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Iraq To Cut Budget Spending After Oil Price Falls

Both Husayn al-Shahristani (left) and Bayan Jabr (center) said spending will have to be cut.
AMMAN (Reuters) -- Iraq will cut 2009 state spending to $67 billion from a previous projection of $80 billion because of a retreat in oil prices, Finance Minister Bayan Jabr said.

Speaking after a meeting with International Monetary Fund (IMF) officials in Amman, Oil Minister Husayn al-Shahristani said the revised budget assumed an oil price of $62 a barrel -- lower than the $80 on which the previous version of the 2009 budget was based.

Iraq sits on the world's third-largest proven oil reserves and depends on oil sales for almost all its foreign-currency earnings. A slide in world oil prices, which peaked at over $147 a barrel in July, forced the budget review.

"We have to rationalize spending because it was an [expansionary] budget," al-Shahristani told reporters.

"There were huge allocations that were made that have been reviewed," he said.

Jabr did not say whether the new budget would leave government finances in deficit or surplus.

Deputy Prime Minister Barham Salih said this month a budget surplus this year could be used to supplement 2009 spending.

The Amman meeting reviewed the impact of falling oil prices on Iraq's economy. Jabr said the government had resisted IMF calls to scrap public-sector pay increases and raise domestic gasoline prices.

The governor of Iraq's central bank told Reuters on the sidelines of the meeting that he would soon cut interest rates by one percentage point to 15 percent to aid growth, adding that the country wanted to cut the annual core inflation rate to 10 percent in 2009 from 13 percent now. The governor, Sinan al-Shibibi, also said the economy's nonoil growth was "modest this year at 3.5 percent." The government aimed to lift that to 5 percent in 2009 and to at least 7 percent in 2010, he said.

"We will take an imminent move to bring interest rates down," he said. "Interest rates of banks will be lowered by one percentage point to 15 percent," he said.

A planned cut in bank interest rates of one percentage point should spur growth, he said.

The core inflation data excludes expenditure on oil, natural gas, and gasoline. Many Iraqis buy gasoline on the black market, where prices fluctuate greatly.

"Indications are that inflation is not rising very much. It's more or less stable. These are good indicators to encourage us to lower the interest rates," al-Shibibi said.

Iraq's foreign-currency reserves now stand at $40 billion, he added. Central-bank officials said Iraq's overall inflation rate had fallen from an overall level of 16-17 percent in 2007 because of a strengthening in the Iraqi dinar which helped shield the country from high commodity prices.