2008 Budget: Theory and Practice

 By : Majid Al- Souri

 Philosophy of the Budget

        The budget philosophy asserts basic subjects that might be correct in their general directions and it considers them new concepts after criticizing the previous budgets. The budget emphasized that it depended on the existence of the national strategy for the years 2007, 2008 put by the ministry of planning and international obligations signed by Iraq with the International Monetary Fund (IMF), in addition to the International Compact with Iraq which is binding for all and is considered a strategy for the government's work.

     The formation of a strategy for the national development, no doubt, represents an important achievement. It was approved by the Supreme Economic Committee and by the cabinet, but it, in all cases, in its current form does not represent an economic policy fro all economic sectors of the country according to the aims and the time tables. Despite the fact that the strategy put the financial needs especially in oil, gas, electricity, agriculture, transportations and communication fields, yet until now it has not been abided by. In addition to that the strategy put frameworks referred to as general expenditures without any details about the projects intended.

    The concerned ministries and institutions had to detail it into annual programs and projects which have studies of the benefits where the best of which is chosen according to previously arranged benefit studies. These projects are achieved within a timetable concerned with the expenditures, the achievement, the mechanisms and the procedure in order to facilitate the monitoring of the performance to measure the performance and find the results. The strategy has been formed according to the financial fields in various fields in order to attain the intended aim, but it did not consider the material, financial, and the human capabilities available in Iraq, neither did it consider the ways of providing these capabilities when needed.  That's why it expresses the desire for attaining the intended aims without considering the possibility of achieving that according to the financial revenues, the other available revenues, the mechanisms and the procedures for achieving these aims. This is the difference between the strategy and the policy

     The obligation, on the other hand, to the international agreements and conventions constitutes more than a general frame for the total economical orientation by following the market economy as an economical approach, in addition to encouraging the private sector, reconstructing the governmental institutions and laws in accordance with the approach, and not expanding the governmental non-investment expenditures added to  that the necessity for reducing the subsidies for goods and services presented by the government on the basis of the fair distribution of the national wealth, treating the unemployment, and enhancing the living standards for all the Iraqi people as well.

    In addition to all of that, it is important to develop the banking system to reach the level of the international banking industry in order to be an aid to the state in activating the economical activity especially the private sector.

       The budget of the year 2008 has criticized the previous budgets, but the question is about the reasons that led to these criticisms. Is there any radical change in the composition of the national income, in the composition o f the state's revenues, or in the policy of expenditures, or even in the pressures of the emergency expenditures that the state confronts?

 Revenues

      The crude oil production and export revenues still represent the basis in constructing the state's revenues. These revenues, according to the estimate of the budget, amounted to 4,42 trillion Iraqi dinars that is %83, 6 of the gross revenues. The decline of the oil share of the general revenues in the budget is attributed to the expectation of gaining 4,5 trillion Iraqi dinars of using the Iraqi skies.      

     The policy of the revenues still affirms that is and will be depending on the exported crude oil revenues. If the process of income distribution and redistribution is taken in consideration, it would be possible to say that all the budget revenues depend on the oil revenues, except 4,5 trillion Iraqi dinars gained form the use of the Iraqi skies.

     Regarding increasing the contribution of the other sources in achieving the revenues, the budget repeats what was mentioned inn the previous budgets. It emphasizes the necessity of imposing indirect taxes such as the sales general tax, yet the obstacle is not achieving the special laws concerned, i.e. legislating and implementing them, knowing that the custom taxes (taxes of reconstruction ) which are indirect taxes have been increased in 2005 from %5 to % 10, but until now that increase is not put into effect. Concerning the direct taxes, the budget still emphasizes the necessity of enhancing the performance of tax administration and spreading the tax awareness along the period of putting the new budgets. The budget, as the case for the other preceding ones, emphasizes the necessity of applying taxes on the mobile phones, yet the concept and mechanisms of which have not been explained until now. The non-oil revenues amounted to 8, 333 trillion Iraqi dinars. The difference between the above mentioned gross amount and the oil revenues part of which reconstruction tax 403,8 billion Iraqi dinars with an increase of %9,4 compared to 2007, the annual gaining out of the activity of the general boards and companies which amounted to 157,1 billion Iraqi dinars with an increase of %36,1 in addition the wages of the public services which amounted to 52 billions (the same amount of 2007), the income taxes and the interests taxes which amounted to 1021 billion Iraqi dinars, in addition to these taxes and customs that amounted to 5282, 9 billion Iraqi dinars with an increase of %1140,8 compared to 2007 due to increasing the taxes of using the Iraqi skies which hiked from zero to 4500 billion dinars which led to the reduction of the percentage of the oil revenues in the budget.

   The main problem that could be referred to is about what has been achieved of the previous budgets. If the 2007 budget figures are not yet achieved, 2006 and half of the 2007 actual figures should be achieved. The mass media promoted that there is a huge surplus in the previous budget due to the weakness in the achievement of some of the projects set for in the budget, the accumulated money amounted to $35 billion till the mid of 2007.

     It is quite vague to prepare a budget with a deficit amounting to7336 billion Iraqi dinars along with such surplus. Why such surplus or part of it is not used to develop the production sectors. Are these surpluses resulting only from the non-execution of the investment programs or from the increase in the oil revenues? Taking care in calculating the oil revenues  represents an important precautious policy, but it is not advisable to overestimate that. It is not understood why counting the price of one crude oil barrel for $57, at the time where all the expectations affirm the increase of the world oil prices to more than $100 per barrel in 2008 (the current price in the world market is $95- 96 pb) for two basic reasons: the growth in the continuous demand of this material and the continuous decline of the dollar against the other currencies. This overestimated precautious assessment can not be understood at the time where the exported amount of oil is estimated to be 1,7 million barrels per day, knowing that the budget mentions that it is impossible to reach that export capacity until the end of 2008 after accomplishing certain steps relate to the investment and the achievement.

     The official spokesman of the ministry of oil has stated that in November 2007 the oil exports amounted to 58,9 million barrels, that is 1,963 million barrel per day, $83, 87 pb. He emphasized that the ministry will monthly publicize information concerning the amount of production and the prices. This procedure, once carried out, will represent the credibility and the transparency of the works of the oil ministry which should be appreciated and highly considered.

     The urgent question is that where do all these amounts of money that exceed the budget estimates go when it goes beyond the planned deficit? When reviewing the 2006, 2007 and 2008 budgets revenues, we find that there are no any figures about the loans and the grants that the state received during these years, whether from the donor states or from the international institutions, but mass media declared that Iraq has paid a loan back to the World Bank in advance.

    Concerning the transparency in writing the budget, why are not the grants and loans put in the budget or at least in an annex with the details of using these grants according to the aims for which these grants have been obtained? Do not these loans constitute one of the sources of the expenditures in the budget?    

 Investment Expenditures

The analysis of the expenditures in the 2008 budget shows the following:

The percentage of the investment expenditures that amounts to 15,860 trillion Iraqi dinars to the gross expenditures that amount to 58,110 trillion Iraqi dinars constitutes % 27,3 , whereas it uses 42,250 trillion Iraqi dinars, that is about % 72,7 of the gross amount of the expenditures. Viewing the expenditures in front of the investment projects shows that the financial profile to the oil sector amounts to 2,4 trillion Iraqi dinars, to the electricity 1,56 trillion dinars, to Kurdistan's projects 3,223 trillion dinars, and 8,677 trillion dinars for the projects of reconstruction of the territories and governorates in addition to the projects of the ministries.

Most of these amounts are specified to the infrastructures such as roads, bridges, governmental buildings, water and sewer projects and some other public services as well. Despite the importance of such services to the citizen which he is patiently waiting for ( we hope that there would be an annex in the budget clarifying these projects, the amounts of money specified, the mechanisms and the implementation  procedures in addition to a timetable for achieving these projects). Yet they can not resolve the bigger problems that the Iraqi economy suffers from especially in the production sector. Thus the general orientation would be the reliance of the import to meet the needs of commodities and the basic services.

The budget has emphasized the necessity of developing and activating the role of the private sector in the economy activity. But it is quite clear that the budget did show the mechanisms of that activation and the financial profile for that purpose only by achieving the service projects. The activation of that productive private sector's role (industrial and agricultural) especially in the current transitional period needs a financial and a material support from the government. The productive private sector (industrial and agricultural) has inherited, as the case with the public sector and all the Iraqi economy, a grave underdevelopment in its productivity and a deterioration in its equipments and installations, as a result of the economic embargo and the wars, added to that the huge exports that have been done to meet the needs of the commodities which Iraqis were lacking. Thus it is in an urgent need to develop itself and its productivity through the financial support that could be provided by the government by allocating amounts of money to develop it by giving long-term feasible loans, which can not be provide  by the banking sector in its current status. It is known that the private sector is more dynamic in its activity and it can achieve good results faster than the public sector regarding providing the industrial and the agricultural goods that are necessary for the local consumption in addition to compensating the imports. The growth of the private sector's activity would be more if it is supported by services, legislations and finances. This represents one of the most important aims in the national development strategy, in the international obligations in front of the International Monetary Fund, and in the International Compact with Iraq.

We, at the same time, do not see the adequate attention of the budget in order to develop the governmental productive projects. Thus the investment financial profile for the ministry of industry amounts to 400 billion Iraqi dinars (= $3,333 million). If we consider what is said about the expected surge of reconstruction in Iraq, especially in the housing sector, these amounts are not enough to reconstruct but a small part of the productive projects in the constructional industry such as the cement, the brick, iron and steel ( if the these  amounts are allocated to such projects). This means the increase of Iraq's reconstruction expenditures, because this would reinforce on the import. It is known that the transportation costs of these materials would be very high compared to their production costs, especially  that all the raw materials are available in Iraq. The ministry of industry has suggested allocating 750 billion Iraqi dinars for 2008 i.e. $ 625 million, but it did not get more than half of this amount.

On the other hand, the suggestion submitted by the Secretariat of the Council of Ministers to allocate 170,1 billion Iraqi dinars to cover the expenditures of the non-financial assets usually allocated for buying cars, has been approved. If we really wanted to activate the production sector ,especially the constructional industry, and increase its share in the formula of the gross local production, the financial profile necessary for the industrial sector in 2008 can not be less than one billion dollars(=1,2 trillion Iraqi dinars) the larger part of it is to be allocated for restructuring the projects of  construction materials production which are considered necessary to cover an adequate part of the local needs for these products, in order to reduce the cost of reconstructing the infrastructures and to reduce the needs for the housing units. It would, at the same time, contribute in reducing the larger part of the budget expenditure on the employees of these companies (the gross numbers of the employees in the boards and the state companies is 633233) and their expenses that amount to 1,679 trillion Iraqi dinars per year. Unfortunately the general budget, and all the previous budgets,  repeat the same statement" the allocated subsidies for all the boards and the state companies would be determined later on, because of the unavailability of the sufficient information of each state company. The above mentioned state boards and companies will, through their ministries, submit their demands to the ministry of finance to ask for subsidies separately for each case.

The investment expenditures allocated to ministry of agriculture amounts to 74,5 billion Iraqi dinars( =$62,1million) which is not sufficient to develop this vital sector in the life of the Iraqi society. it seems that the general orientation of the government is encouraging the imports to the local production, which causes a large gap in the orientation of the Iraqi economy. Increasing the expenditures in the service and production projects to no less than % 50 of the oil revenues and allocating the necessary amounts to activate the public and the private production sectors, is considered an urgent necessity to resolves many problems that the Iraqi economy suffers from including the unemployment, security, stability, the burdens of the budget resulting from the ration card, and the subsidies to the prices of the oil derivatives. at the same time, it is necessary to increase the financial profile for the oil, electricity, water, communication and transportation sectors, that are considered the fundamental basis for increasing the revenues and for the economical development in addition to attracting the foreign and local investments, an d, at the same time, putting the necessary effective procedures and mechanisms in order to achieve their program within the planned timetable. 

The law of investment, the establishment of the national investment board and the governorates and territories boards, has been issued in October 2006, but unfortunately, we have not noticed neither in 2007 budget nor in 2008 budget any reference to this board, to its role in the economical development, the expenditures allocated for it, and to the investment boards belonging to the territories and governorates.

The (Current) Operating Expenditures

The operating expenditures constitute %72,7of the gross expenditures of the budget with an increase of %8,2 compared to the financial profile in 2007. The actual increase of the size of the operating expenditures which is calculated by the dollar, has risen to %13,6. Knowing that these expenditures are completely spent even when some of the apportionments have not been spent at the beginning, they would usually be spent, anyhow, in the last months of the year in order to maintain, at least, the same level of these financial profiles in the years to come or to ask for an increase.

The size of the suggested operating expenditures amounts to 70,8 trillion Iraqi dinars . What has been agreed upon is 42,3 trillion dinars which constitutes %59,7 of the suggested amount. At the same time, %47,7 of the suggested investment expenditures have been approved which represents a pre- insistence on increasing the current expenditures on the account of the investments expenses, which does not go along with the principle of suppressing the expenses.

The analysis of the operating expenditures shows that each one of the employees in the presidency of the republic, whose number is 676, costs the budget about 190 million dinars annually of the current expenditures, or 15,8 million dinars monthly. The secretariat of the council of ministers, whose employees are 2123 cost about 149 million dinars annually (12,4 million dinars monthly) whereas the parliament whose employees are about 493, cost 263 million dinars annually i.e. approximately 22 million dinars monthly. The foreign ministry, the number of its employees is 2076, costs 144 million dinars annually (12 million dinars monthly).

On the other hand, the employee in the ministry of culture, the number of its employees is 4300, does not cost more than 16,4 million dinars annually(1,37 million dinars monthly). The ministry of agriculture, with 11593 employees, costs 7,317 million dinars (160 thousand dinars monthly). Meanwhile the cost of the employee in the ministry of oil, the number of its employees 970, of the current expenditures is 128,3,3 million dinars annually ( 10,69 million dinars monthly). The ministry of industry, the number of its employees is 742, costs 37,2 million dianrs annually (3,1 million dinars monthly ) whereas the ministry of higher education and the scientific research, the number of its employees 63528, costs 14 million  dinars annually ( 1,170 million dinars monthly).

   The cost of one person doe not mean the average of the salary that the employee receives, but the gross amount of the operating expenditures excluding the investment expenditures.    

Compensations of the Employees

The financial profiles for the compensations of the employees in the 2008 budget amounted about 16,3 trillion about 12 trillion of which are salaries, wages and apportionments; and 4,3 trillion Iraqi dinars as salaries and pension bonuses. The real figure for the compensations of the employees should, by all means, include financial profiles of the subsidies given to the state companies' employees except the electricity and the agriculture which amounts about 1,7 trillion dinars, added to that the salaries of the demobilized from the military service, which amounted to 253,3 billion dinars. Thus the actual figure for the compensation of the employees is about 18,3 trillion dinars which constitutes % 43, 21 of the gross operating expenditures ,or % 31,4 of the gross budget expenditures. Meanwhile, the gross number of the employees is 2141432 out of which 493831 employees in Kurdistan which constitutes %23,1. The number of the employees of the state companies which amounts to 633233 who receive the subsidies is added to the number of the pensioners which amounts, according to the news, to 1,5 millions. The total number of those who receive compensations from the state would amount about 4,3 million people excluding the subsidies of the social benefits. When excluding the number of the employees in the interior and the defense ministries, the remaining would be 3547102 employees and pensioners. This is a very huge figure for a country the population of which is 23-30 million people, about 4 millions of them live outside Iraq.

 Non- Financial Assets

According to the budget, the expression" non-financial assets" represents buying the essential capital materials that are necessary for the progress of the work of a certain ministry or an administration. The specified agreement for purchasing, for example, new vehicles is listed under this clause. The size of the financial profile under this clause amounted about 2,977 trillion dinars and the revised financial profiles of 2007 amounted to 2,290 trillion dinars. Whereas the approved amounts of money were 1,681trillion dinars, that is by adding 615 billion dinars which constitutes a difference of %36,6 between the approved amount and the revised one. The size of the allocated amounts for the cabinet in this clause of the 2008 budget is 239,3billion dinars out of which 170,1 billion dinars are allocated for the secretariat of the council of the ministers alone, and 92,227 billion dinars for the offices of the ministry of the finance and 18,870 billion dinars for the parliament, in addition to 4,5 billion dianrs for the presidency of the republic. Thus the gross amount allocated for the institutions alone is about 354,9 billions dinars, that is about %48 is allocated to the secretariat of the cabinet alone. If we exclude the figure allocate to the ministries of defense, interior, health, education and the higher education in addition to Kurdistan's territory; the remaining amount of money for these services would be 474,896 billion dinars %75 of which would be possessed by the above mentioned institutions.

What has been spent in this clause during the previous years and the financial profiles of 2008 passed the credible limits. The greater part of the amounts, that have been spent in this field, could have been used as actual investment expenditures for the production sector to resolve the basic problems faced by the Iraqis people and the Iraqi economy, instead of building a wall, similar to China Wall, of concrete stones and armored cars guarded by many security guards to protect the officials and practicing terrorism on the Iraqi people by sounding disturbing horns and sometimes shooting bullets.

Foreign Debts

Iraq has inherited accumulated debts form the ex-regime % 80 of some of which have been dropped. These debts still constitute a heavy burden to Iraq, whatsoever its size could become after the reduction. Yet we do not see any precautions taken in consideration in the budget to settle these debts in due time or to arrange their dues in a timetable. In addition, the budget did not mention any assessment for these debts or any figures specifying them.