IMF IRAQ CHIEF SEES NEED FOR REMEDIAL ACTION TO

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 002428

SIPDIS

E.O. 12958: DECL: 02/08/2015
TAGS: EFIN EINV EAID PGOV PREL IZ
SUBJECT: IMF IRAQ CHIEF SEES NEED FOR REMEDIAL ACTION TO
ACHIEVE 2006 IRAQ STAND-BY AUTHORITY GOALS

REF: BAGHDAD 1120

Classified By: CHARGE CHRISTOPHER HENZEL,REASONS: 1.4 (B &D)

Summary
--------------


1. (C) Coordinator for Iraq Reconstruction Ambassador Robin
Raphel met with IMF Iraq Resident Representative Ibrahim
el-Tigani in Amman on March 17. In a frank discussion Tigani
provided his assessment of the government of Iraq's
performance to date in meeting the policy and information
provision commitments made in the Emergency Post-Conflict
Assistance (EPCA) agreement it negotiated with the IMF in
September 2004. While indicating that presentation of
Stand-by Authority to Iraq is still achievable by the end of
2005, Tigani warned that this is unlikely to happen unless
immediate actions are taken to begin reversal of what he
depicted as Iraq's comprehensive failure to date to deliver
on its EPCA assurances. End Summary.

Slippage on EPCA
--------------


2. (C) Tigani explained that he had just returned to Jordan
from IMF meetings in Washington where he discussed the Iraqi
government's progress in meeting its various EPCA
commitments. While acknowledging that both the World Bank
and the IMF are under increasing pressure to expedite
assistance to Iraq, Tigani stressed that the IMF can do
little until at least some of the Iraqi government's present
slippage in meeting its agreed EPCA commitments is reversed.
In this context he listed what he called "missed milestones"
and alleged Iraqi government failure to meet many basic
programmatic commitments. While not insisting that every
milestone and policy measure be realized, Tigani warned that
Iraq cannot expect to qualify for Stand-by Authority (SBA) by
2006 without demonstrative progress in many of these areas.

Fiscal Data Overdue...
--------------


3. (C) Tigani divided Iraq's EPCA commitments into three
categories: "fiscal data," "benchmarks," and "key policy
measures," and then addressed the current status of each.
Tigani claimed that none of the required Iraqi fiscal data,
originally due by December 31, 2004, has been provided. He
said that the IMF is specifically waiting for data on the
following:

1) Development Fund for Iraq (DFI) accounts;
2) Bank balances of government Ministries;
3) Capital spending in the oil sector;
4) Accounting Copies of Letters of Credit issued under the
UN Oil for Food program;
5) Iraqi donor spending since the end of the war in 2003.


4. (C) Tigani stressed as particularly problematic the
continuing lack of disclosure of Oil-for-Food Letters of
Credit. According to Tigani, all Iraqi government sources
approached claim that "some other Ministry" or entity (e.g.,
the Central Bank) has these documents; none are producing
them. Ambassador Raphel opined that the Oil-for-Food
supervisory bank, Bank National Paribas (BNP),and/or the
World Bank, might be the best resource for these records.
Tigani agreed that "someone" should check this out.

...Structural Benchmarks Missed or Not Quantifiable
-------------- --------------


5. (C) Tigani gave a similar assessment of progress to date
on Iraqi compliance with several structural benchmarks
identified in the EPCA:

A) Benchmark 1: Development of a summary monetary survey (due
March 2005).
Tigani comment: Not done yet.

B) Benchmark 2: Establishment of an automatic payroll system
for all government employees (due June 2005).
Tigani comment: No apparent progress.

C) Benchmark 3: Issuance of regulations regarding Bank
licensing, utilizing standard prudential ratios (due December
2004).
Tigani comment: No apparent progress.

D) Benchmark 4: Enactment of a Payment Systems Law (due
December 2004).
Tigani comment: Draft legislation currently being completed
in the Ministry of Finance.

E) Benchmark 5: Adoption of a plan to overhaul the tax and
customs administration (due June 2005).
Tigani comment: The Iraqi government has established a tax
unit to prepare the plan.

Policy Measure Issues
--------------


6. (C) Tigani also provided a read-out of his views on Iraqi
progress in adopting several key policy measures specified in
the EPCA:

A) Policy Measure 1: Increase the domestic price of refined
oil (due December 2004).
Tigani comment: The Iraqi government is developing a
discussion paper, but there appears to be no other forward
movement.

B) Policy Measure 2: An external audit of the Central Bank
(due June 2005).
Tigani comment: The Iraqis want the audit to be performed by
Iraq's Supreme Audit Board; however, this organization has
yet to establish international credibility and an audit by it
is unlikely to be acceptable to IMF's Board.

C) Policy Measure 3: Adoption and implementation of
regulations for a public Financial Management System (FMS)
(due December 2004).
Tigani comment. An FMS law has been passed, but the
proposed automated system designed by Bearing Point is not
well understood by senior Ministry of Finance officials, and
may be a "balancing" system rather than a true FMS. The
Ministry of Finance needs to ensure that it adopts a
comprehensive FMS in keeping with international Government
Financial Statistics (GFS) standards. (Embassy Baghdad
Comment: Our understanding is that the the new system
will/will be able to disaggregate budget components and will
be GFS compliant by January 2006, as agreed with the Deputy
Finance Minister and now recommended by the IMF. While it may
not be a "state of the art" system, the finished product will
be able to provide the IMF with the information they require
given the MoF's limited capacity and steep learning curve.
End Comment).

Bottom Line: Significant Progress Needed
--------------


7. (C) Tigani emphasized that, despite the government of
Iraq's slippage, there is still time to retrieve the
situation and put Iraq back on track for SBA by the end of

2005. However, for this to occur, he underlined that clear
forward movement on a significant number of these issues
needs to begin soon. He related that he is attempting to
arrange an "informal" person-to-person meeting with Deputy
Finance Minister Azez before the end of March to
comprehensively and frankly discuss the state of play and
possible short to mid-term remedial steps that might be
acceptable. (Embassy Baghdad Comment: Deputy Finance
Minister Azez sent the IMF a letter on March 10 requesting
further technical assistance or coordination of technical
assistance in 8 areas, with a particular focus on 3-4 areas
to prepare Iraq for the 2006 budget process. See septel. End
Comment)


8. (C) According to Tigani,s thinking, this would be
followed by a formal Ministerial-level discussion of
outstanding issues with senior IMF officials in Washington on
the side of the annual Spring meeting in April. If a
satisfactory understanding is reached at this point, and
appropriate progress demonstrated by the time of the IMF
Executive Board's Article Four discussions in July, Tigani
said that a recommendation to the IMF Executive Board to
provide SBA status to Iraq could be submitted as early as
November. While presenting this schedule as still viable,
Tigani reiterated that its achievement presumes rapid
implementation by the Iraqi government of an effective plan
of action to provide the IMF with credible basic fiscal data
and meet (or credibly begin to meet) its agreed benchmarks.
(Embassy Baghdad Comment: as reported in reftel, Deputy
Finance Minister Azez still anticipates finalizing a SBA by
the end of 2005. Early 2006 is too late as it would threaten
to reopen up the debt deal with the Paris Club. End Comment.)



9. (U) This cable was cleared by Ambassador Raphel.


10. (U) Baghdad minimize considered.
HENZEL