Iraq cuts spending as petroleum price falls

BAGHDAD -- Iraq's government will have dramatically less money to spend this year than expected because of plunging oil prices -- a situation that's already forced the country to slash rebuilding plans by 40 percent, The Associated Press has learned. As the U.S. seeks a timetable for withdrawal, cutbacks on spending and jobs could trigger heightened violence.

U.S. commanders have repeatedly warned that without speedy economic development and reconstruction, the sharp improvements in security since the U.S. troop surge of 2007 could be at risk in a country where about 38 percent of the work force is estimated to have no job or just part-time employment.

But rebuilding requires money. And with oil prices plummeting, the government has been forced to cut planned spending -- by one-third overall and 40 percent for rebuilding, Iraqi officials said -- and to consider even deeper reductions.

It's a turnaround from just months ago when U.S. lawmakers complained that Iraq was swimming in cash from high oil revenue and should do more to help itself, rather than spend U.S. taxpayer money to rebuild.

Iraq is almost entirely dependent on oil money. More than 90 percent of the government's revenue comes from oil sales. The government says it earned about $60 billion from oil sales in 2008 but hasn't said publicly how much it expects to take in this year.

Iraq's government has in the past often used money to create jobs and projects as a way to keep different political groups happy, such as the money it threw into Baghdad's Sadr City district last summer to ease Shiite tensions there. That will become harder now that revenue expectations have fallen sharply.

The government has already been forced to scale back its 2009 budget twice. The budget now is set for $53.7 billion, down from the original planned $79 billion and from an interim cut to $68.6 billion, according to the Finance Ministry.

The reductions have cut the money earmarked for reconstruction projects from $21 billion in the original budget to $12.54 billion in the latest revision, said a member of parliament's budget committee, Alaa Saadoun.

That figure had not previously been disclosed.

Officials warn that more cuts may be necessary if oil prices continue to fall. On Thursday, Iraq's finance minister urged Iraqis to save money and prepare for "hard days to come" but pledged that government salaries would not fall at least this year.

The most recent Iraqi budget was based on an assumption that oil prices would average $50 a barrel this year. This week, oil prices fell below $34 a barrel but recovered to about $44 Thursday. That is down from the high, just last summer, of $147 a barrel.

The sharp, fast decline in oil prices "has serious implications for the Iraqi economy," deputy Prime Minister Barham Saleh said recently.

Iraqi officials told the AP recently that some reconstruction projects may have to be delayed though they would provide no details. They insist no project will be canceled long term.

Instead, the Iraqis are gambling that oil prices will recover and the country's oil production will increase in coming years so they can eventually finish all planned projects. Iraq could fairly quickly bring in big revenues again if oil prices bounce back, but that may be wishful thinking in the short term because the global economic crisis has reduced demand for oil and could last a significant amount of time.

Iraq also has a cushion of about $32 billion in unspent development money from recent years, according to the Central Bank. That could help ride out the price collapse if oil prices remain low.

The country currently produces about 2.4 million barrels of oil per day, and the Oil Ministry hopes to boost exports from 1.8 million to 2 million barrels per day this year to generate more revenue. But that may be too optimistic, according to World Bank experts, because Iraq's oil industry is too dilapidated to quickly ramp up production.

"The question will be what happens if oil stays depressed going into 2010 and even beyond," U.S. Ambassador Ryan Crocker said Thursday. "This country is and will remain for some time really hydrocarbon-dependent."

Because of that, Finance Minister Bayan Jabr and other officials have warned that Iraq may need to take further austerity measures this year, unless oil prices recover.

For now, the prospect of even a slowdown in reconstruction money holds dire security implications. It is not clear if the United States would change its still-evolving plans to draw down American troops if violence in Iraq worsened. President Barack Obama said in his inaugural address that the U.S. would begin leaving Iraq to its people.

Key key danger areas include the shell-pocked streets of Mosul, where Sunni militants are still holding out; Anbar province, where Sunni tribes turned against al-Qaida; and the southern city of Basra, where U.S.-backed Iraqi forces broke the grip of Shiite militias last spring.

In those areas and more, U.S. commanders have warned that security improvements are fragile, and badly need economic development and rebuilding money to boost them.

In Mosul, Iraq's third-largest city of nearly 2 million people, police Gen. Khalid Soltan said last month that "half of the terrorists" in the city could be defeated "if we defeat unemployment," now estimated at more than 60 percent.

That's no small task in a city filled with abandoned and bullet-riddled shops, rutted streets, bomb-shattered buildings and heaps of uncollected garbage from past fighting.

Overall, Iraq still needs significant rebuilding. The U.N. estimates that more than half the country's 27 million people lack access to one or more essential services such as clean water, electricity and health care.

When oil prices were high, the Iraqi government was the target of complaints by members of Congress that the country was relying on U.S. money rather than spending its own surplus.

Last summer, the U.S. Government Accountability Office -- Congress' watchdog arm --estimated that soaring oil prices and the laggard pace of Iraqi government spending could leave Iraq with a cumulative budget surplus as high as $79 billion by the end of 2008.

That estimate was disputed by both the Iraqi government and U.S. officials here at the time. But U.S. officials have long complained that Iraq's Shiite-led government has been slow to commit enough money for reconstruction, especially in areas dominated by the Sunni minority.

Now that spending is likely to slow even more.