66

Thus the country's annual accounts, after resulting in a deficit, but a decreasing one, for two years, have for two years shown a surplus. The first point, therefore, to notice in answering the question, What steps should be taken to ensure that it shall be possible to balance the 'Iraq Budget?" is that for two years it has balanced, and more. Had there been no substantial change in the state of affairs, there is no reason to doubt that it would have continued to balance. Unfortunately, there has been a substantial change. Two heavy new charges have to be met.

3. The first new charge is an obligation to bear a part of the burden of the Debt of the Ottoman Empire. The obligation owes its origin to the Treaty of Lausanne, and was recognised by the Government of 'Iraq in Article XVII of the Financial Agreement subsidiary to the Treaty of 10th October, 1922. between His Britannic Majesty and His Majesty the King of 'Iraq. The amount of the obligation is still uncertain, but it may be taken at 57.01 lakhs for 1925-26 (see para. 103 hereafter), to which must be added as arrears the sum of 23.24 lakhs in respect of the period 6th August, 1924, to 31st March, 1925, making a total charge of 80.25 lakhs.

4. The second new charge is for expenditure on the Army. By the Military Agreement of March 25th, 1924, subsidiary to the 'Iraq Treaty, the principle was recognised that the Government of 'Iraq should, in not more than four years, "accept full responsibility both for the maintenance of internal order and for the defence of 'Iraq from external aggression" (Article 1), the support of British forces being progressively reduced. In pursuance of this principle, it became necessary for 'Iraq rapidly to increase the size of its Army, and its cost. A programme of expansion was fixed by a schedule to the Military Agreement. In pursuit of that programme large fresh commitments for Military expenditure were incurred during the past year. During our investigations the programme has been re-considered and in a measure varied by a new arrangement between the two Governments. Taking the new arrangement into consideration, we estimate (para. 100) that the cost of the Army to 'Iraq in 1925-26 will be 135 lakhs. The actual expenditure on the Army in 1924-25 was only 101 lakhs. The Budget is here faced with an immediate additional burden of 34 lakhs.

5. If we take the Budget for 1924-25 as a basis, it is apparent that these two additional burdens must wipe out the surplus, and confront the country with a large deficit. The financial outlook is therefore a serious one. It has been our task to consider what can be done to close the prospective gap, by increasing revenue and by reducing expenditure.

6. The general result of our investigations is that there is no possibility of effecting immediately any such improvement under either head as would alter the general character of the Budget. 'Iraq is a small country of some some 3,000,000 inhabitants. It

emerged recently from a foreign domination that was hostile to all progress. There has not yet been time for the secure establishment of public order. It lacks much of the apparatus essential for a developed State. It started life without a financial balance. As an independent State it has to support an administration which is necessarily far more expensive than its former one, with all the institutions of self-government, and those higher standards in the discharge of State services which are inevitably required. of a progressive Government. The circumstances of the re-birth of the country have cast a heavy burden upon it in its infancy. History probably shows no instance of a State expected to do so much so soon.

Under these circumstances, the present scale of expenditure on social development and on the apparatus and organs of Government is not more in general than the country requires. It may be more than is possible, and indeed we recommend reductions in view of the financial circumstances; but it is not more than is desirable.

7. On the other hand, the revenue system does not permit the hope that any large increase can immediately be effected in the public revenues. A large part of these revenues, no less than 75 per cent., is derived from Land Revenue (31 per cent.), and Customs and Excise (44 per cent.).* Land Revenue is quite inelastic. Its yield can be substantially increased, but only in process of time (para. 28). With the additions which we propose (para. 33) Customs and Excise will be bearing the heaviest burden of which they are capable. There is no other source of revenue to which to look for a substantial and prompt increase.

The whole machinery of Government is new and necessarily imperfect. The staff of the Government offices as a whole is necessarily lacking in knowledge and experience. Much has already been effected in raising the standard of efficiency, with the assistance of the British advisers. But it will take a good many years more, with the continuance of that assistance, before the machine will be capable of bearing any great additional burdens. In the meanwhile, to require of it the production of a big immediate increase in the revenue would probably result in a breakdown.

8. We have considered the prospects of the revenue from the point of view of the development of the resources of the country. Given a continuance of internal order and of freedom from external troubles, there should be an improvement, but it must be gradual. It would be imprudent to look for any swift increase. For the development of the undoubted resources of its soil, the country needs capital from abroad. Without foreign capital, there can be no general increase in its productivity. It is not to be expected that the foreign investor will trust his money * Figures are from 1925-26 budget forecast.

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into the new country freely and on reasonable terms until, with the passage of time, there is more positive evidence, in the eyes of the world at large, of its stability. Development by this essential agency must be a slow process, and it must depend to a large extent upon the relations from time to time between the British and the 'Iraq Governments.

The best hopes for the economic future of the country are in oil and cotton (paras. 46 to 48). Both hopes are no doubt bright but they are not hopes for the immediate future. Neither can possibly materialise in time to give any important help to the budget in its immediate difficulties. In the matter of irrigation, moreover, there are difficult problems to be solved, before the way is clear for progress (para. 75).

9. It would be imprudent at the present time to count upon any assistance for the budget from loans for capital works on the unsupported credit of the Government of 'Iraq. The Government has excellent security to assign from the merely financial point of view. Mention may be made in particular of the Basrah Customs. But for the present the possibility of the Government obtaining a loan in the money markets of Europe on reasonable terms, or indeed on any terms, is in our opinion precluded by its political situation. The circumstance is of special importance because of the urgent need for capital for the railways (para. 116). We fear that at the present time it will be a matter of the utmost difficulty for the Government to obtain that capital without some support to its credit from an external

source.

10. In this connection we desire to suggest the possibility of a guarantee by the British Government to the 'Iraq Government of a loan for railway works and replacements, and for bridges. Such a loan would bring orders to British industries. A guarantee would therefore be in accordance with the principle of the Trade Facilities scheme. Suitable special security might be found in the customs collected at Basrah, where the harbour 18 to be managed by a trust whose finances will be in substance under British control. The minimum amount required would be about £600,000 (80 lakhs)

If for any reason the guarantee of a loan to the 'Iraq Government be considered undesirable, an application to the Trade Facilities Advisory Committee for a guarantee might be made by the new Railway Corporation, the establishment of which we recommend (para. 119).

11. For the reasons given above, we are of opinion that the increase in revenue and the reduction in expenditure which would be effected by our detailed recommendations in the paragraphs which follow are the greatest which can immediately be made. In making those recommendations we have been guided by the principle that, in view of the serious financial outlook, it is necessary that 'Iraq should call a temporary halt in such services.

as Public Works (paras. 82 and 84), Irrigation (paras. 77 and 79), Education (para. 61), and Agriculture (para. 67), that it should be content for the present with the substantial progress which has already been made therein, and should confine itself to maintaining the existing standards until financial circumstances permit further progress. The necessity is admittedly regrettable, but it appears to us to be imposed inevitably by the new burdens, and in particular by the growing cost of the Army.

12. The result is, that when all has been done that can be done in time to help, the budget of the country is still faced with a deficit in 1925-26 of 49.25 lakhs (para. 109). The resulting position should be clearly stated, as it presents itself to us. If the country meets the military expenditure that is contemplated by the recent arrangement between the two governments, it is very improbable that it can for the present meet the whole of its obligations for the Ottoman Public Debt. If, on the other hand, it meets the whole of its obligations for the Ottoman Public Debt, it is equally improbable that it can meet the whole of the contemplated military expenditure. Thus, if our anticipations prove correct, it seems that either a part of the Ottoman debt-charge must be left unpaid (perhaps to be funded by agreement with the Ottoman Debt Council); or the military programme contemplated by the recent arrangements must be substantially reduced.

13. To express an opinion as to which of these two objects of expenditure should be preferred to the other would be outside our province. There are, however, two observations which may pertinently be made. The first is that, in view of the the uncertainty as to the amount of the Ottoman Debt charge for which 'Iraq is liable, it should not be impossible to make some fresh arrangement with the Debt Council (para. 104), which would prevent any contention that 'Iraq had made a default. The second is that the bill of 'Iraq for its army, heavily as it weighs upon the budget, is but a part of the total expenditure that is required for the defence of the country. The British Government is providing the bulk of that expenditure, in the cost of the Imperial forces in the country, and in the proposed subsidy (paras. 100 and 102). It cannot therefore be said that the expenditure of the Government of 'Iraq itself on defence is in excess of the requirements of the country.

14. In the preceding paragraph we define the issue as a question between the postponement either of military expenditure or of Ottoman Debt charge. It might perhaps be said that there is a third possibility, to make further wholesale reductions in the services performed by the State. In our opinion this is a possibility which should be dismissed from practical consideration. The reductions which we recommend appear to us to be the utmost that can be effected, if the Government is to continue to

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discharge its essential functions. To do more would be to crush all hopes for the rise of the nation. It might seriously jeopardise the stability of the new State. It would be shortsighted policy indeed on the part of holders of Ottoman Debt to impose upon the State a burden that might crush it out of existence. Their prospects of payment are bound up with its continued existence and prosperity.

15. There are two matters in which the British Government has a direct interest in the finances of 'Iraq which we have had to consider in the light of the conclusions stated above. The first is Great Britain's ownership of the railways of 'Iraq. The second is the liability of 'Iraq, under Articles V-VII of the Financial Agreement to make an annual payment by way of a debt charge to the British Government in respect of certain transferred assets. Considering that, in our opinion, 'Iraq is confronted with a deficit which it will need heavy sacrifices to cover, we recommend that the debt charge in respect of transferred assets be definitely cancelled (para. II of Appendix), and that a substantial concession be made in respect of the railways, by way of a postponement of British claims (para. 119). These concessions will be of great assistance to 'Iraq; and the loss to the British taxpayer under the circumstances will be purely nominal.

16. It remains to make some forecast of the outlook for future

years, after 1925-26. After that year, although exact estimation is impossible, it appears to us that, given internal order, freedom from external troubles, and a continuance of a helpful attitude on the part of the British Government, there is no reason why the position of the Budget should not steadily improve. But that is on the essential conditions that our recommendations are promptly put into force, and that there is no further increase in the size and cost of the Army or auxiliaries, after the addition of the two infantry battalions which it is contemplated to raise in 1925-26 (Nos. 6 and 7).

Our reasons for expecting an improvement are as follows. While on the one hand there may be no great prospect of any swift or considerable increase in revenue in the coming years, there is on the other hand no reason why there should be any substantial increase in general expenditure. Some normal increase there must no doubt be. It is a young administration, not yet fully grown. But that increase need not be other than gradual. It will be seen from our recommendations that the following services in particular must be expected to cost a little more year by year; the revenue and audit services, including customs; the work of survey and land settlement; provision for the Legislature; and the police, as the arm of the law is extended to fresh areas. To set against this, our recommendations, if adopted, will result in further reductions of expenditure and increases in revenue in 1926-27 and thereafter (para. 108), and further economies may be expected from the labours of the