Planning for the 2016 budget in Iraq

Planning for the 2016 budget in Iraq

Posted, 08/21/2015

With the last quarter of the year approaching, the General Directorate of the budget in the Iraqi Ministry of Finance to prepare the framework document, which will be built upon the final budget for next year. There is no doubt that the budget will face a deficit again with the government continues to struggle to reduce costs, at a time when oil prices are still lower than they were in previous years. Some of the austerity measures and reduce costs for some government expenditures have helped, but not enough to reduce the large deficit which suffered budget. Continuation of the war with Daash huge amounts of money on defense and security spending will require, at the same time still many oil wells and borders, and the territory outside government control.

To facing budget deficits, planners need two things: the first is to find a way to cut costs, and the second is to find a way to increase revenue. Given that 97% of government revenue depends on oil sales, however, it is not likely to increase taxes and sources of revenue from other sectors in the coming months, so it is very logical to assume those that the revenue side in almost identical to the budget of revenues generated by oil exports. The dissolution of the export of oil deal with the Kurdistan Regional Government, effectively since the month of June, and it is not wise to the federal government relies to build on the expected revenue from oil sales in the North to 2016. So will the budget preparation is less complicated because it depends only on speculation oil exports from the south The expected average price of oil for 2016.

Issued the southern stations at the present time almost more than 3 million barrels per day, with the international oil companies to reduce their investments in the Iraqi oil fields, and the government’s need to pay to these companies by oil rather than in cash, and it would be reasonable to expect that the average export 3 million barrels per day in 2016. It was also mentioned that figure in the statements made by Oil Minister Adel Abdul-Mahdi in the media. Since the south of Iraq live in security, but did not expect that disrupted oil exports, we can assume that the government will be able to export 3 million barrels per day.

As for the selling price, it is very unlikely that oil prices will reach $ 70 by the end of 2016, due to the large number of supply in the market, and lower demand due to the global economic slowdown, and increased OPEC production and non-members of OPEC, and permits the cost of shale oil production in United States. Given the expected most analysts that Brent crude prices would range from about $ 50 at the beginning of 2016, and seeing that there was no reason will make the price rise suddenly improbable, it would be unwise to expect prices to be higher than the $ 60 annual average for 2016, and because Iraq has between $ 4 and $ 12 less than the price of Brent crude export and after the price reduction costs, the sales expectation expressed in a range between $ 45 and $ 50 it seems reasonable price. Again, Oil Minister similar figures in his remarks, there are some expectations that the oil price could fall below $ 40, but this will not last for a long period of time, that the adoption of the budget for the price of $ 45 would be realistic and cautious, and thus will work to avoid any non-deficit expected.

Total revenue will be 49.275 billion dollars if the price per barrel was $ 45 and 54.75 billion dollars if the price was $ 50 a barrel. The best-case scenario if the government generated 10% of total revenues from non-oil sources, you will get 60.83 billion dollars if the price of $ 50 a barrel. That is unrealistic to rely on the export of 3.6 million barrels per day, including from the northern fields, it will give $ 73 billion of 90% of oil revenues. Given all these expectations that will lead us to plan for revenues of between $ 50 billion and $ 60 billion, this would range between 58 trillion Iraqi dinars and 69.6 trillion Iraqi dinars, assuming that the exchange rate $ 1 = 1160 Iraqi dinars price.

In 2015 budget revenues were unrealistic expectations, 94.05 trillion Iraqi dinars, compared to spending estimated at 119.59 trillion Iraqi dinars, with an estimated budget deficit to 25.54 trillion Iraqi dinars. As a result, the budget deficit significantly increased with lower oil prices lower than $ 56 and not expected to export 3.3 million barrels per day, as had been expected. Non-oil revenues accounted for 3% of the 17% expected. Thus, Iraq is facing a scenario of lower revenues again, and it would be wise planning, because the total government revenues below the 70 trillion Iraqi dinars.

From the expenditure side, it is unlikely that the government will be able to do any significant reductions because of the war pressures and the need to improve public services against the backdrop of the recent protests in the country. Will convert any savings in government spending because of Prime Minister al-Abadi reforms to do other Besrviac instead of the reduction of public spending. It may be possible to freeze the level of spending for 2016 spending on 2015 level, so that no more than 120 trillion Iraqi dinars. This freeze will require ministerial spending, or any new investments in the field of public services.

Therefore, planning for revenue ranging from about 70 trillion Iraqi dinars at the most, and spending ranges from about 120 trillion Iraqi dinars, at least, will leave the minimum deficit of about nearly 50 trillion Iraqi dinars. To accept that a large deficit for sure will help to plan how to overcome it. The government may choose to work through a combination of borrowing, either through sales of bonds or foreign loans, and sales of gold reserves, increasing the money supply, and the use of foreign cash reserves. It will work all of these possibilities to increase the inflation rate, so the government to address this.

There are several steps that the government could take to prevent the economy from falling into a deep recession:

Increased foreign investment.
A new round of licenses for oil fields.
Privatization of companies and government-owned facilities.
Increase income and corporate tax rates, and improve tax collection.
Imposition of taxes on some sales.
Increase customs import duties and fees.
Public land and property sales
Licenses for the operation of the new mobile phone licenses and other sectors.
Removal of subsidies on energy.
Major support for private sector development.
Will require all of these steps in accordance with the legislative, and the government will find that the time it would take to get to the blessed results will not ease the difficulties faced by budget 2016. But avoid economic trouble in the long run more important than the term cash crisis is short, so the development of a strategy for economic growth as well as another one in order to close the budget deficit is necessary.

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