On 12 June, 2023, Iraq's Council of Representatives approved a three-year budget (2023-2025) of 198.9 trillion dinars (USD 153 billion), including the budget for Iraq's Kurdistan region. This came around three months after the government filed the draft budget, making it the largest in Iraqi history.
Budget’s Dimensions
The approval of the new Iraqi budget occurred after a two-year period during which Iraq operated without a comprehensive general budget. This delay was primarily caused by deep-seated disagreements among the country's political factions. However, the recently approved budget encompasses several significant dimensions that can be outlined as follows:
1- An expanded budget compared to 2021:
The main items in Iraq's new budget have increased in comparison to the 2021 budget, with total public revenues for the latter amounting to around 101 trillion dinars, total public expenditures amounting to around 130 trillion dinars, and the deficit amounting to around 29 trillion dinars.
The total expected revenues in the tripartite budget, on the other hand, amounted to approximately 134.5 trillion dinars (103.4 billion dollars), and the value of the estimated expenditures reached approximately 198.9 trillion dinars (153 billion dollars) per year. These figures signify a notable rise in both expected revenues and expenditures within the new budget. Of particular significance is the wages and salaries category, as the Iraqi government intends to introduce approximately 600 additional positions in the public sector. This move, however, will impose an increased burden on the budget.
2- The budget’s dependence on oil revenues:
Approximately 90% of the projected revenues in the new budget are reliant on oil, encompassing an average daily oil export of 3.5 million barrels. Out of this, 400 thousand barrels per day originate from the Kurdistan region of Iraq. The budget assumes a stable oil price of USD 70 per barrel, supposing no unforeseen circumstances arise. It is worth noting that oil revenues constituted around 80% of public revenues in the 2021 budget.
3- The stability of Kurdistan’s share:
The Kurdistan region's allocation in the new budget remained relatively unchanged at approximately 12.67%, mirroring its share in the 2021 budget. Notably, as per the March 2023 ruling by the International Chamber of Commerce arbitration court, the region is now required to transfer its oil production revenues to Baghdad. This decision granted Baghdad the authority to oversee the region's oil affairs and imposed the responsibility on the Erbil government to hand over the revenues from approximately 400 thousand barrels per day to Baghdad.
The new budget has solidified this matter, explicitly outlining in the first paragraph of Article 14 that all revenues generated from the region's oil fields must be consolidated into a single bank account. This account will receive the proceeds from the export and sale of crude oil and its by-products, without any deductions permitted.
4- Minimum compatibility:
The new budget in Iraq received approval following numerous faltered sessions amid a growing abyss of differences among political factions. Initially anticipated for approval in early 2023, the budget encountered a delay of approximately five months. The budget's approval signifies a certain level of political consensus, despite differences between the Kurdistan Democratic Party and other political factions concerning the oil export mechanism for the region. Eventually, the party agreed to endorse the budget, justifying its decision as a means to facilitate salary payments, sustain investments, and mitigate problems. This indicates the party's concession to confront the prevailing economic pressures. However, it is worth noting that Kurdistan Democratic Party’s stance significantly shifted following the budget's approval, particularly concerning the passage of paragraph 8 in Article 14, without its consent. The details of this will be elaborated upon later.
Similarly, Ammar al-Hakim, the leader of the Wisdom Movement (Al-Hikma), praised the House of Representatives' work in developing, debating, and approving the budget, urging the parliament to continue approving laws in the public interest. The budget also garnered the support and endorsement of First Deputy Mohsen al-Mandalawi and the head of Al-Sadiqoun Bloc, Qais Al-Khazaali. This was considered a significant achievement in advancing development and fostering economic prosperity.
5- Heading towards development projects:
The new budget allocated approximately 38 billion dollars per year to road development projects, the housing sector, schools, and hospitals, thereby initiating the implementation of various service projects. This is in addition to the presence of existing funds such as the Development Fund for Iraq, which has been allocated one trillion Iraqi dinars, the Development Fund for the poorest provinces, as well as dedicated development funds for Sinjar, the western regions, and the affected areas. This demonstrates the budget's attempt to develop Iraq's Sunni provinces, which have been impacted by the ISIS fight.
However, the parliament rejected Article (42) of the Budget Law, which proposed imposing taxes and fees on gasoline, black oil, and imported fuel sales for travelers at Iraqi airports. This aimed to prevent further burden on the Iraqi people, as it could potentially trigger new waves of violence and popular demonstrations in the near future.
Possible Challenges
The ratification of the new fiscal budget is a first step toward achieving development and reconstruction and addressing the economic issues that Iraq has faced in recent years. However, it should be emphasized that the budget could lead to additional conflicts, which are as follows:
1- The anger of the Kurdistan Democratic Party:
The Kurdistan region's share in the new budget fell short of its President Masoud Barzani's expectations. He had hoped for a 17% allocation, agreed upon during a Kurdish delegation's visit to Baghdad in February 2023.
The extent of the Democratic Party's anger was shown in subsequent statements about the budget, in which it affirmed that passing the law contradicted a previous agreement reached between the regional government and the Baghdad government. What enraged Masoud Barzani was the passing of paragraph 8 in Article 14, which enables Iraqi Kurdistan's provinces to petition the federal government for direct assistance if Erbil refuses to deliver a fair share.
This was raised by the Patriotic Union of Kurdistan, which has long claimed that its rival, the Kurdistan Democratic Party, refuses to give the provinces of Sulaymaniyah and Halabja a fair share of the region's budget in comparison to Erbil and Dohuk, which are controlled by the same party. This is seen as a setback to the latter's authority and a win for the National Union, which has long accused the Kurdistan Democratic Party of monopolizing the region's resources. As a result, according to Masoud Barzani, passing the budget with this provision signifies "a transgression and undermining of the entity of the Kurdistan region," adding that "the Kurdistan Region is not just a red line. It is also a death line.”
In the event of a conflict, it was agreed to form a joint committee to settle it between Baghdad and Erbil. The National Union did, however, succeed in mandating that the resolution of these conflicts is in the hands of the Federal Prime Minister. This has been interpreted as a destabilization of the Kurdistan Regional Government, led by the Kurdistan Democratic Party, in favor of Baghdad.
In fact, Barzani will be unable to change that reality, especially now that the budget has been adopted with the support of the Patriotic Union of Kurdistan and the Coordination Framework.
2- A possible dispute over the Shiite leadership:
Some fear that disputes will erupt within the Coordination Framework during the coming period, as evidenced by the dispute over the Popular Mobilization Commission's decisions within the budget law for example. But this time, the dispute is related to the struggle over Shiite leadership. Al-Sudani also made additional measures to consolidate his political balance during the next stage, including increasing his popularity on the Iraqi street at the expense of conventional leaders such as Nuri al-Maliki, the leader of the State of Law coalition, and other Shiite leaders.
3- Budget timeline:
The new Iraqi budget is for three years, which is not preferred from an economic standpoint because it may be impossible to forecast the changes that may occur over such a long period of time. Hence, economists recommend that the budget be for one year. The new budget indicated that the government would suffice to work on making some amendments to the budget paragraphs for the next fiscal years 2024 and 2025, and then submit the amendments to the parliament for approval, without the need for new legislation within the budget. On the other hand, approving the budget for three years may signal that the current government would continue for the entire duration, rather than only one year, as pledged in its government program. This may pave the way for additional disputes between political parties in the coming stage.
4- High percentage of deficit:
The fiscal deficit in the current budget reached a new high of approximately 64.36 trillion Iraqi dinars, the highest deficit of its sort in Iraq in many years. This increases the government's debt and adds more debt service costs, such as interest and installments on upcoming budgets. The deficit is expected to be about double the previous budget deficit, or around 25% of the total budget size, amounting to USD 40 billion, prompting the Iraqi government to borrow internally or externally to make up for this shortfall.
The new Iraqi budget has now come into effect, governing Iraq for the next three years. This enables Al-Sudani to implement his development plans and boost his popularity among the Iraqi people during the next period. On the other hand, the Patriotic Union of Kurdistan has successfully leveraged its strong relations with the Coordination Framework to secure its share of the region's resources without relying on the government in Erbil, in a move that weakens the Kurdistan Democratic Party’s control over the region.
