.1 million.

The problem is that Iraq has rarely been able to spend its capital budget. In 2005, when Iraq formally got its sovereignty back from the United States, it only spent 23% of its capital budget. That went down to 19% in 2006, and then up to 28% in 2007. In 2008 Baghdad made a huge leap when it expended 39% of its capital budget. Iraq’s main revenue, budget, and services ministries did worse however. The Oil, Water, and Electricity Ministries for example, appropriated $11.9 billion for capital spending from 2005 to 2007, but only spent $985 million of it. In 2007 Oil and Electricity only expended $1 million each from their capital budgets.

What are skyrocketing instead are the operational budgets. Nearly every ministry will see an increase in that department. The Oil Ministry for example will see a jump from $103.7 million in 2008 to $954.4 million this year in its operational account. The Electricity Ministry’s operational budget will go from $89.1 million in 2008 to $2.31 billion in 2009. The Health Ministry’s will increase from $1.872 billion in 2008 to $3.095 billion in 2009. Most of this money will be spent if Iraq follows its past trends. From 2005 to 2007 it spent $67 billion, 90% of which went to operating costs.

Iraq’s poor budget execution has led to massive surpluses. In 2005 Iraq had a $6.5 billion surplus. That went up to $29 billion leftover from the 2008 budget. The GAO estimated that Iraq built up a $47.3 billion surplus from 2005 to 2008. When parliament was drafting the 2009 budget they believed that they could tap into this money to pay for the expected deficit, but after the bill was passed the Finance Ministry and Central Bank of Iraq let them know that they were not obligated to use the surplus to cover the budget. Baghdad has had to get a loan from the International Monetary Fund instead to cover the difference.

Each year Iraq has passed a larger budget, and each year it has been able to spend more of its money. The major ministries however, are still only spending a measly portion of their budgets, and most of that is going towards salaries and pensions, rather than investing in Iraq’s future. The 2009 budget will pose an additional problem for Iraq, as it still has not earned enough from oil to pay its bills. Many ministries did not get the money they requested either, and each still needs billions. The Ministry of Oil said it requires $25 to $75 billion to reach its target of 6 million barrels per day. The Electricity Ministry estimated that it needs $27 billion over the next 6 to 10 years to meet all of the country’s demand by 2015. The U.S. thinks the actual amount might be twice as high. The World Bank believes that Iraq has to have $14.4 billion to fix its water system. These amounts will largely have to come from Baghdad from now on as foreign investors are still largely staying away, while U.S. and international donations are coming to an end. The inability to spend its capital budget, while operational costs are skyrocketing do not point to meeting these goals anytime soon in Iraq.

Major Revenue And Service Ministries’ Budgets 2008-2009


Oil Ministry
2008: $103.7 mil operational, $2 bil capital. TOTAL $2.103 bil, 16% spent
2009: $954.4 mil operational, $2.2 bil capital. TOTAL: $3.160 bil
2008-2009 Changes: +920% operational, +10% capital

Electricity Ministry
2008: $89.1 mil operational, $1.3 bil capital. TOTAL: $1.389 bil, 12% spent
2009: $2.31 bil operational, $1.08 bil capital. TOTAL: $3.39 bil
2008-2009 Changes: +259% operational, -16% capital

Water Ministry
2008: $109.6 mil operational, $375 mil capital. TOTAL: $484. mil. 48% spent
2009: $168.6 mil operational, $563.5 mil capital. TOTAL: $732.1 mil
2008-2009 Changes: +53% operational, +50% capital

Municipalities and Public Works Ministry
2008: $42.6 mil operational, $416.7 mil capital. TOTAL: $459.3 mil, 22% spent
2009: $479.6 mil operational, $468.2 mil capital. TOTAL: $947.8 mil
2008-2009 Changes: +1125% operational, +12% capital

Transportation Ministry
2008: $121.6 mil operational, $250 mil capital. TOTAL: $371.6 mil, 29% spent
2009: $209.7 mil operational, $324.2 mil capital. TOTAL: $533.8 mil
2008-2009 Changes: +72% operational, +29% capital

Communications Ministry
2008: $14.4 mil operational, $250 mil capital. TOTAL: $264.4 mil, 30% spent
2009: $88.2 mil operational, $216.1 mil capital. TOTAL: $304.3 mil
2008-2009 Changes: +612% operational, -15% capital

Health Ministry
2008: $1.872 bil operational, $83.3 mil capital. TOTAL: $1.956 bil
2009: $3.095 bil operational, $408.1 mil capital. TOTAL: $3.503 bil
2008-2009 Changes: +65% operational, +489% capital

Budget Expenditures 2005-2007

Iraqi Budget Expenditures 2005-2007
2005: $16.151 bil operational, $1.432 bil capital. TOTAL: $17.583 bil
2006: $21.173 bil operational, $1.615 bil capital. TOTAL: $22.788 bil
2007: $23.164 bil operational, $3.434 bil capital. TOTAL: $26.599 bil

Oil, Water, Electricity Ministries’ Capital Appropriations Versus Spending
2005: $3,482 mil appropriated, $373 mil spent
2006: $4,473 mil appropriated, $502 mil spent
2007: $4.034 mil appropriated, $110 mil spent
TOTAL: $11,990 mil appropriated, $985 mil spent

Oil Ministry Spending
2005: $160 mil spent, $49 mil operational, $111 mil capital
2006: $191 mil spent, $48 mil operational, $143 mil capital
2007: $36 mil spent, $35 mil operational, $1 mil capital

Water Ministry Spending
2005: $163 mil spent, $42 mil operational, $120 mil capital
2006: $145 mil spent, $54 mil operational, $91 mil capital
2007: $236 mil spent, $128 mil operational, $109 mil capital

Electricity Ministry Spending
2005: $147 mil spent, $5 mil operational, $142 mil capital
2006: $281 mil spent, $13 mil operational, $268 mil capital
2007: $78 mil spent, $77 mil operational, $1 mil capital

SOURCES

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

Cordesman, Anthony, “The Changing Situation in Iraq: A Progress Report,” Center for Strategic and International Studies, 4/1/09

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

Special Inspector General for Iraq Reconstruction, “Quarterly Report to the United States Congress,” 4/30/09

United States Government Accountability Office, “IRAQ Key Issues for Congressional Oversight,” March 2009
- “Iraqi Revenues, Expenditures, and Surplus,” August 2008

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