USA Today
December 17, 2008
Pg. 8
Fears Of Instability Rise As Oil Prices Drop
Iraq may have to slow reconstruction
By Jim Michaels, USA Today
Plummeting oil prices may force Iraq's government to slow ambitious reconstruction plans, and the country could face a budget shortfall by next summer, U.S. and Iraqi officials said.
"We're in a situation where Iraq is … potentially going to be in a deficit mode next year," said Paul Brinkley, who leads Pentagon efforts to aid Iraq's economy.
The trend worries U.S. officials who say a strong economy is needed to lock in the security gains made over the past year. "The long-term stability of the country heavily depends on a vibrant economy," Brinkley said.
Iraq, which sits on the world's third-largest oil reserves, gets at least 90% of its revenue from oil sales. Crude oil prices have dropped about 70% since July when they topped $147 a barrel.
Iraq's government is considering slowing, but not canceling, major reconstruction projects, Brinkley said. Many projects were planned during Iraq's massive oil windfall earlier this year.
Responsibility for funding most large projects has shifted to Iraq from the U.S. government.
The oil market is hard to predict and if prices increase again next year, money would pour once again into government coffers. But the size of the recent drop has Iraqi officials worried about the future.
"For next year, with the oil prices going down, we're going to have a problem," said Samir Sumaidaie, Iraq's ambassador to the United States.
If prices decline after that, "it's not even going to be enough to pay salaries, never mind reconstruction of the infrastructure," he said in a speech Tuesday.
Future stability is tied to a strong economy, U.S. officials and analysts say. "The economy's ability to be able to absorb its young people is absolutely critical," Brinkley said.
Declining revenue would probably heighten tensions between sectarian groups, said Anthony Cordesman, an Iraq analyst at the Center for Strategic and International Studies.
"When you have a large pie, it's easy to divide it up" in a way that won't alienate rival factions, he said.
Iraq's budget this year is $72 billion, including $21 billion for reconstruction.
The government planned to spend $78.9 billion next year based on oil selling at $80 a barrel. Iraq exports about 2 million barrels a day.
Iraq's government is doing a top-to-bottom review of its budget because of the falling oil prices, spokesman Ali al-Dabbagh said.
Iraq could turn to bonds next year to fund reconstruction. "Iraqis have announced no intent to deficit spend next year, but there are not a lot of choices available when one gets into a budget shortfall," Brinkley said.
Whether Iraq is sitting on a large cash surplus is the subject of dispute. A Government Accountability Office report issued this year said Iraq entered the year with a cumulative budget surplus of about $29 billion and forecast an additional $38.2 billion to $50.3 billion surplus this year.
Iraq's government has challenged those numbers. Sumaidaie said Iraq has a reserve to support the country's currency but it is controlled by the nation's central bank and is not accessible by the government.
The drop in oil revenue hit as security gains in Iraq brought a measure of stability to the country. Brinkley said Iraq attracted about $1 billion in foreign investment this year.


