The Al-Bayan Center for Planning and Studies has just published a new report from our Expert Blogger Ahmed Tabaqchali:

The current debate over the interpretation of the 2019 budget that governs the Kurdistan Regional Government’s (KRG) share of the federal budget in return for contributing 250,000 bbl/d to federal oil exports has echoes of the first conflict in April 2012 on the issue.

The adept quote above by the International Crisis Group (ICC), in its description of the relationship between the two sides leading to that conflict, is as applicable today as it was then, and over the many repeats of similar conflicts in the intervening years.

The current flare up is initiated by members of the federal parliament against the Government of Iraq (GoI) over its continuing payments to the KRG, under the terms of the 2019 budget, while the KRG has not or refused to honour its obligations under the terms of the same budget.

The internal and external dynamics of the players on both sides, the federal politicians and the regional Kurdish politicians, follow the same trajectory that led to countless struggles over this issue and others since 2003. Each side is not only blind and deaf to the other side’s needs and motives but views it with suspicion and mistrust.

Unless something breaks the mould, either an intervention by Iraq’s international stakeholders or a change in the balance of relative power between the two, both will continue to think and act in the same manner that each had acted in the past, while still expecting a different outcome for the conflict or a different response form the other side.

Read Ahmed Tabaqchali’s full report here.

By Salam Zidane for Al Monitor. Any opinions expressed here are those of the author and do not necessarily reflect the views of Iraq Business News.

Iraqi President Barham Salih (pictured) approved the controversial 2019 budget on Feb. 4.

The budget passed the parliament Jan. 23 after long debates over allocations for the Kurdistan Region and southern provinces and amendments that ignored Iraq’s obligations under an agreement with the International Monetary Fund (IMF) mandating austerity measures until 2021.

The Iraqi parliament approved draft legislation for the 2019 budget amid objections from authorities in the southern provinces. At 133.1 trillion Iraqi dinars ($112.6 billion), the budget, if passed, would be the country’s third largest, behind those for 2013 and 2014. With a 27.8% increase in spending, it would appear to blow up the IMF agreement.

Click here to read the full story.

By John Lee.

On Thursday parliament approved Iraq’s 2019 budget.

According to AFP, at $111.8 billion it is one of Iraq’s largest ever spending bills, and represents a nearly 45 percent increase from last year.

It assumes exports of 3.9 million barrels of oil per day in 2019, including 250,000 bpd from Iraqi Kurdistan, at an average of $56 per barrel (compared to $63 per barrel at the moment).

More here.

(Sources: AFP, Reuters)

By Ahmed Tabaqchali, for 1001 Iraqi Thoughts.

The proposed budget law, prepared by the prior government and adopted by the current one (with some minor revisions), resembles the ongoing negotiations on completing the formation of the government.

Just as the participants in these negotiations had left behind the pretence of responding to popular demands and are engaged in a replay of the prior squabbles over the spoils of war.

This budget too is a replay of the prior budgets and a continuation of the old rentier state practices and socialist policies.

For both cases, the old Iraqi saying “رجعت حليمة لعادتها القديمة” or “Halima has gone back to her old ways” is an apt depiction.

Click here to read the full article.

By Omar al-Jaffal for Al Monitor. Any views expressed here are those of the author, and do not necessarily reflect the views of Iraq Business News. 

Iraq’s Governorates Reject 2019 Draft Budget

Anger is escalating in Basra over the new government’s stance toward this strategic city and the demands of its people. The continued marginalization of this oil-rich city could spell a new round of unrest.

Voices have been calling for new protests and sit-ins in Basra in light of what activists describe as neglect of the province by the Iraqi central and local governments.

As part of their efforts to organize protests, Basra activists launched the Arabic hashtag that translates into “We are coming back for you.”

They called on Basra’s residents to stage mass protests in front of the South Oil Company (SOC) on Nov. 4 and to prevent its employees from entering its premises.

Click here to read the full story.

This article was originally published by Niqash. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

By Mustafa Habib.

For the first time in over ten years, Iraq managed to pass a federal budget with MPs’ votes. In the process there have been last minute deals, Kurdish losers, angry militias and deeply rooted economic problems revealed.

After heated debates that dragged on for months, Iraq’s parliament passed the national budget for 2018. For the first time since 2003, the decision was made with a majority of votes in parliament in Baghdad, rather political deal making.

As the country’s Sunni Muslim and Shiite Muslim politicians brokered a deal though, Iraq’s Kurdish MPs were left hanging, after they exited the session in protest at the Kurdish share of the budget.

Laws on the federal budget say that a draft should be submitted to the Iraqi parliament no later than November 11 every year. However, this didn’t happen due to conflicts between the various political groupings in parliament and thanks to the country’s deepening financial crisis, started by a drop-in oil prices, then exacerbated by the security crisis caused by the extremist group known as the Islamic State.

Around 90 percent of funds coming into the Iraqi budget are dependent on the country’s oil revenues. If oil stays at US$46 a barrel and exports remain at 3.8 million barrels a day, then this would all funnel into US$88 billion budget. That still leaves a shortfall of US$10 billion, according to the recently passed budget.

As recently as last week, it had not looked at all certain that the 2018 budget would pass. A number of disparate groups were opposed to the draft budget, all for their own reasons. This included Sunnis, Shiites from southern oil-producing provinces and the country’s Kurdish ethnicity.

For months previously, the Sunni politicians had been calling for more money for reconstruction in Sunni-majority provinces where the extremist Islamic State, or IS, group had held sway. The salaries of state employees in these areas had been halted since late 2014 for fear that the cash would end up in the IS group’s hands.

Still, in many of the Sunni-majority provinces, it’s been months since displaced locals started returning home – but the salaries still have not started to be paid again. Sunni Muslim MPS were pressuring the government to restart these.

“We were able to convince the government to agree to pay out those stalled salaries and to offer locals loans, so they can rebuild their homes,” Ahmad al-Jibouri, an MP for Mosul, told NIQASH. “We were also able to convince the government to reappoint those individuals who were dismissed from the army and police and to give back state service jobs to locals in those areas too.”

Article 43 of the Iraqi budget now states that “an additional US$344 million is to be allocated to provinces and areas that fell under the control of the IS group, in order to help stabilize the area and for the reconstruction of infrastructure.”

The budget then details which province gets what: Ninawa, of which Mosul is the capital, will get US$152 million, Salahaddin and Anbar will each get US$84 million and Kirkuk in northern Iraq and Diyala will both get US$17 million.

This change saw the Sunni Muslim politicians willing to agree to the budget.

Meanwhile the Shiite Muslim MPs from southern oil-producing provinces came to agree to the budget for different reasons.

Laws from 2013, about the powers of the provincial authorities, allocate part of the revenue from the oil and gas produced there to the province itself. A province should be getting 5 percent of the money from each barrel of crude oil, 5 percent from each barrel refined in the province and 5 percent from natural gas revenues. However, the Iraqi government has not dispensed money in this way for years due to its own need for the cash.

This has had an impact. For example, the southern province of Basra should be one of the country’s wealthiest, going by how much oil and gas is produced here. However, the province also has one of the highest rates of locals living in poverty.

Shiite MPs from these provinces were dissatisfied by that distribution and wanted to force a change before they would agree to vote for the 2018 budget. The government then guaranteed in Article 2 of Chapter 2 of the budget that the provinces that produce the country’s oil would get one of those 5 percents.

For example, Basra extracts oil, refines it and also produces natural gas. According to the original rules, the province should be getting 5 percent from each form of energy. If the province extracts one barrel of oil and then refines it, it should be getting 5 percent plus 5 percent. However the new rules say the province will only get one of those payments.

At least that is better than nothing, says Ammar Tumeh, a Shiite Muslim MP.

“And the budget will also give the oil-producing provinces 20 percent of any budget surplus, should the price of oil go up, beyond the US$46 per barrel,” Tumeh adds.

Of the various interest groups competing to turn the budget to their advantage, the biggest losers were the country’s Kurds. Kurdish politicians withdrew from the final session to vote on the budget in protest over the percentage their semi-autonomous, northern region was supposed to get. The Kurds run their own semi-independent region in northern Iraq; it has its own military, parliament and laws. In the past the Iraqi Kurdish region had been supposed to receive 17 percent of the federal budget, based on how much oil revenue the region contributed to the national income and on the region’s population.

The topic has been a long-running cause of conflict between Baghdad and Iraqi Kurdistan and things recently worsened, after the ill-fated referendum on independence in the northern region in September last year. And the proposed budget didn’t make things any better as the first version of the document saw the Kurdish share of the federal budget drop to around 12 percent.

The new version of the budget does not apparently specify a percentage for the Kurds but analysts suggest that it may now be sitting around 14 percent. None of this matters, of course, if the Iraqi government doesn’t start paying the money to the Kurdish authorities and paying the salaries of Kurdish civil servants.

The fact that the federal budget was passed in parliament even after the Iraqi Kurdish MPs walked out was a source of consternation for those running the Kurdish region. The Iraqi Kurdish prime minister, Nechirvan Barzani, called the budget decision a collapse of the principles of partnership in power, upon which the modern Iraqi state was built.

Now that the budget has passed, it is also far from trouble free.

Another sticking point arose almost immediately. The new budget allocates US$2.5 billion worth of defence spending like this: US$600 million for the ministry of defence, US$146 million to the ministry of interior, US$80 million to the counter-terrorism forces and US$80 million for the formerly-volunteer, mostly-Shiite Muslim militias. The rest – over US$1 billion – will go towards armaments and weaponry.

But just hours after it was approved, some Shiite Muslim politicians were already complaining. The fighters in the militias, which started as a volunteer force assembled to combat the IS group and which have evolved into an official, albeit separate, part of the Iraqi defence forces, were only listed as contractors. Their salaries are paid by the government but the budget says they are not permanent government employees, unlike soldiers in the Iraqi army. Additionally the militia fighters were getting lower salaries than those the ministry of defence was paying out.

Keeping the heroes of the militias on a different pay level and defining them as contractors was “the ultimate betrayal,” said Qais al-Khazali, who heads one of the more extreme militias, the League of the Righteous. Despite their controversial nature, members of the militias are seen by many as heroes who stepped up to protect the homeland when the official army collapsed in the face of attacks by the IS group.

The new budget also presents further problems for the future. It outlines a number of austerity measures and new taxes of the kind that have not been seen in Iraq for decades.

For one thing, the government has decided to suspend new appointments in the civil service. This could have a dramatic impact because a lot of Iraqis are employed by the government – it is the only way that many locals will ever be employed as the private sector remains very small in comparison to the government sector.

A lot of young Iraqis see a government job as their only option to get work. But the number of new openings has been falling steadily since 2013. That year there were 100,000. In 2014, there were only 37,000, in 2015, 30,000 and in 2016, 32, 000. Last year there were only a few thousand and this year there will be none at all.

It’s a decision that threatens to increase the national rate of unemployment dramatically. In 2012, the rate was estimated to be around 12 percent. By 2017, it had risen to 30 percent, thanks mainly to the chaos caused by the security crisis and the displacement of millions of Iraqis from their homes. The rate is almost bound to increase further by the end of 2018, with this new directive.

There are also new taxes for the newly unemployable to think about paying. The Iraqi government wants to impose a sales tax on the costs of using mobile phones and on Internet fees. A special tax will be added whenever an Iraqi buys mobile phone units. So for instance, if somebody buys US§10 worth of mobile phone credit, they will need to pay US§12 in the future.

The tax of US$20 added to every ticket in Iraqi airports will also continue to be charged.

Another item in the Iraqi budget that does not bode well for the future is the amount of foreign debt that the government is continuing to take on.

(Picture Credit: Essam al-Sudani)

By Salam Zidane for Al Monitor. Any views expressed here are those of the author, and do not necessarily reflect the views of Iraq Business News. 

The Iraqi government sent to parliament a revised version of the 2018 budget bill for the fourth time Feb. 11. The budget proposal includes a new 10% tax on sales at commercial centers, restaurants and barbershops.

Iraq lacks the appropriate environment to collect new taxes because sales are made in cash, not credit cards. This reality will likely impose obstacles on tax collection as both citizens and shop owners can find ways to evade taxes. This is not to mention the influence peddling in the tax collection departments, where some officials could add the taxes to their personal accounts instead of state coffers.

The government’s new tax policy comes as a result of Iraq’s 2015 agreement for a $5.4 billion loan with the International Monetary Fund.

This deal includes a reform of public finances (including the tax system) to collect 2.3 trillion dinars ($1.8 billion) under the 2018 budget through taxes imposed on telecommunications services, hotels, refreshments, cigarettes and alcohol, among other items.

In an interview with Al-Monitor, Madhar Mohammad Saleh, financial adviser to the prime minister, attributed the government’s new taxes to efforts to diversify the economy and end its reliance on oil. Saleh said, “Iraq ranks last in the world in terms of paying taxes — with the amount of tax paid equivalent to only 3% of GDP. Paying taxes is still alien to the Iraqi people.”

He added, “Paying taxes is a national duty so that every citizen could contribute to the state budget and these funds could be used for national projects that are of paramount importance to Iraqis, such as hospitals and infrastructure, among other development projects. … The imposed taxes are very low and will not pose any burden to citizens. Politicians need to find solutions to financial problems as the situation in the country is already difficult.”

The government began to impose taxes for the first time in the 2015 budget, namely Article 33, on prepaid mobile card and airplane tickets in the wake of the financial crisis that broke out in 2014, which is still ongoing. Those taxes were implemented because of low oil prices and the high cost of the battles against the Islamic State, which swept the north and west of Iraq.

Najiha Abbas, director of the General Tax Authority, said, “The proposed sales tax in the budget of 2018 is not imposed on traders and shop owners but are rather deducted from consumers.” Abbas added, “Taxation will help diversify the economy and reduce the rate of the non-oil deficit and therefore make the country less reliant on oil.”

The Finance Committee of the Iraqi parliament described the economic measures as “unrealistic and full of confusion.”

“Imposing new taxes on the Iraqi people means further impoverishing them as the country’s economy is facing major obstacles in addition to the bad economic decisions that came to the detriment of citizens,” parliamentarian Serhan Ahmed told Al-Monitor.

“These taxes will raise the prices of goods and will lead to economic stagnation and citizens are already tied up with loans. The oil funds, loans and grants have already gone to the pocket of the government, which is now seeking more funds through taxes,” Ahmed said. He called upon parliament to cancel the article on taxation from the 2018 budget bill.

Shop, hotel and barbershop owners have largely objected to the 10% tax, which will adversely affect their incomes in light of the stagnation that has been gripping the country since 2014.

Selim Khadem, a barbershop owner in Baghdad, told Al-Monitor, “The government does not provide any service of essence to the citizens while it continues to collect billions of dollars from oil every year. Now they want more money, which explains the new taxes. If this system comes into force, I will have to sell my business as I cannot afford that the government shares my profits through sales taxes.”

Khadem said, “Usually people pay taxes in exchange for good services provided by their state. In Iraq, however, people buy fake commodities at a very high price and now they will pay taxes.”

Abdul Rahman al-Mashhadani, a professor of economics at Iraqi University in Baghdad, agreed with Khadem.

“This is a bad decision by the government. The country is already gripped by an acute financial crisis that has taken its toll on citizens, causing more poverty and unemployment. With these new taxes, the already shaky trust between the people and the government has been strained,” Mashhadani told Al-Monitor. He said the new taxation system will serve as fertile ground for the rampant financial and administrative corruption due to the major imbalance in the tax system, stressing that Iraq needs a long-term strategic policy to reform its economy and not short-term palliatives.

The government has been facing many obstacles in collecting taxes, as it has said more than $8 billion a year from custom duties on imported goods have been wasted.

(Picture Credit: Adam Jones)

By Ahmed Tabaqchali (pictured), CIO of Asia Frontier Capital (AFC) Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

‘It’s Not the Donations, Stupid’: Key Points from the Kuwait Conference

With a few exceptions, the coverage of the “Kuwait International Conference for the Reconstruction of Iraq” has been confusing at best, ranging from those who thought it was a failure for raising far less than needed to those who thought that that it was a reasonable success for raising a third of what was needed.

These thoughts were not helped by an Iraqi delegation that was focused on presenting a shopping list of projects that would need $88bn in financing. In the end, it was reported that Iraq received pledges of $30bn in loans and guarantees, just over a third of the required total.

Lost in all of this is the significant document “Reconstruction & Development Framework” that the World Bank Group (WBG) prepared with the Iraqi Ministry of Planning (MoP), as well as the IMF’s work on Iraq and its presentation at the conference.

The first is a comprehensive analysis of the reconstruction requirements across all sectors of the country and provides plans for short-, medium- and long-term reconstruction needs within the framework of a long-term recovery for the country. In combination with the second, they provide the structure for funding the reconstruction effort.

The key takeaway is that the Government of Iraq (GoI) is realistic in its expectations that external sources of financings will be small, and therefore it expects to utilize its own resources over the next five years for the required reconstruction.

Please click here to download Ahmed Tabaqchali’s full report.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets. He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS). He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

A top Kurdistan Regional Government delegation, headed by Prime Minister Nechirvan Barzani held an extensive meeting with the Kurdistan Parliament Deputy Speaker Jaafar Ebrahim Eminky and heads of Parliamentary Committees of Natural Resources, Industry, Energy, Financial and Legal Affairs.

The KRG delegation included Deputy Prime Minister Qubad Talabani and a number of senior officials.

In the meeting both sides discussed a number of pressing issues related to the current situation in the Kurdistan Region. They shed light on budget options for the 2018 fiscal year, relations with Baghdad, Kurdistan oil production, mechanisms to pay back debts, fighting corruption, transparency, reforms and efforts to protect the constitutional rights of the Kurdistan Region.

The KRG and Parliament officials stressed on the importance of continued cooperation and coordination between the Kurdistan Government and Parliament and agreed that priority should be given to securing the salaries of the public sector employees, conducting reforms and auditing in the payroll systems of the Region.

Both sides also agreed that relevant Kurdistan Parliament committees visit their federal counterparts in Baghdad to lobby against passing the draft 2018 federal budget bill that significantly reduced Kurdistan Region’s share of the federal budget.

(Source: KRG)

By John Lee.

Following Iraq’s successful return to the bond markets earlier this year, it is now reportedly planning a $2 billion sovereign bond issue in 2018.

The Governor of the Central Bank of Iraq (CBI), Dr. Ali Mohsen Ismail Al-Allaq [Alak] (pictured), told Reuters that the plan is currently awaiting parliamentary approval.

He added that Iraq’s foreign currency reserves have risen from $46.5 billion at the end of 2016 to $49 billion , helped by the increase in oil prices.

The country’s budget deficit is running at around $15.4 billion to $16.3 billion.

(Source: Reuters)