Analysis: Iraq’s new budget may hamper more than it helps

This year’s budget is Iraq’s largest at 198.9 trillion dinars ($153bn) with the same allocated for 2024 and 2025.

The Iraqi Council of Representatives passed the 2023, 2024 and 2025 federal budgets on June 12, nearly eight months after Prime Minister Mohammad Shia al-Sudani’s new government was formed.

This year’s budget is Iraq’s largest at 198.9 trillion Iraqi dinars, about $153bn based on the official exchange rate. The 2024 and 2025 budgets will be the same unless the cabinet requests any changes and Parliament approves them.

For the first time, the government took advantage of 2019’s financial management law, which allows for up to a three-year budget. Iraq has not only been slow at passing budgets, but three out of the past nine years also saw no budget passed at all – in 2014, 2020, 2022.

Although there is only half a year left to spend the 2023 budget, there is the reassurance that the next two years will be covered, guaranteeing the government a budget until the next federal elections in late 2025 and for provincial council elections scheduled for this year.

The federal budget also allows the government to fund local investment projects and hire hundreds of thousands of public sector employees, which reflects positively on the prime minister and his governing coalition and increases their electability in both upcoming elections.

Ambitious yet precarious

However, Iraq’s economy and budget rely heavily on oil, which puts both in a precarious position. Nearly all state revenue is from oil sales. In 2022, Iraq earned a record $115.6bn from oil, but it is a volatile commodity. Iraq is not in control of the global oil market, and it is not a relevant decision-maker in OPEC despite being the second-largest member in terms of production.

This leaves Iraq vulnerable to the precarity of oil markets and the decision-making of other OPEC members regarding output, especially since this budget is based on an ambitious oil price of $70 a barrel. If the price dips, it risks unleashing a cascade of economic woes and public anger.

The budget calls for more than half a million Iraqis to be hired this year. It is not the first budget to include massive public sector hiring. Iraq is a country that already struggles with an overburdened public sector of at least 4.5 million employees.

Government offices are overcrowded and disorganised, slowing bureaucracy down further. Big hiring this year will also burden future governments with pensions.

Pipelines and chimneys burning flames at the Nassiriya oil field in Iraq
In 2022, Iraq earned a record $115.6bn from oil [File: Asaad Niazi/AFP]

If the government wants to add even more jobs in 2024 and 2025, it just needs Parliament to vote on it, so it is possible that even more jobs will be added in the next two years.

Iraq’s social contract, like many states in the region, is premised on public sector hiring, with citizens expecting a public sector job the moment they graduate from university. The right to a job is enshrined in Article 22 of Iraq’s 2005 constitution, and while it does not specify the type of job, it is a common belief that it means a government position.

The public sector has grown fourfold since 2003, and now salaries constitute more than a quarter of the 2023 budget.

Iraq’s political elite, which formed after the removal of Saddam Hussein in 2003, operates as though the country can still afford this set-up, and it does so for political gain. Most of its members had been exiled or based in the Kurdish region of Iraq and used patronage networks to build ties and legitimacy with the people in the new Iraqi state.

So millions of Iraqis were hired for the public sector, something they were accustomed to but with a new political patron to be grateful to.

Whether for electability or out of a belief in the right to a public sector job, even independent candidates and members of new political parties advocate for public sector hiring. Even the reformist political movement that emerged after the 2019 October protests is disincentivised from pursuing unpopular economic reforms, no matter how important they may be.

Two reforms often discussed by experts and rejected by the public are curbing public sector hiring and implementing more stringent taxation.

The protests, which took place from October 2019 to March 2020, called for economic opportunity, an end to corruption and political reforms. They resulted in early elections and a new electoral law but no systemic change to the political system itself.

To complicate matters further, protesters continue demanding employment and, in some instances, these protests are attended by the handful of independent MPs.

To rebuild a nation

Infrastructure spending is a focus in the new budget, which allocates development and reconstruction funds in particular areas.

Like the Sinjar and Nineveh Plain reconstruction fund of 50 billion dinars ($38m) to reconstruct areas that were destroyed in the fight against ISIL (ISIS), there are also 100 billion dinars ($76m) allocated to the Baghdad municipal government for service projects in Karkh, the west bank of the Tigris, where the Darwish Bridge will be built, streets paved, and public spaces and parks rehabilitated.

Seventy-five billion dinars ($57m) are allocated for revitalizing marshes spread across two southern governorates.

In addition, there is a reconstruction fund for the poorest provinces with 500 billion dinars ($381m) aimed at improving services, such as infrastructure and access to healthcare, electricity and educational services. This is in addition to the existing reconstruction fund for areas that suffered under ISIL.

However, Iraq does not have the best record in spending its federal budget. The last budget passed in 2021 had a 79 percent execution rate and prioritised the payment of salaries and pensions.

Iraq is enjoying a record high in foreign reserves and no longer has to pay reparations to Kuwait for the 1990 invasion, but there is no vision for how to invest this wealth, and the budget still runs a deficit.

Enlarging the public sector actually contributes to further slowing Iraqi bureaucracy down, which holds back the implementation of development projects. To address this, economic reforms are necessary, but they are missing from the budget.

For example, there was no money allocated for the economic policy unit at the Prime Minister’s Office and, as a result, its director is seeking external funding in spite of Iraq just passing its largest budget ever.

The current government may simply be implementing the hiring promises of past governments, but there is no apparent justification for not embedding economic reforms into the budget law.

If a public hiring freeze or cap were to be enshrined in the law instead of having it mandated by an executive order from the Prime Minister’s Office, it would be harder to reverse.

The size of the budget makes it difficult for Iraq to seek development aid or foreign assistance for economic reforms. Improved security and growing stability in Iraq may be able to attract foreign investment, such as the $27bn TotalEnergies deal in Iraq, in which Qatar Energy has a 25 percent stake.

However, it will be difficult to prove to foreign investors that Iraq is a good bet without economic reforms and with a budget that is not significantly different from previous ones.

This is, of course, in addition to the fact that a budget this large is ripe for corruption, which further decreases foreign trust and interest in Iraq’s business environment. Iraq has long struggled with corruption, and experts estimate that $150bn to $300bn have been taken out of the country since 2003.

This budget, by virtue of covering three years, is forward-looking and emphasises infrastructure and reconstruction, which are positives. But its disregard for economic reforms will add pressure on future budgets and governments.

Source: Al Jazeera