Understanding Iraq’s Budget: Examining the Structure, Concepts and Principles 

Introduction

Government’s manifesto, policies and goals are thoroughly translated in federal budgets that direct national revenue to different channels and manage expenditures of government ministries. According to the Iraqi constitution, the Iraqi government distributes the oil revenue exports and natural resources over the government institutions, which include the federal government, regional government, governorates, municipals and local governments. During budget formation, the government needs to reflect on ways it could generate more revenue to cover the expenditures. Distributing revenue through government channels is the most powerful economic tool to affect people’s lives and livelihoods, especially the minorities, poor and marginalized, besides the majority demographics.

Budgets are the most tangible expression of government’s real policy priorities.

International Budget Partners 

Iraqi Budget Background

The Iraqi budget on the other hand, under the previous regime, was not seen by the public since it was compartmentalized according to the inter-ministerial departments. The main purpose of this was to hide this knowledge for retaining power. The Ministry of Finance and Ministry of Planning were responsible for forming the budget. It is worth mentioning that a larger more inclusive budget was never released according to the data available today. After 2003 when the international coalition led by the U.S. invaded Iraq, they found that Ministry of Finance and many of its records have been looted or destroyed. ¹

The Coalition Provisional Authority (CPA) Order No. 95 outlined a new budgetary process using what was left of the data and information to figure a general structure of the previous budget. The role of the parliament was not included in the previous budget, however after the CPA and the formation of the new Iraqi constitution, parliament was given the role of approving the last document formed by the government ministries, the Ministry of Finance and Ministry of Planning. This was the first Iraqi federal budget containing operational expense such as salaries and pensions and the allocation of 3-4% of the budget to investments.²

The Ministry of Planning uses different accounting principles than those of the Ministry of Finance and while both are paper-based systems, they also use different budget frameworks. The government entities use cash-based, while the state-owned businesses use accrued -based accounting. This creates fiscal differences in expenditure and revenue accounts. Cash-based accounting only records financial transactions when cash is transferred, however, accrued accounting records the financial transaction and accounts for the revenues and expenditures even when cash is yet to be moved around.³

Budget Analysis

• Budget information must facilitate policy analysis and promote accountability, for these purposes budget elements classification must be according to international standards. This way the budget is unified and transparent to international bodies. This is referred to the principle of transparency.  
• Budget must contain a complete picture of government operations; therefore, all government agencies and institutions must be covered by the budget and have a unified accounting system. This is referred to as the principle of comprehensiveness and it is to enhance efficiency and effectiveness of the budget. 
• Budget “language”; bookkeeping and accounting principles must be unified across all the budget users and beneficiaries to promote understanding between ministries governing bodies.  
• Equity must be shared as public expenditure according to priorities of the government. Therefore, resources must be allocated in one common pool. This is the principle of unity. 

Who Can Benefit from Budget Analysis?  

• Civil society: Civil society includes universities, the media, development institutions and research institutions all have legitimate interest in being able to view the federal budget, the actual spendings and prospects for the next fiscal year. This is to assess the revenue-raising and spending in different sectors. Civil society is also able to play a constructive role in making sure the government engages in issuing policies, implementing them and making use of budget data and analysis for budget and policies plans. 
• Government: Government officials that are elected and part of the policy making need to be able to understand patterns, trends and gaps in inter-departmental spendings and revenue collection. This assessment will guide future policy formulations and ensure an effective and efficient use of the federal budget.  
• Legislators: The legislative body responsible for issuing laws related to the spendings of the budget need to be able to understand the details of the budget and its capacity to withhold unaccounted-spendings and make use of additional surplus in the budget.  

Accounting Principles in Iraq

To understand the details of the budget, it is important to have some historic background of the Iraqi accounting system. In the 1920s, the Iraqi accounting system was centralized and due to smaller governmental ministries operations and size, the operations and transactions could be controlled. As oil revenues increased and so did the overall government's size and capital in general, a decentralized accounting system was formed and implemented in the 1970s. After the United States Coalition interim government was formed in 2003, the accounting system was adjusted for the aim of stirring it towards an internationally approved accounting system in the future. To this day Iraqi accounting is yet to be unified and digitized.⁴

The benefit of an internationally approved accounting system is that it will promote understanding between Iraq and international entities and governments. Knowing the number of financial transactions that occur across-boarders is vital in modern economies. The internationally unified accounting will support and help grow cross-border transactions which will promote free capital flow between Iraq and the outside world. In the aim of stirring the accounting system towards an internationally accepted accounting system, Iraqi policy maker should consider the following: 

What Iraq Uses Now:

Iraqi Unified Accounting System (IUAS): All registered entities are to publish their financial statements in accordance with the Iraqi Unified Accounting System (IUAS), which is an accrual-basis system, the currency must be in Iraqi Dinar (IQD) and in Arabic.⁵

Governmental Accounting System (GAS): All entities funded by the government are to publish their financial statements in accordance with Governmental Accounting System (GAS), which is a cash-basis system, the currency must be in Iraqi Dinar (IQD) and in Arabic.⁶

What Iraq Should Use Instead: 

International Financial Reporting Standards (IFRS): A promulgated version of this international standard is released by the Iraqi Board of Accounting and Auditing Standards (IBAAS). All businesses in joint stock and private companies must use this promulgated version of international accounting standard as stated by the Iraqi Company law no. 21 of 1997 (amended in 2004). Therefore, this standard is partially adopted by the Iraqi business entities.⁷

International Public Sector Accounting Standards (IPSAS): An international system of accounting standards adopted by governments to adopt high-quality and transparent financial reporting which allows its users to hold the state entities accountable. This system is yet to be adopted in Iraq.⁸

Is a Digitized Banking System Required for These Standards to be Adopted?

IFRS is the first step towards achieving budgetary transparency for the general government: the federal government, regional government, governorates, municipal and local governments. Unless this international standard is adopted, digitization alone will not ensure complete transparency and clarity. First, the accounting principles must be united across all Iraq, so the financial statements show the same revenue and expenditure values according to accrued based accounting. Then, the IFRS provides IFRS Taxonomy which will allow the transformation of the budget elements reported by different governmental bodies to be categorized and summarized for the public stakeholders.⁹

Public Financial Management

Managing public revenue and expenditures in all the governmental spending units is a massive task. The public financial management framework sets a general direction for the budget timeline and elements considered.  

Public Financial Management
Revenue Management		Expenditure Management
Fiscal Transfers	National divisible revenue pool: This revenue is according to the national expenditures, and according to the constitution it should account for Kurdistan Region national expenditures as sovereign expenditures. These fiscal transfers are through the Iraqi Central Bank (CBI) in Baghdad and Kurdistan Central Bank in Erbil.	Public wage	-Civil service management   -Public sector reform  -This expenditure by far is the largest portion of the federal budget and directly affects the budget deficit.   -In 2023, they accounted for 88% of the total expenditures.
	In-kind expenditures: Covers programs such as food rations, fuel subsidies and medical drugs which are deducted from the common revenue pool.	Non-wage Recurrent Expenditures	-Operational expenditures  -Includes the KRG budget
	Regional Development Fund:  This fund is distributed among the governorates towards the development of the governorates. According to the Iraqi Budget Law 2023, there are no standard formula that determines this allocation in the budget.	Capital Investment	-Investing in the rebuilding, infrastructure, real estate, residency and general construction of the governorates.   - Includes the KRG budget
	Regional Development Banking Program: This allocation is for the development of the banking system. It can also serve as a contingency reserve for the banks.	Short-term liabilities and special programs	-These expenses are current.  -In 2023, they accounted for only 12% of the total expenditures.
Non-oil Revenue	Tax Administration:  Import and export Taxes Tariffs Customs and duties	Long-term liabilities	-Investment expenses from the government, foreign entities and governorates and from the Trade Bank of Iraq (TBI)
Debt Management	-Public debt management -External and internal debts

Iraq’s Basic Budget Framework

As mentioned before, the Iraq budget framework is based on Coalition Provisional Authority (CPA) Order No. 95, written for Iraq by the U.S. Administration in 2003 and 2004. The Iraqi constitution promulgates this instruction in form of laws governing the budget-generating process. The CPA brought in parliament's role in passing the budget and sets the main government body responsible for the budget formulation as Ministery of Finance. The Ministry of Planning also has a role in controlling the capital budget as a continuation of its role in the government structure of the previous regime. The items on the Iraqi budget can be categorized as:  

Current Budget 

The following are general items on the current budget: 

• Operational expenses 
• Staff salaries, wages and related expenses. 
• Travel and logistics  
• Supplies and consumables  
• Maintenance of fixed capital 
• Short-term debt expenses 
• Special programs  

Capital Budget 

The following are general items on the capital budget: 

• Fixed capital such as buildings, construction and major repairs. 
• Big infrastructures such as roads, electricity, water and public service venues. 
• Vehicles and equipment (used for a period of time). 
• All assets that are depreciated and have a useful life span of over 1 year. 

Where is the Money? 

The revenue from oil exports is held in a bank account under the name of “Iraq Development Fund” in New York City Bank. Portions of that revenue are sent to the Ministry of Finance’s account in the central bank periodically. The CPA states that the public revenue must be placed in a common pool and then distributed among the ministries in accordance with instructions from the Ministry of Finance.¹¹ This dynamic applies to all the general government entities such as ministries, governorates, regional government of Kurdistan and other related governmental bodies. In 2023, the Iraqi federal budget was released for the following 3 consecutive years (2023-2025) and updates on periodic actual expenses are reported on the Ministry of Finance website. 

Chart 1: Open budget website provides budget data and analysis of that data in an open survey. Source: Ministry of Finance Open Budget.¹²

Entities Responsible for Setting the Budget  

Annual Budget Formation

The Republic’s President

The Council of Ministers

The Prime Minister

The House of Representatives

Ministery of Finance

Ministry of Planning

General government Ministeries and regional government

Budget Calendar 

The government's accounting period begins on January 1st and ends on December 31st.
Date	Event
January 1st	The beginning of fiscal year
Prior	The Council of Ministries and the Prime Minister come up with strategies and fiscal policies for next year's budget.
May	The Ministry of Finance (operational budget) and Ministry of Planning (capital budget) conduct their annual meeting to align their books, share their reports since they operate on two accounting systems and finally create a circular setting guideline.
June	The circular setting guideline (objectives and operating rules) are released by the Ministry of Finance to spending units, which must comply with the guidelines in preparation for their budget draft for next year.  The circular is based on fiscal policies set by the Council of Ministers which consider quantitative analysis of macroeconomic framework and general assumptions underlying the budget, such as future oil price and production.  Quantified fiscal impact of new policies and fiscal risk including uncertainty of future prices for certain expenditures and variation in economic assumptions comes in this macroeconomic framework.
June	Governmental ministries budgets are formed reflecting on the ministry's expenditures, programs and goals for the coming year.
July	Spending units report back their drafted budgets to the Ministry of Finance which include expenditure estimates for the next year: Number of personnel requirements.  Operation cost estimates. Long-term liabilities. Capital expenditure separately prepared. Core activities of spending units. Short-term liabilities or portion of expenditures due in foreign currencies. Copies of these reports will be sent to the Ministry of Planning as well.
August	The Ministry of Finance set details and timeline for the ministry's budgets related to the MoF (current expenditures). The Ministry of Planning set details and timeline for the ministry’s budget related to its responsible entities. (capital expenditures)
September	Draft of the federal budget is submitted by Ministry of Finance to the Council of Ministers (CoM) for approval.
October	The federal budget is presented by the Ministry of Finance to the House of Representatives for approval.
December 31st	The end of the fiscal year.

Budget Spendings Recommendations: 

• Through surplus in the budget of some periods, the government can reinvest in projects to be able to cover deficits in other periods. Governmental spendings does not need to increase with revenue increase. This is a short-sighted plan.  
• Some non-budget spendings include spendings that comes from individuals, entities, institutions or companies on local infrastructure or public services that are not accounted for in the budget. This includes funds and grants in the private and public sector provided by foreign entities. These funds and grants for different projects are not monitored properly and not accounted for in the federal budget. This is an important part of the budget as it injects funds into different sectors of the market.  
• It is a law that 5% of the federal budget would be allocated to paying back previous borrowings and this is also deducted from the Kurdistan Regional Government share of the budget. It is important that over time these borrowings are revised and adjusted according to how much debt was borrowed and paid back. 
• The conditions set for Kurdistan Regional Government capital investment spendings are more than most Iraqi governorates. If these conditions set by the federal government on KRG budget are eliminated, the economic performance of Kurdistan and Iraq in general would improve.   

Budget Analysis Concepts 

• Variance Analysis: budgets serve as blueprint for government spendings and revenue accounts. In budgets, estimates are presented as the basis for the forecast of revenue and expenditure. For example, the Iraqi budget law in 2023, sets $70 dollar as the price of one barrel of oil and 3.5 million for oil volume production. In reality, barrels of oil are sold at different prices and volume in different periods depending on various factors, such as production capacity, changes in regional political scene and OPEC influence on oil prices. Variance analysis is used to determine favorable and unfavorable periods for oil sale revenue by comparing the budget estimates to actual numbers.  
• Leverage Analysis: The Iraqi government as an entity borrows money from international network of international entities and governments and is the major provider of the salaries and pensions to public sector employees. In order to understand how much of its assets (current, fixed) can pay for its debts, it is necessary to analyze its ratio of debt to assets periodically. On the other hand, its debts need thorough monitoring as the value of cash depreciates over time and the foreign currency exchange rates change. It is imperative to keep international ties through proper management of foreign debts. It is also important to borrow from foreign central banks to maintain foreign currency supplies in the Iraqi Central Bank.   
• Portfolio Variety: A financial concept to lower risk and maximize safe profit from investments. Revenue sources and investment projects must be diversified to guarantee return even if delays and unaccounted for situations occur to some investments or revenue sources.  

Challenges that Hinder Budget Analysis of Iraqi Budget Documents 

• Availability of data: Data on the official governmental websites are not periodically updated. This can be seen on the Ministry of Finance website, where the last published budget laws published go back to 2013 and 2014. 
• Format, Consistency and detail: Difference in accounting systems between governmental entities creates major lags in reporting expenditure and revenues of the respected inter-ministerial departments both Ministry of Finance and Ministry of Planning are responsible for.  
• Clarity and compatibility: Without a digitized and well-presented budget and financial transaction, Iraq will not achieve financial stability and the economy will fall at the mercy of changes of volatile macroeconomic.   

1. D. Savage, James. “Iraq’s Budget as a Source of Political Stability.” United States Institute of Peace, March 2013. Read More ↩︎
2. Bremer, Administrator L. Paul. “Coalition Provisional Authority Order Number 95.” United States Government Info Library, 2003. Read More ↩︎
3. Tabaqchali, Ahmed. “Gone with Muhasasa: Iraq’s Static Budget Process, and the Loss of Financial Control.” www.jstor.org, January 1, 2021. Read More ↩︎
4. وزارة المالية. “الدليل الموحد للحسابات.” وزارة المالية, جمهورية العراق. Read More ↩︎
5. IFAC. “Iraqi Union of Accountants and Auditors-International Public Sector Accounting Standards.” IFAC, 2022. Read More ↩︎
6. Please refer to reference no. 5. ↩︎
7. LLOYDS BANK. “Accounting and Accounting Rules in Iraq - International Trade Portal.” Lloyds Bank Trade, December 2023. Read More ↩︎
8. “International Public Sector Accounting Standards (IPSAS),” April 12, 2021. Read More ↩︎
9. IFRS Foundation. “IFRS Accounting Taxonomy.” IFRS, 2024. Read More ↩︎
10. UNDP. “Budget Execution Support in the Kurdistan Regional Government.” United Nations Development Programme (UNDP), April 2009. Read More ↩︎
11. Please refer to reference no. 2.  ↩︎
12. Republic of Iraq-Ministry of Finance. “Open Budget Survey Documents,” 2024. Read More ↩︎
13. Embassy of the Republic of Iraq in Washington, D.C. “A Guide to Iraq’s Government Formation Process, as Stated in the Constitution | Embassy of the Republic of Iraq in Washington, D.C.,” 2024. Read More ↩︎

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