Iraq’s Budget Challenges: Public Wage Bill, Oil Prices, and Fiscal Policy
Recently, Iraq’s parliament approved the 2023 budget amounting to 198.9 trillion dinars, roughly $153 billion. This year’s budget spells record spending on the public wage bill and other development projects designed to improve Iraq’s infrastructure and services gravely impacted by war and neglect. However, it is interesting to note that the budget deficit stands at a record high of 64.36 trillion Iraq dinars, an amount that is almost double the budget deficit in 2021.
According to lawmakers, the budget is based on an oil price of $70 per barrel, with 3.5 million barrels per day (bpd) of oil exports anticipated, including 400,000 bpd from the semi-autonomous Kurdistan region.
The budget sets the exchange rate for oil earnings at 1,300 dinars to the dollar. Due to Iraq’s reliance on oil money, this rate will be in place until 2025, but it may be changed. This is especially true of the oil price used in budget calculations.
Surprisingly, the budget calls for hiring more than 500,000 public sector employees. This hiring contradicts the suggestions of many experts who think Iraq should implement a stricter fiscal policy.
According to Mohammed Nouri, a member of the parliament’s finance committee, a million additional personnel, including contractors, part-timers, and full-timers, were revealed before the session.
The approximate number of new employees was 600,000, according to Ahmed Tabaqchali, a visiting fellow at the Middle East Centre of the London School of Economics. Due to this influx, he voiced worry that the cost of public salaries and pensions might surpass $58 billion (76 trillion dinars).
“The more you augment this type of spending, the more susceptible you become,” he warned of the consequences of such excessive spending. The oil price must rise steadily to support this onerous spending, which increases the country’s reliance on borrowing.
The International Monetary Fund (IMF) cautioned that the expanding public salary bill in Iraq would result in mounting deficits and financial distress unless oil prices significantly increased.
While the average oil price in May was $71.3 per barrel, the IMF estimated that Iraq would need an oil price of $96 per barrel to break even. The IMF stressed the need for a significantly tighter fiscal policy while also ensuring that necessary social spending requirements are satisfied to increase resilience and decrease the government’s dependency on oil revenues.
Before the start of the financial year, Iraq’s budget adoption procedure is meant to take place. Still, because of political unrest and instability, it sometimes takes longer than expected or is never completed.
Iraq is anticipated to double in size from 43 million people now to 80 million by the year 2050, making it one of the countries with the fastest population growth rates. Iraq also struggles with a state-run economy, high unemployment, and regular protests motivated by various concerns.
Additionally, the budget seeks to resolve long-standing differences between Iraq and the territory of semi-autonomous Kurdistan. According to the terms of the April contract, the government-owned marketing firm SOMO of Iraq will now be in charge of selling and exporting crude oil generated in the Kurdish region. This comes after Kurdistan previously exported crude on its own through Turkey, against Baghdad’s objections.
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Nevertheless, despite Baghdad’s appeal to Ankara to resume exports on May 11, crude oil shipments have not yet been restored.