Iraq Institute for Economic Reform Oil Revenues and Fuels Subsidies April, 2006

Iraq Institute for Economic Reform

Oil Revenues and Fuels Subsidies

April , 2006


Iraq is facing a huge bill for financing reconstruction at a time where donated grants are declining.

Government revenue is very much limited to oil exports, currently Iraq cannot produce more than 2.3 mbd and export 1.6 mbd.

This export makes more than 90% of total Iraqi revenue.

Revenue Generation


Revenue Sources

rates of estimated revenues planned for the year 2006 budget according to their sources

Other taxes & duties 1.08

Ttransfers from SOFs 0.40

Interestincome 0.16

Excise duty 0.37

Pension contribution

0.32Income tax (staff)

0.19

Services fees 0.07

Construction1.32

Income tax (personnel)

0.20

Income tax on corporation

3.13

Oil revenues 92.76


planned revenues Percentage/

2005 (1)Percentage /

2006 (2) difference

between (1.2)

Oil revenues 88 92.76 4.76

Construction levy 1 1.32 0.32

Income tax (personnel) 0.22 0.2 -0.02

Income tax on corporation 0.09 3.13 3.04

Income tax (staff) 0.28 0.19 -0.09

Interest income 0.05 0.16 0.11

Transfers from SOEs 7.77 0.4 -7.37

Services fees 0.02 0.07 0.05

Other taxes & duties 1.05 1.08 0.03

Pension contribution 0.68 0.32 -0.36

Excise duty 0.58 0.37 -0.21

Revenue Sources


Distribution of Expenditure/ 2006

2006/ النسبالمئويةللنفقاتالتشغيليةلموازنةعام

بقيةالنفقاتالتشغيلية (38.84%)

بدالتالعسكريين (0.90%)

البطاقةالتموينية (10.79%))

استيرادالوقود (9.81%)

الديونالخارجية فوائدالسنداتعلىاطفاءللقطاعالخاص

(0.54%)

برنامجتنميةانعاشاالهوار (0.54%)

الرواتبوالمكافأتالتقاعدية (9.51%)

رواتبرعايةاألسرهوالرواتبالتقاعدية لدائرةالعملوالضماناالجتماعي (0.38%)

االدوية(2.08%)

تعويضاتالحربعلىالكويت (5.05%)

فوائدحوالتالخزينة (0.59%)

منحالمؤسساتالبلديةومديريتيالماء والمجاري(0.47%)

تعويضاتالضحايا (1.08%) صندوقدعمالفقراء

(1.20%)

نفقاتدعمالمزارعين (0.72%)

استيرادالطاقةالكهربائية (1.08%)

احتياطيالطوارى (5.70%)

منحالشركاتوالهيئاتالعامة (3%)

نفقاتاالنتخابات (0.67%)

هيئةدعاويحقوقالملكية (0.77%)

تنميةالمصارفاالقليمية (0.65%)

النفطالخامالمصدر كلفةانتاج(1.03%)

امانةبغداد (0.36%)

التسويةالنقديةللديونالصغيرةللقطاع الخاصفيالخارج

(0.29%)

تنميةالمشاريعاالقليمية (3.60%)

مديونيةالبنكاالسالمي (0.35%)


Expenditure

P ercentage rates of the transferable expenditures for the budget/2006

Food basket

)23%(

Other transferees expenditures

7%

Baghdad municipality

) % 1(

Treasury bills interest

)1%(

Fuel import

)21%(

Electricity import

)2% ( Farmers support expenditures

)2%(

Contingency reserves

)12% (

Election expenditures

)1%(

Grants f or corporation general

companies

)7%(

Regional bank development

)1%(

.I.P.C.C

)2% (

Cash settlement for small debts of

foreign private sector

)1%(

program of marshes restoration

development

)1%( Bonds interest on foreign debts

reconciliation for private sector

)1%( Grants f or municipality institutions

and sewage&water directories

)1%(

Victims compensations

)2%(

Regional projects development

)8%(

Islamic bank debts

)1%(

Cost of export crud oil

)2%(

Poverty support fund

)3%(


Percentage of operating and Investment Expenditures 2006

Project investment expenditures (18%)

Operating expenses (82%)

0

10

20

30

40

50

60

70

80

90

2006


Expenditure, Revenue & Defects

Expenditures 50,963

Revenues

45,392

Deficit5,571

0

10000

20000

30000

40000

50000

60000

2006

Billions


The challenges are:

a( to increase the production and the export rates,b( to increase diversity of income generation.

The current strategy is to is:

to invest in oil sectors to the permitted limit by capacity of expanding, and

to implement other measures to increase income generation through various type of taxations.

Revenue Generation


National Gross Production for the third quarter

Mining, 63.9

Transportation &

Communication, 6.7

Wholesale and Retail Trading,

6.4

Money and Inssurance, 1.4

Social and Personal

Development Services, 10.2

Building and Construction1

Transformation Industry, 1.7

Electricity and Water, 0.5

Agriculture, 7.3

National Gross Product


Reforming the Subsidies System


To reduce inefficiency, the government started to reforming the untargeted subsidies programmes and to begin the process of replacing their welfare implications with a well-prepared and efficient system of income transfers. The major two policies here are the food basket and fuel price subsidies.

The strategy is to reduce subsides gradually and as form the budget year 2006. Therefore, government for 2006 reduce the budget for both of importing fuel and for the food basket by 25%. Iraq currently spending 17% of the total budget on two subsidies )8.1% for fuel and 8.9% for food basket(.



The following actions have been recommended:

A( Fuel subsidies: increase full prices and introducing for the first time a new system ‘Social Safety Net’ to target the poor families and compensate them.

b( Food basket: The government anticipated that some time during this year to start experiment with monetising the food basket in three provinces



This reform is at present time attracting considerable This reform is at present time attracting considerable attentions. The government is already announce new prices. attentions. The government is already announce new prices. This action, as it is expected create unrest, the citizens of Iraq This action, as it is expected create unrest, the citizens of Iraq start asking the question:start asking the question:

Why is a country with rich oil reserve )such as Iraq( can not Why is a country with rich oil reserve )such as Iraq( can not afford cheap fuel?afford cheap fuel?

To address this important question, let us look to the following To address this important question, let us look to the following slides. slides.

Reforming Fuels Prices


3.3

41

24 24 24 29 27

12.05

101

0

20

40

60

80

100

120

العراق سوريا الكويت السعودية االمارات مصر البحرين ايران تركيا

البنزينالممتاز

Super Benzene

Iraq Syria Kuwait KSA UAE Egypt Bahrain Iran Turkey

Prices of the improved Benzene (gasoline

$


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

البنزينالعادي البنزينالممتاز النفطاالبيض زيتالغاز السائل اسطوانةالغاز

Regular Benzene Super Benzene White Oil Gas Oil Liquid Gas Cylinder

Consumer Contribution

Government Contribution

Percentage of Government and Consumer

Contribution to the Cost of Fuels

%100

%0


Subsidies for Locally Produced

(5)

Subsidies for Imported Fuel (6)

Crude Oil Price

Component of Fuel Subsidies (in Trillions ID)


Expenditures35,981

Revenues28,959

Budget Deficit7,023

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

The Deficit in the 2005 Budget (in Billions I.D.)


Allocation of the Budget on Select Items

Budget Allocation/ Actual Spending

( for 2005 (Trillion .D

Per Capita)Thousand ID(

Items

12 477 Fuels

4 144 Food Basket

2 59 Heath

2 70 Education

0.5 18 Public Work


Fuel Food Basket Education Health Public Work

Budget Allocation to Fuels and other Items


Thank you

Documents

Iraq Institute for Economic Reform Oil Revenues and Fuels Subsidies April, 2006