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Al-maliki gambles on the deficit

Mayada Daood
Iraq’s 2010 budget, considered one of the most controversial in the country’s history, was finally endorsed at the end of January by parliament and the presidential council. The US$72 billion (84 trillion dinar)…
23.02.2010  |  Baghdad

It is the biggest budget since 2005 and runs with a deficit of US$19.6 billion (23 trillion dinars).

There is innovation in this budget but not the sort that will bring in revenue to the government. This year, provinces that produce oil and natural gas will receive a guaranteed US$1 per barrel of oil or per 150 cubic metres of natural gas they produce.

This is of special benefit to Basra, responsible for between 60% and 70% of Iraq’s hydrocardbon industry, and the Kurdistan region, Iraq’s other major centre of production. The provinces originally demanded only US$0.50 but, under Article 43 of the bill, twice the amount will now reach them.

So as not to appear guilty of favouritism – there is an election on after all – resource poor provinces will also get a share of oil revenue, with 5% going to provinces bordering oil producers to help them cope with environmental fallout.

Desperate not to leaeve anyone out in the distribution of money the government doesn’t have, $20 will be paid for each visitor to governorates with holy shrines.

The budget’s provision for 115 new jobs in the civil service has been put on hold until the formation of a federal civil service council. This council will not sit until some time after the elections.

“This will make people complain and accuse the government of not being able to provide them with the support and assitance they need,” complained Nouri al-Maliki about opposition to the plan, which he believes would help solve unemployment problems but which also seems a nice way for him to extend patronage and build alliances ahead of the elections. It is against that possibility that the freeze seeks to act.

There are three routes through which the government hopes to make-up the deficit, their first port of call being surpluses from previous years and the rise in oil prices last year ahead of predictions.

Abdul-Hadi al-Hassani, head of the parliament’s oil and gas committee, was optimistic about the government’s chances of making up the deficit.

“Oil and gas revenues and surpluses from previous years are expected to cover the state deficit in 2010,” he said, adding, “It is most likely that oil prices will increase rather than decrease, so the deficit will not be a big one, given that the budget was calculated on the basis of oil price of $62.5 per barrel.”

The current price exceeds $75 but al-Hassani’s plan is the same one the government hoped to use to deal with 2009’s deficit. It did not materialise. Calculations for production of 2.15 million barrels of oil per day are also optimistic. Last year, production fell to just over 2 million barrels per day.

Manaf al-Sayegh, an expert at the Economic Reform Institute, contradicted the government approach.

“Compensating the budget deficit by relying on oil prices is the wrong approach. Oil prices depend on international supply and demand. You can’t plan for things going wrong. The global financial crisis of 2008 had a negative impact on 2009 budget.”

Al-Sayegh also criticised the government’s borrowing plan.

“This approach is damaging to the economy even if the debt is paid back over a long period of time,” he warned. “This solution will restrict the country’s capacities and will subject Iraq to ups and downs in the economies of foreign countries. It will only lead to significant problems for Iraq.

“Iraq needs economic policies that can develop its economy in general in the near future. We need to boost our GNP, not rely on foreign money.”

Under the 2010 budget plan, the Federal Minister of Finance can borrow up to US$4.5 billion (5.5 trillion dinars) from the IMF and use Special Drawing Rights up to a further US$1.8 billion (2 trillion dinars). On top of this, US$3.8 billion (4.5 trillion dinars) can be taken from the World Bank to cover the deficit.

Borrowing from institutions like the IMF or the World Bank will put the country under restructuring pressure, according to many Iraqi economists. One area where Iraq will be expected to make changes is in its food rationing system, which international institutions want to see limited to only the most needy.

The government is desperate to rebuild the economy in the wake of 12 years of sanctions and seven years of conflict following the invasion of 2003 but, even with an election looming, they should be doing more to execute the plan calmly and carefully, not gamble with the country’s finances.