Iraq and Gulf Analysis

The Economics of Federalism in the Iraqi 2012 Draft Budget

Posted by Reidar Visser on Friday, 9 December 2011 13:28

The Iraqi government has presented its draft for the annual 2012 budget law.

In light of the recent surge of interest in federalism in Sunni-majority areas of Iraq, the government’s approach to federalism issues in next year’s budget is of particular interest. The allocation of money to central government ministries, ordinary governorates, and federal regions can tell us a lot about the facts of Iraqi federalism in a setting where the legal and constitutional frameworks remain hazy.

What is clear from the 117 trillion Iraqi dinars budget is that it is the existing federal region – the Kurdistan Regional Government – that continues to get the best deal from the allocation of money. The budget envisages that Kurdistan oil exports will amount to 175,000 barrels per day in 2012, which is about 6.7% of the anticipated total Iraqi daily production of 2,6 million barrels. By way of contrast, the KRG will receive a 17% allocation of the expenditure budget (around 16 trillion ID) after the deduction of so-called “sovereign” spending covering mainly external defence and foreign diplomatic service. By increasing its exports, the KRG contribution to the national income is up from about 4.5% in 2011, but it is perfectly clear that the Kurds remain dependent on a big subsidy from Baghdad.

Compare the 16 trillion ID Kurdish share of the budget with what goes to the ordinary governorates. The oil-producing governorates will continue to get their one dollar per exported barrel fee, but this is not expected to make up more than 1.7 trillion ID in total, or just a tenth of the total Kurdish budget share. This despite the fact that a governorate like Basra contributes the lion’s share of Iraq’s total 2.6 million bpd production. Similarly, the pilgrimage fees that were introduced in 2010  will produce a mostly symbolic contribution to the governorates of Najaf, Karbala, Baghdad and Salahaddin. (In 2011 budget this income was given to the border governorates instead.) Additionally, the investment headings for all of Iraq amount to no more than 30 trillion ID in total for the entire country.

It should be clear that in seeking a federal status, many governorate politicians outside the KRG (such of those of Salahaddin) are probably envious of the generous allocations to the KRG in the budget. This in turn highlights the numerous problems related to the discrepancies between how centre–periphery relations are described in the Iraqi constitution and how things actually work. Constitutionally speaking, there should be a central government role in areas of shared government such as health and education. However, in these areas the Kurds actually maintain full sovereignty and do not pay for central government services. They are able to do this because their autonomy (and institutional capacity) has evolved gradually since 1992. If Salahaddin and Basra were to become federal regions in the near future, they would have to build their own health and education sectors from scratch if they were to maintain the Kurdish argument about paying for “sovereign expenses” only.

The budget signals a central government intention to deliver more of the same in 2012: Generous allowances to the Kurds and a relatively centralised government formula for the rest of Iraq south of Kurdistan. Is it realistic to predict the secession of Kurdistan when their current 6.7% of the Iraqi oil production gets closer to the 17% rate with which their share of the expenditure budget is currently determined?

5 Responses to “The Economics of Federalism in the Iraqi 2012 Draft Budget”

  1. Sadoon said

    “…which is about 6.7% of the anticipated total Iraqi daily production of 2,6 million barrels.”

    2.6 million barrels per day referrs to exports, not production. The latter is currently at ~2.9 million bpd and is expected to increase to, I believe, 3.4 million bpd next year.

  2. Reidar Visser said

    If the total reaches 3.4 bpd it means Basra is contributing even more and the KRG relatively speaking less…

  3. Sadoon said

    Much of next year’s projected increase is putatively coming from a new pipeline that will be inaugurated December 25th. The new pipeline will add capacity to the port of Basra. So yes, Barsa, as always, will contribute a greater share to next year’s revenues.

  4. Mohammed said

    HI Reidar:

    Per Iraq’s constitution, is it not the general principle that the amount of federal or “oil” money that is trickling down to each governorate or federal region be shared in a manner that is proportional to its respective population? Thus, the kurds claim to have a population of about 4.6-4.7 million (roughly 15% of the total iraqi population) and the 17% allocation seems to be about right. Of course, no oil-gas law has yet to be passed, but until that happens, what in practice are other regions (governorate/non-federal regions) receiving as compared to their relative population sizes?

    regards,
    Mohammed

  5. Reidar Visser said

    Mohammed, there are two issues here:

    1. The Kurdish 17% share has repeatedly been criticised by other parties for being too high (remember technically speaking it relates to the KRG areas only, not total Kurdish share of the population). As you can well imagine, the Kurds claim that the percentage is too low…

    2. The constitution says the distribution of oil income should be “just” in the sense of proportional per capita distribution in all of the country, with provision for special subsidies for regions that were particularly hurt by the former regime.

    What citizens of Basra will ask themselves is why the KRG with its around 4 million people is getting something that corresponds more or less to their share of the population (one may quarrel about the exact proportion but it is probably in the 15-20% range) whereas Basra with 2.5 million are getting a lot less.The idea of remuneration for production is not constitutionally acknowledged, but it has become a centrepiece of regionalist agitation in the south.

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