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Pouring oil on IS: OPEC deal boosts Iraq's war-budget

Iraq is hoping a rise in oil prices will plug its $18.32 billion deficit [Getty]

Date of publication: 2 December, 2016

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Haider al-Abadi's government hopes the OPEC deal to revive oil prices will help it pay for the costly battle against Islamic State militants in Mosul.

The agreement among the world's biggest oil producers to cut production could spell a turnaround for Iraq's ailing economy.

The historic OPEC decision announced on Wednesday is set to revive oil prices, eventually generating enough revenue for the oil-reliant Baghdad government's war budget.

"If there was no deal, we would have been in a very bad situation," said Iraqi lawmaker Haitham al-Jabouri, a member of parliament's Financial Committee.

"The deal will have a positive impact on oil prices and therefore on our precarious economic situation."

"According to our own calculations, I think that the rise in oil prices, every $1 for a barrel of oil will add $1 billion to our budget. So, I think we will have more by cutting the production and increasing the price," Prime Minister Haider al-Abadi said in an interview with Associated Press on Monday.

Iraq, whose oil revenues make up nearly 95 percent of its budget, has been reeling under an economic crisis since late 2014, when oil prices began to slip from a highs of more than $100 a barrel.

The plunge began just months after Islamic State militants overran large parts of northern and western Iraq. They seized territory that prompted a huge government effort to rebuild the military and security forces and to care for a flood of people displaced from their homes.

Iraq's financial crisis has forced the government to introduce austerity measures, eliminating posts, merging some ministries, halting spending on construction projects and imposing new taxes. It has also sought loans from foreign and local lenders.

The agreement this week earned an immediate boost in oil prices with the international benchmark for crude jumping 8.3 percent, or $3.86, to $50.24. The price of oil dipped as low as $26 a barrel in February.

Iraq's projected 2017 budget - nearly 100.67 trillion Iraqi dinars (about $85.17 billion) - is currently based on a price of $42 per barrel and a daily export capacity of 3.75 million barrels.

Iraq will not change the projected 2017 budget after the OPEC agreement, but instead will use the expected increased revenues to help bridge the state's $18.32 billion deficit, Jabouri said.

He added about 32 percent of the 2017 budget will go to the ministries of Defence and Interior and other security organisations, an increase from 28 percent in this year's budget.

I call it a peace budget rather than a war budget, as much of the military expenses will go down with the liberating of Mosul this year

The budget provides for a 4.8 percent cut in salaries and pensions for government and public sector employees to finance paramilitary forces, which are made up mainly of Shia militias, and humanitarian aid for the millions of displaced by the fighting.

OPEC's second-largest producer, Iraq will reduce output by 200,000 barrels a day to 4.351 million barrels, according to Mudhir Mohammed Salih, al-Abadi's economic adviser. Iraq will not only benefit from the anticipated increase in oil prices, but also from the reduction in production costs arising from smaller output, he added.

Salih hopes defence spending will be reduced when IS militants are driven out of Mosul, the last urban bastion in Iraq still held by the extremist group.

"I call it a peace budget rather than a war budget, as much of the military expenses will go down with the liberating of Mosul this year, ending major battles," he said. "By then, we'll see more surpluses to cover other areas."

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