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.
