Political and Fiscal Calculations in Iraq’s New Budget

Iraq’s passage of its 2018 budget earlier this month was a win-win for the political class, coming as it does ahead of elections set for May 12. Yet, it was accomplished in a way that left it unclear just how much the country would actually benefit from the spending bill. For Prime Minister Haider Al Abadi, it was a test of his administration. For without a spending plan, the government could pay day-to-day operational expenses but not fund badly needed capital expenditures. Still, the fact that legislators passed the budget with spending amendments that did not have cabinet approval means those changes could be constitutionally invalidated, complicating the actual disbursement of funds. Furthermore, the International Monetary Fund’s objection to Kurdistan-related provisions could create a stalemate for much of the year that hinders funding.

Iraq’s constitution gives primacy to the executive branch. In terms of the budget, this means it is the cabinet that drafts the spending plan. While parliament can cut expenditures or make other amendments, it cannot increase spending. MPs from Basra, Iraq’s primary oil-producing area, objected to the bill. They argued that the budget needed to compensate for damage from energy production to both its environment and its historically productive agriculture sector. Similarly, MPs from Sunni Arab areas heavily damaged during the recent war made a long list of demands related to reconstruction and benefits for state employees who were unable to work for long periods. This set up conflict with the executive.

In response, however, Abadi offered only modest concessions. Consequently, when parliament held its first debate, the budget was criticized from all sides, with MPs demanding more for their provinces. But recognizing the need to push the bill forward, the speaker, Salim Al-Jiburi, brought it up for a vote on March 1. When some Sunni MPs insisted on amendments that would increase spending (and were therefore constitutionally prohibited), he proposed that parliament should nevertheless move forward with approval and pass all the amendments it wished. Then, “anyone harmed thereby can appeal against it if they wished.” Essentially, he dared Abadi to appeal against populist demands.

The budget was thus approved with a series of amendments. Some of these reduced revenues or increased expenses, making them vulnerable to legal challenge. Two notable cases were parliament’s limit on the sales tax to 5 percent, instead of 10 percent, and the insertion of language that would compel the government take out loans to pay back-salaries of state employees who had been unable to work because of the war. All that notwithstanding, because of the principle of “separability,” the budget should remain operative even if specific provisions are invalidated. (For example, in August last year, the supreme court invalidated 18 provisions of the 2017 budget based on Abadi’s objections.). A legal challenge by Abadi will negate the benefits conferred by the amendments.

That said, the bill was politically still a win for both Abadi and Sunni MPs. For his part, Abadi can claim he got the budget passed, and can challenge the amendments in court if he wants. And for Sunni leaders, they can go to the polls saying they passed a budget that favors their constituency. But whether the amendments actually can implemented won’t be known until well after the upcoming election. For the MPs, this was a safe bet. Political wins, however, don’t necessarily mean equate to a fiscal one.

As for the Kurds, it was clear from the beginning that they would not be voting for the budget given its strong centralist provisions. Thus this budget resolution, messy as it was, did not involve the Kurds, who indeed boycotted the vote. But issues in the bill involving the Kurds could complicate implementation of the budget. The Kurds had begun by objecting to clauses that federalizes oil exports (these have appeared in every budget since 2013). Such measures make the Kurdistan Regional Government’s independent oil export program illegal. In addition, instead of the KRG receiving a lump sum of 17 percent of the budget, an early version of the bill reduced this to 12.67 percent.

While Abadi quickly withdrew that early version of the bill, submitted in mid-November, his reasons for doing so were not due to the Kurds’ objections. Instead, it was because of those by the International Monetary Fund. The final version did away with the percentage-based lump sum and provided that the Kurdistan region would receive funding according to the size of its population. While Iraq has not held a post-2003 census to provide an authoritative figure, estimates from the commerce ministry, based on food-aid distribution, indicate the population to be 13-14 percent of the national total.

With the budget passed, the government can now, at least in principal, make use of the $20.9 billion capital allocation, including the borrowing authority included in the law. Iraq’s poor-performing public-service ministries have suffered during Abadi’s term as the steep decline in oil prices reduced revenues to below the level necessary just to pay operational costs, forcing the state to borrow from its foreign reserves. (By law these are not supposed to be used to fund the government.) At current oil prices, operational expenses absorb over 90 percent of oil revenues, and a Brent price drop to below $60 a barrel would make that 100 percent. Almost certainly, Iraq will need to borrow. The question now is, can it?

It turns out that the IMF may be poised to freeze its loan program over both the sales-tax cut and the Kurdistan-related provisions. This is according to a recent IMF interview with the Iraq Oil Report. But Abadi cannot be seen to compromise on the Kurdish issue ahead of elections. So, if the IMF sticks to its gun, Iraq will have to do without its IMF credit for some months. And since Iraq’s ability to borrow from other international creditors is predicated on the IMF’s seal of approval, the capital investment budget, heavily dependent upon loans, is in doubt.

So Iraq will have an election campaign in which budget achievements are trumpeted. But its public-service infrastructure could be in for another hard year.

Kirk H Sowell is a political risk analyst and publisher of the biweekly newsletter, Inside Iraqi Politics. Follow him @uticarisk.