Iraq's economic predicament: Balancing billions from oil revenue against increasing debts
2023-09-29 16:00:06 - Source: Shafaq News
Shafaq News / Iraq, a nation abundant in oil resources, boasts a significant cash reserve of over $113 billion generated from its oil revenues. Nevertheless, it faces a pressing issue in the form of a substantial domestic debt estimated at 70 trillion dinars. This situation has raised concerns about the government's strategies in handling these debts, meeting interest obligations, and effectively utilizing these funds to generate new resources.
Deputy Governor of the Central Bank of Iraq (CBI), Amar Khalaf, revealed in July that foreign exchange reserves had risen to $113 billion, benefiting from improved oil prices, which contribute significantly to the nation's income, accounting for 96%. Simultaneously, Iraq's internal debt has surged to 70 trillion Iraqi dinars, roughly equivalent to $47 billion.
Additionally, Ali al-Allaq, Governor of the CBI, disclosed in August that the government has an outstanding debt of 46 trillion Iraqi dinars, which is approximately $34.6 billion.
Given the volatile nature of oil revenues based on market prices, the current government expenditure encompasses an annual allocation of $47.6 billion for salaries, supporting approximately 12 million employees. Furthermore, defense, security, and service expenditures consume around $60 billion from a total annual income of approximately $120 billion.
Iraq's debt landscape
Economic scholar Ali Daa’doush provided insights into Iraq's public debt structure, categorizing it into external and internal debt. External debt, which amounted to approximately $13 billion at the beginning of 2023, is consistently serviced and funded through deductions from oil revenues, driven by oil price increases beyond the set barrel price in the general budget.
Daa’doush also highlighted an additional external debt of $5.8 billion attributed to pre-2003 obligations, along with unresolved debts outside the Paris Club, totaling around $40 billion, which have yet to be claimed by Gulf countries.
Regarding internal debt, Iraq has amassed approximately 70 trillion dinars, with 50 trillion dinars owed to the CBI. These debts are periodically rescheduled, with interest rates determined by the government.
Daa’doush explained that the government's delay in repaying internal debt stems from its extensive commitments to investment and service projects outlined in its agenda. Notably, the planned deficit in the 2023 general budget is approximately 64 trillion dinars, further impeding the government's ability to settle internal debt, thus foreshadowing potential financial and economic challenges.
He pointed out that there was an opportunity to settle internal debt before the COVID-19 crisis, particularly between 2017 and 2019 when financial prosperity was achieved. However, this opportunity went unrealized due to the absence of a clear plan and the failure of private banks and other entities that funded internal debt to demand repayment when they had the liquidity to address banking risks.
In summary, while external debt is consistently serviced, internal debt is repaid at irregular intervals with relatively small amounts.
Reclaiming Iraq's rights
Mudhhir Mohammed Saleh, Financial Advisor to the Prime Minister, addressed Iraq's debt situation, particularly loans granted by the Iraqi Foreign Development Fund to other countries during the mid-1970s to the early 1980s. Saleh emphasized that these debts are continuously serviced, with deductions made from oil revenues as oil prices surpass the budgeted barrel price.
Saleh highlighted that most of these loans were extended to developing nations across Africa, Asia, and Latin America. Outstanding claims persist for the remaining unpaid portion of these loans, amounting to less than $2 billion.
Efforts are underway to address these debts through diplomatic channels and methods, although some may have been covered by agreements between these countries and the Paris Club, considering their status as sovereign debts belonging to groups of impoverished nations.
Iraq's debt overview
Nabil Al-Marsumi, an economics professor at the University of Basra, provided an overview of Iraq's public debt. As of the end of 2022, the country's public debt amounted to IQD 94.94 trillion, approximately $63.3 billion, with domestic debts accounting for IQD 70.5 trillion, roughly $47 billion.
Notably, the servicing of both internal and external debt, encompassing principal and interest payments, in this year's budget totals IQD 18.96 trillion, approximately $12.6 billion annually.
Al-Marsumi highlighted a critical concern—the budget is structured as trilateral rather than annual. Consequently, spending will continue into the next year, based not on 1/12 of actual expenditure but on the allocation in the previous year's budget. This may grant the government substantial leeway in internal and external borrowing, particularly with the disappearance of the cash surplus intended for this year's budget. Moreover, the budget may remain unchanged for the next two years without parliamentary authority to reject or amend it, potentially exacerbating the country's debt situation.
Enacting the trilateral budget would confer full legal authority to the government to borrow IQD 41.5 trillion, not only in 2023 but also in 2024 and 2025. This effectively means that the government could borrow internally and externally without needing parliamentary approval, amounting to IQD 121.5 trillion over the three-year budget covering 2023, 2024, and 2025.
Significant economic risks
The World Bank has labeled the Iraqi economy as "fragile," pointing out that the nation's debt has surged to approximately $152 billion.
In a report issued in August, the World Bank highlighted that the government's annual budget entails a significant increase in public expenditure, up by 59% compared to the previous year, constituting 74.3% of total expenditure. This projects a substantial fiscal deficit of IQD 51.6 trillion, equivalent to $39.7 billion, representing 14.3% of general revenues—an amount surpassing more than half of the recent standard reserves accumulated following the surge in oil prices.
The World Bank noted that Iraq's failure to diversify its income sources due to the chaotic policies of successive governments has led to a 1.1% contraction in GDP in 2023. Concurrently, the nation's public debt has risen from 53.8% to 58.3% compared to the previous year, reaching $152 billion, a $10 billion increase. External debt stands at $50 billion, while internal debt amounts to $102 billion. This reflects that government authorities have borrowed approximately $60 billion domestically over the past three years, at an annual rate of $15 billion, with annual interest rates on domestic debt ranging from 16% to 17% of the debt size.
The World Bank emphasized that Iraq's future economic prospects remain exposed to significant risks due to its excessive reliance on oil. This vulnerability makes it susceptible to oil market shocks and global demand fluctuations, as evidenced by recent declines in oil prices. Additionally, enduring challenges such as corruption, inadequate service delivery, infrastructure development, and security risks contribute to the nation's economic fragility.
The continuation of these policies by government authorities is expected to skew the country's budget in favor of political parties that have hindered development and exacerbated imbalances, despite two decades of claims that the war has ended.