Baghdad Failing To Invest In Its Future

Iraq's Presidential Council just vetoed the 2009 budget, and then passed it. Each year spending has increased, and Baghdad has been able to expend about the same percentage, but almost all of this is on operational costs like salaries, pensions, goods and services. The capital budget, which includes investing in infrastructure, vehicles, etc., is hardly spent at all. After decades of war, sanctions, and the U.S. invasion, Iraq needs billions to rebuild and move forward. The government has largely failed at this task, and cannot expect American or foreign funds to make up for their lack of diligence anymore.

Each year since 2005 when Iraq was given back its official sovereignty its revenues and spending have increased. In 2005 Iraq earned $24.1 billion and spent $17.6 billion of it. By 2008 income had increased to $67.8 billion thanks to the skyrocketing price of oil, while expenditures had gone up to $49.5 billion. The 2009 budget is at $58.5 billion.

Iraq Revenues, Spending And Surpluses 2005-2008

	2005	2006	2007	2008	Total 2005-2008
Total Revenues	$24.1 bil	$32 bil	$39.9 bil	$67.8 bil	$163.7 bil
Expenditures	$17.6 bil	$22.8 bil	$26.6 bil	$49.5 bil	$116.5 bil
Surplus	$6.5 bil	$9.2 bil	$13.3 bil	$29.0 bil	$47.3 bil

From 2005-2007 90% of Iraq's spending has been on its operational budget, and only 10% on capital projects. In 2007 for example, Baghdad spent 80% of its $29 billion operational budget, but only 28% of its $12 billion capital one. This is the major reason why Iraq has ended up with large surpluses, which by 2008 stood at around $29 billion. The situation is even worse when broken down by ministry. The main ministries that bring in revenues and provide services such as oil, electricity, and water, only spent 11% of their $8 billion capital budget in 2007. In 2008 they were able to more than double their spending to 23%, but that's still a miniscule amount. The major causes are lack of trained staff, a weak procurement process, the inability to plan and carry out strategies, and violence.

Capital Spending By Iraq 2005-2007

	Appropriated	Spent	% of Total
2005	$6.3 bil	$1.4 bil	23%
2006	$8.3 bil	$1.6 bil	19%
2007	$12.1 bil	$3.4 bil	28%

The U.S. has also far outspent Iraq in reconstruction. The Americans have expended 87% of the money it has allocated for rebuilding Iraq, totaling about $9.5 billion of $10.9 billion since 2003. Iraq on the other hand has only spent 12%, approximately $2 billion, of $17.2 billion. Iraq has also not maintained projects the Americans have built and turned over to them.

Comparing U.S. and Iraqi Allocations and Spending For Reconstruction

	U.S. Fiscal Years 2003-2008	U.S. Fiscal Years 2003-June 2008	Iraqi 2005-2008	Iraqi 2005-2008
Sectors	Allocated	Spent	Allocated	Spent
Oil	$2.7 bil	$2.5 bil	$10.8 bil	$700,000
Electricity	$5.3 bil	$4.8 bil	$5.2 bil	$800,000
Water resources	$2.9 bil	$2.2 bil	$1.3 bil	$600,000
Totals	$10.9 bil	$9.5 bil	$17.2 bil	$2.0 bil

The reason why Iraq's inability to invest in its infrastructure is important is because the country desperately needs billions of dollars to develop. Oil is Iraq's main source of revenue. In 2008 it earned $68 billion, $62 billion of which came from petroleum. According to the State and Defense Departments not enough money is being spent on the industry to sustain output. In March 2009 Iraq produced 2.36 million barrels per day, but that's still below the estimated 2.5 million barrels per day average before the U.S. invasion. Production has also fluctuated up and down each month. According to the Oil Ministry it needs $25-$75 billion to reach its target of 6 million barrels per day. Last year the Ministry only spent $421 million of its capital budget, a mere 19% of the total. Electricity production only meets 52% of demand. There are still blackouts and access to power varies greatly from city to city, neighborhood to neighborhood. Like oil, electricity production is up overall, but the Electricity Ministry estimates it needs $27 billion to meet the entire country's demand by 2015. The U.S. thinks it may need twice that much. The same goes for the water system. 8.1 million Iraqis have access to potable water, but that's short of the American goal of 8.5 million. The U.N. says that 40% of children do not have safe drinking water. The country's treatment plants are also only operating at 17% of capacity. The lack of clean water led to cholera outbreaks in 2007 and 2008. The World Bank estimates that Iraq needs $14.4 billion to fix the water system. In total, that amounts to $66.4-$143.4 billion in investments.

Iraq's ability to spend its overall budget has improved each year, but its capital expenditures remain anemic. Almost all of the government's money has gone towards salaries, pensions, and services. It has spent more and more of its capital budget, but it's still a small percentage of the total. This comes at a time when the U.S. is almost finished transferring reconstruction to Iraqi control. No more major American or foreign aid is expected for Iraq in the future. The billions of dollars needed to improve the oil business and improve services will have to be largely self-generated, borrowed from international financial institutions, or gained from foreign companies. This will pose serious barriers to raising the standard of living for the average Iraqi as it will probably take several years for the government to ever learn how to spend its capital budget and work out successful deals with international corporations.

SOURCES

Aswat al-Iraq, “PB turns down federal budget,” 3/26/09

O’Hanlon, Michael and Campbell, Jason, “Iraq Index,” Brookings Institution, 2/26/09

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

United States Government Accountability Office, “IRAQ Key Issues for Congressional Oversight,” March 2009