Joseph A. Christoff, director of the international affairs and trade division for the U.S. Government Accountability Office, which has audited Iraq's finances, says Iraq has weathered low oil prices in the past and and is likely to do the same now. "Oil prices back in the 2005 were $43 a barrel and Iraq still ended up with a surplus at the end of that year," Christoff says. "Now you have oil prices that have declined to about $65 per barrel, but Iraq generated a heck of a lot of money in the first eight months of the year; it's still going to have a chunk of change at the end of this year to hopefully begin investing in its own infrastructure."
In a previous interview with CFR.org, Iraq's Minister of Finance Bayan Jabr Solagh said Iraq has no surplus of funds. But Christoff says the GAO's August 2008 analysis found the opposite. "Iraq has a lot of money available for its day-to-day operations that exclude the foreign exchange reserves." The GAO says Iraq spent just 14 percent of the money it allocated from 2005 to 2007 on roads, bridges, vehicles, and other critical infrastructure. Christoff says a lack of skilled workers and a reluctance to spend their own capital while U.S. dollars circulate have contributed to the budgetary inertia.
Can you give a bit of an overview of Iraq's budget, how the bulk of it is generated, and what's happened to Iraqi revenues in the last two to three years?
One of the unique qualities of Iraq's budget is over 90 percent of Iraq's revenues that it generates each year come from the oil sector, so it's heavily dependent on the oil sector as the means by which it has money to spend. And when we were asked by Senators [Carl] Levin and [John] Warner to look at Iraq's budget over the last three years, and do some projections for 2008, we worked closely with the Iraqi Ministry of Finance, the Treasury Department, the IMF, to first determine how much money Iraq had in the bank, and then secondly to try to determine how much revenue they had generated in the past. And then secondly, to do some projections for 2008.
Here's basically what we found: In a nutshell, we found in the prior three years, I mean 2005 to 2007, Iraq generated about $96 billion in revenues. Most of that, again, comes from oil revenues. They spent $67 billion and that left them with a $29 billion surplus as of December 2007. So then we had actual data on revenues and expenditures for the first six months of 2008, and then we made some projections using a variety of scenarios for the last six months of 2008, to come up with some estimates of how much money Iraq could generate, how much it would spend, and how much it would have remaining in the form of a surplus. And for that, we found that in 2008, Iraq would generate between $73 billion to $86 billion in revenues, would spend about $35 billion, and end up with a surplus of between $38 billion to $50 billion. And if you add the $29 billion that they already had in the bank at the end of 2007, we were projecting that Iraq would have a surplus that's anywhere between $67 billion and $79 billion.
Your estimates for Iraqi revenues for the second half of 2008 assumed oil prices were going to be around $100 per barrel, if not more. But oil prices are dropping [they were around $64 per barrel at this time of this interview]. How then do falling oil prices affect the projection for Iraq's revenues for 2008?
We developed six scenarios [for the first] six months of 2008. And we looked at historical data and used a price range of between $97 and $125 per barrel. I think you have a very legitimate question about prices of oil going down significantly in the past three or four weeks. How does that affect our projections? The reason why we provided a range, first of all, was to take into consideration increases or decreases in the price of oil, from the highs that Iraq was receiving in July of 2008. And I think when we look at the scenarios that we put together, and I think the scenarios are in our report, right now we believe that [Iraqi revenues] would be close to the low-end of our scenarios in terms of the amount of oil revenues that Iraq would generate and subsequent surpluses as well.
"Starting in December of 2008, a lot of oversight mechanisms are going to go by the wayside. There is at least concern on our part that [Iraq's finances] may not be as transparent."
But it seems like your projections are even lower than the low end.
You have to look at how much money Iraq generated when there were such high prices to begin with. When we look at the data through the end of August, for example, because of the high price of oil, even to the end of August, Iraq had $47 billion in revenue, oil revenue, that they generated. And even by the end of August, Iraq's price per barrel was averaging $112. So we're talking about just in the past three or four weeks that the prices of oil has gone down quite a bit. So if you have $47 billion already in the bank by the end of August, the State Department estimates that in September, Iraq generated $6 billion, they're going to generate $4.5 billion in October. So by the end of October, you have about $57 billion. Two more months remaining, you're pretty close to the low end of our scenario, which is $67 billion in generated oil revenues.
The Iraqi finance minister told me recently that Iraq does not have a surplus of cash. He broke down some of the numbers; pointing to $30 billion, give or take, held in the Central Bank of Iraq, which he said is used to support the Iraqi currency. Help me understand the discrepancy.
Let's talk about that $30 billion that Minister Jabr referred to. That $30 billion is money that Iraq's Central Bank sets aside to try to support its currency. Most countries do that. They have a foreign exchange reserve account that can be used should inflation go up or down so they can adjust the monetary system, put more money in or take money out of the economic system. That also is to control inflation. So that $30 billion is not, and was not, included in GAO's estimates. We took that into consideration, and we made a very important point in our report saying that we did not include that $30 billion because it would result in double counting.
Here's what sometimes the differences come down to--that is, what do you call an expenditure? When we look at an expenditure, we look at the data that is generated by the ministry of finance, and in a cash-based economy, which Iraq has, an expenditure is when the other ministries actually provide receipts to the ministry of finance to prove that they've spent money. I believe that the minister of finance and the minister of planning also have, and try to take in account, what are called commitments, or their plans to spend money. And we are not including these commitments, or intentions to spend, when we document how much money Iraq has actually spent. And I think that's where there is a difference in defining what an expenditure is, because the Iraqi government is including commitments or intentions to spend. We are not.
The suggestion from some U.S. politicians has been that Iraq has this windfall of cash that it isn't spending, while the U.S. is spending upwards of $10 billion a month in Iraq. Are these criticisms fair or accurate?
First of all, the United States does spend a lot of money in Iraq on military operations. But the United States has invested a sizable amount of money, $48 billion [since fiscal year 2003] to try to reconstruct Iraq and try to build up Iraq's security forces. When we looked at how much Iraq was contributing to security and some other critical sectors, like oil, water, and electricity, we found that the United States was spending a considerable amount of money on those critical sectors. Iraq, while it was committing money to those sectors, wasn't actually spending a lot on security, on the oil sector, the water sector, and the electricity sector.
I think you reported that between 2005 and April of 2008, Iraq spent just 14 percent of its allocations for oil, water, electricity and security?† Why are they allocating money but not spending it?
I want to make a very important distinction: Iraq can spend its operating budget. An operating budget is going to salaries, wages, and goods and services that you spend in less than one year. It's the investment side of the budget that Iraq has not been spending its money on. And by investment, I mean building critical and important things that the Iraqi people want: schools, housing, medical facilities, generating more electricity, repairing the dilapidated oil infrastructure. So that part of the budget is where Iraq has not been spending a lot of its money in the past. Now, the question is why. Some of the reasons that have been cited, by Iraqi officials and U.S. officials, are that number one, there are just inherent bureaucratic problems. And Iraq does not have the kind of expertise it needs in good procurement, budgeting, and contracting issues. Secondly, there's been brain-drain in the technocrats that were once part of the Iraqi government, that are now, many of them, refugees in neighboring countries. And finally, I think some would contend that because the United States has spent $48 billion to contribute to Iraq's reconstruction and stabilization, there has been less of an incentive on the part of the Iraqi government to spend its own capital money to try to rebuild its infrastructure.
"Because the United States has spent $48 billion to contribute to Iraq's reconstruction and stabilization, there has been less of an incentive on the part of the Iraqi government to spend its own capital money."
Most U.S.-based observers are focusing on troop withdrawals and the December 2008 expiration of a UN resolution authorizing the presence of foreign forces in Iraq. But the end of 2008 could also bring financial changes to Baghdad, including the end of immunity from debt repayment. What is this immunity, and what happens if it's lifted?
When the UN Security Council first passed resolutions in 2003 that established the Development Fund for Iraq, it stated that Iraq oil revenues would be protected and would remain unencumbered by any future debt that the Iraqi government would have to pay. That Security Council resolution expires in December. And so it is conceivable that after December of 2008, Iraq would have to begin [repaying] a lot of its external debt. Now, the good news is that since 2003, Iraq has received quite a bit of debt relief from the so-called Paris Club [an informal group of nineteen of the world's richest countries that assist indebted countries and creditors]. Iraq still owes money to some of its neighboring countries such as Saudi Arabia."
One thing I would like to stress is that the revenue and expenditure data that we use to base our conclusions on was data that had been audited by external sources. So, we're very comfortable and confident that the oil revenue data that we project in our report, and that we provide in our report, is data that was audited by the International Advisory and Monitoring Board, who keeps track of Iraq oil revenues. However, starting in December of 2008, a lot of oversight mechanisms are going to go by the wayside because the UN Security Council resolution that established these oversight mechanisms will no longer be in effect. For example, the Development Fund for Iraq that was established by the United Nations in 2003, the resolution expires in December of 2008. Those monies will be transferred back to the Iraqi government, and it's not clear if any kinds of audit will continue by the International Advisory and Monitoring Board. I think there is at least concern on our part that transparency that was pretty apparent in the work that we did may not be as transparent starting in January of 2009 as these external auditors from the International Advisory and Monitoring Board and the IMF no longer have the access that they currently have.