Tuesday, January 27, 2009

Iraq Revises Down Budget Once Again

Iraq has again cut its planned 2009 budget. This is at least the third time it has been revised. Originally, the budget was set at $78.8 billion, the largest in the country’s history, and a 13% increase from the 2008 budget. Now it is estimated to be at $53.7 billion, a $25.1 billion reduction. The new budget is based upon a $50 a barrel price of oil. The original one was based upon $80 a barrel. Oil accounts for over 90% of Iraq’s revenue as there are few taxes or tariffs. Baghdad is hoping for a rebound in world crude prices, but the world economic slowdown could go into 2010 meaning continuing low prices, and a drag on Iraq’s revenues. In mid-January for example, a barrel dropped to $34 before going up to $44. This compares to the highest price of $147 during the summer of 2008.

There appears to be little relief in the near future. The government says they have $32 billion in the Central Bank from money not spent in previous budgets to cover some of the difference. Officials have been calling for a boost in oil exports to help alleviate the issue. The problem is Iraq has no flexibility in its petroleum production. Output has gone up and down. Despite government hopes to boost exports to 2 million barrels a day in 2009, the World Bank doubts that will happen because the infrastructure is so old and run down.

To deal with this crisis the Ministry of Finance says that the government will have to have massive budget cuts, and even then will still run a deficit. They will hold off on buying new cars, equipment, hiring, and benefits. There is also a push to cut wages, which were increased in 2008, but the Deputy Minister of Finance Dr. Fazil Nabi said they are trying to put that off. More importantly, Baghdad will cut its reconstruction budget 40% from $21 billion to $12.54 billion. This has already had concrete effects as the Ministry of Displacement and Migration announced in early January 2009 that they will postpone building housing projects and integrated living areas for Iraq’s displaced. There is also pressure to cut the nation’s food rations program by relegating it only to the poor. The Kurdistan Regional Government has also cut its budget 20%. The Planning Ministry announced a 50% cut for the provinces overall. Even with these reductions, Iraq might still run a $19 billion deficit.

These budget problems come at a time when U.S. development aid is coming to an end, and Iraq’s economy is full of trouble. In September 2008, the U.S. appropriated its last large reconstruction package for Iraq. After that money is spent Iraq will be largely responsible for its own development. As reported before, oil is the only thing keeping Iraq’s economy afloat. The rest of the country’s industries are suffering from cheap imports, little to no protection, a lack of credit and banks, fuel and electricity shortages, and security issues that have put many out of business, increased costs for the rest, and led to high unemployment and underemployment. It hasn’t helped that many of the large U.S. and Iraqi projects have not trickled down to the average Iraqi who still faces high rates of poverty as well. Government jobs and food rations are some of the few things that actually provide relief to people, and both of those are now under pressure due to the budget deficit. There is little that can be done but to ride out the storm as Iraq is more dependent upon oil than its Arab neighbors, and there’s little hope for a rebound in the rest of the economy in the short to mid-term.

SOURCES

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

Aswat al-Iraq, “Austerity could save 20 trillion dinars for 2009 budget – expert,” 12/9/08
- “KRG cuts ministries’ operational costs by 20%,” 1/1/09
- “No decrease in salaries because of oil prices – planning minister” 12/19/08

Chon, Gina, “As Crude Falls, Iraqi Leaders Scramble to Plan Budget,” Wall Street Journal, 10/22/08

IRIN, “IRAQ: Budget cuts threaten IDP housing projects,” 1/6/09
- “IRAQ: Iraqis want free food programme to continue, finds survey,” 1/4/09

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

Mawloodi, Aiyob, “Iraqi government sharply cuts its expenditures,” Kurdish Globe, 1/22/09

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

Reuters, “Basra Oil Exports Nearly Double to 1.03m Bpd After Earlier Drop,” 12/30/08
- “Iraq earns $60 billion from 2008 crude exports,” 1/5/09

Special Inspector General for Iraq Reconstruction, “Quarterly Report to the United States Congress,” 10/30/08

11 comments:

Matt Delventhal said...

How likely is this to have a tangible impact, given the ministries' poor record of spending allotted funds in the past? Cutting the budget from almost $80 billion to just over 50 sounds like a huge drop, but if the ministries were only going to spend 30% of the 80 anyway, what's the real effect?

AndrewSshi said...

I wonder if the Iraqi government can't draw on the money that in previous years they weren't able to spend, since it's still sitting around in a bank.

motown67 said...

that's exactly what they plan on doing. They have a lot of unspent money even going back to 07 I think. I'm not sure how much it is or whether it'll cover the deficit though.

motown67 said...

That's the big question. The government especially at the provincial level just can't handle the job that's required I them either because of corruption, incompetance, lack of skilled staff or the top down system they still have where no one can do anything without the okay of the higher ups. Perhaps the bigger budgets are better because it means the total spent even if only a fraction is still bigger than a fraction of a smaller amount.

Iraqologist said...

Motown, I'm looking for some solid, up-to-date economic and development sources on Iraq. I'm interested in the development of private enterprise and the emergence of markets, investment climate and the government regulatory regime, the banking system, currency and foreign exchange policy, macroeconomic indicators like GDP, that sort of thing. Where's a good place to look. World Bank? IMF? SIGIR? I don't look at this stuff much, so any guidance you could give me would be appreciated.

motown67 said...

Iraq Directory is a site dedicated just to business reporing they don't do any original reporting just translate a lot of stories from Arabic to English plus collect English stories as well.

I've found economic and business reporting especially very spotty. The numbers are all over the place.

SIGIR's quarterly reports are the best for an overview of reconstruction. They also talk about the economy in the individual proinces in general. I've found the Pentagon quarterly reports to be pretty bad. The last one does have aggregate numbers like GDP, etc.

That's what I can think of off the top of my head.

That's what I can think of off the top of my head.

motown67 said...

Aswat al Iraq also has an economy section in English.

motown67 said...

Iraq Updates also has several sections on the economy where they collect articles. Niqash also has an economy section in English. All of these along with Iraq Directory and Aswat al-Iraq have links on my blog under the "News, Think Tank, U.N. and Iraqi Government Sources on Iraq" section on the right hand side.

motown67 said...

Iraq Oil Report, again, no original reporting, but does a good job collecting and summarizing news about the oil industry and the economy in general.

motown67 said...

Here's a new World Bank report on household income in Iraq:

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/IRAQEXTN/0,,contentMDK:22032522~menuPK:313111~pagePK:2865066~piPK:2865079~theSitePK:313105,00.html

Here's the World Bank's Iraq page link:

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/IRAQEXTN/0,,menuPK:313111~pagePK:141159~piPK:141110~theSitePK:313105,00.html

The IMF also has an Iraq page. It's all about the compact they have to reduce the debt:

http://www.imf.org/external/country/IRQ/index.htm

Iraqologist said...

Thanks a lot, very helpful. WB seems to be the only organization on the ground that does economic research--no IMF, no UNDP.