Friday, September 17, 2010

Iraq’s Finances Are A Wreck

The United States Government Accountability Office (GAO) released a report in September 2010 trying to determine whether Iraq had a surplus, and if it did whether that money could be spent on security. The GAO estimated that Baghdad had accumulated an $11.8 million adjusted surplus. That was no surprise, as Iraq has never spent all its money since 2005 when it got back its sovereignty from the United States. The real revelation of the GAO study was the fact that Iraq’s finances are a wreck, and the government doesn’t know where all its money is.

Each year the government has made advances on its spending, but it cannot fully account for them. From 2005 to 2009 the GAO found that Iraq had amassed a $52.1 billion surplus. At the same time, Baghdad claimed that it had $40.3 billion in advances, leaving an $11.8 billion adjusted surplus. The Board of Supreme Audit, the main financial oversight organization, found that the authorities didn’t fully report all of their advances, and that some of the money might have been misappropriated. A report by the Board on the 2005 budget for example, claimed that at the end of the fiscal year not all the advances were settled, but they were counted as spent anyway. It also reported that the government didn’t follow rules when executing the advances. The GAO, going through Iraq’s 2005-2009 records, couldn’t determine the nature of 40% of the spending, which was listed as “other temporary advances.” Iraqi officials would not provide any more details about them.

Another problem was that the government couldn’t keep track of all of its deposits. The GAO found that by December 2009 Baghdad had $15.3-$32.2 billion in the Central Bank of Iraq, the Development Fund for Iraq in New York City, and state owned banks. The range of money was due to a discrepancy between what the Central Bank reported to the International Monetary Fund (IMF) and what the Ministry of Finance reported. The latter said that it there was $32.2 billion in government funds in the banks, but only $15.3 billion of it was free to be used on spending because the rest belonged to state-owned enterprises, trusts, and pensions. The Central Bank reported no such obligations to the IMF.

In addition, Baghdad said that it had shifted some of its money between the different banks in 2009, but this was not shown in the records. The Central Bank said that the government had transferred $10.3 billion from it to the state-owned Rafidain and Rasheed banks. There was no paper trail of this transaction however. In fact, the government accounts showed a $1.7 billion increase in its deposits with the Central Bank. The Department of Defense claimed that advances made that year could have accounted for the $10.3 billion, but the GAO didn’t find any correlation between the two. The previous year the Ministry of Finance showed a $1.8 billion deficit after advances, while government deposits in banks increased from $29.4 billion to $41.1 billion.

Finally, an independent audit of the state-run Rafidain Bank said that it could not account for its money. The private company Ernst and Young found that the bank could not validate its accounts or financial statements. At the end of 2008 the bank didn’t have records covering $11 billion, and $800 million in 2009. An earlier audit of the Rasheed bank found the same problems.

What the GAO revealed is that Iraq does not know how much it’s spending, how much of a surplus it has, nor where all its money is. That means the budget numbers are largely meaningless because of all the extra spending going on. Reporting on those advances is not trustworthy either. The lack of accountability is probably a major contributing factor to the massive fraud and corruption going on within the government, since no one seems to know where all the money is going. Since Iraq has an antiquated, paper-based bureaucracy that lacks the capacity to handle all of its expenditures, this could’ve been predicted. Under an agreement with the IMF the Iraqi government is supposed to be addressing some of these issues. The question is how effective will the measures be. In all likelihood Baghdad is probably years away from having a competent civil service that can keep track of all its accounts. Until then, Iraq will have to assume that it has money in the bank, it just won’t know how much, nor where all the funds are.  


United States Government Accountability Office, “Iraqi-U.S. Cost-Sharing Iraq Has a Cumulative Budget Surplus, Offering the Potential for Further Cost-Sharing,” September 2010

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