Wednesday, 11 February 2015

The Iraqi budget and oil: First as tragedy, then as farce

Iraq might approach the IMF for help, just like it did in 2009 when oil prices fell

The Iraqi parliament approved the government’s 2015 budget on 29 January. Merely passing a budget is normally an unremarkable event, except in Iraq where it was met with relief and jubilation. After all, the country went through the whole of 2014 without a budget.

How does the new budget fare? Starting with the broad figures: Government revenue is expected to be around 94.0tn Iraqi dinar ($80.7bn); expenditure is budgeted to reach 119.6tn dinar ($102.6bn) resulting in a fiscal deficit of $21.9bn. A portion of the deficit will be financed externally (around $8.3bn) with the rest financed through domestic borrowing and the issuance of bonds. The broad picture hides two problems, at least as far as raising the required $8.3bn of external financing is concerned.

1. The budget stipulates that Iraq would use $1.8bn of its special drawing rights (SDR) to finance the deficit. But according to the latest accounts at the International Monetary Fund (IMF), Iraq’s remaining holdings of SDR amount to only $0.6bn, which is the maximum it can use. It is not clear how the shortfall be explained or bridged.

2. The budget suggests borrowing $4.5bn from the IMF to finance the deficit. Problem: This can probably only happen if Iraq agrees a programme with the IMF. An IMF programme would imply conditionality, most likely starting with cutting government expenditure.

Now we can blame declining oil prices for Iraq’s fiscal predicament, but Iraqi policymakers do not seem to have learnt from past mistakes. Iraq did rush to seek the IMF’s help last time oil prices fell sharply in 2009. That programme was a failure as the subsequent recovery in oil prices weakened the appetite for reform in Iraq.

Rather than learning from this experience by building up reserves during the oil boom years, Iraq has managed to blow most of its savings. Reserves at the Development Fund of Iraq (DFI)—whose role is precisely to accumulate oil surpluses in the boom years to finance deficits in slumps—declined from almost $23bn in March 2013 to an estimated $4bn in November 2014. This drawdown would have been enough to finance most of the deficit this year. Why did the government tap the DFI at a time when oil prices were so high? No one knows. Conveniently, by the way, the DFI has stopped publishing its balances since March 2014!

So after four years of record high oil prices, Iraq remains fragile. All it took was a quick drop in oil prices (which has not even persisted yet) to make Iraq consider seeking the IMF’s help, just like it did in 2009/10. But while 2009 might have been a tragedy, 2015 looks more like a farce.