Measuring and analyzing the relationship between the general budget deficit and the trade balance deficit in Iraq for the period (2005-2020) using the VECM model

Abstract

The Iraqi economy is considered a rentier economy, and therefore it suffers from the problem of its public revenues being dependent on the export of a primary commodity. The consumer nature of government spending, along with a decrease in the local supply of goods, increases the volume of imports, creating a relationship linking the general budget with the trade balance. The research aims to measure and analyze the relationship between the general budget deficit and the trade balance deficit in Iraq by adopting annual data for the period (2005-2020). The research is based on the hypothesis that there is a causal relationship linking the general budget deficit and the trade balance deficit, and the study arrived at proving the hypothesis that there is a relationship. Causality between the variables studied and the imbalance of both the structure of fiscal policy in favor of consumer spending and the structure of the trade balance due to the commodity concentration of exports versus the diversification of the import side, and the dependence of the general budget on its revenue side mainly on oil exports. The study recommended the need to rationalize government consumer spending and increase investment allocations while ensuring efficiency in their allocation, in addition to adopting a trade policy aimed at protecting the local product, especially agricultural products.