The 2015 Budget: Financial Challenges and Opportunities for Economic Reform

In the extraordinary meeting of the Iraqi Council of Representatives held on 25/12/2014, the first reading of the 2015 budget was conducted. The budget was read as it was received from the Council of Ministers, which had approved it the previous day.

The draft of the “Federal General Budget of Iraq for the 2015 Fiscal Year” states that the total revenues shall be IQD 99.8 trillion. These revenues are comprised of IQD 84.3 trillion in revenue from the export of 3.3 million barrels of oil per day (bbl/d) at an estimated price of $60 per barrel, and IQD 15.5 trillion in non-petroleum revenues.

The total allocations amount to IQD 125.2 trillion. This includes IQD 45.2 trillion for investments, mainly for ongoing projects, and IQD 80 trillion for current (operating) expenditures.

Therefore, the deficit will be IQD 23.4 trillion after deducting the “national savings for government employees,” which amounts to IQD 2 trillion, from the deficit.

It is important to note that in 2015, Iraq will face financial challenges as a result of the current security situation and the country’s unconventional war with an unconventional transnational enemy. According to experts, the cost of financing the war against ISIS could reach $10 billion in 2015. This is in addition to the need for another $5 billion to manage the issue of displaced persons, who number more than 2 million Iraqis, as well as the issue of poor families who have suffered from the latest security problems. These families represent 5 million destitute individuals. Furthermore, the financial deficit will be doubled with the fall in oil prices to lower than $ 50 per barrel. Iraqi oil prices will also suffer further reduction which may exceed $5 less than the world prices to cover the difference in crude oil quality and competition costs.

Over the course of eight 8 years (2006-2014), Iraq has garnered around $700 billion from oil revenues. Oil prices exceeded $100 per barrel for several years before decreasing by 40% to less than $60 per barrel. This decline ended the period of the policy of lavish budget expenditures. The Iraqi governments had been approving budgets without taking into consideration the many factors that lead to the drop in prices and the fluctuation in the markets.

In 2004, after the government employees’ pay scale was amended, the Iraqi budget reached $19 billion, with a deficit of 20% and an operating rate of no less than 70%. This equation continued until 2014. In that time, the budget increased sevenfold, reaching $140 billion, since all of the oil revenues were utilized in the budget. These revenues grew because of the fivefold increase in the price of oil, not because of an increase in production, which did not exceed 25%. At the same time, Iraq’s population growth did not exceed 10% and Iraq remained at the mercy of the international markets and oil production, which comprises over 96% of the country’s revenues.

The policy of previous governments was (and still is) based on using all the revenues to create government jobs, which burdened the country with disguised unemployment – what is known as the “phantom employees” phenomenon. Likewise, the governments allocated projects that are managed by inefficient government departments. This resulted in the spread of corruption and the proliferation of sham projects and contracts, which contributed to the financing of political corruption and local terrorism. These policies then led to the freezing of the public sector and weakening of the private sector. Furthermore, they wasted the country’s savings and exposed future governments to financial challenges as a result of the absence of economic reform and the reliance on a single source of income: oil revenue. These policies, among others, have impoverished Iraq financially and weakened the country’s security. 

In order to overcome this crisis, we have to develop a plan with a realistic timeframe to change the current situation and to use the present circumstances as an opportunity to accomplish the economic reform that has been delayed for nearly a decade. Below are some recommendations for economic policies that will reduce the financial deficit to a reasonable rate and guide the country’s expenditures, while also enabling the private sector to promote development and eliminate all forms of unemployment: 

Oil and Gas Sector Reforms:

• Establishing the Federal Council for Oil and Gas through a decision by the Council of Ministers. This council will be entrusted with the executive authority to develop policies and set controls until its structure and mandates are amended after the passage of the federal oil and gas law. The Federal Council for Oil and Gas shall be headed by the federal Prime Minister and its membership shall include the regulatory authorities, such as the federal Ministry of Oil and the Kurdistan Regional Government Ministry of Natural Resources, until the passage of the oil and gas law. All parties shall comply with the Federal Council’s decisions so that this institution can serve as an alternative to the political solutions that could conflict with the constitution and the resolutions of the federal Council of Representatives.
• Passing the oil and gas law and the federal revenues distribution law within 6 months of the start of 2015, as well as passing the federal Supreme Court law and establishing the court.
• An oil price of $40 per barrel shall be approved for 2015.
• Revising the oil agreements with the Kurdistan Region to increase the export rate from the Kirkuk oilfield to 350 thousand barrels per day (rather than 300 thousand barrels per day) – as the first phase – and increase the export rate from all other fields subject to the control of the Ministry of Natural Resources to 400 thousand barrels per day (rather than 250 thousand). This increase will ensure revenues equal to 200 thousand barrels and an increase of $4.83 billion in the federal budget.
• Cooperating with the international companies investing in southern Iraq and solving their problems in order to increase production and enable the approval of an export increase of 250 thousand barrels over the current export rates from the southern fields, which will bring in $5.475 billion to the state treasury.
• Ending the subsidy of oil products by calculating the domestic consumption of crude oil based on international prices, especially since the low price of oil makes increasing the cost to the consumer acceptable. The amount of crude oil allocated for local consumption is 600 thousand barrels per day, so this will result in a savings of $13.14 billion for the state treasury.
• Developing a fast-track plan, in cooperation with the international companies, to end the flaring of associated gas within 12 months, so that the gas can be collected and used as fuel for power stations. This will end the use of crude oil and its products in power plants and will result in a fuel savings valued at $5 billion annually.

Power Sector Reforms:

• Ending all investment and operating allocations to the Ministry of Electricity, so that it will be self-financed. This will save the state treasury $7 billion.
• Privatizing or transferring 5 gigawatts of electricity to investment, which will save $5 billion. 
• Using investment revenues to finance electric power transmission projects and covering the expenses from consumption revenues.

Austerity Measures:

• Transferring ration card allocations, which cost the country more than $6 billion, and allocating them to displaced persons and poor families in the form of coupons or financial certificates to cover food and fuel costs.
• Revising and reducing the salary scale for the government sector, as well as the allocations and benefits, in addition to ending the phenomenon of ‘phantom employees’. This will help to save $5 billion for the budget.
• Ending the policy of using employment in government positions as a general model for job creation, and utilizing the salaries of ‘phantom employees’ to cover the expenses of volunteers in the war against ISIS.

Fees and Taxes:

• Imposing reasonable fees on foreigners’ entry to Iraq (including pilgrims visiting holy sites).
• Imposing reasonable fees on users of the services of some departments like traffic and real estate registration, in order to convert these departments into to self-financing ones and remove them from the federal budget. 
• Reviewing the customs and taxes regulations (especially for luxury goods) and imposing suitable taxes and duties according to the current situation, provided that they do not discourage investment and they do not compete with local products.

Other Measures:

• Making it easier for the private sector to register companies and obtain investment licenses, as well as ending needless bureaucracy and decreasing the processing time to less than 72 hours.
• Developing a plan for the privatization of state projects, starting with the Ministry of Industry’s companies.
• Referring disguised unemployment to social security and enrolling “phantom employees” in training courses with a set deadline to prepare them for work in the private and mixed sector.
• Reducing the authorities and disbursements of the federal ministries and granting executive authority to the governorates, as well as relying on international companies to audit accounts and on administrative companies to monitor the progress of projects according to the contracted schedules, with adherence to international controls and conditions.
• Inviting the private sector to compete for projects that used to be monopolized by companies in the public sector, and providing tax exemptions to megaprojects.
• Reviewing the banking system and supporting investment banks to become partners in small and medium sized enterprises, as well as supporting these enterprises with soft loans and guaranteeing companies’ assets.
• Inviting investment companies to the secure governorates and facilitating the attraction of capital.
• Reviewing the oil contracts in order to give incentives such as Reserves Booking to the international companies in exchange for the reduction of payments (dues) for the next ten years, considering that the allocations of the oil companies working in southern Iraq will exceed $16 billion in 2015, which will increase the financial deficit in the budget. Therefore, it is logical to reschedule the payments with sovereign guaranties covered by future oil. This will be accomplished through negotiation with the oil companies to reach a balanced contractual agreement that is beneficial for both parties: the government and investors.
• Borrowing from the investment banks using the strategic projects as a guarantee. The banks shall be the principle partner in these projects. This is in addition to granting banking facilities to local investors in the private sector (industry, agriculture, transportation, tourism, services) with the guarantee of the companies’ assets.
• Forming a reconstruction council and an investment fund, which will be given the right to borrow and to supervise strategic projects, especially in airport and seaport construction, the housing sector (for building modern cities), and the transportation sector (railways, facilities and modern transportation lines). 

In conclusion, it is important to note that some of these recommendations and policies will have an immediate and direct impact, as they will result in savings of up to $50 billion in 2015. The impact of some of the recommendations will become apparent within 2-4 years, as is the case with natural gas investment, which will provide at least $15 billion annually. However, Iraq will see the fruits of the most important part of these recommendations after five years, when we move to a market economy after restructuring the economic system. This is a constitutional requirement that has not yet been enacted, and which has been neglected in recent years as a result of political corruption. However, we hope that the government of Dr. Haider Al-Abadi will use the financial crisis as an opportunity to advance the new Iraqi state and to move forward quickly with practical plans that will help to reconstruct a country of institutions, which will benefit the Iraqi people and guarantee the rights of future generations under a federal democratic state.

This article was originally published in Arabic by Al-Sabaah.