Iraq's oil revenues must be spent wisely

15 August 2008
As Baghdad’s oil production continues to rise, the government’s biggest problem is no longer how to earn money, but how to spend it.

For the first few months of 2008, Iraq has enjoyed sustained oil exports of about 2 million barrels a day (b/d) for the first time in five years. With production hovering around 2.5 million b/d, there is a realistic expectation that the pre-war peak of 2.8 million b/d, reached in 2000, can be restored in the next 12 months.

Beyond that, things are more uncertain. Plans to sign technical service agreements with international oil companies to raise production by 500,000 b/d look shakier by the day, and a recently launched licensing round is having to go ahead without a functioning hydrocarbons law in place.

But while securing a sustainable income from oil is crucial to the long-term future of Iraq, the most important challenge for Baghdad is what to do with its new-found wealth.

According to a recent US report, in 2007 the Iraqi government spent just 28 per cent of its $12bn reconstruction budget, and the ministries responsible for essential services spent just 11 per cent of their allocated funds. In the first three months of 2008, Iraq’s 15 regions spent just 2.7 per cent of their capital budget for the year, according to the Finance Ministry.

Although there are signs that expenditure rates are increasing, the US still predicts that the government will fail to spend 25-50 per cent of its 2008 budget.

It is unlikely that Baghdad will hit its current target to increase oil production to 6 million b/d by 2013. But however much it increases its production, the real test will be what it does with the revenues.

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