Thereafter, gradual reductions, with a special "big drop" of, say, 7 lakhs after 1944-45.

104. It should be obvious that no authority attaches to any opinion of ours as to the sums properly payable, and that we are not qualified to make any admission of liability or offer of payment on behalf of 'Iraq. But we think it well to make an express statement to that effect. We have used the expression "Treaty liability "; but we volunteer no confident opinion as to the meaning or effect of the relevant provisions of the Treaty of Lausanne. Tentatively, we suggest that there is no precise sum the payment of which by 'Iraq can be described as a treaty liability, and that there is no prescribed machinery by which such a figure can be determined. The intention of the framers of the Treaty of Lausanne that 'Iraq should pay a contributive share in respect of the Ottoman Public Debt is apparent, and 'Iraq has expressly recognised her liability in this respect in Article XVII of the Financial Agreement. We do not for a moment put forward the idea that the liability should be repudiated or evaded, though the history of the discharges of analogous liabilities by other States is suggestive. But we think that the figure at which it should be assessed in any particular currency and the manner in which it should be discharged can only be determined by negotiation between 'Iraq, as one of the debtors, and the Debt Council, as representing the creditors, and we recommend that such negotiations should be taken in hand at an early date. In the conduct of the negotiations we think that His Majesty's Government, with their wider financial experience, should lend assistance to 'Iraq. We do not think that they need feel under any obligation to regard themselves as trustees for the bondholders.

Pending the successful conclusion of the negotiations and the consequent determination of a figure for 'Iraq's liability, we do not advise that any action should be taken to give security to the Debt Council; for the giving of security appears to us to presuppose a liability already determined.

105. In our forecast of the 'Iraq Budgets of 1925-26 and future years we have assumed that the amounts to which 'Iraq will be liable in respect of this debt charge will be those amounts which we have specified in para. 103 above as a reasonable estimate of the liability. There is much uncertainty; but it appears to us that, whilst it is needless at present to allow for more, it would be imprudent to allow for less. We feel certain that the 'Iraqi

nation is anxious not to incur any charge of treating its international obligations lightly, and we regard the payment of a share within its means towards the service of the Ottoman Public Debt as such an obligation. Moreover, we think that the frank acceptance and full discharge of such a liability will be a real enhancement to the credit of 'Iraq when the time comes for her to issue loans and so raise funds for those capital works which the country needs, the cost of which cannot be met from revenue.

RELIABILITY OF ESTIMATES.

106. Before summarising the effect of our recommendations upon the estimates for 1925-26, we must refer to the degree of accuracy attributable to those estimates.

In the past the estimates, both of revenue and of expenditure, contained in the budget have not shown a very satisfactory degree of correspondence with actual results. In the past four years, estimates of expenditure have shown an average variation of 7 per cent. from actual results, and a maximum variation of 13.4 per cent. (1924-25). Estimates of revenue have shown an average variation of 7.7 per cent., and a maximum variation of 18.3 per cent. (1921-22). In these figures due allowance is made for all large heads of expenditure, such as the Ottoman Public Debt charge, which were estimated for, but had not subsequently to be met.

The variation has no doubt been partly the result of inevitable lack of precedents in a new administration. But in part also it has been the result of intentional over-estimating by the spending departments, to make things comfortable, and under the mistaken impression that there is virtue in a substantial underspending on a vote. That impression should be corrected. The best service that a department can render to economy is to make its estimates accord as closely as possible with the facts of the Habitual over-estimation of expenditure is the worst of all nuisances to those responsible for general financial policy. 107. In view of the variations from actual results which estimates have shown in past years, we consider that, to obtain a true view of the outlook, a correction must be applied to the preliminary estimates of the departments for 1925-26. This correction should be a diminution of 4 per cent. in anticipated expenditure, for over-estimation; and an increase of 1 per cent. in anticipated revenue, for under-estimation.

Effect of Recommendations.

108. We estimate the total reduction in expenditure to be effected by our recommendations in round numbers at 50 lakhs in 1925-26, and 7 lakhs more in 1926-27. The total increase that they will effect in revenue we estimate in round numbers at 40 lakhs in 1925-26, and 9 lakhs more in 1926-27. But time will be needed for their consideration, and it may be expected that some

two months of the financial year 1925-26 will have elapsed before they begin to take effect. Allowance must be made for this in estimating their effect upon the finances of the current year. In the summary which follows we have accordingly reduced these amounts of 50 lakhs and 40 lakhs for 1925-26, by 4 lakhs and 6 lakhs respectively, to 46 lakhs and 34 lakhs. The reductions are based upon the time that will probably be lost, and the headings affected.

109. We proceed to show what should in our opinion be the position as regards the budget for 1925-26, on the assumption that all our recommendations are adopted and put into force without delay.

(In round numbers. Lakhs of rupees.)

EXPENDITURE.

Provisional departmental proposals as submitted to us (excluding Defence)

Less

Reductions to be effected by our proposals

...

418(*)

46

372

No provision is made for debt charge on the "Transferred assets" (see paragraph 15). Programmes of Fresh works for Irrigation, P.W.D. and other departments are included.

The budget for the Sulaimani district, where military operations are in progress, is separated from that of the rest of the Kingdom.

WAYS AND MEANS.

110. On March 31st, 1925, as a result of the surpluses of the two preceding years, the Treasury had a balance in hand of 46.47 lakhs made up as follows:

In Treasuries and Banks (Current A/c)
With Banks on short-term deposit

...

31.47 15.00 ⚫

46.47

If the readjustment is made in the Account Current with His Majesty's Government which we have recommended in the Appendix (para. I) in connection with the payment to the Disposals and Liquidation Commission for railway stores, the cash resources of the Treasury will be increased by 14.25 lakhs, and the total figure at the opening of the current financial year may be taken as 60.72 lakhs. We have, however, found it necessary to recommend that the 'Iraq Government should make an immediate advance by way of loan to the railway administration of 15 lakhs to meet expenditure which cannot be postponed without imperilling the existence of the undertaking (para. 123). If this recommendation is accepted the opening balance will be reduced to 45.72 lakhs.

111. About 25 lakhs is required by the Government under present conditions as "working capital" for turnover. This may seem a large amount in proportion to the annual revenue and expenditure, but it should be borne in mind that the Government has not the advantage of commanding banking credits on the security of Ways and Means in anticipation of revenue.

Deducting the 25 lakhs for working capital from the 45.72 lakhs of opening balance, it appears that there is a surplus of about 20 lakhs in the hands of the Government which could be used to help to cover the deficit in 1925-26. If our recommendations are adopted, and if the finances for the year show some result such as that which we have forecasted in para. 109 above, the use of this surplus would have an important effect in reducing the deficit of 49.25 lakhs. These suppositions, however, involve a large element of conjecture, and it would be imprudent to reduce the cash balance of the State until experience has shown whether those conjectures are justified by events. We recommend, therefore, that no allocations should be made out of balances in hand to any specific purpose, other than the provision of the 15 lakhs already mentioned for the railways, unless and until actual experience of the relation between receipts and expenditure in 1925-26 has shown that such allocations are justified.

C.-Railways.

112. 'Iraq is a land of long distances and a scattered population. Improved transport is a first essential for any improvement in economic conditions and in revenue. As already observed, the retention of the transit trade of the country to and from Persia against possible rival routes is a vital interest. For these reasons, the welfare of its railway system is of the utmost importance to its general prosperity and to its budget. We believe, therefore, that it is strictly relevant to the terms of our reference that we should take the position of the railways into consideration and make recommendations thereon.

113. The Railways, with the exception of the German-built line from Baghdad to Samarra, were built by the British Government during and after the war, and they remain the property of that Government. Since April 1st, 1923, under Article VIII of the Financial Agreement, the Government of 'Iraq has been responsible for their management and administration. During that period the Government of 'Iraq has advanced to the Railways 34.2 lakhs for urgently needed extensions and improvements. There is some uncertainty, and the possibility of a difference of opinion, as to which government would be responsible for a deficit upon the working of the system, and as to the ownership of improvements made during the administration of the Iraq Government.

114. The present physical condition of the lines is far from satisfactory. They were hastily built in war time, and much of the material used in their construction was old when it was used. The numerous bridges are of temporary construction, and are largely made of old material. The buildings are also of a temporary nature. Many of the locomotives and much of the rolling stock were old when first bought for the service of the lines. The system has been subjected to severe wear and tear during years of military operations. There is urgent need for the replacement of bridges, and for the renewal of permanent way, of rolling stock and of locomotives. Unless such renewals and replacements are made, the lines will become unsafe and unworkable within two or three years. Owing to circumstances into which it is unnecessary for us to enter, not only have no renewals or replacements at all proportionate to requirements been made since the opening of the lines, but no reserve has been accumulated out of which their cost can be met. The Director of Railways advises us that some 72 lakhs will be required for these purposes during the next four years if the railways are not to close down.

115. The lines, constructed in the first place for military purposes, were left in many respects incomplete for ordinary purposes, even on the basis of their present extension. To put the system upon a reasonably economic basis, capital expenditure will be required in the immediate future for the completion of existing works. The sum required for this purpose will be some 40.6 lakhs.