Thursday, January 29, 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.

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

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