Iraq’s budget for 2017: between clear austerity and flagrant deficit

The failure to diversify the resources of  Iraqi economy, which depends on oil   to a large extent  led to more problems facing macroeconomic and social  problem of unemployment  stands  on top of those problems, in addition to inflation and the deficit of  balance of payments and low economic growth.

And these problems are emerged  due to poor recruitment of oil revenues in order to achieve economic diversification of activating the productive sectors of  such as transformational industrial , agricultural, tourism, etc., in order to build the tax base, which increases the effectiveness of diversifying public revenues.

Among the necessary means  to address the economic problems   is to prepare a general balance in both its current and investment plan for spending and revenue, to be able to cope with those problems, according to the philosophy of the state and its plan to intervene or not, if the state adopts a capitalist system, the principles of the state are limited to the traditional functions of external defense and interior security and  achieve justice between the citizens and the budget to be less effective in addressing social and economic problems, and if they adopt the principles of the socialist system the budget will be  in more face to it.

However, plans  investment its laws  in Iraq  are heading now and turn toward a market economy and its laws, but it does not have the mechanism of a real experience for the success of this approach.

Despite the fact that all public budgets since 2004 has prepared with  a planned deficit   ended  with real surplus as a result of ignorance in the planning and  poor   performance – as the real percentage of completion in the implementation of all previous current budgets did not exceed 70% of the planned  ones.

Earlier ,2017 budget was also prepared the same mistakes as the Iraqi Council of Representatives approved on 7/12 project of  the country’s budget law for 2017 under the financial crisis experienced by Iraq as a result of lower oil prices and the growing expenses of the  war against Daesh , the Council voted by majority on the financial budget items after semi consensus on its provisions with the exception of the item on a share of the Kurdistan region. The deputies  of the State of Law coalition, led by the Vice President of the Republic article Nuri al-Maliki objected to the region’s share and demanding slashing to 13% on the back of a long dispute between Baghdad and the Kurdistan Region on the export of oil, but was voted 17% for the region , provided that the Prime Minister agree to exchange these allocations from the Ministry of Finance.

The total value of the budget approved by the government about 95 billion dollars, and  anticipated  deficit of $ 20.5 billion. And  the budget figures  were based on  expected  price for a barrel of oil at $ 45, and the export amount of 3.6 million barrels per day of crude from within oil exported by the province of Kurdistan and the agreement  made on the late of the last year states  that the regime  to hand over  550,000 barrels of oil a day to the federal government in exchange for receiving  its share of the budget.

But Kurdish officials say the Baghdad does not comply with the agreement and the province does not receive financial dues, forcing him to sell oil independently of Baghdad, to meet the growing expenses due to the war against Daesh and sheltering hundreds of thousands of displaced people and refugees.

the  head  of parliamentary bloc of the Kurdistan Democratic Party Ahmed Muhsin al-Sadoun said his bloc did not attend the voting session, but  have objections from the beginning  and see   that the budget, which was approved did not meet its demands.

He stressed that the  passing of the budget did not   solve the outstanding issues between the federal government and the Kurdistan Region , including oil exports, and added that the budget did not allocate enough funds for the salaries of government employees and fighters  of the peshmerga  in Kurdistan. The Kurdistan Regional Government announced that it would not be binding on the federal budget law if the observations and reservations were not taken into consideration by legislation. The government of  the regime  says  it needs a month to (733) million dollars to pay salaries, and not the 264 million dollars that have been identified to the draft budget.

Iraq, which depends on the sale of oil revenues to cover about 95% of the expenses  that the drop  of the barrel price to less than $ 40  will lead to a lack of oil revenues to be paid in addition to the expenses of the war against Daesh and  to more loans, which could result in additional financial burden as a result of benefits In addition to the future economic and political dependency.

The 2016 budget included a large fiscal deficit, because the deficit was about $ 25 billion. It has already been warned by a report issued by the International Center for Development Studies, based in London, that the Iraqi budget deficit is clearly threatens the Iraqi oil sector. According to the report, if  the deficit exceeded $ 50 billion in Iraq  , it would be at risk of bankruptcy in 2017, and the inability to pay its employees’ salaries. In regard to the proposed solutions to cover the deficit in the public budget, deputies of the Finance Committee said that it «will be made via the International Monetary Fund and the World Bank and the Islamic Bank for Foreign and loans and the issuance of treasury bonds.

Through accurate reading of the federal budget for the year 2016 could be the following markings: –

According to Article 1- b:  revenues  from crude oil export  are calculated on the basis of the average price ($ 45) per barrel. Note that crude oil prices of  the actual  export is   much lower. And it mentioned in the same paragraph: that the rate of export of crude oil from the South and the North is estimated at (3.6) million barrels per day, while the quantity exported actually exceeding that amount (500,000) barrels per day.  And it is included  in the same paragraph also: Including the amount of (3.6) the amount of barrels exported (250,000) barrels of oil per day from the amount of oil produced in Kurdistan note that the  regime   exports   (600,000) barrels of oil per day except for the amount of (300 000) exporting barrels of oil per day from Kirkuk. And it stated in Article-2-II-b:

The federal minister of finance is  authorized to continue in taking loans  to cover the actual deficit of the federal general  Budget  or for other purposes included in this law despite achieving a surplus equal (172 trillion Dinar) nearly for years (2004-2014) and more than  15 trillion dinar  of a surplus of a budget of 2015. And for the purpose of  compensating  for  the decline  of   oil  crude prices  exported  and the increase for the need  to find out alternatives , the government sought  to reduce some  taxes according  to the article 24 –b in the budget 2016  which was existed in the budget of 2015 including all types of cars  in which the  percentage of tax was reduced  from  15%   to 5% , and cigarettes  and alcoholic  drinks  from 300% to 1oo% .

At  the same time when the government should to seek to repeal some of the unnecessary expenses and rationalizing the others, it has increased some operational allocations in the budget of 2016 as follows:

The question, after reviewing the table above, is: Where did  go the   previous surplus  of budgets  amounted  (7518) billion Iraqi dinars, and why the government is  complaining about the fiscal deficit, and  do not work on correcting errors contained in  the articles of budget in line with the requirements of the stage.

The Prime Minister  Haider al-Abadi said : “The oil revenues planned for 2017 amounted to 68.4 trillion Iraqi dinars, and non-oil revenues of 11.6 trillion dinars,” noting that “the price of a barrel of oil to budget in 2017 was estimated at $ 42.

He added that the estimated value of the loan to fill part of the planned deficit of 5.6 trillion dinars, indicating two trillion dinars allocated  from the share of the cabinet to support the farmers.

The deputy chairman of the parliamentary Committee Faleh al-Sari, said that “the appointments in the budget of 2017 will be in the four ministries only, the interior, defense and health and education,” noting, “it was stopping all other appointments in ministries.”

The Member of Parliament Hanan al –Fatlawi said  that the budget was built on the mistaken speculation , including: the assumption  of a large speculative deficit  such as assessing compensation of employees’ salaries by 39 trillion deficit while the real exchange 20 trillion, and identified the provinces of 400 million dinars, and did not get a quarter of the amount, and  Fatlawi confirmed  that the increase of  taxes on  employees  is a crime against them, surprising the allocation of  the necessities of goods increased by 22% and the country in a state of austerity.

Among  speculative mistakes according to  Fatlawi,  the allocation of government  an  emergency reserves to budget by 2016 with 112 billion while  it did not  spend  to the Ministry of Education $ 75 billion for the printing of school textbooks  and this reserve  did not help the  school students, calling to cancel the emergency allocations; because it will open the door to corruption!

Financial advisor to Haider al-Abadi , mudhher   Mohammed Saleh, revealed that the  expenditure for the year 2017 less than the total 2016 budget by 5%, and 86% of oil revenues from total revenues, adding that the state in a  status of austerity and increase deductions from employees’ salaries  from  3%  will reach to  4.8% to support the displaced people and the crowd People with doubts  of arrival of these amounts to its rightful place, which has carved out for it, and this is evidence that the budget suffered a large deficit  and it is supposed   the  employee participation of it to  bridge the deficit, and the direction of the state towards increasing borrowing either from  income or from abroad to cover the deficit and the worst of borrowing is the misuse of borrowed amounts.

From the above we conclude that Iraq’s oil wealth began to lose its value in the Iraqi budget, not the absence of the surplus that was achieved by the oil wealth before 2013 only making the Iraqi economy suffers the problem of debt. The trend towards diversification of the Iraqi economy, which requires reducing the proportion of oil revenues to other revenues  such as taxes, fees and public sector earnings and revenues of  capitalism and manufacturing revenues and earnings of the agricultural sector and others.

Shatha Khalil

Translated by : Mudhaffar Alkusairi

Rawabet Center for  Research and Strategic Studies