by Ali Al-Mawlawi
As Iraq enters a new fiscal year, the proposed 2019 federal budget remains stuck in parliament with few signs that a deal will be reached soon. The delay in passing the budget is symptomatic of the growing political intransigence that is most acutely exhibited in parliament. Twelve weeks after assuming office, Prime Minister Adil Abdul-Mahdi’s cabinet is still not complete, with 4 of the 22 ministerial posts vacant including the highly contentious positions for interior and defence ministers.
Disagreements over the budget began back in early October 2018, when then prime minister Haider Al-Abadi’s cabinet reviewed a preliminary draft from the Ministry of Finance. Just a day before Abdul-Mahdi assumed office, a draft bill was submitted to parliament, proposing some $110 billion in total spending, making it the second largest budget in the country’s history.
When parliament convened on 6 November 2018 to undertake a first reading of the bill, it was clear that none of the leading political blocs were willing to move ahead without significant amendments. The two leading parliamentary coalitions – and architects of Abdul-Mahdi’s ascendancy to power – Fateh and Sa’iroon both expressed major reservations about the draft, citing the need for the budget to better reflect the country’s priorities in service provision and job creation.
As a compromise, the government agreed to form a high-level joint committee that would consider the demands of the blocs before submitting an amended version of the bill to parliament. Six weeks later, parliament completed the first reading of the amended bill despite the fact that only minimal changes had been made to the original version. A further $700 million had been added to overall spending including significant budget increases for the Hashd al-Shaabi and the ministries of health and defence.
It was clear that most of the issues raised by the political blocs had not been addressed by the joint committee, so the parliamentary finance committee carried out a thorough review of the draft bill. The committee claimed that the budget in its current form did not meet the aspirations of the Iraqi people and four days later, parliament reconvened to discuss the committee’s findings. Out of 47 recommendations it says it had submitted to the joint committee, only 9 had been incorporated into the amended bill.
Among the major contentions, the committee noted that the budget was no different from previous budgets, namely its heavy dependence on oil revenues, with income from non-oil sources such as taxes and customs only making up a small fraction. Secondly, the bulk of spending is allocated to operational costs, while less than a quarter of the total budget is earmarked for capital spending. Third, the committee raised concerns about the size of the deficit and the extent of growing external and domestic debt. Related to this, it expressed reservations about the continued financing of unprofitable state-owned enterprises. And finally, the committee called for greater allocation of resources to reconstruction and investment in areas liberated from ISIS.
Trends within the budget
The proposed 2019 budget represents a 28% increase in spending compared to last year. To compare, oil revenues are only projected to rise by 22%, meaning that the expected deficit this year is much higher. Projected oil revenues account for nearly 89% of the government’s income, based on an average price of $56 per barrel and exports averaging 3.88m bpd. But with oil prices currently on a downward trend, some lawmakers have urged the government to revise the oil price to as low as $45 per barrel.
However, it is also important to factor in actual spending given sub-optimal budget execution across all state institutions. By the beginning of November, actual spending of operational expenditures was 84%, while capital spending was only 61%. Ministry of Finance records show that by September 2018, the government had already accrued a $15 billion budget surplus. This is also because it generated higher than expected oil revenues. The 2018 budget was based on forecasted oil sales of $64 billion but, by the beginning of November, Iraq had already reached its annual target.
Table 1: Overview of key trends. Figures are in billion IQD.
|Capital spending share||23.7%||24.8%||+1.1%|
|Average oil exports||3.888 million bpd (at $46 per barrel)||3.88 million bpd (at $56 per barrel)|
|Projected oil revenue||77,160||93,741||+22%|
|Non-oil revenue share||15.2%||11.2%||-4%|
|Employee compensation (salaries, contractors, pensions, social security)||54,448||62,524||+15%|
|Total number of salaried employees||2,885,716||2,941,986||+2%|
Among the biggest beneficiaries to the expanded budget is the Hashd Al-Shaabi, whose budget has grown by 54%. Although the number of personnel on its payroll has remained frozen at 122,000, the budget increase reflects last year’s parliamentary decree that ensures Hashd members achieve wage parity with other members of the security forces.
Meanwhile, the Kurdistan Regional Government (KRG)’s share has officially remained at 12.67% of total spending minus sovereign expenses. In real terms however, budgetary appropriations to the KRG have jumped by 47% compared to 2018. A couple of interesting changes happened to the KRG’s share in the amended 2019 bill. Firstly, a breakdown of spending for each of the three KRG provinces was removed. This had been initially introduced in the 2018 budget to illustrate the exact per capita share of the provinces of Erbil, Sulaimaniya and Dohuk. The original version of the 2019 budget maintained this arrangement, but the amended version has done away with it. Secondly, compensation for KRG employees as a share of their total budget inexplicably jumped from 38% to 56%, despite the number of budgeted employees remaining the same at just over 622,000.
While Kurdish lawmakers will continue to push for the reinstatement of their 17% share, it does appear that this will be difficult to achieve. Abdul-Mahdi has hinted that rather than renegotiate their share, Baghdad will pursue a broader political and financial settlement that includes a deal on oil exports as a means toward reaching a compromise.
Table 2: Comparison of budgetary appropriations for key ministries and institutions. All figures are in billion IQD.
|Ministry of Interior||10,067||11,270||+12%|
|Ministry of Defence||7,487||9,056||+21%|
|Ministry of Electricity||6,129||10,057||+64%|
|Ministry of Health||1,919||3,292||+72%|
As things currently stand, it seems unlikely that the budget will be approved anytime soon. The biggest obstacle lies in the fragmented nature of Iraqi politics. With so many demands and little internal cohesion within parliament, it will be an uphill struggle for the government to satisfy enough parties to get a majority in parliament for the bill. Reports suggest that during the final cabinet meeting of 2018, a decision was made to make yet more changes to it. At what point Abdul-Mahdi’s government will satisfy the demands of the key blocs, or whether agreement on the budget will be tied to a broader deal over the vacant ministerial posts, remains unclear.
What is abundantly clear from the parliamentary debates over the budget is how inconsistent and contradictory the demands have become. On the one hand, lawmakers are concerned about the burgeoning size of spending and the deficit, while at the same time calling for job creation in the public sector. Similarly, the finance committee wants the budget to encourage growth of the private sector, but it has committed to ensuring that all public sector contractors are afforded salaried employment.
This dichotomy between a commitment to fiscal reforms and the political imperative of meeting the popular demands of citizens is emblematic of the general malaise that has afflicted post-war politics in Iraq.
Ali Al-Mawlawi is Head of Research at Al-Bayan Center, an independent public policy think tank based in Baghdad. He previously served as spokesperson for the Iraqi Embassy in Washington, DC, and Research Fellow at the Iraqi Institute for Economic Reform. Ali is currently leading on a research project focusing on Payroll Expansion and the Political Marketplace in Iraq as part of the LSE Conflict Research Programme. He tweets at @aalmawlawi.