Baghdad cuts budget to reduce deficit
- Iraqs capital expenditure has fallen sharply, according to Fitch Ratings
- An expected budget deficit of 15.8 per cent means Baghdad must find savings
- Spending in other areas such as defence and welfare spending cannot be easily cut
Iraqs capital expenditure (capex) has been sharply reduced since highs in 2013, according to US-based Fitch Ratings.
Due to lower oil prices, no new projects are likely to be announced in the near future, but many existing schemes could go ahead.
Iraqs projects market has collapsed, according to MEEDs Top 100 Projects index. The value of major schemes under way in the index reached a high of $24.2bn in the second quarter of 2014. It now stands at $10.1bn, with questions surrounding whether those projects still in the index can be executed.
The jihadist group Islamic State in Iraq and Syrias (Isis) capture of three out of 18 Iraqi provinces has prevented many projects from going ahead due to security concerns and budget constraints.
Reduced government spending will further hurt non-oil GDP growth, which had been averaging about 7 per cent thanks to reconstruction efforts. Non-oil GDP fell 9 per cent in 2014 and Fitch estimates it will fall a further 11 per cent in 2015, although increased oil production will keep headline GDP growth at 1.9 per cent for 2015. Non-oil GDP growth should recover to 2 per cent in 2016.
But the cuts are unlikely to have an effect on actual spending.
The capital spend they announce, they dont execute, says Paul Gamble, senior director for sovereigns at Fitch. They had ambitious plans, but reducing the budget allocation is more realistic.
Baghdads capex budget rose by 33.2 per cent to 26 per cent of the budget in 2013. Figures for 2014 and 2015 have not been released.
The government urgently needs to invest in infrastructure, especially in the power sector. Mass protests broke out in August this year over frequent power cuts during a heatwave.
As a result of years of underinvestment and conflict, the installed capacity of 11,025MW in 2013 fell far below the 16,574MW peak power demand recorded during the year.
Iraqs budget is under severe strain. Fitch forecasts a 15.8 per cent of GDP budget deficit for 2015, owing to lower oil prices, higher military spending and costs associated with civil conflict. This could reach 25 per cent if oil prices average about $50 a barrel for the year, rather than the $65 Fitch bases its calculations around.
Baghdad is limited in its policy response to falling oil revenues, says Gamble. Defence spending is 23 per cent of the budget and is very difficult to cut in the current security environment. They cant easily cut benefits or the public sector wage bill either, while subsidies are only a small proportion of spending. Capex is an obvious place for near-term consolidation, as in all Gulf countries.
The Iraqi government is turning to debt to finance the deficit, including $6bn in bonds and a $1.24bn emergency loan from the Washington-based IMF.
Baghdad also plans to stem falling oil revenues by increasing its oil production to 3.6 million barrels a day (b/d) in 2015, 3.8 million b/d in 2016 and 4.2 million b/d in 2017. The main increases in production are planned for the south of Iraq, far from areas threatened by Isis.
However, this will require better infrastructure, including floating storage and fuel injection.
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