In light of the financial setback Iraq is experiencing, and the decline in oil revenues, considered the primary and true resource for the federal budget, Al-Nabaa Forum for Dialogue held its monthly panel discussion titled "Iraq's 2018 Budget: A Reading and Outcomes." The event convened in the Iraqi capital, Baghdad, with the participation of a distinguished group of former parliamentarians, experts in economic, financial, and banking affairs, directors of research and study centers, as well as media and press outlets.
The Chairman of the Forum, journalist Ali Al-Talqani, stated that "the convening of this specialized forum comes at a time when there is a problematic situation and objections from some political blocs regarding the omission of certain provisions in the draft budget, including allocations for liberated areas, border crossing revenues, the share of oil-exporting provinces from its revenues, as well as employment."
He added, "Through the forum's program, we attempted to examine these disputes and find appropriate resolution formulas in the presence of government and legislative representatives, alongside organizations, study centers, and economic experts."
He pointed out that "the forum concluded with several recommendations that will be presented to the central government and the Iraqi Council of Representatives for consideration, and to find effective solutions to all pending issues, as the budget is a crucial matter related to the life of an entire nation, and the operation of all sectors depends on it."
The session was moderated by Mr. Saeed Yaseen, who began his remarks with an introduction stating: "Undoubtedly, the annual budget must center on transparency, sound financial management, and the enhancement of integrity. Certainly, there are monitored revenues; at least less than 85% of financial revenues in Iraq are monitored through transparency in extractive industries, let alone other revenues the state realizes through taxes, customs, and fees. Last year was indeed marked by discipline and a high percentage of customs revenues. Generally, we hope the budget will focus on meeting citizens' daily needs. However, for the third consecutive year, the budget is austere and borders on being a war budget, which certainly puts pressure on many services."
For his part, Dr. Mudher Muhammad Salih, Financial Advisor to the Prime Minister, clarified that he was attempting to address the issues of financial sustainability in Iraq, particularly since financial sustainability inherently means the ability of government authorities to maintain their current expenditures and revenues without threat. "Iraq, as an oil-producing country, relies on oil for 93% of its budget revenues. Consequently, an internal variable must be used to control this financial sustainability. It is worth noting that in modern finance, there is what is called the (dynamic stabilizer). This term refers to the mechanism that shields the budget from any external shocks or tremors. One might ask how this internal variable was selected in Iraq; it was chosen based on the largest revenues."
Salih also confirmed, "This variable, according to the Financial Management and Public Debt Law No. (94) of (2004), whose first article states that 'the preparation of the budget is based specifically on prudent and moderate forecasts for oil prices, plus taxes and others.' Therefore, budgets from (2004) to this day rely on the price of a barrel of oil, treating it as a dynamic stabilizer. Another point is that financial sustainability follows another variable in public finance, which is an external variable known as (fiscal consolidation). This means the government authorities' ability to target revenues and expenditures and their capacity to prevent the accumulation of debt. Any shortcoming in any of these aspects will reflect on financial sustainability. Furthermore, fiscal consolidation is subject to an important factor, which is the (fiscal anchor)."
Salih further noted, "This is the point of contention in Iraq's fiscal policy, as it centers around the fiscal anchor. Particularly, one of the most dangerous problems of the fiscal anchor is the issue of extra-budgetary operations. Regrettably, whenever there was an oil abundance and financial surpluses, we resorted to issuing unprecedented and arbitrary government decisions. These behaviors, detached from the budget, created a weak fiscal anchor or a weak budget constraint. This weakened fiscal consolidation and automatically impacted financial sustainability. Thus, in the budgets of the Republic of Iraq, up to (124) trillion Iraqi dinars remain unliquidated to date. Another important point pertains to the investment budget, whose projects are prepared in the second half of the year without any feasibility studies."
Salih emphasized, "Consequently, what have these phenomena left us with when we used a (fragile budget constraint) and a (fragile fiscal anchor)? Among the most critical issues is that oil prices increased fivefold, while the salaries of the Republic's employees increased sevenfold. These increases negatively impacted the market and private sector activity, especially since the private sector cannot keep pace with the oil bubble. Therefore, the rise in government salaries led to privileges for employees but destroyed the market. Hence, public finance in Iraq today has shifted towards searching for what is called a (strong fiscal anchor), especially since the oil shock that hit oil prices leaves long-term effects. Given that the debt level will persist for years to come, you subsequently need a fiscal constraint for the longest possible period. On this basis, the budget ceiling was determined as follows."
Salih explained, "The concept of an (intertemporal budget constraint) or the (hard fiscal anchor), which strengthens fiscal consolidation and subsequently fortifies financial sustainability—especially as 21st-century modern finance speaks of (primary non-oil fiscal balances). Here, the value of non-oil fiscal balances is estimated at (13) trillion Iraqi dinars. When you subtract this amount from the budget's total value of (104) trillion, and additionally subtract debt services estimated at (8) trillion, the accurate fiscal balance becomes clear, upon which movement is possible."
Salih also pointed out, "Therefore, in order to create a correct and hard fiscal anchor, there must be a numerator, which consists of non-oil revenues minus all expenditures, excluding debt services, and is then divided by the non-oil financial output. Consequently, the numerator speaks of financial diversification; the more non-oil revenues increase, the more financial diversification you have. Conversely, as the denominator increases, it means you have economic diversification. Therefore, in the financial planning for the year (2016), for the ratio to be ideal, it had to be minus (44). In the year (2017), to adhere to the figure of (104), it had to be minus (40). For the year (2018), it is minus (38), this is what the financial planning indicates. By the year (2022), the figure must be (8.29)."
"On this basis, we are proceeding with this financial plan, which is likely to strengthen the fiscal consolidation through which we target expenditures, revenues, and debt reduction. Simultaneously, it works to reinforce financial sustainability, which is the government's ability to protect revenues and expenditures without facing financial insolvency. The final point is that there is a savings gap; the ratio of required savings to desired investments, divided by the GDP, is minus 7%. We still need funds for development, which is why we expect the Donors' Conference in Kuwait will aim to bridge this gap, ensuring that the denominator of the ratio in the fiscal anchor is high in the future."
Free Market Economy and Social Market Economy
Economic expert Basim Jameel Antoine expressed during his discussion of the 2018 budget, "One of the fundamental problems we suffer from is the failure to foresee the global market, especially since the Iraqi economy is a dependent economy. Thus, it is required that we have a task force of competent professionals and experts aimed at forecasting the crises of the capitalist system, in order to take precautions against any emergency. This is particularly important because the global capitalist system periodically experiences economic crises, and these crises negatively impact impoverished populations. Consequently, the issue here hinges on the inefficient management of economic resources."
Antoine adds, "Therefore, we need alternatives to oil, especially as we inflate administrative apparatuses and employment. Here, naturally, monetary inflation occurs, and in turn, the private sector pays the price. Additionally, there is no social justice in the constitution. Hence, in the five-year plan, we must transition from a free market economy to a social market economy, which achieves a kind of justice and reduces class disparities, poverty rates, and unemployment rates. It is imperative, then, to redistribute income within the budgets. Moreover, the issue of diversification and non-reliance on oil resources must be addressed by establishing agricultural, industrial, and tourism sectors. But how can this be achieved, especially when these sectors have been impoverished for many years and require capital?"
Antoine continues, "Also, some politicians played a major role for electoral purposes. In the year (2004), there were complete schedules and dossiers for industrial facilities intended for privatization. Therefore, we need courageous and conscious leadership to make the right decision; otherwise, if economic decision-making remains in the hands of political forces and away from qualified experts, the future does not bode well. What does today's budget hold for the private sector, and are there any programs in it? The current budget, under the present circumstances, achieves a lower deficit. Another point is that currency sales at the Central Bank expose Iraq to massive financial losses. Consequently, if these issues are reviewed, the budget's position can be strengthened. Furthermore, tax collection must be improved."
Antoine points out, "Thus, the application of laws and procedures involves some favoritism between one party and another. Also, the industrial sector and other productive sectors are difficult to revive unless a set of laws is implemented, such as the customs tariff, national product protection, and consumer protection, which were approved by the Council of Representatives in the year (2010). These are foundational laws for reviving the productive sector. Moreover, neighboring countries thrive on the crises that Iraq suffers from."
Antoine stated during the panel discussion, which bore the title "The 2018 Budget: A Reading and Analysis," that "the financial deficit in the budget is likely to vanish if oil prices continue to rise," emphasizing the necessity of "allocating funds to develop productive sectors such as agriculture, industry, and tourism to serve as an alternative reserve to oil rents over time."
Interventions
On this note, Dr. Abbas Shiyaa, a former parliamentarian and member of the Economic Committee in the previous term, indicated, "We were concerned with a part of the budget, and in reality, we were not privy to the details presented by the lecturer, since it is the government that drafts economic policy, which must be based on a five-year or long-term plan. On this basis, economics is a science; it is not guesswork or improvised decisions. The statements made within the scope of this lecture are correct and accurate, but many political decision-makers in Iraq are either ignorant of this information or are not given the opportunity. Finally, a question comes to mind: Were those parameters mentioned in the lecture taken into consideration in the (2018) budget?"
Dr. Bashar Al-Saadi, holding a PhD in Political Research from the University of Baghdad, a university professor, member of the Al-Irtikaz Center for Political and Strategic Studies in Beirut, member of the Daw' Center for Political and Strategic Studies in Baghdad, and member of the Al-Nabaa Center, stated: "The focal point here is that the instability of the fiscal anchor in Iraq is considered a problem because we lack a clear economic policy. This means we do not possess a specific economic constant, be it socialist on one hand or capitalist on the other. This issue remains unaddressed since we rely on state capitalism and the private economy. Regarding the alternative economy, is there any strategic planning in previous and subsequent budgets to revive the alternative economy? Another point is that reviving the industrial sector requires a set of elements: first, the availability of raw materials at low prices; second, changing the labor policy, meaning the employee in the industrial sector transitions from receiving a salary without production to earning wages based on production; third, sustainable production, which requires abundant energy; fourth, roads; fifth, market demand; and sixth, the expertise available in the Ministry of Science and Technology, which is currently sidelined without utility."
Mr. Ahmed Jwaid, Director of the Adam Center for Defending Rights and Freedoms, "asked whether the chapters adopted in the (2018) budget were processed in the same manner as previous budgets. Also, the budget is essentially a legislated law; did the Iraqi legislator consider the rights of future generations?"
Dr. Ihab Ali, an academic and researcher at Al-Nabaa Foundation, said: "He asked whether automatic stabilizers work to increase financial and economic diversification, or if they rely on the pre-existence of economic and financial diversification. Also, don't automatic stabilizers require the presence of a strong economy where the tools of monetary and fiscal policy are effective, especially since there is a gap and ineffectiveness in fiscal policy, such as taxes and interest rates? In addition, there is the issue of the exchange rate: is it an economic or a political problem? Also, how do we reduce waste in line-item budgeting amid an austerity policy?"
For his part, Sheikh Murtadha Maash stated: "He inquired about the five-year strategy: is it a radical solution or a temporary one to cross into a second phase? Consequently, if it is not a solution, there is an underlying problem in the citizen's economic culture. The Iraqi citizen, in the post-monarchy era, has transformed into a subservient citizen to the rentier socialist state. Hence, he cannot emerge from this crisis, regardless of how much time passes, as long as he thinks in the same way."
He added, "At that point, the politician, owing to electoral practices, became a captive to populist policies. Therefore, we must change our way of thinking to transition toward the middle class so that we have a strong private sector and an independent Iraqi citizen who is not subordinate to the state. This is an important point that can be reinforced by spreading cultural awareness among citizens."
He pointed out that "the banking system and investment laws contribute to combating hoarding, as does the citizen's economic partnership in domestic investment. Also, the parallel economy currently in existence benefits from economic laws outside legal frameworks. Another point is: why hasn't Iraq integrated into the global financial system?"
Dr. Nassar Al-Rubaie, a former parliamentarian, "indicated that annual budgets consistently coincide with election periods; consequently, there is a financial dilemma regarding the extent of political influence on the implementation of programs and schemes of the state's economic approach. Also, what is the magnitude of the real deficit versus the hypothetical deficit upon which the government budget is based? As for the issue of the law drafted for the Social Protection Network in (2014), it aimed to target impoverished and low-income families. Thus, we decided on a monthly salary of (420) thousand dinars for every family consisting of a mother and a father. Naturally, this law exists but remains unimplemented due to the events Iraq experienced during the incursion of ISIS."
Response to the Interventions
Dr. Mudher Mohammad Salih stated that the financial plans currently adopted are modern and being used for the first time in Iraq. "Another point is that within the Iraqi state and financial apparatuses, there is not even a basic familiarity with the subject of economics. Therefore, we are responsible for preparing a plan, first by training workers in the economic sector on basic disbursement mechanisms across one province and four ministries. This is for the purpose of preparing a shadow budget, which consists of line items, programs, and performance metrics, bearing in mind that the problem lies in the operational budget, not the investment one, thus constituting a technical obstacle."
"In the year (2019), we will double that number in the hope that training is completed to reform administrative work in Iraq. Therefore, if financial planning is correctly realized, provided it is insulated from political and electoral dimensions. Moreover, the sound performance and proper administration of the budget facilitate the proper administration of all other policies. Additionally, there ought to be funds intended to provide loans to youth and small enterprises. Also, the state of revenue deviation in the previous period placed us in the position of heading toward unbalanced development. Consequently, financial planning is supposed to align with the plan launched by the Ministry of Planning. Recovered funds are entered into the transferred funds clause, which falls under the general budget chapters. As for the budget itself, it essentially consists of revenues, expenditures, and deficit management."
