The House of Representatives and the Parliamentary Finance ... the decision is yours

Published on August 29, 2019

 Iraq: a 2019 budget that is resolutely expansionary, sustainable but undersized with regard to investments.


Adopted by Parliament on 23 January 2019, the initial Finance Act 2019 [1] marks a certain break. Built on more realistic revenue assumptions, this budget, up almost 28% from 2018 [2] , shows a deficit of $ 23.1 billion [3] . While investments focus on the energy, defense and urban water sectors, they remain well below needs, even as the new government is judged on its ability to provide services very quickly. Basra, to create jobs and to resettle 1.9 million internally displaced persons [4] . At the regional level, the GRK [5], seems to reap some benefits from the normalization of its relations with the Federal Government with allocations higher than those of 2018 [6] 

1. Increased dependence on oil revenues.


Overall, revenues are expected to increase by 15.2% from $ 76.88 billion to $ 88.57 billion (see Annex 2).
Supported by a positive price effect, oil revenues would rise from $ 64.73 billion to $ 78.64 billion (an increase of about 21.5%), with their weight in total revenues continuing to grow (88 , 8% against 84.2% in 2018). The data available for the first two months of 2019 [7] seem to confirm the validity of the assumptions made (namely an average price per barrel exported equal to $ 56, compared with $ 46 in the BIA 2018, and crude oil exports of 3.88 Mb / d [8] , identical to those of BIA 2018). Commitments under OPEC [9] , the ongoing negotiations with the KRG could nevertheless counteract the initial objectives.


Representing only 11.2% of total revenues (against 15.8% in 2018), non-oil revenues would be reduced from 12.15 billion to 9.92 billion dollars, a decrease of more than 19%, and come mainly from taxes on income and capital (32.5% of total non-oil revenues), profits made by state-owned companies back to the state (23.3%), as well as taxes consumption [10] and taxes on production (21.1%) The lack of a strategy for revenue diversification [11] remains one of the main shortcomings of the Iraqi economic policy, regularly recalled by the IMF.


2. A sharp increase in investment spending, but insufficient in terms of infrastructure needs.


Cyclical Pro, the 2019 budget shows a spending component that is clearly expanding. Total expenditure would rise from $ 87.38 billion to $ 111.67 billion, an increase of about 28%. Details by recipient government departments / agencies are provided in Annex 3.


Up 26%, current spending would be $ 84 billion and 75% of all spending. As the main beneficiaries of BIA 2019, the Ministries of Finance, the Interior, Defense, Electricity and Petroleum will continue to absorb most of these expenditures [12] (56%). On the other hand, the ministries of Immigrants and Displaced Persons [13], Housing and Construction and Transport will see their envelope shrink drastically (respectively -55%, -56% and -57%). The Ministry of Commerce - which purchases staple consumer goods to resell them at highly subsidized prices and was traditionally in the lead - retroceded two places and saw its budget stagnate at 2.6 billion $. Two other ministries, Industry ($ 1bn) and Agriculture ($ 530m), also devote a substantial portion of their current grants to subsidies: 90% of the budget of the first is dedicated to public enterprises and 50% of the allocation of the second. on the purchase of agricultural inputs.  


The three main items of current expenditure are the payroll of 3.1 million civil servants [14]   ($ 37 billion), pensions ($ 9 billion) and social assistance [15] ($ 6 billion) . These three posts would absorb 62% of current expenditures and 46% of the Iraqi budget.


It is well known that capital expenditure is higher in relative terms than current expenditure (+ 34% and + 26%, respectively). They will be in 2019 at a level of $ 27.8 billion. The main winners of the budget arbitrations, spearheading a proactive policy of access to energy, urban water and defense, are the Ministries of Petroleum ($ 12.4 billion, + 8%) Electricity [16] [17] ($ 4 billion, + 50%) Defense ($ 1.8 billion, -7%) and a newcomer, the Ministry of Municipalities ($ 1.6 billion, + 132%). These four ministries could be responsible for 71% of capital expenditure if the selection of projects and their implementation proved to be more efficient than they have been in recent years.


Ironically, the projected budget for current expenditures is largely in line with the estimated infrastructure needs estimated by the World Bank for the reconstruction of Iraq over five years, or $ 88 billion. But in this finance law only $ 1.7bn - or 1.5% of the total budget - are signposted on reconstruction. For the record, at the Kuwait Reconstruction Conference in February 2018, the IMF, at an informal meeting, indicated that the Iraqi authorities could finance about 80 percent of reconstruction needs.


3. A large but sustainable budget deficit in view of the weakness of budget execution and the decline in public debt


Largely dependent on changes in crude oil prices, the projected deficit would, if the assumptions on which this budget is built be confirmed [18] , to $ 23.1 billion, the largest since 2003, 9.2 % of GDP [19] . Against the advice of the Ministry of Finance and contrary to last year, the Parliament demanded that about 80% of this deficit be financed by a call for internal capital (see Annex 4). Loans and external guarantees will amount to $ 5 billion against $ 8.6 billion in 2018. These loans, in principle, will only be able to finance projects in progress. Any new project should therefore, in principle, be financed from Iraqi funds .  


The considerable divergences observed between the construction and the budget execution, during the previous exercises [20] , must nevertheless encourage us to consider with caution these first forecasts. These discrepancies come from the high volatility of the price of a barrel but also from the low rate of execution of the expenditures: 75% in 2017 and 78% in 2018. The security situation, the state failure, the inertia and the bureaucratic heaviness explain largely these percentages. Given the same causes with the same effects, it is highly likely that the budget execution rate for 2019 will not be more than 80%, leaving the Iraqi authorities with additional leeway to control the deficit. In this context,it is conceivable that the public accounts will tend towards a balance in 2019 [21] , if the price [22] and barrel exports remain in line with the budget forecasts.


As for the public debt ratio, it has been steadily decreasing since 2016 [23] . It would oscillate around 50% at the end of 2019, and thus remain at levels commonly accepted as sustainable. As for its amount, it amounts to $ 119 billion [24] . 62% of this public debt is of external origin [25] and tends to progress, contrary to the internal debt. It must undoubtedly be seen there, beyond a nationalist sentiment, one of the reasons why the deputies wanted to limit drastically the external indebtedness, while Iraq has sufficient room for maneuver to go into debt.

---

[size]

[1] Later named by the acronym LFI 2019.

[2] Since the figures for budget execution are partial, all comparisons made between 2019 and 2018 are based on the initial 2018 budget. For your information, inflation could, according to IMF staff, be 2% in 2019 (a level comparable to that recorded in 2018 according to the latest available estimates).

[3] For the sake of precision, all amounts expressed in USD have been calculated on the basis of the following exchange rate: 1 USD = 1192 IQD (average rate over the last 90 days).  

[4] The Ministry of Immigrants and Displaced Persons would have an annual budget of $ 300 per displaced person.

[5] Kurdistan Regional Government.

[6] Fiscal transfers from the Federal State to the KRG had not exceeded $ 5.58 billion in 2018 but had not been paid in 2017.

[7] Crude oil exports increased from 3,458 Mb / d in the first two months of 2018 to 3,634 Mb / d in the first two months of 2019, due in part, the resumption of production of Kirkuk fields (about 100,000 b / d currently), which would be expected to progress. The average price per barrel was $ 57.33 over the first two months of the year.

[8] Including 250 000b / from the Kurdistan Autonomous Region.

[9] Iraq has pledged, with OPEC, to reduce its production by 140,000 barrels / day during the first six months of the year, so as not to cross the 4,513 M of b / j.

[10] These are mainly revenues generated by a 20% tax on mobile communications and internet services.

[11] In the BIA vote, MPs abolished the introduction of a 5% tax on sales and a new airport tax, as well as a 2 percentage point increase in the tax on rental income.

[12] With an increase in their operating budget of + 22% (Finances), + 11% (Interior), + 33% (Defense), + 69% (Electricity) and + 42% (Oil).

[13] Section 65 of BIA 2019 provides that the Ministère des Finances transfers $ 376 million from the budget of the Ministry of Immigrants and Displaced Persons to the provinces that have been the most affected by the presence and abuses of Daesh so that they are able to reinforce the recently established stability and support reconstruction efforts that support the return of the displaced.

[14] The KRG is the main employer with about 22% of the workforce (682,000 civil servants), followed by the Ministry of the Interior (19% of the workforce, or 586,666 civil servants), the Ministry of Defense (9% with a workforce of 289000) and then the Ministry of Education (5%). The BIA created 57,000 public service jobs, including 21,000 in the Ministry of Health, 11,000 in Baghdad governorate and only 3,391 in Basra governorate (while the former prime minister promised 10,000 jobs riots of July 2018).

[15] These are mainly ration cards ($ 1.27 billion) and wheat subsidies ($ 1.29 billion).


[16] Including the construction of two new power plants in Nasiriya ($ 500m) and Samawa ($ 200m).

[17] It should be mentioned that the electricity sector is heavily subsidized. The amounts corresponding to consumer default are financed by external debt. Representing only 12% of total investments in 2019, the Ministry of Electricity weighs in far more significant measures on the Iraqi budget.

[18] The political crisis in Venezuela (the country with the largest oil reserves in the world) and Algeria (the fifteenth largest oil reserve in the world) and the sanctions imposed on Iran (the third largest oil reserve in the world) the planet) could be likely to maintain the maintenance, see the progression, of the price of the barrel since these last months.

[19] Staff expects GDP volume growth of 6.5 percent in 2019. This would reach $ 250.1 billion.

[20] The forecast deficit associated with BIA 2018 was $ 10.6 billion while the actual budget showed a surplus of $ 21.7 billion.

[21] According to the most recent IMF forecast, the public accounts surplus could reach 3.8% of GDP in 2019.

[22] A $ 1 increase in the price per barrel results in an increase of $ 1.4 billion in annual revenues, or 0.6% of GDP.

[23] While it reached 66% in 2016 and 59.7% in 2017, the public debt ratio would have been reduced to 51.8 in 2018.

[24] With a debt service amounting to $ 15 billion, of which $ 11 billion in debt and $ 4 billion in interest.

[25] Of which 60% owned by CGG countries, which have not renegotiated their debt, unlike Paris Club members and other non-member countries.
Published on August 29, 2019








https://www.tresor.economie.gouv.fr/Pays/IQ/le-budget-irakien-2018
[/size]