Additional information on the financial situation of Iraq

 No. E 91 RESTRICTED 66999 This report is restricted to q.se within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT ADDITIONAL INFORMATION On the FINANCIAL SITUATION of IRAQ J June 9, 1950 Economic Department  - 1 - The following are the main items contained in a statement of the budge- tary situation for the fiscal years 1949-1950 and 1950-51 submitted to the Bank by Dr. S. Haider, Iraqi Delegate, on June 7, 1950. 1. The 1949-50 Ordinary Budget deficit is estimated at ID 3 million, as compa.red \·ri th an ID 6.5 million deficit for 1948-49. The deficit for 1949- 5'0 has been financed \,d thout resorting to neN borrm~ling. The Government used the proceeds of sales of surplus stocks of \'Theat, sugar, and tobacco and used also a surplus on the Capital ;lTorks :Budget of ID 764,000. It ~!as even possible to red.eem ID 350,000 of the outstanding treasury bills. 2. ~vith regard to the 1950-51 budget, it is nO~T the agreed policy of the Iraq, Government to balance the Ordinary Budget entirely from ordinary revenue. The budget estimate as submitted to the Parliament ShO~TS a deficit of ID 2 million. Several bills "rere approved already, aiming at an increase of government revenue. Custom duties lo·Tere increased, an exp~rt \1'a."C on agri- cultural products imposed, and the sales tax on cigarettes doubled. These and other measures to be taken are expected to yield at least ID 2 million which are needed to cover the Ordinary Budget deficit. 3. A fe\·, i,reeks ago, the nevelopment Board La1~T "',as enacted", It con'" tains the follo~ring provision; All the sums paid to the Government from oil revenue shall be deposi ted to the accout'1.t of the Board '~rith the National Bank of Iraq. From no,,' on, revenues from oil are earmarked entirely for the Development Board and cease to be at the disposal of the Hinister of Finance. In the 19.50-51 Capi tal ':orks Budget, total revenues are estimated at ID 4 million, of ",hich oil royalties account for ID ),640,000 and the govern- ment share in the National Bank profi't for ID 360,000. The Development Board which is to be constituted shortly ,:.,i11 decide for ",hat projects the budgeted '" ID 4 million \-7111 be used in 1950-51.  - 2 - 4. The financial reforms introduced in Iraq represent a very important step towards a substantial improvement of the country's financial and economic position. The principle of earmarking oil revenues for development pu.rposes Nould mean that the country '~rould be able to execute a sizeable development program financed by 'rThat may be considered a secure and rising income. The second prtnciple, that the Ord~nary Budget be 'halanced, au.tomatically initiates a fiscal reform in Iraq. It m~ be assumed tha·t ordinary expenditures 't,dll increase as the country develops and. therefore, it Nill be necessary to raise more in taxes. This "Till be possible only if the present tax system is moder- nized, if the tax burden is more equally shared, and if over a period of time direct taxes are increased -to represent a greater share of the total revenue th~~ they do at present.  - 3 - mlB.J\SSY J SF ~RAQ, tvashington, D. C. ~rdinary J3udget 1949-50 In Table A (See Appendix), are given the figures of the main heaj~ of revenue and expend:i.ture for the fiscal year 1949--.50 0 The revenue figures are estimates for the whole year based on actual receipts for 11 months up to the end of February 19.50 "lith the exception of the last item under "other" which is an estimate for the ,,,holC1 year based on actual rcceiIJ"~s for only soven months!) Expendi- ture figures for the same year are cs't. 'latas based on actucl.l expendi- ture for the first seven months of tho year. Tho ordinary budget for 1949-.50 is expected to end in a deficit of approximately IoD. 3$OCO,000. Capital i~rorks Budget 1949=50 The figures for the Capital Works rudget for 1949,-.50 (~re a.lsn given in Table A. The revenue figures are actual receipts for the ,,[:'101e yearo The expondi ture figures ar.e estimates for the \"hole year based on actual expenditure for the first soven rr:onths of the year and c0mmitrnents for the rest of tho year a It ,,1111 be seen that tho Cnpi tal Harks budget is oxpecte¢1. to and wi th a surplus of nOD.rly ID 764,000 0 Il'hug the net deficit in t~le Comcined Ordinury and Ce.pital "lorks budgets will be nearly ID 2t'236f.OOO~ This deficit hns 1'een financed l>y the follO\,ringi a) Sale of surplus stocJ:::s of to(n.CCO DJ!1oun~,ing to I:J 1,986,000. b) Sale of surplus stocks of \'lh8at and bnrley nmoiID.ting to ID .551,331. c) Salo of surpl'Lls stocks of sugar amounting to ID 27 0 f OOO • The total c[1.sh received frOM the sO"lo of these stocks ar:1Ounts to nearl:r ID 2,807,000 vlhich was used mainly to finn.nce the dofici tc The 'balance 'vas nsed partly to roduco the Total of Outstanding Treasury bills by ID 350,000 nnd portly to improve the cnsh ~osition of the IraQ Treasuryo  -4- prdinnry Budget 1950-51 It is the agreed policy of tho Iraq Goverl1mOnt to balance the ordinary budget for 1950-51 entirely from Ordinary revenue, and to devote the ,,,hole of the revenue of the. cnpi tal 1'lorks budget for Cap- ital Development. The estimates of revenue ancl e:q?enditure ::/:or 1950-51 are given in Table A. It will be noted that revenue estimates a:re considerably belo,,! actual receipts for the previous years. This is specially the cnse 'lfi th the three principal heads, namely, customs and oxcise, Taxation on Agri- cul ture and property, income and si;nmps tax. 'J~he estimates for these three heads are shmm f.'!..t a figure 10"ler by SOm(;l ID 1,200,000 from actual receipts during the previous yenl~. In cnse of the TobaCCO monopoly the estim~te of ID 1,000,000 rev- enue is much nearer the figure than the figure of ID 500,000 for the previous year. The latter figure "las abnormally 10'''' due to the chenge in the accounting system in the Tobacco ~/Lonopoly Administration which necessi~ated the setting of part of the revenue of that year against the excess revenue ,·,hich 'vas paid to the government in the years 1946-47 and 1947-48. JJ The increase in "other" revenue of about ID 500.000 as compared with 1949-50 is mainly due to the fact that certain extraordinary circum- stances combined in 1949-50 to reduce several items under this head, and it is believed that these circumstances are not likely to recur •. The estimates for eJ..."})enditure are ,,,orked out in a different manner from the previous year. In 1949-.50 cost of living allo't,ances '-Tere put under a separate head. In 1950-51 these were added to the allocation of the various r,iinistries and Services. Considerable economies ".'lere made in e~1)enditure specially in Defence and Police and in other administra- tive departments, while the allocation for Education and health services ''lere substantially increased. Despi te this increase the economies that 1.1 In 1946-48 profits transferred from the Tobacco Monopoly Adminis- tration to the Treasury were based on the sale price of stocks entered into the balance sheet of the Administration. This resulted in trans- ferring profits to the Treasury in excess of the true profits realized in cash had the accounting system been based on the cost price of stocks. ,\1hen an inventory ''las taken in March of tb.is year, it ",as found nec- essary, firstly, to change this accoQ~ting system in order to get at the true profit and, secondly, to reIrcdy the situation created by the previous system by setting off a part of the true profits of 1949-50 against re- ". duction of assets ",hich has arisen from the IJrevious profi t calculation. , . - 5- 'oJ have been made in other departments reduce the total estima.ted 6A-pendi ture by ID 2,125,000 as compared Nith last year. Strict instructions Nere issued to stick to these appropriations ",hich ,·rere in fact agreed bet',,,een the r.Iinistry of Finance and the other departments and ,.rere noi imposed on the latter by the former. Nevertheless, the Ninistry of Finance frankly revealed an esti- mated deficit of some ID 2.000,000 and consequently asked Parliament ""ith the sanction of the Council of 14inisters for more revenue through aclc.i tional taxation to close the gap. Several bills "'ere introduced to Parliament by the government of ,~rhich the follm1Jing have alr~ady been passed by Parliament and became la",s during the months of April and M~: a) Customs duties 1tTere increased on luxury goods such as silk goods and motor cars and some articles ",hich are produced locally such as 'r'oollen goods and soap. b) The sales tax on cigarettes Nas doubled. c) An export tax Nas imposed on all exports except manu- factured goods at the rate of 5% of the value of such exports. d) The land property tax in to1trns '·;"rae rai st:::d from l2~1: to 15% of the rental value of land or buildings. These ne1:'T taxes and <\thers l,rhich are still in Parliament are calculated to offset the deficit entirely as it is the agreed policy of the government ':Thich has since received the concurrence of Parliament that ordinary e~penditure should be met entirely by ordinary revenue and revenues of the Capital qorks budget should be devoted entirely for Capital . forks • tI  - 6- Capital Works Budget This principle had alrea.dy received the sanctity of la1}T. A fe"T ':Teeks ago the Development Bop·rd Lata! was enacted l}Thich stipulates that all revenue received from oil is to be handed directly to the Development Board ",hieh is entrusted to study and execute development projects in Iraq. Heneefo~,ard, the revenue from the oil '~rill cease to be under the disposal of the r~inister of Finance ~~d will be entirely under the disposal of this permanent and indepenCi.ent body \vhich is composed of six permanent members in addition to the Prime IIinister \ITho is the ex~offieio president and the Minister of Finance as an ex-officio member. Hence it is not possible tv give the Capital ~1orks Budget yet,pending decision of the Development Board ldlich is going to be constituted shortly. as to the manner in ,·,hict. they l.·rill dispose of some ID 4,000,000 "Thieh they torill receive from the Oil Cornpa,.,.'1ies this year. Subsidiary Bud~ets Unfortuna tely. I do not have the figures for the Rail,q~ys; the Port of Basrah and :FA:) Bar Dredging scheme sho\'T a surplu... in their o:rdinary budgets and substantial reserves; they are both launching development t.rorks ~Thieh are fed from their surpluses and reserves. The rail1'Jays have been affected by the general economic stagnation during the last t,·TO years and their ambi tious development Norks had to be cut dOl/Tn. Previous commi tments ,-"hlch they could not meet from their Q't\Tn resources last year are going to 'be met from the ID 3 million loan l.rhich is borro1.·:ed from the Export-Oredi t Guarantee office in the Uni ted rCingdom. Any further development projects will be considered by the Develop- ment Board. The Currency Board used to pay to the Iraq Treasury some ID 500tOOO every year being the major part of the interest on British Securities "rhich constituted the major part of the Currency Cover. The Currency Board was liCluidated in July 1949 and its functions '-rere transferred to the National Bank of Iraq. Under its law t the ~ational Bank has to pay to the Treasury every year all i t3 profi ts except 10% or ID 250, 000 \}Thichever is the more. The net profits of the National Bank may come to some ID 600,000 this year.  ESTIHATES OF IRAQI GOiJERNl<ENT IS GENERAL BUDGET Fiscal Years 19497so,=:i950/51 1949/50 1950/51 as of: November, 1949 Februar,y,1950 Final --~--------------(OOO ID)--~---------------- A. ORDINARY BUDGET Reve11ues ---,................. Taxation on Agriculture, Animals and Rent of Government Propel~Y 4,150 4,210 3,766 Property Income and stamps Tax 4,800 3,580 3,100 Miscellaneous 670 705 650 Customs and Exci se 10,500 11,100 9,750 Post and Telegraphs 1,000 1,154 1,154 Other Governmen'~ Services and Instt tution~: l01:e.ccc i·ionopol:y 1,750 500 1,000 \".~ther .2:-.1.!L 11721 2~~5~ Sub-total -1. 880 2 z 25l 3 1 425_ Total Revcnme s 25,000 23,000 21,875 Ewe ndi tUre. s General Civil A.dmi!1istration 11,3?5 12,612 14,195 Defense 5,625 6,325 6,983 Police 2,000 2,340 2,597 • Emergency Expe:l.'ldi tures: Cost of Living A.11o'Wance 4,500 5,768 -----(1) Other 1 1 500 100_ Sub-total ~OQO 21 768 100 Total Expendi turtl 25,000 26,000 (2) 23,875 Balance to 1:e COVeJ."l90. py ne\.J' Taxation in 1950/51 - ~;l000 - 2"",000 i.3) B. CAPIT At l-JORKS BUDGET REfve?fL1e s Oil Royalties 2,160 3,175 3,640 Govt's Share in National Bank Profits 500 -2.QQ.. __ 360 (?) Total Revenues --2,660 3,675 4,000 Expendi turEL§ Capital Horks 1,765 1,54l Not yet availalie Army E qui proe nt 700 950 Not yet available ~ ...... 1~1scellaneous 195 l.ZJ :tIot vet available Total Expenditures 2,660 2,911 Balance f 764 '_. _ __ .' C. OVER-ALL BALANCE ============~~.-~~=J2=3~6~========~ ____ = This has been added to the various allocations above. The actual total here is ID 27,045,000 but 4~& su:ry.-J..t1S is G:;::pected 'ltlhich amounted to about ID 1,045,000 thus leaving 10 26 mi1.J.lons. This \dll be met by r.e,v u~\xation.