The US-led Coalition Provisional Authority (CPA), in conjunction with the interim Iraqi Ministers of Finance and Planning, has published a budget for 2004-06 which it says will cover the “bare minimum” of the country’s requirements. The budget projects a deficit for 2004 of 886bn New Iraqi Dinars (NID – $591mn based on the official budget exchange rate of $1 = NID1,500). Total revenues for the year are forecast at NID19.3 trillion ($12.8bn), the bulk of which is made up of oil revenues projected at NID18 trillion ($12bn) based on average oil exports of 1.6mn b/d at a price of $21/B. Total expenditures, meanwhile, are expected to reach NID20.1 trillion ($13.4bn), the majority of which is accounted for by current or ‘operating’ expenditures (NID19 trillion – $12.7bn), while capital projects make up the remaining NID1.1trillion ($746mn). The full document is available at http://www.cpa-iraq.org/budget/NIDmergedfinal-11Oct.doc
In a reference to the forthcoming Donors’ Conference to be held in Madrid on 23-24 October, the document points out that the budget will not cover the costs of reconstruction, which have been assessed at $55bn up to 2007 by the UN and World Bank (MEES, 6 October). “The 2004 Iraqi budget is the bare minimum necessary to keep Iraq going. It is nowhere near enough to kick-start the economy and create an enabling environment for future growth and prosperity. Iraq will need international assistance to help it through this transition period, and enable it to take large strides back on the path to economic prosperity.”
The 2004-06 Iraqi budget gives revised figures for that of 2003 (July-December), raising the projected deficit from $2.2bn to $3.1bn, mainly as a result of a downward revision of oil revenues, which are expected to reach $2.7bn rather than the $3.5bn envisaged in the original budget (MEES, 4 August). The document also outlines a fiscal framework for 2005 and 2006, with the budget projected to be roughly balanced in both years as oil revenues pick up. Oil income will continue to make up the lion’s share of revenues, with non-oil revenues not expected to top the $1bn mark during the whole budget period. Capital projects will also receive a greater share of expenditure in 2005 and 2006 with around $5bn in both years.
Iraqi Budget: 2003-06
2003* | 2004 | 2005 | 2006 | ||||||||
NIDBn | $Mn | NIDBn | $Mn | NIDBn | $Mn | NIDBn | $Mn | ||||
Revenues | |||||||||||
Oil | 4,096.5 | 2,731 | 18,000 | 12,000 | 27,750 | 18,500 | 28,950 | 19,300 | |||
Customs Duty | - | - | 450 | 300 | 525 | 350 | - | - | |||
Income Tax | - | - | 45 | 30 | 120 | 80 | 240 | 160 | |||
Returns from State-Owned Entities | 337.5 | 225 | 562.5 | 375 | 142.5 | 95 | 150 | 100 | |||
User Pays Fees and Charges | 85.5 | 57 | 96.3 | 64.2 | 132.5 | 83.3 | 185.1 | 123.4 | |||
Other Taxes and Income | 76.5 | 51 | 105 | 70 | 105 | 70 | 120 | 80 | |||
Total Revenues | 4,596 | 3,064 | 19,258.8 | 12,839.2 | 28,775 | 19,183.3 | 29,645.1 | 19,763.4 | |||
Expenditures | |||||||||||
Operating Expenditure | 7,362.3 | 4,908.2 | 19,026.7 | 12,684.5 | 21,119.2 | 14,079.5 | 21,463.8 | 14,309.2 | |||
Capital Projects | 1,869.9 | 1,246.6 | 1,118.4 | 745.6 | 7,636.5 | 5,091 | 8,154 | 5,436 | |||
Total Expenditures | 9,232.2 | 6,154.8 | 20,145.1 | 13,430.1 | 28,755.7 | 19,170.5 | 29,617.8 | 19,745.2 | |||
Budget Balance | -4,636.2 | -3,090.8 | -886.3 | -590.9 | 19.3 | 12.9 | 27.3 | 18.2 | |||
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Source: Republic of Iraq. 2004 Budget, October 2003.
* The 2003 budget only covers July to December 2003.
Non-Oil Revenues
Non-oil revenues will be generated from a number of sources indicated in the table above. Personal and company income tax will be introduced on 1 January 2004 with a maximum rate of 15% for individuals and a flat rate of 15% for companies, including foreign companies operating in Iraq. Transfers from State-Owned Enterprises (SOEs) will only come from a small number of sources including the Central Bank of Iraq (CBI), the Shopping Centers Company, the Automobiles Company, the Construction Materials Company and the Agriculture Supplies Company. The revenue generated by all of these SOEs (except the CBI) falls to zero by 2006, suggesting that they are earmarked for privatization by the CPA. A reconstruction tax (‘Customs Duty’) of 5% will be levied on all goods (except humanitarian supplies) entering Iraq from 1 January 2004 until 1 January 2006. Other revenues include ‘User Pays Charges’ such as vehicle registration and passport fees; and a rather unusual luxury tax of 10% which will be placed on the profits of businesses delivering remote access television “in order to fund an indigenous effort to search for and recover funds stolen from Iraq under the previous regime.”
Expenditures
The budget breaks down expenditures by ministry and by operating expenditure. While a full breakdown of allocations to the individual ministries is provided, there is no explanation of the rationale for the allocations. By far the largest beneficiary is the Ministry of Finance (payment of salaries), which will receive NID15.8 trillion ($10.5bn) in 2004 – almost 80% of the total of NID20.1bn ($13.4bn) – increasing to almost NID18 trillion ($12bn) in 2005 and 2006. Other major beneficiaries are the Electricity Commission and Oil Ministry, which receive capital injections in 2005 and 2006. The Electricity Commission receives NID2.3 trillion ($1.5bn) in 2005 and NID2.5 trillion ($1.65bn) in 2006. The Oil Ministry receives NID1.5 trillion ($1bn) in both years, supplemented presumably by private sector cash injections.
Operating expenses are broken down into staff expenditures; service requirements; goods requirements; assets maintenance; capital expenditures (regular purchase items rather than capital projects); transferred expenditures; foreign obligations; and salaries and retirement rewards. Transferred expenditures make up just over half of total operating expenditures in each year, and include items such as the cost of the public distribution system, support for SOEs, a contingency reserve, local and regional government grants, nation and institution building projects, economic restructuring programs, agricultural subsidies and interest on treasury notes and foreign debt. Pending final negotiations on the thorny issue of Iraq’s debt, the budget sets aside NID300bn ($200mn) for interest payments in both 2005 and 2006. The foreign obligations category “includes the war reparations to Kuwait required under Security Council resolution 1483,” which will be covered by the UN-mandated 5% share of Iraq’s oil revenues.
Financing The Budget
The deficit of NID886bn ($591mn) in 2004 will be financed by refunds of unspent oil-for-food program funds, according to the budget document. The oil-for-food program will be closed down at the end of November and its remaining funds – estimated at up to $10bn – transferred to the Development Fund for Iraq (DFI). The forecast of an almost balanced budget in 2005 and 2006 obviates the need to provide the potential sources of funding should expenditure exceed expectations or (oil) revenues under-perform. However, given the parlous state of Iraq’s finances and the difficulty it would have in borrowing, any deficit would presumably have to be covered by international donations or the unused funds transferred from the oil-for-food program to the DFI. No source of financing is given to pay for the higher than expected deficit ($3.1bn as opposed to $2.2bn) forecast for 2003. However, the initial budget figures predicted a net surplus of $1,091mn (MEES, 4 August) – enough to cover the extra $900mn deficit.
Budget Financing
($Mn)
2003 | 2004 | 2005 | 2006 | ||||||||
NIDBn | $Mn | NIDBn | $Mn | NIDBn | $Mn | NIDBn | $Mn | ||||
Opening Financial Capital | |||||||||||
Development Fund for Iraq | 1,500 | 1,000 | 1,513.8 | 1,009.2 | 177.4 | 118.3 | 166.7 | 111.1 | |||
Vested Assets | 1,350 | 900 | - | - | - | - | - | - | |||
Seized Assets | 825 | 550 | - | - | - | - | - | - | |||
Total Opening Financial Capital | 3,675 | 2,450 | 1,513.8 | 1,009.2 | 177.4 | 118.3 | 166.7 | 111.1 | |||
Plus: Capital Inflow | |||||||||||
Oil-for-Food Program Refunds | 2,025 | 1,350 | 900 | 600 | 420 | 280 | - | - | |||
Transfer of Iraqi Assets from Abroad | 450 | 300 | - | - | - | - | - | - | |||
Less: Capital Outflow | |||||||||||
Transfer to Central Bank Reserves | - | - | 1,350 | 900 | 450 | 300 | - | - | |||
Plus/Less: Budget Surplus Deficit | -4,636.2 | 3,090.8 | -886.3 | 590.9 | 19.3 | 12.9 | 27.3 | 18.2 | |||
Closing Financial Capital | |||||||||||
Development Fund for Iraq | 1,513.8 | 1,009.2 | 177.4 | 118.3 | 166.7 | 111.1 | 194 | 129.3 | |||
Vested Assets | - | - | - | - | - | - | - | - | |||
Seized Assets | - | - | - | - | - | - | - | - | |||
Total Closing Financial Capital | 1,513.8 | 1,009.2 | 177.4 | 118.3 | 166.7 | 111.1 | 194 | 129.3 | |||
Memorandum Item: | |||||||||||
Cumulative Central Bank Reserves | 450 | 300 | 1,800 | 1,200 | 2,250 | 1,500 | 2,250 | 1,500 | |||
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Source: Republic of Iraq. 2004 Budget, October 2003.
Copyright MEES 2004.
