Iraq tightens its belt
The people of Iraq will face severe hardships under the country’s new austerity budget, writes Salah Nasrawi
With oil prices plummeting and the economy squeezed by inefficiency and corruption, Iraq’s parliament has approved a belt-tightening budget. The step is widely seen as having significant ramifications for the country’s volatile domestic politics and the war against the Islamic State (IS) terror group.
Iraq’s 328-member House of Representatives endorsed the country’s 2015 budget last week. The budget approval followed weeks of squabbles over cuts, allocations and what oil price the government should base the budget’s projected revenues on.
The lawmakers approved a cut of nearly three per cent in spending, bringing the total expenditure in the budget to $99.6 billion, down from the $102.5 billion the cabinet had initially proposed in the draft.
Before sending the bill to parliament for ratification, ministers warned that this would be an austerity budget, slashing the country’s bloated public sector and freeing up funds for military spending as Iraqi forces battle IS.
Iraq’s government had originally forecast a $125 billion budget for 2105, but faced with still-falling prices for its oil exports it was forced to slash this by some 20 per cent.
The new budget is based on a price of $56 for a barrel of crude, lowered from $70 and then $60 a barrel in earlier drafts. The expected budget deficit will still be around $19.1 to $21.1 billion, however.
One of the main hurdles that delayed the budget’s endorsement were objections from some Shia members to an oil-export deal struck in December between Baghdad and the Kurdistan Regional Government.The Shia MPs said the deal would unfairly benefit the Kurdistan Region at the expense of the Shia-populated oil-producing provinces in the south.
Sunni lawmakers also threatened to boycott the vote because the budget did not include funding provisions for a national guard, a new security force to be set up to fight IS and police Sunni-populated provinces.
Many lawmakers also objected to the oil price assumption in the budget, saying it was unrealistic as market prices had slipped below $50 a barrel with no concrete indications that they would rebound in the foreseeable future.
The reduction in oil prices is expected to strangle Iraq’s economy at a time when the country needs a boost in resources to cement its fractured national unity and sustain the war against terrorism.
While the government said it would not cut salaries or pensions, other reductions in the lavish spending of oil money, such as generous allowances, travel and office expenses, were announced.
But the bulk of the funds to cover the deficit will come from taxation, borrowing and withdrawals from the country’s reserves, estimated at $75 billion. While the Central Bank is expected to provide funds from its reserves, the government said it would also issue bonds in foreign currencies.
Under the provisions of the budget the government will be able to meet part of the deficit by introducing new taxes, levies and duties. Obligatory saving accounts are also to be opened for senior government officials to deposit part of their salaries.
Since the fall of the regime of former Iraqi president Saddam Hussein in the US-led invasion in 2003 Iraq’s parliament has had difficulty passing annual budgets in regular order. Wrangling over budgetary allotments are routine, and last-minute deals usually come at the expense of a solid fiscal plan.
Worse still, Iraqi governments throughout this period have failed to present their final revenue and expenditure accounts for review and endorsement before passing the next annual budget.
Last year, parliament was unable to approve the state budget because of a dispute between the central government and the autonomous Kurdistan Region over independent oil exports from the region.
The crisis allowed former prime ministerNuri Al-Maliki to use budget advances and emergency provisions, circumventing the checks and balances enshrined in the constitution to ensure limits imposed by parliament are respected.
As a result, billions of dollars in unchecked spending are now unaccounted for. Lawmakers have said that Iraq’s state coffers were nearly empty when the government of Prime Minister HaidarAl-Abadi took office in August. Iraq’s economy has been hard hit by decades of war, international sanctions and inefficiency.
But the country’s current economic ills are largely due to the abysmal economic policies of post-Saddam governments. Instead of working to rebuild the economy and sustain growth in basic sectors, they relied heavily on oil revenues to bankroll the budget.
Though Iraq is the second-largest producer of crude oil in OPEC, the oilproducers’ organisation, the country’s economy is in a shambles due largely to mismanagement, poor public spending and rampant corruption.Some 70 per cent of the budget has been going to pay for food imports, energy subsidies and funding an inflated bureaucracy and ramshackle armed forces.
Government policies are mainly responsible for the decline in productive sectors.Agriculture has been neglected, and less than 15 per cent of the country’s total area is now being cultivated. The agricultural sector, which used to employ one third of the work force, now accounts for less than four per cent of the country’s GDP.
The manufacturing, construction and electricity industries are in tatters and account for only eight per cent of national wealth. Thousands of state-owned industries andsubsidised factories have shut down because of a lack of electricity and poor maintenance.
Iraq’s banking system is largely dysfunctional, and without an overhaul, analysts say, the economy has little hope of competing with its oil-rich neighbours. Iraq has failed to invest in sovereign wealth funds, unlike oil-exporting countries in the Gulf, whose investments are now being used to cover budget deficits and public spending.
Corruption comes at the top of the reasons behind the depletion of Iraq’s coffers. According to some lawmakers, some $750 billion has been lost in corruption, waste and inefficiencies over the last ten years.Though Al-Abadi promised to combat corruption in his policy statement to parliament when he took office, there have been no signs that his government has taken concrete steps to bring corrupt officials to account or recover stolen money.
One day before the parliament passed the 2015 budget, a report by the World Bank warned that Iraq faces “a crisis which will have important implications for the welfare of its people.”The report said that about 20 per cent of Iraq’s population lived below the poverty line in 2012 and a significant portion of the Iraqi people was vulnerable to falling into poverty.
It said “poverty declined only modestly” since 2012 and “deep deprivations in non-monetary dimensions persisted.”The report painted a grim picture of Iraq before the current crisis. It said close to half the population had less than primary level education and almost a third of children aged up to five years old were stunted.
The report said over 90 per cent of households in Baghdad and the central and southern provinces received less than eight hours of electricity a day, a third of men and 90 per cent of women aged 15 to 64 were neither employed nor looking for work, and more than 60 per cent of the calories consumed by the poor came from a nationwide food subsidy programme.
“Addressing this crisis will take time and concerted effort,” the report said.
Looking forward, there are real concerns that the new belt-tightening budget will have serious impacts on the lives of most Iraqis. Moreover, there are concerns that the combination of falling oil prices and the austerity measures will have adverse implications for the country’s stability and hurt efforts to fight IS extremists.
This article appeared first in Al Ahram Weekly on Feb.5, 2015