A rowdy meeting on September 7, 2020 was attending by two teams – the Minister of Finance and his ministerial team, and the Parliamentary Finance Committee, in the presence of the Prime Minister and the Speaker. They squabbled over the current financial situation; while the Minister of Finance requested new loans to pay salaries and government expenses, the MPs inquired about the practical steps taken by the ministry to fill the budget deficit, reduce expenses, and increase revenues.
The meeting was punctuated by personal accusations flung between the two parties – which the media used as headline news material, instead of focusing on the origin of the issue, the stifling financial crisis facing the country.
The dust of the tumultuous session had not settled when the ministers of finance and planning were summoned to a Parliament session the following day to answer a question from Finance Committee member Muhammad al-Darraji. He wanted to know why the finance minister had not yet presented the reform paper, which the government must present after approval of the Domestic and Foreign Borrowing Law to finance the fiscal deficit for the year 2020. Article Seven of that law states: “The Council of Ministers shall present a program for economic reform to the Parliament within a period not exceeding 60 days from the date of approval of this law.” The law was approved on June 24 this year, well over 60 days ago.
While answering Darraji’s questions, the Minister of Finance said that the paper will be ready in the middle of October; it needs a lot of work, he said, and "40 experts are working on preparing it." He added that the reform process will need five years of continuous work to correct its course.
Financing the real deficit
The second priority in the government program approved in Parliament was "preparing an exceptional budget bill that, if approved by the Parliament, would work to deal with the current economic crisis and the repercussions of the collapse of oil prices." But the government has not worked on preparing the budget for the past four months, because it saw that presenting the budget law would not be feasible. It is best to work according to the 2019 budget and disburse one twelfth, as is customary. And it turned towards borrowing to finance its financial deficit to pay salaries, so it submitted a bill of domestic and foreign borrowing, which was approved by Parliament.
After the government exhausted the funds allocated in the said law, it returned to the Parliament to request new funding. Why didn’t the government act on its promise to reduce expenses and increase revenues to fill the deficit, Parliament asked, instead of borrowing and withdrawing the balance from the reserves of the central bank? This question is legitimate, and needs a real answer.
In the past, governments headed towards the easiest option – to borrow from home and abroad. We see that the budget is burdened with paying debts and their interest, with the draft budget for the year 2020 including ten trillion dinars to pay off loans and interest. This government will follow the example of others and present a draft budget that includes a new loan of 22 trillion, as stated in the draft law, because they know that Parliament will not vote on a new draft loan bill; rather, it will vote for a budget draft, because the budget will include many opportunities to pass what MPs want in terms of job grades, and financing projects of interest for their provinces or parties. Despite this, Parliament has no choice but to approve the budget (and finance the government deficits), as the government is unable to pay salaries at the end of this month. In the event that Parliament refuses, the current system is subject to total collapse.
The government knows that it has a monthly expenditure of approximately $7 billion. With a monthly income from oil sales of about $3 billion, there is a monthly deficit of approximately four billion dollars. At the same time, all ministries have become dependent on the government budget and barely contribute in revenue generation, even though the majority of them have the ability to increase their monthly revenues by various means and within the law.
For this reason, the Prime Minister should press each minister to contribute to reduce the deficit by setting specific goals for each of them in the coming months, to reduce the expenses of their respective ministries and increase the revenues, noting that some ministries, such as telecommunications, industry, electricity, agriculture and finance, can support state revenues by billions of dollars annually if they worked according to a detailed program.
Economic Reform Paper
The government has twice taken it upon itself to prepare a reform program. First, the several promised reform steps that were included in the Government’s program, and second, what is included in Article Seven of the domestic and foreign borrowing law.
The Minister of Finance took on preparation of the reform paper on behalf of the government and faced Parliament with it, but he admitted that the reform program will not be easy. He also indicated that reform, after the paper’s approval, needs five years of continuous and diligent work.
What no one has spoken about is that the reform paper will face major obstacles, both within the government and in Parliament, as it will include harsh measures to stop the bleeding and waste of public money. These measures for reform will not help the political forces in their election endeavours, in addition to cutting off the finances that they obtain through the ministries and state institutions.
For this reason, the most likely possibility is that the reform paper will be born while it is in the Intensive Care Unit, and many will work to cut its oxygen supply so that it dies a clinical death.
The paper might not reach this fate in the event that the entire government defends it and the Prime Minister insists on its implementation, which means that he will be clashing head on with many political parties. Will he be ready to take such action?
It is worth noting that the cash liquidity which will be provided by the budget law will not last for more than 4 months. That means we will be facing a painful reality in the coming year if the government does not find new ways to finance the deficit and increase non-oil revenues.
There is no doubt that the Iraqi economic situation is in continuous deterioration amid severe haemorrhage caused by the gigantic increase in spending and the lack of income, in addition to the utter failure to create an economic environment that encourages domestic and foreign investment, and develop industry and agriculture, as well as other sectors. Governments have tried repeatedly to implement temporary solutions by resorting to the easiest and shortest way, which is to borrow at the expense of our successors and the future of the country. It is important to point out that if the situation continues in its current form, then the 2021 budget will be burdened with countless debts and obligations, which in turn may contribute to the complete collapse of the economy, to the point of no return. The political class knows that the future of Iraq is in its hands, and it needs to understand that there is no time to waste, to procrastinate with, or to place losing bets.
Farhad Alaaldin is the Chairman of Iraqi Advisory Council. He was the political adviser to former Iraqi President Fuad Masum, the former chief of staff to the KRG prime minister from 2009 to 2011, and former senior adviser to the KRG prime minister from 2011 to 2012.
The views expressed in this article are those of the author and do not necessarily reflect the position of Rudaw.
The meeting was punctuated by personal accusations flung between the two parties – which the media used as headline news material, instead of focusing on the origin of the issue, the stifling financial crisis facing the country.
The dust of the tumultuous session had not settled when the ministers of finance and planning were summoned to a Parliament session the following day to answer a question from Finance Committee member Muhammad al-Darraji. He wanted to know why the finance minister had not yet presented the reform paper, which the government must present after approval of the Domestic and Foreign Borrowing Law to finance the fiscal deficit for the year 2020. Article Seven of that law states: “The Council of Ministers shall present a program for economic reform to the Parliament within a period not exceeding 60 days from the date of approval of this law.” The law was approved on June 24 this year, well over 60 days ago.
While answering Darraji’s questions, the Minister of Finance said that the paper will be ready in the middle of October; it needs a lot of work, he said, and "40 experts are working on preparing it." He added that the reform process will need five years of continuous work to correct its course.
Financing the real deficit
The second priority in the government program approved in Parliament was "preparing an exceptional budget bill that, if approved by the Parliament, would work to deal with the current economic crisis and the repercussions of the collapse of oil prices." But the government has not worked on preparing the budget for the past four months, because it saw that presenting the budget law would not be feasible. It is best to work according to the 2019 budget and disburse one twelfth, as is customary. And it turned towards borrowing to finance its financial deficit to pay salaries, so it submitted a bill of domestic and foreign borrowing, which was approved by Parliament.
After the government exhausted the funds allocated in the said law, it returned to the Parliament to request new funding. Why didn’t the government act on its promise to reduce expenses and increase revenues to fill the deficit, Parliament asked, instead of borrowing and withdrawing the balance from the reserves of the central bank? This question is legitimate, and needs a real answer.
In the past, governments headed towards the easiest option – to borrow from home and abroad. We see that the budget is burdened with paying debts and their interest, with the draft budget for the year 2020 including ten trillion dinars to pay off loans and interest. This government will follow the example of others and present a draft budget that includes a new loan of 22 trillion, as stated in the draft law, because they know that Parliament will not vote on a new draft loan bill; rather, it will vote for a budget draft, because the budget will include many opportunities to pass what MPs want in terms of job grades, and financing projects of interest for their provinces or parties. Despite this, Parliament has no choice but to approve the budget (and finance the government deficits), as the government is unable to pay salaries at the end of this month. In the event that Parliament refuses, the current system is subject to total collapse.
The government knows that it has a monthly expenditure of approximately $7 billion. With a monthly income from oil sales of about $3 billion, there is a monthly deficit of approximately four billion dollars. At the same time, all ministries have become dependent on the government budget and barely contribute in revenue generation, even though the majority of them have the ability to increase their monthly revenues by various means and within the law.
For this reason, the Prime Minister should press each minister to contribute to reduce the deficit by setting specific goals for each of them in the coming months, to reduce the expenses of their respective ministries and increase the revenues, noting that some ministries, such as telecommunications, industry, electricity, agriculture and finance, can support state revenues by billions of dollars annually if they worked according to a detailed program.
Economic Reform Paper
The government has twice taken it upon itself to prepare a reform program. First, the several promised reform steps that were included in the Government’s program, and second, what is included in Article Seven of the domestic and foreign borrowing law.
The Minister of Finance took on preparation of the reform paper on behalf of the government and faced Parliament with it, but he admitted that the reform program will not be easy. He also indicated that reform, after the paper’s approval, needs five years of continuous and diligent work.
What no one has spoken about is that the reform paper will face major obstacles, both within the government and in Parliament, as it will include harsh measures to stop the bleeding and waste of public money. These measures for reform will not help the political forces in their election endeavours, in addition to cutting off the finances that they obtain through the ministries and state institutions.
For this reason, the most likely possibility is that the reform paper will be born while it is in the Intensive Care Unit, and many will work to cut its oxygen supply so that it dies a clinical death.
The paper might not reach this fate in the event that the entire government defends it and the Prime Minister insists on its implementation, which means that he will be clashing head on with many political parties. Will he be ready to take such action?
It is worth noting that the cash liquidity which will be provided by the budget law will not last for more than 4 months. That means we will be facing a painful reality in the coming year if the government does not find new ways to finance the deficit and increase non-oil revenues.
There is no doubt that the Iraqi economic situation is in continuous deterioration amid severe haemorrhage caused by the gigantic increase in spending and the lack of income, in addition to the utter failure to create an economic environment that encourages domestic and foreign investment, and develop industry and agriculture, as well as other sectors. Governments have tried repeatedly to implement temporary solutions by resorting to the easiest and shortest way, which is to borrow at the expense of our successors and the future of the country. It is important to point out that if the situation continues in its current form, then the 2021 budget will be burdened with countless debts and obligations, which in turn may contribute to the complete collapse of the economy, to the point of no return. The political class knows that the future of Iraq is in its hands, and it needs to understand that there is no time to waste, to procrastinate with, or to place losing bets.
Farhad Alaaldin is the Chairman of Iraqi Advisory Council. He was the political adviser to former Iraqi President Fuad Masum, the former chief of staff to the KRG prime minister from 2009 to 2011, and former senior adviser to the KRG prime minister from 2011 to 2012.
The views expressed in this article are those of the author and do not necessarily reflect the position of Rudaw.
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