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Iraq: Selected Issues

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
August 2015
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Food and Electricity Subsidies in Iraq1

This note focuses on food and electricity subsidies in Iraq. Together with subsidies on fuels, they make up for the bulk of subsidies, for a total subsidy cost at least about 9 percent of GDP (2014), of which 1.8 percent from food, 3.4 percent on electricity, and 3.6 percent on fuels according to staff estimates. These figures may actually be conservative—according to the authorities, energy subsidy alone accounts for about 13 percent of GDP.2The note reviews how the food and electricity subsidy systems work, and presents some suggestions on reform, together with quantified reform scenarios. While it is difficult to plan subsidy reform in Iraq under the current challenging circumstances, the fiscal pressures from the conflict and the decline in oil prices may actually mobilize support for reform, especially with effective communication about the trade-offs between reducing subsidies and cutting other, more necessary government expenses or increasing non-oil taxation. In addition, the conflict with ISIS is undermining the distribution of in-kind food subsidies through the Public Distribution System, the main food vehicle, and may therefore accelerate reform towards more efficient social safety nets such as cash transfers. Explicit recording of subsidies on the government budget as a line item would improve transparency and facilitate reform.

A. Food Subsidies: The Public Distribution System (PDS)

Current Structure, Institutional Setup and Key Issues

1. The main food subsidy mechanism in Iraq is the Public Distribution System (PDS).3 The PDS is a ration card system through which the government provides a list of subsidized food commodities to the vast majority of the population, benefiting over seven million Iraqi households. The ration card covers disbursed quantities for a number of commodities: wheat flour (nine kilograms/card/person/month), rice (three kilograms), sugar (two kilograms), vegetable oil (one liter), and children’s milk (three packs; 450 grams each). The government’s General Company for Trade in Grains is in charge of ensuring adequate provision of food commodities to beneficiaries. The government purchases local crops from farmers after each season at administered prices, and sells them to beneficiaries through the ration cards at subsidized prices. Locally administered prices are determined by the Ministry of Agriculture and Cabinet, with the cost accounting maintained by the Ministry of Trade. Quantities imported are determined by the shortfall between the volumes needed for the PDS basket and local production. The system makes use of silos and warehouses to maintain inventories.

Food Subsidies Under the Public Distribution System (PDS)

Source: Ministry of Finance.

Composition of Food (PDS) Subsidies, 2014.

Source: Ministry of Trade.

2. Food subsidies amounted to 1.8 percent of GDP in 2014. Subsidies are calculated as the difference between revenues to the government and the cost of food purchased from local farmers or imported. Therefore, the calculation takes into account (a) local (final) selling prices to end consumers, (b) local purchase prices paid by the government to farmers, and (c) import prices. The cost of the PDS recorded in the budget stood at ID 4.8 trillion (1.8 percent of GDP) in 2014, and makes up over 60 percent of the total cost of the entire social safety net system.4

3. Most commodities are imported or have sizable import content, with wheat purchases being the most costly. Wheat subsidies comprise over 60 percent of total food subsidies under the PDS due to its particularly low selling price, with sligthly over half of all wheat purchases being imported. The second largest total subsidy relates to rice because of its subsidized sale price and high administered purchase price. Remaining products disbursed on ration cards—sugar, vegetable oil and milk products—are wholly imported and sold locally at very low prices.

4. Administered prices create significant distortions. In the case of wheat, the government’s purchase price paid to local farmers is almost double the import price, as a way to encourage farmers to grow wheat. In the case of rice, two distinct domestic varieties exist, with the higher quality’s purchase price paid to farmers set above import prices, and the lower quality’s purchase price set marginally below the import price. The local administered selling price is set at less than half of 1 percent of the purchase price, on average.

Prices for selected food commodities, 2014

(USD per unit)

Source: Ministry of Trade.

5. The administrative costs of the PDS are relatively low. Administrative costs in 2014 (defined as all costs except purchase costs) were ID 697 billion, or 0.3 percent of GDP. This amount is about 13 percent of the total PDS cost. Costs related to transportation and wages comprise over 60 percent of total administrative costs.

6. Subsidized wheat flour quantities exceed consumer needs. Wheat flour quantities disbursed on ration cards are reportedly higher than typical household consumption (which according to some estimates would amount at 6–7 kilos compared to 9 kilos of the allocation). Excess subsidized quantities reportedly find their way to the black market where they are resold at a profit margin.

7. The timing of import procurement is inefficient. Food import needs to cover part of the disbursed quantities through the PDS take place when the need arises. As such, import costs—and hence, the subsidy burden—are affected by exogenous factors, such as a surge in demand by other, price-making globally important players (e.g., Egypt and Brazil in the case of the wheat market).

8. Targeting of beneficiaries has been improved for public employees, but not for private sector employees. In recent years, the government made an effort to improve PDS targeting by excluding public sector employees with a monthly income of ID 1.5 million ($1286) or higher. This income threshold was possible to determine given that public workers’ payrolls are known and could be easily differentiated and identified based on income. However, this approach could not be applied to private sector beneficiaries—who comprise around 50 percent of total labor force—given the lack of information on their salary structures.

9. The government made other attempts to reform the PDS in the past, but the most radical changes faced difficulties. The government streamlined the list of subsidized commodities in mid-2009, de facto eliminating subsidies on tea, beans, soap, detergents, and adults’ milk, which where all available on ration cards prior to that time. However, more ambitious attempts to replace the PDS with a cash transfer system in 2012–13 led to widespread demonstrations, and the government had to backtrack, leaving the in-kind nature of the system unchanged.

10. Governance issues have historically affected the distribution of commodities. In Iraq, as in other countries with similar schemes, the cumbersome structure of the in-kind subsidy system appears to have generated governance issues. Several former officials were charged with corruption and embezzlement related to food imports (May 2009). In addition, observers have attributed the reported delays in commodities reaching distribution outlets (by up to more than one month at a time) to poor management and corruption along the delivery channel.

11. The ISIS insurgency since mid-2014 is undermining the coverage of the PDS. The intensification of the conflict with ISIS has negatively affected the coverage of the distribution system, impacting the disbursement of some products to eligible households in areas under ISIS control. ISIS’ smuggling and abuse of the system has also been reported.

Possible Reform Objectives and Estimated Savings

12. Despite past efforts, the PDS remains a costly and inefficient system and needs to be reformed further. The PDS weighs on the budget, does not target well the poor, creates price distortions, and generates waste and governance problems. The authorities are aware of these issues, and have undertaken serious reform efforts in the right direction, testing the limits of political and social acceptability of reform. Some of these efforts, such as the streamlining of covered products, have borne fruit. But the reform momentum needs to be maintained, even though a gradual approach, mindful of social impact, should be undertaken, particularly under the current, extremely difficult conditions. Reform should aim at improving overall efficiency, first of all in terms of support to needy households, but also in terms of removing distortions—such as those created by the large wedge between local purchase and import prices. These considerations may in fact be even more important than budgetary savings, which are likely to be relatively limited once the alternative social support systems are adequately funded. In the following, some broad reform ideas are laid out.

13. The reform path could follow two broad options. With a more gradual approach, the current system could be improved at the margin along its main dimensions (targeting, distributed quantities, procurement system etc.) while leaving the main architecture intact, including the support to local farmers. In alternative, the PDS could be entirely replaced with a cash transfer system which would monetize the current in-kind support and explicitly target the poorest segments of society.

Option A: Reform at the margin

  • Better target beneficiaries. Targeting should be extended to households depending on private sector employment. This would require creating a database to set an income-based eligibility threshold. Such database could be based on household income/expenditure or similar surveys (carried out by the authorities with the support of the World Bank) cross-checked against self-reporting and bank accounts. The data could be corrected taking into account geographical disparities in incomes across provinces. While improving targeting, restricting access would also bring substantial savings. Estimates based on 2014 subsidy and consumption data identify savings in the neighborhood of ID 1.1 trillion (0.4 percent of GDP) assuming current coverage is cut by one-fifth as a proxy assumption in the absence of income distribution data. These savings would increase to around ID 1.8 trillion if coverage is cut by one-third. However, creating a database would be very difficult, particularly in the current unstable and conflict-prone environment.
  • Re-set quantities in the basket. The basket could be updated based on actual dietary needs and preferences (the basket was last revised in 2009). But quantities need clearly to be revised downward for wheat, given the reported leakages to the black market. Estimates of subsidy savings assuming wheat quantities disbursed are 2 kilograms lower than their currrent levels (i.e., 7 Kg instead of 9 Kg per person) amount to ID 0.8 trillion.
  • Lower government purchase price of wheat, link it to import cost, and partially compensate farmers. The government’s policy of supporting farmers can be still pursued even if prices are lowered, which would bring substantial savings. For example, capping wheat purchase price at 25 percent above import prices (instead of being set at double the import price as at present) would yield ID 0.8 trillion in estimated subsidy savings. The price should also be linked to movements in international prices. As partial compensation, the government can assist farmers through other means, including from the rollout of a system of government discounts on seeds, fertilizers, cultivating machinery, or similar measures.
  • Improve import procurement methods, particularly with regard to timing. By relying on a risk-based system that better manages the interplay between local harvest times, consumption patterns, stocks of commodity inventories and a closer monitoring of international food prices, the government would be in better position to avoid peak purchase times created by market price makers. This is particularly important for wheat due to its high import content.
  • Strengthen governance to improve PDS distribution. Better institutional governance and accountability along the chain (from borders, to inventories/silos, to transportation, to delivery and finally at the outlet stage) through improved controls over, and monitoring of, the delivery of subsidized commodities at each stage of the process, is needed. This would necessitate a more prudent system of checks and balances at every stage of the distribution process, with clear roles and accountability frameworks, supported by stepped-up coordination among various authorities (e.g., between the Ministry of Trade, Customs Authority, Ministry of Interior).

Option B: Replace PDS with a cash transfer system

  • Moving to a cash transfer system would improve efficiency and could drastically reduce governance issues. With the PDS mechanisms indirectly undermined by the ISIS insurgency, a cash transfer system may also become the only viable approach. At the same time, a proposal to transform the PDS into a cash transfer system would also likely increase resistance to reform from farmers and vested interests. Furthermore, it would require setting up an adequate targeting system to avoid a quasi-universal transfer approach. Cross-country experience of a well-planned and gradual phasing out of in-kind subsidies in favor of cash transfers is encouraging. Iran’s experience, while focused on energy, is a case in point that could be applied to food subsidy reform in Iraq. In 2010, Iran envisaged migration to cash transfers through a gradual, five-year plan to eliminate subsidies on energy products and replace them with unconditional cash transfers to the entire population. Revenue from price increases on fuel, electricity, and gas were redistributed among population segments and sectors. In the initial phases (2011), the government cash transfer handouts were reported to be $40 a month per individual applicable to 90 percent of the population. A fraction of the revenue was also earmarked for assistance to affected industry sectors.

14. A communication and consultation strategy can support the reform of the PDS. In advance of reform initiatives, beneficiaries should be brought on board by consulting them on the strategic choice between food rations and cash transfers. Reform implementation should also be supported by a communication campaign that would point to the advantages of change and the compensating measures to alleviate the impact of the reform (including for local farmers).

15. The government should introduce mitigating measures, where needed, and strengthen social safety nets. A successful reform of the PDS should improve support to the poor. However, the poorest segments may be negatively affected if the introduction of an adequate social safety net (e.g., a cash transfer system replacing the PDS) is delayed compared to the elimination of the in-kind subsidies. The government is implementing a Social Protection Strategic Framework with the support of the World Bank, which is also intended to mitigate the effects of subsidy reform.

B. Electricity Subsidies

Current Structure, Institutional Setup and Key Issues

16. The government controls the electricity sector in Iraq. The government owns the 24 companies operating across the electricity sector (chart). Electricity generated is sold to transmission companies. The transmission phase includes two key networks: Ultra-high voltage network (400 Kilovolt), and high-voltage network (132 Kilovolts) that links the ultra-high network to distribution networks. Electric power is then bought by distribution companies, who sell it to end-consumers at administered tariff rates set by the Ministry of Electricity (MoE) through a distribution sector comprising two networks (medium-and low-power).

17. Iraq’s electricity production has increased over the years. Production increased in recent years in tandem with rising demand, reaching 70.4 million mega-watt-hours (MWH) in 2013, up from 48 million MWH two years earlier. While electricity production is somewhat diversified by source, most is generated through thermal power, whose output comprises above 75 percent of total production. Thermal power depends largely on gas powered-stations which represent 70 percent of installed capacity.

Structure of the Electricity Sector in Iraq

Electricity Production by Source: 2011-2014

(Share in total production, by year)

Source: Ministry of Electricity

Geograpic distribution of installed capacity for Gas powered stations, 2014

(Million Watt)

Source: Ministry of Electricity

18. Consumption demand has also grown strongly, driven by the government sector which is now the second largest consumer after households. Consumption rose markedly during the same period, almost doubling to 45 million MWH. Households remain the largest consumers of electricity, while commercial activity utilizes the least power. However, the relative share of the government sector’s demand in total electricity demand rose to almost one-third (from almost one-fourth), replacing receding consumption shares of industrial and commercial sectors.

Electricity Consumption Composition: 2014 and 2011

(Share in total consumption)

Source: Ministry of Electricity

19. Shifts in the structure of the economy help explain changes in sectoral consumption patterns for electricity. Sectoral output composition shows that the nominal share of the agricultural sector in non-oil GDP has declined by almost 18 percentage points over the ten year period from 2003–13. Similarly, the share of wholesale and retail trade has halved. While the share of industrial (non-oil manufacturing) output retreated by just 1 percentage point of non-oil GDP over this period, the share for building and construction has increased by 13 percent.

20. Electricity production is affected by significant losses, poor distribution networks, lack of production inputs, and reliance on liquid versus gas fuel. First, losses make up one-third of total production. Technical losses—considered at acceptable levels between 12–14 percent of production—are mainly due to obsolescence of electrical equipment (up to 30 years old in a number of power plants). Non-technical losses however, are reportedly larger, partly reflecting encroachments on the electricity grid by inhabitants from slum areas. Most of the losses are realized during the distribution phase (chart). Second, distribution of electricity is problematic from production plants to end-consumers because of the vast geographical distances between power plants and end-users (most production takes place in the south). Furthermore, some land owners refuse to allow for the construction of electricity towers on their plots of land. Third, inputs for electricity generation are sometimes unavailable. In particular, gas used in some power plants is not regularly supplied by the Ministry of Oil, causing stations to be often run on liquid fuel for generation despite having been designed to run on gas.

Electricity Losses by Phase: 2011-2014

(Share in total production, by year)

Source: Ministry of Electricity

21. Production is not sufficient to meet demand for energy, leading to blackouts. Insufficient overall production is resulting in limiting the number of hours of service delivery. For example, in Baghdad, with around eight million inhabitants, average daily consumption of electricity is reported to be limited to 12 hours a day. Some consumers are increasingly relying on electricity supplied through private generators, but this only allows running very small electrical appliances (given low amperage).

The Subsidy System and Financial Aspects

22. Electricity pricing is progressive in Iraq, but revenues are weak given currently administered low tariff rates. Tariff rates for light users of electricity (up to 1000 KWH) are roughly ID 10 ($0.009) per KWH, and the structure is progressive, with tariffs rising to ID 50 per KWH for the largest consumers. Nevertheless, overall revenues are low, covering only 10 percent of total production costs. Currently, Iraq is ranked among the cheapest Arab countries in the Middle East in terms of electricity prices.

Cross-Country Comparison of Electricity Prices, 2014 1

(In US$ / KWH)

1 Residential prices based on a 500 KWH average monthly consumption; Commercial prices on 1,500 KWH, and Industrial prices on a 30,000 KWH average monthly consumption.

Source: RCREEE.

23. Electricity costs are high amid production cost rigidities and large fuel input and import content. Electricity production costs doubled within a span of just three years (2011–13). Total and unit costs rose, respectively, from ID 3.5 to ID 7 trillion and from ID73 / KWH to ID122/KWH. Costs reflect mainly production, transmission, and distribution expenses, and include wages and salaries of personnel, material purchases (e.g., fuel and oil for generation in some power plants), and contracting services, among others. Costs also vary by generation type (gas, hydropower, etc). Rigidities prevail in the production costs structure; while the cost of input materials in the production phase comprise the largest cost, expenses related to wages and salaries in the distribution and transmission phases form the bulk of operational spending. Meanwhile, 16 percent of electricity is imported, mostly through Iran’s grid.

24. As a result, subsidies are large and rising. The cost to subsidize electricity almost tripled from 2011 to 2013, with the total electricity subsidy bill estimated by staff at ID 9 trillion in 2014 (3.4 percent of GDP and 8 percent of total budget expenditure). The estimate includes the production subsidy arising from the artificially low price of fuel used as input by the electricity grid in electricity generation.5 Electricity subsidies benefit a wide range of end-users, but particularly households (residential sector) and government, in addition to an industrial share of 15–20 percent of total subsidy, and much less for commercial activity and agricultural users. The share of subsidies going to households has declined over time while that for the government has increased (Figure).

25. The electricity sector is affected by several financial issues:

  • Non-payment of electricity tariffs by consumers. The authorities report rampant tariff evasion by end-users, often justified because of poor-quality (and intermittent) service, which forces many consumers to rely on private providers of electricity generators for their power supply. In addition, many public or state-owned entities are delinquent. Non-compliance is made easier by the poor consumption monitoring by electricity companies.
  • Ministry of Oil-Ministry of Electricity cross-debt. During 2013 and 2014, lack of reconciliation between the Ministry of Electricity and the Ministry of Oil over the exact quantities of petroleum products delivered as inputs for electricity generation has resulted in dues on the electricity sector to the budget worth ID 4 trillion (according to the MoE).
  • Inadequate coverage of electricity subsidies by the federal budget. The MoE estimates the annual cost of subsidies on the budget for electricity purposes at roughly ID 10 Trillion (which is broadly consistent with staff’s estimate). However, the MoF’s current transfers (ID 314 billion in 2014) besides other capital investments for the sector have been recently insufficient to cover MoE’s total costs, which resorts to independent borrowing and postponement of non-essential expenses. In addition, the government does not explicitly record the total subsidy costs on budget as a clear line item.
  • Investment in recent years favored production capacity over transmission and distribution. Investment in electricity over the past decade focused on the production phase, leading to bottlenecks in distribution networks over the years and inability of networks to accommodate such high (growing) production capacities.

26. The expected cost of rehabilitation and expansion of the electricity sector in the coming years is high. The MoE estimates the cost of expanding the electricity sector to meet rising electricity/power demand over the next five years at $25 billion. Of this, $6.7 billion would be needed for additional electricity generation, $8.6 billion for transmission, and $9.6 billion for distribution. However, international investment—so far mostly financed by donors such as the Japan International Cooperation Agency—remains very limited, as poor security conditions keep away international investors.

Current and Prospective Transmission and Distribution Requirements to Meet Electricity Demand by 2020

Electricity Reform Scenarios: Redesigning the Tariff Structure, Cutting Costs, and Improving Payment Compliance

27. The authorities are planning to reform electricity tariffs. Under the current tariff structure, subsidies are projected to rise to ID 10 trillion (5 percent of GDP) in 2015 and about ID 18 trillion (5.4 percent of GDP) by 2020. The authorities recognize that this subsidy level is unsustainable financially, but also that it prevents adequate investment in the sector and ultimately does not allow meeting the growing demand. As a first step to address subsidies, the government intends to raise the tariff structure and make it more progressive by introducing new consumption brackets for high-end users. This is designed to minimize the social impact on poor segments, for example on low-income households (where the tariff increase will only be marginal on the two lowest consumption brackets).6 Tariff increases will be steep for the government sector. A previous attempt to raise tariffs in the first half of 2015 had to be abandoned as Parliament increased the original tariff structure proposal by the MoE, thus generating political backlash and rejection of the reform. The proposal currently under consideration is closer to the MoE original proposal and hence more realistic (Table).

Electricity Tariffs: Proposed New, and Old Structures
Old structureNew structure
Consumption bracketTariff (ID/KWH)Consumption bracketTariff (ID/KWH)
ResidentialResidential
1-1000101-50010
1001-200020501-100010
2001-4000301001-150020
4000-501501-200040
2001-300080
3001-4000120
4001-200
IndustrialIndustrial
1-1000100.4 KV100
1001-20002011 KV100
2001-40003033 KV100
4000-50132 KV100
CommercialCommercial
1-1000101-1000100
1001-2000201001-2000125
2001-4000302001-3000150
4000-503000-4000200
4000-225
Government (Public entities)Government (Public entities)
1-1000101-5000125
1001-2000205001-10000150
2001-40003010001-20000175
4000-5020001-40000200
40001-225
AgricultureAgriculture
1-100010Unified (one) bracket100
1001-200020
2001-400030
4000-50
Source: Ministry of Electricity
Source: Ministry of Electricity

28. The proposed tariff reform scenario is expected to generate ID 5–7 trillion in gross annual subsidy savings in 2015–16, which should allow phasing out subsidies almost completely by 2019. The new tariff structure would raise the highest tariff rate to ID 200 per KWH for households, ID 225 for commercial and government sectors, and to a flat rate of ID 100 for industry and agriculture. Based on data from the authorities, the estimated gross subsidy savings to the ministry of electricity—built on a one-time tariff increase—are estimated to amount to some ID 5 trillion in 2015, and to start being almost completely removed as early as 2019. A small annual surplus starting 2020 is estimated, beyond which the electricity sector is expected to generate increasing annual surpluses. Given the bulk of consumption falls in the higher tariff brackets, average revenues increase over time and drive the reduction in subsidies, assuming all consumption brackets grow at the same rate (unit production costs are assumed to remain constant). It is noteworthy that much of the subsidy savings accruing to the government sector will be an additional cost to it as well (given higher tariffs levied), implying less savings realized on a net basis. The scenarios that follow are presented on gross basis.

29. In the following analysis, four alternative reform scenarios simulate the evolution of the subsidy bill in 2015 and over the medium term. Each simulation illustrates results from combining the new tariff structure with one other reform measure, benchmarked on the current system (baseline). Scenario A looks at impact of consumption savings, Scenario B covers improved cost efficiency and Scenario C examines improved fee payment compliance. The last scenario shows the impact of undertaking all these variants simultaneously.

  • Scenario A: Combining lower consumption (due to higher tariff rates) with higher tariffs. Given the large increases in tariffs for the middle-high users, even a very small elasticity has large effects on these users’ consumption and on revenues. For illustrative purposes, the scenario assumes an elasticity of –0.02 percent of consumption to tariff increases, with the impact concentrated in households and government, the two highest-usage categories (in the baseline and simple tariff reform scenarios, zero elasticity is assumed given the repression of demand). Results under this scenario—when compared to the baseline of no reform—yield savings estimated at ID 4.5 trillion in 2015, which is lower than under the simple tariff reform scenario (without consumption rationing) because consumption in the higher-tariff brackets is lower. Over the projection horizon, consumption grows from a lower base, and at slower annual pace compared to the baseline and simple-tariff reform scenarios. Therefore, subsidies still increase, yet compared to the baseline of no reform the base effect will still yield sizable savings on an annual basis because of the base effect.
  • Scenario B: Combining cost efficiency measures with the new tariff structure: This scenario assumes that the MoE is also able to undertake some cost saving measures leading to a 10 percent reduction in operational expenses (bringing costs down by an additional 7 percent compared to the simple tariff reform scenario). In comparison with the baseline scenario, this reduces further the subsidy bill to create estimated savings of ID 6.0 trillion in 2015. Over the medium term, subsidies are eliminated starting in 2019, and by 2020, the projected electricity sector surplus converges to ID 4 trillion.
  • Scenario C: Combining improvements in fee payment compliance with higher tariffs: This scenario assumes better compliance through, for instance, better service provision and/or more stringent penalties for noncompliance and enhanced monitoring capacity by the MoE. This scenario estimates subsidy bill savings over the baseline scenario in the neighborhood of ID 5.8 trillion over 2015, with a small surplus starting in 2019 and increasing to ID 3.8 trillion by end of the projection horizon.
  • Finally, a combined reform scenario takes into account the new tariff structure, consumption rationalization, cost efficiency and better compliance simultaneously. This scenario yields estimated savings of ID 5.7–6.7 trillion in the short term (2015–16) compared with the baseline scenario, with the subsidy burden continuing in outer years, to around ID 6 trillion by 2020.

Subsidy Estimates Under Alternative Electricity Tariff Reform Scenarios: 2015-2020 1

(Trillion Dinars; negative values denote subsidy)

1 Tariff reform based on authorities’ design of the newly proposed tariff rates structure and electricity consumption brackets.

Source: Ministry of Electricity and IMF Staff calculations.

30. These results underline that tariff reform should be deepened and complemented by reform in cost structure, institutional framework, tariff collection, investment and renewable energy.

  • The tariff structure may need to be gradually increased further in the future, and should be linked to costs or energy price benchmarks, as well as to appropriate mitigating measures.
  • Production costs need to be reduced through technical and organizational restructuring along the production-transmission-distribution chain.
  • Institutional framework
    • The true cost of subsidies needs to be reflected on-budget. The transfers from MoF to MoE reflect only a portion of the true subsidy burden on MoF accounts. Explicit recording of subsidy costs on budget is essential to give a comprehensive and transparent view of the financial interrelationship between MoF and MoE and compensate financial losses of the MoE which are the result of government policy.
    • Intra-government debts need to be addressed, and resolved, by means of an agreement among all stakeholders to settle dues simultaneously (for example through an exchange of checks).
    • Some companies in the sector are inefficient and will need to be reformed.
  • Stronger compliance for payments of electricity bills. The MoE should start strengthening its monitoring capacity, including over state entities which continue to fail to pay their dues. This should be done in close coordination and collaboration with the ministerial cabinet and legal apparatus, as well as enforcement through stringent penalties for non-compliance/evasion (including with the support of the Ministry of Interior).
  • Investment in the electricity sector. Given limited available resources to invest in new infrastructure and power plants, a portion of subsidies saved should be devoted to support investment.
  • Cooperation and coordination with other state entities. Strengthened cooperation among MoF, MoE and the Ministry of Planning on the choice and implementation of electricity-related investment projects and its funding options, would be crucial to ensure effective execution, follow-up, and to prevent recurrence of mismatches in investment spending between production, transmission and distribution phases.
  • Renewable energy sources and integration with regional electricity networks. The authorities should continue exploring how best gains from renewable energy can be harnessed, and consider prospects of integration in regional energy markets to raise electric power provision to adequacy levels (e.g., link with GCC electricity grid) and exploring synergies across other regions (such as links with the European Union to harness the different peak load times between the regions, provided such connections are viable and feasible).
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1Prepared by Amgad Hegazy.
2See analysis below for food and electricity, and MCD subsidy study for fuels (based on the price-gap approach). The full cost of fuel subsidies along the entire chain for the sector—apart from the direct product subsidy—is more difficult to measure given lack of accurate information on a product by product basis.
3The conflict with ISIS is affecting the PDS by limiting coverage in the conflict-affected areas and restricting the variety of food stuffs provided under the scheme. The description of the PDS in this section is mostly based on the pre-conflict set-up.
4Iraq’s social safety nets also include assistance to widows and martyrs, and agricultural subsidies.
5The estimate does not include some costs for which adequate information was not available, such as investment for the expansion of the existing grid, construction of new electricity lines, infrastructure, etc.
6Simulations prepared by the World Bank confirm that the impact on the lowest consumption segments would be minimal, even though data availability may affect these results.

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