Iraq’s state finances are increasingly vulnerable to a drop in oil prices and the government could have difficulty financing this year’s budget plan, an International Monetary Fund official said on Monday.
“There is a structural problem. The fiscal policy depends crucially on oil revenues and that dependence has been increasing,” Carlo Sdralevich, the IMF’s mission chief for Iraq, told a financial conference in Dubai.
“This trend is concerning because the break-even price has been increasing in the last few years.”
Iraq, which depends on crude oil exports for some 93 percent of government revenues, needed an average oil price of $106.1 per barrel in 2013 to balance its budget, up from $95 in 2011 because of rising expenditure, the IMF estimated last October.
But Brent crude oil, now around $107, is expected to drop gradually in the next two years, to $103 in 2014 and $100 in 2015, as a shale boom in the United States and increasing output in Iraq keep the market well supplied, according to a Reuters poll of analysts.
“Another concern is that spending is pretty rigid. There is a lot of current spending and when the government does not have enough revenues it ends up cutting investment, which is of course negative for the long-term growth,” Sdralevich said.
The IMF estimates the state budget of Iraq, which has been hit by a fresh surge of sectarian violence, slipped into a deficit of 0.7 percent of gross domestic product last year, the first deficit since 2010, from a surplus of 4.1 percent in 2012.
Sdralevich said this year’s budget draft, which is currently being discussed by parliament, was very expansionary in its present form and might be difficult to finance.
Earlier this month, Iraqi Kurdish ministers walked out of a cabinet session in a revenue dispute involving the draft 2014 budget, which is estimated at 174.6 trillion dinars ($150.1 billion).
The head of parliament’s Treasury committee told Reuters that the budget, swollen by extra expenditure, would “collapse” if the state kept paying Iraq’s northern Kurdistan region its 17 percent share of oil revenues even as the Kurds withheld oil export proceeds.
He said the draft budget projected a deficit of about 21 trillion dinars – assuming the Kurds paid the Treasury the revenue from budgeted oil exports of 400,000 barrels per day. Industry sources say that target far exceeds Kurdistan’s current export capacity of around 255,000 bpd.
In a previous report, the IMF criticised Iraq for poor budget planning and execution, large off-budget spending, low investment execution rates, and serious deficiencies in fiscal reporting.
Sdralevich also said Iraq should ensure the central bank’s (CBI) independence from government policy, keeping the CBI’s reserve management separate from the Development Fund for Iraq (DFI).
“The crucial point which we really insist on is maintaining the current architecture,” he said, echoing comments in an IMF report last July.
“Maintaining independence of the CBI…is very important. It really underpins the stable exchange rate which in the context of Iraq’s economy is a crucial anchor.”
Reserves in the DFI, which the government uses for public investments, plunged to $6.5 billion at the end of 2013 from $18.5 billion in 2012, Sdralevich said.
That, together with rising budget spending, triggered concern that the government might eventually use the central bank’s $77 billion of foreign currency reserves to finance state expenditure, which could weaken the currency and spur inflation.