UPDATE 3-Iraq parliament cuts 09 budget by 7 percent

Thu Mar 5, 2009 4:41pm GMT

* Parliament cuts 2009 spending plan by 7 percent

* Lawmakers defy government plea to passed budget unchanged

(Adds lawmaker, central banker comments, paras 10-16)

By Ahmed Rasheed

BAGHDAD, March 5 (Reuters) - Iraq's parliament defied government objections and voted on Thursday to cut the oil-dependent country's 2009 budget by $4.2 billion, or nearly 7 percent, due to slumping oil prices, a lawmaker said.

The drop in global oil prices from a high of $147 per barrel last summer to close to $40 now has slashed Iraq's income from oil exports, its main source of revenues, just when it desperately needs money to rebuild after years of war.

The action by parliament would reduce the proposed gap between income and spending this year to 27 percent of total spending from 32 percent previously, said lawmaker Sami al-Atrushi, a member of parliament's finance committee.

"I think this budget is acting firmly in dealing with falling oil prices," said Atrushi, a Kurdish parliamentarian.

"Now the government will be committed to acting in accordance with this vote and the finance ministry will have to find ways to accommodate the new budget." He said the new budget set spending at $58.6 billion at current exchange rates.

Dependent on oil exports for more than 95 percent of its revenues, the Iraqi government is being starved of funds just as the violence unleashed by the 2003 U.S.-led invasion begins to die down and hopes grow for investment and economic growth.

If the government fails to restore services, equip its armed forces and improve the lives of Iraq's 28 million people, there could be a resurgence in bloodshed, some analysts warn.

Finance Minister Bayan Jabor on Wednesday tried to persuade legislators to pass the budget as it was. They could review spending in June if oil prices remained depressed, he said.

But lawmakers say the government is squandering money and budget cuts can be made without affecting investment spending.

Some may be interested in trying to shackle Prime Minister Nuri al-Maliki ahead of national elections late in the year, after the success that allies of the once obscure but increasingly assertive leader scored in recent local polls.

"These blocs were unhappy with the results achieved by Maliki's list during the last provincial elections," said a lawmaker from Maliki's Dawa Party, asking not to be identified.

"They want to handicap the government," he said. Reducing its funds would be one way to do that.

The 2009 budget has already been cut twice, from an initial $80 billion. But the last version was still dependent on an average oil price of $50 per barrel, above current market rates.

Sinan al-Shibibi, governor of Iraq's central bank, said in an interview a day before the vote that the slump in oil revenue would force the government to make more sober budget decisions.

"There will be a difficult transitional period, but it should give us an idea of how to take a more realistic attitude toward allocations and demands from the various sectors."

"Of course, this occurs at the wrong moment because of the fact that Iraq actually needs to embark on huge projects and it will affect that," he said.

Maliki has called on Iraq to reduce its dependency on oil, but the government has few options for an immediate short-term increase in revenues, as there is little taxation.

Iraq has the world's third biggest reserves of crude and is seeking foreign investors for its antiquated oil infrastructure. (Writing by Michael Christie; Editing by Ron Askew)

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