Public finances in Iraq

As a consequence of over two decades of neglect and corruption by the former regime, Iraq's economy is in dire need of fiscal discipline.

The main objective of the Coalition Provisional Authority was to establish a budget for 2004. According to the CPA, the new budget provides authority for the commitment and expenditure of money by the 'Interim Government of Iraq' for 2004 and sets the fiscal framework for 2005-6.

The CPA is committed to improve Iraq's oil revenue by restoring its pre-war oil output on a sustainable basis, and raise non-oil revenue by enhancing the role of the private sector.

In the short to medium term, the CPA is placing efforts on managing oil revenue to ensure that essential services are funded and civil servants salaries are paid. In the long term, the intention is to raise non-oil revenue starting with international aid inflows.

The Iraqi governing council announced the re-introduction of custom tariffs of 5% in 2004. The EIU projects custom tariffs compounded with increased oil revenues will lead to eventual implementation of non-oil revenue raising measures that include sales tax as well as income tax. Prioritizing the role of the private sector could also lead to increase in non-oil tax revenue.

As per the CPA, the draft budget for 2003-2006 meets to the degree possible with available revenues, the recurring cost of the Iraqi government, some of the most crucial capital projects and other urgent reconstruction programs.

The budget also incorporates the social safety net which will function as replacement for Oil-For-Food Program. While the whole population receives OFFP assistance, it is estimated that more than 60% of the Iraqi population relies mainly on goods provided under the OFFP for their subsistence.

In these conditions, it is essential to establish a social safety net that targets a gradual transition from the existing OFFP to a uniform cash-based system. This social safety net is estimated to cost US$4.9bn in the budget 2004.

The budget drafted by the CPA projects total revenues of new Iraqi Dinar 19.25 trillion and a fiscal deficit of ID886bn for 2004. Oil revenues account for bulk of the revenues and are projected at ID18trillion.

The budget 2004 deficit of ID886.3bn does not rely on increased borrowing or printing money, instead the deficit will be financed from the return of unspent OFFP funds and other assets confiscated from the previous regime.

A large portion of the funds required for reconstruction over the next three years are expected to be financed through the support of the international donor and the investment community.

Though the budget for 2004 includes only the bare minimum investment needed to kickstart the economy, the budgeted expenditure for 2005 and 2006 reflects substantial reconstruction and redevelopment needs.

Revenues are projected to increase over the next few years despite the expected decline in oil prices in 2005, which is likely to be offset by higher oil export volumes. As a significant portion of the reconstruction costs are expected to be funded from the Iraqi budget in 2005, the forecasted spending is expected to rise from ID20.1trillion in 2004 to ID28.7trillion in 2005.

The increase in expenses is projected to be offset by higher oil revenues over the period 2004-2006. The budget surplus forecast is ID19.3bn for 2005 and is expected to increase to ID27.3bn in 2006.

The Development Fund for Iraq established by the United Nations Security Council resolution 1483, for the sole purpose of aiding the reconstruction of Iraq and assisting its people will also provide part of the budget revenues. The fund is managed by the CPA with the collaboration of the Interim Iraqi Authority.

The fund has accumulated a total of $1bn in proceeds from oil export sales, transfer from the OFFP account, and the funds seized in other countries that were part of the overthrown regime.