Tivon and KTFA Members "CBI, EFSL, Budget and more" 7-7-2022

KTFA:

Samson:  Khazali Clarifies The Possibility Of Passing The Budget During The Era Of The Caretaker Government

7th July, 2022 Legal expert Raqiah Al-Khazali explained the possibility of passing the 2022 budget by Parliament in light of the presence of the caretaker government in power.

Khazali told "Al-Maalouma", that "the current government is a caretaker and cannot send a budget to Parliament for its legislation, because it does not have the legal right to raise bills, including the budget."

She added that "passing the budget is by going towards forming the new government, which in turn studies the budget and submits it to Parliament for a vote."

And she indicated that "the budget can be legislated during the era of the current government by voting by members of Parliament by a simple majority within the House of Representatives, and therefore these votes give the government the legal framework to raise the budget in order to vote on it."   LINK

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Tivon:  I will need you to tell us why you are so focused on passing the budget with about 5 1/2 months left. What do you need it for? Because the EFSL is or will  address the areas below this year.

The budget is not even going to be fully financed. They will only allocate 51 trillion to it. And that will be for new projects only. You might as well wait until the 2023 budget comes about.

Why is everyone trying to undercut Al-Kazemi? Let the man work his magic with the EFSL for the remainder of the year. The deadline for picking the President of The Republic has already passed. That means the GOI is currently in violation of the constitution.

You know you can't pass a budget without having a formed government. And whatever government gets seated will be the ones chosen after dissolution. Which would still leave us with who? Al-Kazemi and his cabinet.

They can't even legally form a GOI for this year. So why are you wasting energy on the budget? You know the 2022 Budget dead in the water when Maliki is trying to use it for political points. IMO

Reconstruction? Done.

Investment Projects? Done.

Payment to Farmers? Pending.

Electric Dept To Iran? Done.

Ration Cards? Done.

Final Accounts? Done.

Reducing Unemployment? Pending. 

Oil & Gas? Pending.

Citizens Entitlements? Pending.

Social Protection? Pending. 

Raising the Value of the IQD? Pending. 

Import & Exports? Done.

Agriculture? Done.

Corruption? Done.

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Wagmister:  They still need a seated government.  Fully compliant chapter 8. Dinar on the forex.  NUFF SAID….  

Tivon:  I don't know if you have been paying attention. But the CBI does not have to announce that they are Article 8. The only time we will know that is when we literally see the rate on the Forex.

Secondly even Delta back in 2018 mentioned the reason the markets along with speculators (Us) will not be tipped off in advance as to when Iraq will become Article 8 Compliant simply because it will cause manipulation in the markets by merchants, traders, or just the local market as a whole.

Maliki even mentioned the Money Mafia just a couple of days ago. Which is why things are held close to the chest. Thirdly when you look at the PDF file of the EFSL it stated that the "current government, that is exercising emergency powers have constitutional obligations to address the economic crisis.

Which means if you look at the 100 Deputies that signed on to reduce the USD exchange rate at the earliest legislative session didn't announce any requirements outside of their powers to execute the reforms that is contingent upon the government.

The formation of the government is a formality. Keep in mind it can take up to 60 days to form the government after the vote. You have to ask yourself how can Al-Kazemi request a reinstatement (USD Reduction) without waiting on the formation of the GOI?

Why hasn't he not been called out for violating any constitutional law that he can not prematurely change the exchange rate without a GOI in place first?

How was he able to get a law published in the Gazette without a formed GOI? How was he able to get Kurdistan to sign over the Oil & Gas Law without a seated GOI?

Seems to me he will keep this trend going and actually release the new rate without a formed GOI. Frank said it himself on multiple occasions that the rate can come prior to the formation of the GOI.

Well wouldn't this explain the reason of those 100 Deputies signing a contract to reduce the USD price at the earliest session which is this month.

Because they can only vote on a new government. It will still take two months to form one. Which would take us into September/October depending upon what happens next week. But the earliest legislative session starts after the holiday.

 Because if you can find any articles supporting that we need a seated GOI in order for the reinstatement we would love to see it.

Because I can not find one. If it's not in writing by any official I do not entertain it. IMO

Clare: :  Market Review: Supplementary Budget Stabilises the Market

7th July 2022  By Ahmed Tabaqchali, Chief Strategist of AFC Iraq Fund..

Supplementary Budget Stabilises the Market

The market, as measured by the Rabee Securities RSISX USD Index, was up 3.4% for the month, and up 5.1% for the year.

The last two months of profit-taking continued into the first week of June, at which point it was halted by the passage of the supplementary budget bill on June 8th. This in turn stabilised the market, whose technical picture continues to be positive, as its two-month decline has only taken it to within the middle of its two-year up-trending channel (chart below) - an uptrend that ended a brutal multi-year bear market.

While there is the potential for the market to resume its decline, the macroeconomic fundamentals discussed here two months ago support thesis that the two-year uptrend should continue even if the upward slope moderates somewhat.

This picture contrasts favourably with the majority of global markets, which underscores Iraq's attractive risk-reward profile and diversification benefits versus these markets, especially considering that Iraq's economy, unlike most economies worldwide, is a significant beneficiary of the current high oil price environment.

Passage of the Supplementary Budget Bill

The delays in government formation, following the parliamentary elections on October 10th, meant that the current caretaker government, lacking the authority to propose a 2022 budget, was restricted to spending 1/12th of the 2021 budget on a monthly basis in 2022.

While the 1/12th spending rule allowed the government to continue funding its current expenditures (salaries, pensions, social security and the provisioning of goods and services), and some of the investment spending that was initiated in 2021; it nevertheless prevented it from fulfilling its continuing investment spending requirements. Crucially the 1/12th rule prevented the government from using the bounty of higher oil prices in alleviating the harmful effects of the sharply increasing food prices on the population.

 The supplementary budget, in combination with the 1/12th spending rule for 2021, would in effect be in lieu of a 2022 budget.

 As such the total effective budget for 2022 would be about USD 92 bn, an increase of 23% above that for 2021; and made up of the 1/12th rule spending allocation of about USD 75 bn for 2022, and the supplementary budget's spending allocation of about USD 17 bn.

The supplementary budget bill, officially called the "Emergency Food Security Support" bill, has its origins in demands by parliament for extra spending measures in response to public anger over the increased cost of living, and to public pressure for the government to translate the sharply rising oil revenues into public expenditures.

 However, the bill's passage was almost imperilled by the Federal Supreme Court (FSC) ruling, in mid-May 2022, that the government lacked the authority to present a supplementary budget bill to parliament, essentially ruling that in proposing a supplementary budget bill to parliament, it was attempting to circumvent its lack of authority to present a full budget bill. Parliament's dilemma was that although it was able to propose legislation, such legislation should not have any financial implications, which prevented it from proposing its version of the supplementary budget.

 However, the political class's ingenious solution was arguing that if a proposed legislation was not objected to by the government, then it can propose legislation with financial implications - which it did by legislating its own version of the supplementary budget bil, which was welcomed by the government.

The government has the wherewithal to fund the supplementary budget and still build a substantial budget surplus that it, or a future government, can utilise to continue pursuing expansionary budgets.

Iraq's oil export sales are estimated to be at USD 117 bn for 2022, if Brent crude prices were to average USD 100 per barrel (/bbl) for the year as discussed here. Contrasting oil export sales with estimated spending for 2022 of USD 92 bn provides an idea of the expected budget surplus after accounting for the government's non-oil revenues as well. Iraq's extreme leverage to oil is manifested in the translation of every USD 1/bbl change in Brent's average price for the year, into about USD 1 bn in oil export sales, and as such in the current high oil prices environment, there is an upside to Iraq's oil export sales estimates.

Given that the year-to-date average for Brent crude is about USD 106/bbl, and that Brent future contracts imply an average of USD 111/bbl for the balance of the year, then Brent crude would average USD 109/bbl in 2022 leading to about a USD 9 bn upside to Iraq's oil export revenue estimates (chart below).

However, there is also downside to Iraq's oil export revenue estimates stemming from the inhibiting effects of higher oil and food prices on the world economy, and consequently lower global demand for oil. Magnifying these growth inhibiting effects would be the almost synchronized interest rate increases by central banks worldwide to combat the inflationary effects of the higher oil and food prices.

Conversely, the changing world order following the invasion of Ukraine, and the extent of and likely extended duration of the sanctions imposed on Russia, will alter the dynamics governing the relationship between world economic growth and global oil demand. In the short and medium terms, Western governments' need to lessen dependence on Russian oil, and to ensure their energy security, would mitigate the negative effects on global oil demand from weaker world economic growth. All of which should lead to sustained period of higher oil prices as argued here in "Oil and the Iraqi Economy", in which Iraq would be a major net beneficiary.

The passage of the supplementary budget bill in June, means that most of the USD 17 bn of increased spending would be concentrated in the second half of the year, which in the process would inject sizable liquidity into the economy in a relatively short period.

in turn, should lead to a re-acceleration in the year-over-year growth in the amount of money circulating in the economy (broad money). The timing of the supplementary budget's passing came just as broad money growth is estimated to have slowed down significantly in May 2022, as the effects of the prior stimuli were exhausted after multiple months of sharp year over year increases. All of which underscore the centrality of government spending in the economy, acting as a super-efficient mechanism for transferring oil revenues into economic activities.

Political Stalemate or Manoeuvring

The passage of the supplementary budget bill would prolong the current impasse over government formation into the near future, contributing to the political uncertainty following the surprising results of the October 2021 parliamentary elections as discussed in "Continued Momentum".

Increasing the political uncertainty, in the second week of June, the largest parliamentary bloc, and the apparent winner of the 2021 elections - the Sadrist Movement - resigned its seats in parliament in protest over the 10-month impasse over government formation.

This was seen as an opportunity for the apparent loser in the election - the Fateh Alliance - to control parliament and ultimately government formation, however emerging internal conflicts within the alliance seems to be preventing this. Nevertheless, these developments, as dramatic as they might appear to be on the surface, could be part of the continued political manoeuvring of a very tortuous government formation process.

This line of reasoning is rooted in the curious timing of the resignations immediately following the passage of the supplementary budget bill, which was championed by the resigning Sadrist Movement; and its passage in parliament was assured due to the large parliamentary block it commanded, before its resignation, with its partners.

It seems that the continuation of the status-quo, despite the continued political uncertainty, would be a preferred solution for all political parties, as it would preserve the country's ethno-sectarian parties' share of the state's resources achieved in the 2018 elections. While it's unclear if the status quo would continue for a few more weeks or months, or how it would the impasse over government formation be resolved; yet it's clear that the compromise over the passage of the supplementary budget bill would keep the wheels of government spending turning, and with that the lifeblood of the economy.

Conclusion

The market's benign response to the unexpected political developments in the month, and its continued positive reaction to the passage of the supplementary budget bill, supports the argument made above. Moreover, the market's action is similar to that following the late adoption of the 2021 budget in April 2021 - which at the time led to a continuation of its rally as discussed here in April.

While the political uncertainty would continue to dampen foreign interest in Iraq's equity market until the government's formation a few months later, Iraq's value proposition is compelling as its economy is a huge beneficiary of the high crude oil price environment. And its equity market is in the very early stages of emerging from a multi-year bear market, and as such its risk-reward profile is very attractive against most global markets.

Please click here to download Ahmed Tabaqchali's full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the Chief Strategist of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years' experience in US and MENA markets. He is a Visiting Fellow at the LSE Middle East Centre, Senior Fellow at the Institute of Regional and International Studies (IRIS), and a Senior Non-resident Fellow at the Atlantic Council. He is also a board member of Capital Investments, the investment banking arm of Capital Bank in Jordan.
LINK

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Tivon:   Thank you for posting this Clare. This is what I came for. What a Article. I read this with a big smile. Which further supports my line of thinking in everything I have said over the past few months regarding the EFSL.

This is iron clad air tight information. Especially when they mentioned the resignations once the EFSL was passed, voted, and published. Those were the proxies who seen the writing on the wall. Not to mention they reaffirmed the fact that the ESFL will prolong the powers of Al-Kazemi.

The only reason they are trying to form the GOI is to take the powers away from Al-Kazemi that he has gained even more so in the EFSL.

Which is why Maliki is trying to win over the citizens by promising something he has no authority to do when it comes to reducing the price of the USD in the 2022 Budget that literally requires a seated government to even think about trying to pass let alone actually open it.

Which would take the citizens into November or December before the thing is even open. But now that the EFSL is in the Gazette Al-Kazemi knows he can provide purchasing power since his cabinet now has the Oil & Gas Law. Which the Citizens Entitlements are intertwined into the EFSL.

This is why I will continue to say that Al-Kazemi is going to exercise his "Emergency Powers" and give the citizens what they want without waiting on anything bit the next legislative session to serve them their dues that are owed to them and the ministries.

Mazar M. Saleh stated as such just days ago which is why the government couldn't challenge the EFSL because of the paragraphs in it are mandatory obligations. Foreign interest in Iraq is something that will always be there. How many times have the IMF request Iraq to address the exchange rate?

Because even if they vote on a new GOI it will still take a few months to officially form one. Al-Kazemi will not wait on this because the emergency law requires him to address everything affecting the citizens independently of what is happening with the political impasse.

They literally said the government has the wherewithal to fund the supplementary budget ie (EFSL) and still build a substantial budget surplus that it, or a future government, can utilise to continue pursuing expansionary budgets. What more do you want?

They are spelling it out that there is a current government seated now. And what they do today another future government can pick up on once it is formed. Sounds like a plan to me.

Didn't they say about a month ago that the EFSL Stabilizes All Contracts & Procedures? Here you see it again in regards to the broader market. IMO

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Popeye7:  Imo, and just to set the record straight on this. the CBI does not have to wait on the next legislative session to actually change the rate of the dinar?... It would seem to me that in order for this supplemental food budget law to be be effective, the rate would have to change first?... Which is what the citizens are waiting for because their purchasing power is essentially very poor at the moment leading into this holiday period of Eid...

 This would help the shops, and business's within Iraq if change were to occur before this holiday period begins on the 9th (this Saturday).... After the holiday, once the next session of government proceeds, the monies from this ESFL will be divvied out with the brand new rate already enforced?...

I am asking because it would seem the rate would have to go first before ESFL is fully implemented... Imo... Thanks MM, Tivon, Clare, and all who are giving info, and their own personal insight in this...