There is often confusion and misunderstanding when analysts and journalists, especially among Kurdistan region observers, try to decipher how the region’s share of the federal budget is calculated. The budget itself is a public document. Being a law ratified by the Iraqi Parliament, it is published annually in the official gazette. However, the document contains a lot of summaries and nuances that are always subject to misunderstanding unless one has followed the debates that precede the ratification of the law – drafted by the ministry of finance and approved by a simple majority at the council of ministers. To fully understand the logic of the different allocations, one needs to read the budget document with the associated tables.
The 17% that is often floated in discussions on the subject is not a straightforward percentage of the annual revenues or annual expenditures as forecast in the budget law. It is calculated based on an agreed formula. Yes it is an “agreed” formula in the same manner that the percentage 17 is an agreed percentage. It is not by law and it is not in the constitution either, as writers on Iraq often assume. But this is a subject for a future post.
In this post, I’ll attempt to explain how the KRG share of 17% has been calculated over the years, including in the latest 2015 federal budget law ratified by parliament late January. The only difference introduced this year is that the final allocations will be computed based on actual expenditures, whether they come at the end higher or lower of those forecasted in the approved law.
How the KRG budget share from the federal budget is calculated
It’s calculated in the 2015 budget law based on total budget forecast of 119.6 Trillion Iraqi Dinar, equivalent to about $102.4 billion (based on the conversion rate of $1=1166 ID used by the ministry of finance) after deduction of agreed expenditures. These agreed expenditures are:
- Sovereign expenditures: These are expenditures of state institutions such as: Parliament, Presidency, Council of Ministers, ministries of foreign affairs & defense, Federal Court, IHEC, State Audit Bureau, Interest on state foreign debt and state treasury bonds,…etc.
- Governing expenditures: Though these are called governing expenditures, they are actually state obligations and include subsidies by the state such as imported food rations, electricity, fuel, and medicine in addition to Haj and Omra duties and subsidy to grain purchases from the local producers.
- Provinces and regions development allocations: this is basically the budgets of the provincial councils which are based on population percentage in each province. The KRG receives this allocation as well and it splits it – theoretically – among the three provinces in the Kurdistan region according to population.
- Petrodollars allocations: These are allocations for oil and gas producing provinces as well as those where refineries are located that are meant to compensate them for the damages suffered as a result of the oil and gas operations. They are set by law at $5/barrel of oil produced or refined and $5 for every 500 cubic feet of natural gas produced.
The federal ministry of finance calculates the Kurdistan Region share of the budget using the following formula:
Total budget (minus) total sovereign expenditures (minus) total governing expenditures (minus) provinces and regions development allocations including KRG (minus) petrodollars allocations excluding KRG = Remaining budget.
KRG share = 17% X remaining budget (plus) KRG share of provinces and regions development allocations.
Based on the 2015 federal budget forecast, the total share of the KRG from the federal budget would be about 15.44 Trillion ID or around $13.2 billion.
How the ministry of finance dispenses the budget allocations
Annual Allocations to ministries, provinces, state institutions…etc. are dispensed monthly, in equal installments, provided the revenues are available. These are in majority (85%) revenues from the exported oil through the Gulf and the Mediterranean. Any month where shortages in revenues occur (as a result, for example, of reduction – voluntary or not – of oil exports), the ministry of finance/treasury will face a shortage in available funds to fulfill its commitments towards the monthly instalments.