Iraq and KRG reach deal on 2021 budget

Baghdad has reached a deal with the Kurdistan Regional Government (KRG) in northern Iraq over the 2021 economic budget, which could pave the way for its approval within a week, according to finance minister Ali Allawi.

"The ministry reached an agreement with [the Kurdistan region] on the 2021 budget, and the present delegation is discussing its allocations for the year 2020," Allawi was quoted as saying by state-owned news agency Ina.

The draft budget — which requires parliamentary approval — assumes an oil price of $42/bl next year and crude exports of 3.25mn b/d. It could now reach parliament for a vote "within a week", Allawi said.

The 2021 draft budget is based on oil revenues of 73 trillion Iraqi dinar ($60.9bn), representing only 80pc of total government revenues. This is down from as high as 90pc in some previous budgets.

But Allawi did not address the issue of KRG oil exports — an issue which has caused delays to the progression of the draft budget. He only said "the Kurdistan region exports its oil at prices that are less than [state-owned marketer] Somo oil by $5/bl to $7/bl."

The draft budget states that the KRG must hand over 250,000 b/d of crude to Somo in order to receive its share of the federal budget, a clause that has long been a point of contention between Baghdad and Erbil.

The KRG has said it is unable to hand this over to Somo because of its long-term contracts with trading companies that previously provided loans, an Iraqi official told Argus last week, adding that politicians would need to find financial solutions in order to move forward.

Under the draft budget, Baghdad has agreed to pay transport costs for this 250,000 b/d of crude through the KRG export pipeline to the Turkish port of Ceyhan, in addition to 100,000 b/d of Kirkuk crude that the federal government currently exports through the pipeline. KRG crude exports have averaged around 415,000 b/d so far this year, which means it would have to pay the transport costs for the remaining 165,000 b/d itself.

Another sticking point has been plans by the government to devalue the Iraqi dinar in an attempt to help it navigate the liquidity crisis that was brought on by the collapse in oil prices earlier this year. A decision to move ahead with the plan was taken by the central bank yesterday, announcing that it had set the new rate at ID1,450 per dollar.

"The central bank will add a margin to the specified price," Allawi said. "The margin that the central bank will add will not be large and may reach ID1,490."

This is down from the earlier exchange rate of ID1,182 that had been in place since December 2015. A weaker dinar should help the government's balance sheet. The high cost of salaries has been difficult for Baghdad to cover in a low oil price environment.

By Adal Mirza and Rowena Edwards