Beyond Iraq’s budget crisis
Iraq’s budget crisis is its latest challenge to master. The standoff could have grave financial and political implications, writes Salah Nasrawi
A state budget in any country is the government’s most important economic policy tool which provides a comprehensive statement of the nation’s priorities in a fixed period of time.
But in Iraq, a nation mired in corruption, mismanagement and political turmoil, drafting the annual budget is perhaps the most obvious example of the country’s ruling elites’ indifference and impotence and ultimately 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.
Iraq’s President Fouad Masoum last week refused to sign the government budget for fiscal year 2018 which parliament has endorsed over concern 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 budget 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 autonomous region.
IMF Deputy Division Chief Christian Josz told Kurdish media that the group has communicated to the Baghdad government that about $5.56 billion that are in the 2018 budget “do not suffice to cover the needs of” the KRG.
The government, however, said there will be no turning back on the budget. Saadi al-Hadithi, a spokesman for the government said the budget was passed “in accordance with the law and in agreement by the Iraqi state institutions.”
“Every provision in it is in line with the IMF conditions.” He said.
Iraq’s parliament on 3 March passed the 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 fall of oil prices. This year budget is based on a projected oil price of $46 per barrel and a daily export capacity of 3.8 million barrels.
The KRG’s lawmakers walked out of the session in protest against what they described as cuts to the region’s share of budget allocations and for putting a ceiling on its oil exports.
But Iraq’s budget crisis goes beyond the KRG’s rejection which was highlighted by Masoum’s rejection, the IMF’s 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 underlining financial and monetary problems. In addition, the budget fails to address many issues crucial for the country’s future such general population welfare, quality of health service 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 issuing to finance its 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 to cover the budget deficit and financing imports.
Baghdad has signed a loan package with the IMF that would also serve as the basis for international banks to provide additional finance. The deal under the fund’s stand-by arrangement (SBA) puts sever austerity and monetary conditions for the loans.
There are grave social consequences in the 2018, too. The budget cuts public spending in education, health and other essential social services which are already reeling.
The budget also imposes belt-tightening measures, including cutting subsides, imposing new tariffs, sale taxes and credit the revenues to the public treasury.
Among the budget’s austerity measures, the government will impose a freeze on all state employees to reduce workforce through attrition, exempting the military.
Now, the consequences that result from Masoum’s and the IMF’s rejection of the budget remains unclear. The post of presidency in Iraq is largely ceremonial and Iraq’s constitution does not grant the president a veto power.
It is up to the parliament now to decide whether it will meet to amend the budget law. Right now, however, it is unlikely that the parliament which ends its term in May will reopen the debate over the budget and will most probably insist that Masoum should ratify it anyway.
That could leave the budget into limbo and prevent the government from taking aim at the structural problems that affect Iraq’s economy and may lead to important projects and initiatives being put on hold.
One of the key question now is how will the government be able to meet the terms of the 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 specific economic and governance benchmarks laid out in the SBA, the IMF can cite non-compliance to put the agreement, and therefore billions of dollars for Iraq, on hold.
Another key question is that Iraq may lose some $30 billion in international pledges to help Iraqi stabilization and reconstruction following the war against the Islamic State (IS) group.
International donors at the February conference in Kuwait made pledges include loans, direct investment and investment guarantees all depending on success of the Iraqi government in providing fiscal discipline and combating corruption.
The dispute over Iraq’s government budget has become the norm rather than the exception. Most of Iraq’s budgets since the fall of Saddam’s regime went through political drama as lawmakers squabble for weeks of allocations.
Careening from one budget crisis to another has eroded the capabilities of the Iraqi government on everything from national defense to the delivery of social services.
And, like budget stalemates before it, this one too is expected to have adverse implications for the country’s volatile domestic politics, stability and may hurt efforts to fight the (IS) extremists.
The acrimonious debate over the budget has certainly deepened mutual mistrust and divisions among Iraqi communities, primarily between Kurds and the Baghdad Shia-led government.
The failure to resolve the dispute over the budget will sends a terrible signal to the Iraqi people and provide further evidence about how their leadership is becoming incompetent beyond repair.
To be certain, Iraq’s main problem is that of mismanagement and poor leadership. Unfortunately, Iraq’s upcoming election doesn’t promise change in leadership style nor in policy.
Iraqis, therefore, should be ready to embrace the future with more crises and challenges- some of them may be very grave and probably even fatal.
END