Iraq’s Public Finances Could Weaken Ability to Finance Its War Against ISIS
|October 27, 2014||Filled under Iraq Daily News|
Iraq Daily News -
A looming fiscal crisis is threatening to curtail Iraq’s ability to finance its war against the Islamic insurgents who have cut a swath across the country, according to Iraqi and international officials and economists.
Despite having large oil revenues, billions of dollars in reserves and surplus funds left from unexecuted projects, Baghdad’s public finances are in a worrying state of disarray, observers say, a legacy of the final years of former prime minister Nouri al-Maliki’s government and declining oil prices.
Iraq’s expenditures have skyrocketed. It is funding a huge public payroll and food and energy subsidies that take up 70 per cent of the public budget. In addition, Baghdad must finance the reconstruction of its dilapidated armed forces, which collapsed in the face of an advance by the Islamic State of Iraq and the Levant (Isis) in June, following years of corruption and mismanagement despite the billions of dollars invested in training and equipment by the US and Iraq itself.
It must also marshal the resources to train, feed, house and pay tens of thousands of men who have volunteered to fight Isis. In addition it is costing as much as $500m a month just to feed 1.75m internal refugees who have been displaced in the war, which has engulfed the country’s north and west.
“These internally displaced need immediate attention and that’s beside the military campaign,” said Luay Khateeb, founder of the Iraq Energy Institute and a fellow at the Brookings Doha Centre.
Baghdad also owes the self-ruling Kurdistan Regional Government billions of dollars in subsidy payments suspended earlier this year in a bitter dispute over money and power that has slowed military cooperation.
Exacerbating the crisis, Iraqi lawmakers have yet to pass a 2014 budget more than 10 months into the year and are operating on 2013 budget assumptions, despite lower-than-expected oil production and oil prices dipping below $90 a barrel. Few officials have a firm grip on how much money Iraq is spending or earning, although most economists estimate it is generating about $7bn a month in revenues, almost exclusively by oil exports.
“For how long can they sustain this?” said Ashraf Abdelaal, the economic affairs officer for the UN mission to Iraq. “You will not be able to freeze the economy forever. There’s corruption. The public financial management system is really fragile. We don’t have a system. We don’t have a budget execution rate to measure performance of the government.”
Economists are concerned about 2015, when Iraq will almost certainly run a deficit. Baghdad could borrow against its reserves but at the risk increasing inflation and weakening its currency. “The moment they do that the Iraqi dinar will devalue,” said Mr Khateeb.
Iraq could also reallocate money left over from development projects that could not be executed because of deteriorating security or a lack of administrative capacity. But there is little sense of how much money rests in such surplus accounts scattered across Iraq’s 18 provinces.
Without adopting a budget, Iraq is not only operating in the dark, but is deterring potential helpers. “The IMF and the World Bank will not give Iraq one dollar until the budget has been approved,” said Mr Abdlelaal. “Credibility in the Iraqi system does not exist any more.”
Iraq’s estimated economic growth has reached 6.9 per cent this year, compared with the 9 per cent forecast by most analysts, who are convinced the war effort will further stymie growth. Iraq had counted on producing 3.4m barrels a day of oil this year, but output sagged to 2.3m bpd in August, excluding Kurdish-controlled oilfields, according to the latest IEA monthly report.
“Iraq can finance this war but it will be at the expense of any development, any reconstruction.” said Mr Khateeb.
Iraq has long been rife with economic mismanagement and corruption, problems now sharpened as it struggles to counter the Isis threat. Haider al-Abadi, Iraq’s new prime minister, previously chaired parliament’s finance committee and is aware of the country’s tightening fiscal space, officials and economists say.
Shortly after Isis took control of Mosul in June, senior government officials summoned a group of economists to request their help. “You have to create a military economy,” said Basil Anton, deputy chair of the Iraqi Economists Society and one of the experts who attended the meeting.
“[Isis] is not any ordinary group,” he said.
“It’s an economic force taking advantage of Iraq’s problems. We have no industry, no agriculture. We are importing yearly $75bn while our factories are not working and our farms are not producing anything. We cannot survive without domestic revenues. if production is slowed and the price of oil goes down, it’s a big danger for Iraq.”
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