International Network for Economics and Conflict

Budgeting is a core state function.  Effective budgeting enables the state to plan, prioritize, allocate resources, manage the bureaucracy, constrain corruption, and set fiscal policy.  Iraq, in one sense, is no different from any other state; it needs to budget in order to function.  The American-led Coalition recognized from the beginning of the occupation the importance of Iraq’s budget.  The Coalition Provisional Authority (CPA) drafted the 2003 and 2004 Iraqi budgets, and codified the Iraqi budgetary process through Order 95, the “Financial Management and Public Debt Law.”   The Order enhanced the powers of the Finance Ministry, set a timetable for formulating and approving the budget, promoted budgetary transparency, and initiated a rudimentary system of fiscal federalism.   To prevent a shutdown of the government, the Order included a critical provision that authorized the Finance Ministry to release operating funds on a monthly basis at the previous year’s level, even in the absence of a formally approved budget.  The government must pass a budget, however, to fund new and current investment projects.  By 2007, the Coalition's strategy for countering the insurgency and reconstructing the Iraqi state centered not only on a surge in American military forces, but also rebuilding Iraq’s ability to budget.  An indicator of the Coalition's concern is found in the 17th benchmark, which measured Iraq's capacity for “Allocating and spending $10 billion in Iraqi revenues for reconstruction projects, including delivery of essential services, on an equitable basis.”  To assist the Iraqis meet these targets, the Coalition attempted to build Iraqi budgeting through USAID’s Economic Governance, Tatweer, Legislative Strengthening, and Local Governance programs, and the Defense Department's Task Force on Business and Stability Operations.  The World Bank and the IMF made similar efforts.  Budget execution and rates of investment spending, in turn, became the metric for measuring the success of these and many other Coalition programs.  Getting the Iraqis to spend their budget proved to be more important than how they spent these funds and the sustainability of their investments.

Though not buying into of all of these capacity building projects, the Iraqis did take ownership of Order 95 and have employed it as the legal framework for developing their budgets since 2005.  Iraqi ownership occurred for a number of reasons, but principally important is the rise of new Iraqi stakeholders in the budgetary process who seek to make it more transparent and accountable.   By contrast, Saddam’s budgets were unpublished state secrets; budgetary decisions were made in a top-down fashion that excluded meaningful legislative deliberation and the participation of credible provincial governments.   Also important for Iraqi buy-in was the fact that the CPA layered their new rules on existing Iraqi institutions, thus making their acceptance more palatable.  By way of this process the Iraqis succeeded in passing a budget each year despite such formidable obstacles as the escalation of violence in 2005 and 2006, the Coalition's demand for increased investment spending in 2007, the wild oil/revenue fluctuations of 2008-2010, and the parliamentary stalemate of 2011.  The Iraqis even used the budget process in 2011 to achieve a temporary resolution of some the differences between Iraqis over oil payments and revenues.   In a highly significant move to end the government's budget dispute with Kurdistan and move the budget forward to final approval, Prime Minister Nouri al-Maliki honored the Kurd's contracts with foreign oil firms.  This issue of whether the central government would honor these contracts served as one of the major sources of contention between Baghdad and Kurdistan. 

Consideration of the 2012 budget began normally enough, but conditions in Iraq quickly challenged the government’s ability to ratify the budget.  First, the process began with the Finance Ministry somewhat tardily submitting its initial budget to the Cabinet for review in November.  Taking into account the World Bank and IMF's recommendations for increasing investment spending while reducing the deficit, the Ministry proposed a budget of 133.6 trillion ID ($112 billion) and a deficit of 23.9 billion ID ($20 billion).  Finding even this to be excessive, the Council of Ministers approved a revised version in December calling for 117 trillion ID ($98.4 billion) in spending, a 20 percent increase over 2011, and a deficit of 14 trillion ID ($12 billion).  The Council set the investment allocation at 37 trillion ID, 35 percent of total spending, compared to 29 percent in 2011.  The Council reduced the expected price of a barrel of oil in the Finance Ministry's draft of $90 to a more conservative $85.  The Parliament’s Financial Committee and Economy and Investment Committee later urged that the price of oil be re-estimated and raised to the global price of more than $100 per barrel.  The committees also urged the Finance Ministry to release final accounts for the 2011 budget in an attempt to promote greater transparency.   Meanwhile, provincial governments and other claimants called for additional funding for their own interests in the budget.  All of this reflected what had become the normal ebb and flow of the budget process.

Then sectarian tensions and escalating violence threatened to unravel Iraq's power sharing agreement and end any further consideration of the budget.   On December 19, Prime Minister al-Maliki ordered the arrest of his Sunni vice president, Tariq al-Hashimi, and in January an attempt was made to assassinate Finance Minister Rafe al-Essawi, also a Sunni.   Within days of the assassination attempt, Amin Hadi, a member of the Finance Committee, announced that Parliament would indeed move forward and act on the budget.   "The adoption of the budget will not require political consensus, and this issue is far from the disputes and outstanding issues, and it is settled between the political parties," said Hadi.  Moreover, “the Finance Minister Rafe al- Essawi called the House of Representatives to speed up approving the budget in 2012. There are no objections from the Iraqiya List, in this regard.”  Nevertheless, at the time of this writing, al-Maliki is arresting his opponents and the Iraqiya bloc is boycotting the Parliament; sectarian conflict is tearing the government apart.

In the midst of this bitterness, the budgetary process may offer some source of political and institutional stability.  Order 95 fortunately permits the continued funding of Iraq’s operational activities.  The Iraqiya bloc appears willing to approve the budget when and if they lift their boycott of the Parliament.  A basic fact of life in Iraq is that all factions are dependent upon the budget and the resources it allocates.  Thus, there may be a coincidence of interests that have come to rely upon the budget process as a mechanism for compromising over some of the deep divisions that plague Iraq.  The government’s budgeting, of course, is subject to improvement.  The budget needs to be formulated and approved in a timely manner.  Budgetary documents are often opaque and incomplete. 

Budget execution is inadequate and often corrupt, as suggested by the demands of Iraqi protesters during the “Arab Spring” for the sufficient provision of essential public services and honest government.   A viable, transparent, and inclusive budgetary process could contribute to a strong, stable state with a predictable policy framework and accountable officials.