Where does Iraq’s money go?

The failure to pass a state budget has unveiled the full extent of Iraq’s empty coffers, writesSalah Nasrawi

The annual budget debate is an important tradition in parliamentary systems, a time when lawmakers discuss the government’s draft financial blueprint and the public is told about the nation’s financial status.

A budgetary crisis can trigger a standoff and may develop into a government shutdown in which the government temporarily suspends non-essential services until a budget is passed. The failure of the parliament to pass a budget can also spark the fall of the government.

Yet, in Iraq nothing of this sort has happened. Even as 2014 is coming to an end, the country still does not have a state budget for this year, and the government is operating on 2013 budget predictions despite lower oil prices and cuts in production.

The government has also not unveiled plans for the 2015 budget.

The scandalous failure to introduce a budget means that Iraq is entering another year without having an annual financial chart for the country or even a scenario for proposed revenues and spending.

Last week, the new Minister of Finance Hoshyar Zebari surprised the parliament by telling members that the government would not submit a budget, instead making a statement in which he provided figures on government revenues and expenditures.

In summarising the country’s financial status, Zebari told the parliament that the government’s revenues in 2014 had amounted to ID105 trillion, ID96 trillion from oil exports and the rest from non-oil income (the Iraqi Dinar = 0.00086 $).

As for expenditures, Zebari explained that the government had spent ID185 trillion, divided between ID103 trillion on its operational budget and the rest on investment.

While parliaments usually debate the government’s proposals and take action in choosing to increase or decrease spending on any of its programmes, Iraqi MPs were asked to endorse the aggregate figures given by the government without discussion.

Since the collapse of the regime of former Iraqi president Saddam Hussein in the US-led invasion in 2003, Iraq’s parliament has had difficulty passing annual budget bills in any regular order.

Squabbles over appropriations are routine, and last-minute deals usually come at the expense of a solid budget. Worse still, the government usually fails to introduce its final revenue and expenditure accounts for endorsement before passing a new budget.

Last year, the parliament was unable to pass a budget because of a dispute between the central government and the autonomous Kurdistan Region over independent oil exports from the enclave. The row resulted in cutting Kurdistan’s budget, creating a new fissure in relations between the Shia-led government in Baghdad and the Kurds.

The crisis allowed former Iraqi prime minister Nuri Al-Maliki to use budgetary advances and emergency provisions, circumventing the checks and balances enshrined in the country’s constitution to ensure limits imposed by the legislative branch.

Al-Maliki argued that he wanted to avert a government deadlock as a result of the freezing of funds while the country faced political instability and soaring violence. Critics, however, say that Al-Maliki did not only overreach himself in spending but also gave himself a free rein in using the state’s coffers.

Despite its huge oil revenues, Iraq’s economy is in a shambles due largely to mismanagement, poor public spending and rampant corruption. Some 70 per cent of the state budget goes to food and energy subsidies, funding an inflated bureaucracy and ramshackle armed forces that collapsed in the face of an onslaught by Islamic State (IS) forces in June.

The budget has been hard hit by a displacement crisis triggered by the war against IS, and the government now spends some $500 million a month to feed and house some 1.75 million internal refugees. Additional amounts are being spent on constructing a new force in Sunni-dominated provinces to fight the IS terror group.

But Iraq’s budgetary problems are also more deep-rooted. For most of the past 12 years the government has been violating the budget rules by using loopholes in the constitution and the law.

Few data are available about how much money Iraq has been spending or earning. There are no accurate figures for oil exports, and it is widely believed that oil is being smuggled out in large quantities, sometimes under government officials’ noses.

In addition, the implementation rates of both the state’s operational and investment budgets are either lagging or low. Some departments have failed to spend even half of their annual budgets.

This dismal rate of implementation of the public budget, largely blamed on government inefficiency, reflects badly on development projects and economic growth.

With expectations that Iraq’s economy is likely to shrink by 2.7 per cent this year, the UN has warned of an economic downturn in the country influenced by pressure from rising security spending and the humanitarian crisis.

The government has promised to present a draft 2015 budget but has given no details so far. Estimates for government revenues have totalled ID139 trillion based on an oil price of $90 per barrel, and the head of the Iraqi parliament’s finance committee, Majda Al-Timimi, has predicted that the country’s budget deficit in the 2105 budget will be some $50 billion.

Zebari said the government hoped to cut this deficit by nearly half or more, suggesting drastic measures to cover the deficit and make up for lower oil prices and oil production.

Zebari, a Kurd who was a foreign minister in the former government and has no economic or financial background, has proposed that the government resort to loans and IMF special drawing rights, as well as to issuing bonds against the pension funds and assets of the two state-owned banks, the Rafidain Bank and the Al-Rashid Bank.

He has also suggested raising taxes, levies and customs. In addition, he has suggested that the Central Bank, which has $77 billion in foreign reserves, should lower its reserves to seven per cent instead of its current 15 per cent mark.

The aim, he said, was to raise ID21 trillion to help meet the country’s deficit. However, Zebari’s proposals have been largely dismissed by the government. While the Central Bank has ruled out any move to lower the reserves, an aide to Prime Minister Haidar Al-Abadi has categorically rejected the idea of foreign loans.

Experts have also warned that borrowing against the country’s reserves to cover the deficit will increase inflation and weaken the Iraqi Dinar.

As the budget bottleneck tightens, many experts believe that the government will have to impose austerity measures to cut spending and waste. While the government has said it will not cut salaries or pensions, other reductions in the lavish spending of oil money may increase unemployment and poverty, already sky-rocketing as a result of downbeat growth.

Iraq’s economy has been hard hit by decades of wars, international sanctions and inefficiency. Though the country has the fifth-largest proven crude oil reserves in the world, and is the second-largest producer of crude oil in OPEC, most of the oil revenues go to imports, mostly food and other basis commodities.

But Iraq’s current economic ills are largely due to the bad policies adopted by post-Saddam governments. Instead of rebuilding the economy and sustaining growth in basic sectors, these have relied heavily on oil revenues to bankroll the budget.

Though Iraq’s arable land is estimated at eight million hectares, or less than 15 per cent of the country’s total area, agriculture, which employs one third of the work force, accounts for less than four per cent of the country’s GDP.

The manufacturing, construction and water and electricity industries are in tatters and account for only eight per cent of the national wealth.

Government policies are mainly responsible for the decline in the country’s productive sectors. Corruption comes at the top of the reasons for the depletion of the country’s coffers. Last week debate in parliament revealed that large chunks of $500 million allocated to displaced people had gone into the pockets of corrupt officials.

Now Iraq’s economy is in disarray. While the fiscal crisis, lower oil prices, and violence caused by the war on IS will add more pressure to the government’s revenues, its overall economic performance will also remain detrimental to the country’s growth and progress.

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