Monday,17 December, 2018
Current issue | Issue 1386, (22 - 28 March 2018)
Monday,17 December, 2018
Issue 1386, (22 - 28 March 2018)

Ahram Weekly

Beyond Iraq’s budget crisis

Iraq’s current budget crisis is the country’s latest challenge, with the standoff having potentially grave financial and political implications, writes Salah Nasrawi

 

Beyond Iraq’s budget crisis
Beyond Iraq’s budget crisis

The budget of any country is the government’s most important economic policy tool, providing a comprehensive statement of the nation’s priorities in a fixed period of time.

However, in Iraq, a nation mired in corruption, mismanagement and political turmoil, drafting the annual budget is perhaps the most obvious example of the indifference and impotence of the country’s ruling elites and ultimately of the government’s dysfunction.

Since the fall of the regime of former dictator Saddam Hussein in 2003, Iraq’s parliament has had difficulty passing annual budgets in regular order. Governments have also failed to present their final revenue and expenditure accounts for review and endorsement before passing the next annual budget.

Iraqi President Fouad Masoum last week refused to sign the government’s budget for the 2018 fiscal year, which the parliament has endorsed, over concerns that it violates Iraq’s constitution and fails to comply with a consensual deal to earmark oil revenues with the autonomous Kurdistan Region Government (KRG).

In a letter to the parliament, Masoum, an ethnic Kurdish politician, raised 31 objections to the budgetary law, which he returned to the assembly for redrafting.

The International Monetary Fund (IMF), which controls Baghdad’s access to over $5 billion in international loans, has also come out against the budget, largely due to cuts in allocations to the Kurdistan Region.

IMF Deputy Division Chief Christian Josz told Kurdish media that the organisation had communicated to the Baghdad government that about $5.56 billion in the 2018 budget “do not suffice to cover the needs of” the KRG.

However, the Iraqi government said there would be no turning back on the budget. Saadi Al-Hadithi, a spokesman for the government, said the budget had been passed “in accordance with the law and in agreement with the Iraqi state institutions.”

“Every provision in it is in line with IMF conditions,” he said.

On 3 March, Iraq’s parliament passed the country’s 2018 budget of about 104 trillion Iraqi dinars, or nearly $88 billion. The budget will run with a deficit of 12.5 trillion dinars, or about $10.58 billion.

The budget of the world’s fourth-largest oil producer has steadily shrunk in recent years because of falls in oil prices. This year’s budget is based on a projected oil price of $46 per barrel and a daily export capacity of 3.8 million barrels.

KRG lawmakers in the Iraqi parliament walked out of the session in protest against what they described as cuts to the region’s share of budget allocations and the putting of a ceiling on its oil exports.

But Iraq’s budget crisis goes beyond the KRG’s rejection, and this has been highlighted by Masoum’s refusal to approve it, the IMF veto, and some Western governments’ reservations.

Iraq’s financial law for 2018 does little to tackle the country’s economic fragility and rein in its huge underlying financial and monetary problems. In addition, the budget fails to address many issues crucial for the country’s future, such as welfare, the quality of health services and education.

Instead of dealing with the country’s structural financial crisis caused by plummeting oil prices and government mismanagement, the budget increases the burden on the state’s coffers through resorting heavily to international loans and bond issues to finance the deficit.

Under the budget, Iraq plans to take out some $6 billion in loans and credits from the IMF, the World Bank, foreign governments, and international banks in order to cover its budget deficit and finance imports.

Baghdad has signed a loan package with the IMF that should also serve as the basis for international banks to provide additional finance. The deal under the Fund’s stand-by arrangement (SBA) places severe austerity and monetary conditions on the loans.

There are also grave social consequences of the 2018 budget, which cuts public spending on education, healthcare and other essential social services, even though these are already reeling.

The budget imposes belt-tightening measures, including cutting subsides, imposing new tariffs and sale taxes, crediting the additional revenues to the public treasury.

Among the budget’s austerity measures is a freeze on the employment of new state employees in order to reduce the public-sector workforce through attrition, though the military is exempted.

The consequences of Masoum’s and the IMF’s rejection of the budget remain unclear. The post of president of Iraq is largely ceremonial, and the constitution does not grant the president veto power.

It is now up to the parliament to decide whether it will meet to amend the budget. However, it seems unlikely that the present parliament, which ends its term in May, will reopen the debate on the budget, and it will probably insist that Masoum ratify it anyway.

That could leave the budget in limbo and prevent the government from taking aim at the structural problems affecting Iraq’s economy, possibly leading to important projects and initiatives being put on hold.

One of the key questions now is how the government will be able to meet the terms of its IMF deal, which include a wide-ranging restructuring programme that aims to “bring spending into line with lower global oil prices and ensure debt sustainability.”

If Baghdad fails to reach the specific economic and governance benchmarks laid out in the SBA, the IMF can cite non-compliance in order to put the agreement, and therefore billions of dollars, on hold.

Another key question is whether Iraq will lose some of the $30 billion in international pledges to help the country’s stabilisation and reconstruction following the war against the Islamic State (IS) group.

International donors at the February conference in Kuwait made pledges including loans, direct investment and investment guarantees, all depending on the success of the Iraqi government in providing fiscal discipline and combating corruption.

The dispute over the budget has become the norm rather than the exception in Iraq. Most of the country’s budgets since the fall of the Saddam regime have gone through political drama as lawmakers squabble for weeks over allocations.

Careening from one budgetary crisis to another has eroded the capabilities of the Iraqi government on everything from national defence to the delivery of social services.

Like the budgetary stalemates before it, this one too is expected to have adverse implications for the country’s volatile domestic politics and stability, and it may hurt efforts to fight the IS extremists.

The acrimonious debate over the budget has certainly deepened mutual mistrust and divisions among Iraq’s communities, primarily between the Kurds and the Baghdad Shia-led government.

The failure to resolve the dispute over the budget will send a terrible signal to the Iraqi people and provide further evidence of how their leadership is becoming incompetent apparently beyond repair.

Iraq’s main problem is mismanagement and poor leadership. Unfortunately, the country’s upcoming elections do not promise changes in leadership style or in policy.

The Iraqis should therefore be ready to embrace the future with more crises and challenges in store, some of them very grave and possibly even fatal.

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