An empty chest

Almost 90% of government revenue in Iraq comes from oil. Yet the price of the stuff has fallen by more than half over the past year, and the volume of Iraq’s exports has fallen by a fifth, even as the government embarks on an expensive military campaign against Islamic State (IS), the militant group that has taken over much of the north and west of the country. The country’s fiscal problems, in short, are almost as big as its political ones. In January Iraq’s parliament passed a budget of 119 trillion Iraqi dinars ($105 billion).

That constitutes a 16% cut in spending: funds to every ministry were slashed. The budget also attempts to raise revenue, by introducing a sales tax on mobile and internet top-up cards, airline tickets, vehicles, alcohol and cigarettes. It nonetheless projects a deficit of 25 trillion Iraqi dinars, or about 9% of GDP. Even that seems optimistic. The budget is based on an oil price of $56 a barrel, and assumes exports of 3.3m barrels a day. In January Iraq exported 2.4m b/d, at an average price of $41 a barrel, according to the Economist Intelligence Unit, a sister company of The Economist. To fill the void the government plans to sell bonds, postpone some payments and dip into its savings. Having paid down its public debt from over 300% of GDP in 2004 to 31% of GDP today, it has some room for man oeuvre.

It is discussing a $6 billion bond sale with Citigroup and Deutsche Bank. Officials say they will also borrow from the IMF and World Bank. The government of the autonomous Kurdish region in northern Iraq is borrowing from Turkey. Haider al-Abadi, Iraq’s prime minister, has talked to Egypt about converting debts into oil (although that would also cut into export revenues). Kuwait, meanwhile, has agreed to defer some of the compensation Iraq owes for its invasion in 1990. Western oil companies with contracts to boost Iraq’s oil output have agreed to cut back on investment, the cost of which is partly borne by the government. Shell alone has reportedly agreed to savings of $0.9 billion—although this, too, will eventually curtail exports. The government also plans to borrow from the central bank’s reserves, which the World Bank puts at $78 billion. It still has some assets abroad, although it appears to have exhausted a special fund in which it stashed excess oil revenue. War and austerity are taking their toll on the economy, which shrank by 2.7% last year, according to the IMF.

Unemployment is thought to be over 25%; another 40% of Iraqis of working age are employed by the government. Even in 2013, before IS burst on the scene, new foreign direct investment was only $2.9 billion—a fraction of what Iraq needs to rebuild its war-torn infrastructure and revive its oil industry. In something of a vicious cycle, the shortage of cash is poisoning Iraqi politics. The budget only passed after the authorities in Baghdad and the Kurdish regional government agreed to share the income from oil, which the central government claims the sole right to export.

The deal stipulates that the Kurds must provide the government with 550,000 b/d in exchange for17% of the government’s oil revenues. Neither side is keeping to the bargain. So far the central government has paid a measly $250m to the Kurds, who, in turn, have handed over less oil than promised: only 248,000 b/d in the first seven days of March, for instance. Ashti Hawrami, the Kurds’ oil minister, says poor infrastructure prevents them from providing enough. Adil Abdul Mahdi, the national oil minister, insinuates that the Kurds are selling barrels on the side. This bickering, needless to say, is not helping the supposed allies push back IS.

MARCH 21ST–27TH 2015

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