IBT Iraq started with 20 billion deficit and cannot meet basic obligations

In December, Iraq exported about 91.1 million barrels of oil, its highest level in any month since 1980. But that crude bonanza isn't the windfall that the government of the world's eighth-largest oil producer might have expected. Iraq has managed to ramp up production to levels not seen since before the war with Iran 35 years ago, but the plunging price of oil is hurting the country. With oil at $50 a barrel, it's nearly impossible to eradicate the Islamic State group from the country or provide basic social services.

The oil price fall is also straining the deal signed just a few weeks ago between the Kurdish regional government and Baghdad, in which the Kurds, who have been running what amounts to a near-independent state for years, would get a share of Iraqi government revenue if they don't sell their oil on the market bypassing Baghdad. 

“There is a serious financial strain not just on Baghdad and the Kurds but across the country, and it is going to require across-the-board cuts,” Denise Natali, a senior research fellow at the National Defense University in Washington, said.

Those cuts would be a heavy hit for Iraqis. About 23 percent of the population lives on about $2 a day and 11 percent of the population is unemployed, according to U.N. statistics. Tens of thousands of people displaced by the war in Iraq have been deprived of medical care, and humanitarian organizations there are struggling to provide for the ever-growing number of displaced people.

The economy is expected to grow steadily in 2015, but that nominal growth won't translate to more money in the Iraqi state coffers. According to the U.N., 99 percent of Iraq’s government revenue is generated by the oil sector. The price of a barrel of crude dropped from $100 in mid-2014 to below $50 this week, a five-year low. In November, the Iraqi oil ministry said Baghdad lost more than 27 percent of its projected revenues for 2014 because of the fall in prices.

The government of Iraqi Prime Minister Haider al-Abadi approved the budget for 2015 on Dec. 23, which was $100 billion and included a $20 billion deficit. But that deficit is in reality much more. Baghdad budgeted using a global oil price of around $60 a barrel. With oil prices now much lower than that, Iraq is in more financial trouble than it originally estimated.

The low price is fueling tensions between the Kurdistan Regional Government, the central government in Iraq, and the oil-rich region of Basra, the largest city in the south of Iraq. Each region is vying for more control over oil production and revenue. The infighting and fractionalization is hindering the effort to contain and repel the Islamic State group, also known as ISIS or ISIL.

The Kurds, whose military has been fighting ISIS since June, for the past six months has been exporting oil via a pipeline that runs through Turkey to the Mediterranean port of Ceyhan, without the consent of the Baghdad government, which was required by law. According to the Iraqi Oil Report, the three provinces of the Kurdistan Regional Government were producing about 120,000 barrels a day from two fields in the Kirkuk region. Dozens of tankers picked up some of that oil in Ceyhan. About 34.5 million barrels of illegally exported Kurdish oil were offloaded in Ceyhan. 

Baghdad and the semiautonomous Kurdish region settled their long-running oil dispute last month, in a deal that means Baghdad will receive the revenue from oil sales but also resume payments to the Kurdistan Regional Government. Experts say the Kurds didn't have any other choice but to cut a deal as they have a large influx of refugees to handle. And with its military fighting some of the fiercest battles in Iraq, Kurdistan was running out of cash, and many international buyers wary of legal consequences stayed away fr

Remember...  Iraq STARTED the 2015 budget with a 20% deficit with the assumption of $60 bbl oil.  They purposely put more costs and allocations into the budget than they knew they had money coming in to cover.

And now it's worse.  What, we might be looking at a 38% deficit if the price of oil stays low?  

For those of you who hail the HCA and the 'budget,' this is what you are all excited about.  The country is bankrupt at the start of this budget.  They can't tax themselves out of the deficit.  They can't put taxes on enough imports to get themselves out of this jam.  They can't pump oil out in large enough numbers to erase the deficit.  

Are they planning to finance the deficit by issuing bonds?  That's about the only real option they have left for themselves.

If they go that route, the will have to put a pretty hefty yield on the bonds to get people to buy them.  After all, they have lost nearly 40% of their country this year, are under constant attack where ISIS hasn't already taken over, and have ceded autonomy to the Kurds.  Now, there's talk of ceding autonomy to Basra and losing even more of the country.

No....  I am not buying the victory celebrations that all these gurus are trying to pull over people's eyes.  The facts do not bear out a lot of hope and expectation here.