Iraqi Budgets and the lack of hedging

By Fester

One of the great advantages that the Maliki government has enjoyed since 2007 had been ever increasing global oil prices.  This gave them a whole lot of money to throw around and buy off competing interest groups as well as build up primary loyalties to the Maliki government. However over the past couple of months, oil prices have collapsed, and with it, the ability of the Iraqi government to throw money at problems. 

The US Special Inspector's General has a good graph in its January 2009 report to Congress on the importance of high oil prices for Iraqi government revenue.  The most interesting thing about this graph is that it strongly implies that Iraq did not hedge its oil prices in the same manner as Mexico.  Mexico engaged in contracts which guaranteed it the option to sell oil at $70 per barrel for this fiscal year.  Those contracts were engaged when oil was above $100.  This hedge has given Mexico some fiscal breathing room and stability in its budgeting process.  It does not appear that Iraq has engaged in such a hedging strategy so their budget is much less stable and predictable. 

Musings on Iraq has been following the Iraqi government budget process and has a couple of very interesting points to make:

The original 2009 budget was set at $79.8 billion, but now is at $62.8 billion, a $17 billion reduction. The budget has been changed three times. After the second time it was cut to $59.5 billion. $2 billion was recently added to cover government salaries and benefits however. Even with the reductions Iraq is still predicted to have a 31% budget deficit according to a member of parliament’s Finance Committee....

An even bigger problem than the costs and cuts in the 2009 budget is the fact that it is based upon assumptions of the oil industry that may not come true. The revised budget estimates that world oil prices will be at $50 a barrel, and the country will export two million barrels a day, a long time goal of the Oil Ministry. In 2008 Iraq only produced 2.42 million barrels a day on average. For the last three months of 2008 it was down to 2.37 million barrels a day, almost the same amount as the last quarter of 2007. Exports averaged 1.79 million barrels a day at the end of 2008, a 3% increase from the previous quarter, but a 6% decrease from 2007. In January 2009 Iraq increased its exports to 1.89 million barrels a day, but the average price per barrel was only $37, a lower price than the world average of around $40. As the numbers show, oil production and exports have been largely stagnant since the U.S. invasion. They are also below the 2.58 million barrels a day mark set before the invasion. If the price and production goals are not met, Iraq will end up with a larger deficit than already expected.

The Iraqi government probably has sufficient cash reserves to cover this fiscal year, but what happens when they have to cut the goodie distribution network and dismantle patronage networks in a bid to balance the budget or at least keep it from going too far out of whack?