Iraq is debating a draft federal budget for 2027 that would be the biggest in its history, but the plan is also the most detached from the country's financial reality.
The bill, a copy of which was seen by The National, looks like a welfare-state budget drafted for a stable time, not an austerity plan for a government in the middle of its worst financial crisis in years.
The total public expenditure is projected at about 217.2 trillion dinars ($143.6 billion). The draft expects only 174.2 trillion dinars in revenue – about 144 trillion dinars is to come from selling crude oil and 30.2 trillion dinars from non-oil sources – leaving a gap of about 43 trillion dinars.
The draft says the deficit "is covered from the surplus realised from the increase in crude oil export prices or increased crude oil exports or internal and external borrowing and from carry-over funds". But that is an assumption disproved by Iraq's recent fiscal performance.
Inside the spending, the welfare state dominates. Salaries are about 64.7 trillion dinars and social welfare is around 33 trillion dinars. Grants, subsidies and interests are about 17 trillion dinars, while debt service is also around 17 trillion dinars.
Iraq’s finances have collapsed since the Iran war began in late February and led to the effective closure of the Strait of Hormuz. Iraq earns more than 90 per cent of its budget in dollars from oil exports, almost all of which must pass through the waterway – about a third of the world’s seaborne oil crosses the strait.
Exports fell from 3.36 million barrels per day in February to 131,000 bpd in April. The result was the sharp drop in monthly oil revenue that previously hovered at about $7 billion.
Finance Ministry execution data as of end of August showed revenue of only about 45.3 trillion dinars against spending of 78.9 trillion dinars. To close the gap, Iraq has mainly relied on foreign reserves that have fallen from about $109 billion to $80.6 billion, Iraqi Central Bank data shows.
External help
The scale of the shock forced Baghdad to seek external help for the first time since the 2016 Stand-By Arrangement with the International Monetary Fund. Iraqi officials approached the IMF and formally requested a financing programme, managing director Kristalina Georgieva said at the Annual Meetings in Bangkok this month.
"We will get to Iraq both money and policy support," she said, adding that the IMF intended to support Iraq "very firmly" with a requested loan programme. “We have made significant progress towards the programme. We have still a bit more work to do together and I’m confident we will be successful."
The IMF projected Iraq's economy would contract by 16 per cent in 2026, with a current account deficit of 10.8 per cent of GDP this year. Against that backdrop, the budget could be built around an oil price assumption of $58 per barrel and exports of around four million bpd, including from the Kurdistan region, a government official told The National.
There are tentative signs of recovery. Iraqi oil exports have rebounded to about 3.4 million bpd so far in October. Despite higher export volumes, the State Organisation for Marketing of Oil (Somo) has faced pricing pressure and heavy discounts – sometimes $25 to $30 per barrel – owing to maritime risk premiums.
The government expects further improvement in the coming weeks. However, with at least a two-month lag between export and revenue receipt, the full benefit will not be felt until later this year.
While awaiting support from the IMF, the government borrowed internally to cover payroll and moved to devalue the dinar to inflate dinar-denominated oil revenue.
'Ignores reality'
“The state is in severe financial distress and, instead of tightening, the government is expanding expenses,” Baghdad economist Nabil Al Marsoomi told The National. "We were surprised by a large, highly stretched expansionary budget, and it seems that the Ministry of Finance and Planning are very relaxed. The salary item is very large, along with social welfare and debt service, and the deficit gap is very large."
Mr Al Marsoomi said the budget may take Iraq into "another tunnel because until today the picture is not clear, especially in the Strait of Hormuz", describing the draft as a political document rather than an economic one.
"It is a budget that reflects the behaviour of the rentier state, a populist budget that tries to please people as much as possible. It does not care about economic efficiency, but rather cares about the desires and needs of people and electoral votes," he said.
Iraqi Prime Minister Ali Al Zaidi led a budget meeting on Saturday and issued a directive that 500,000 contract and daily-wage workers be made permanent, plus 120,000 new contract posts, in next year's budget.
He explained that the government would work to “secure the necessary allocations to implement the decision”, according to a statement.
Kurdistan commitments
The draft also keeps Kurdistan region's share at 12.7 per cent of actual total spending, after excluding sovereign expenditures despite calls from the region to increase it.
It obliges the Kurdistan Regional Government to market no less than 400,000 bpd through Somo in co-ordination with the federal Oil Ministry. “If exports via Turkey’s Ceyhan or any other outlet is not possible, the KRG must deliver the quantities to the federal ministry for domestic use as needed," it said.
It also obliges the KRG to hand over non-oil revenue to the federal treasury for audit by federal and regional audit boards, to hand over surplus gas to the federal government or have its value deducted from its share, and not to agree on contracts with foreign or local companies on oil and gas except through the federal oil ministry.
On Sunday, Kurdistan's Prime Minister Masrour Barzani told local media that "no final agreement has been reached yet with Baghdad and talks are continuing to defend Kurdistan people's rights and to secure its financial allocations”.
The Finance Ministry will only release monthly entitlements after compliance, with submission of monthly balances – a condition for continued financing, the draft said. The draft budget still needs to be approved by the Cabinet before the final endorsement by parliament.