IRAQ: MINISTER OF FINANCE ON CONFERENCES, ARTICLE

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002588

SIPDIS

E.O. 12958: DECL: 06/16/2015
TAGS: EFIN ECON EAIR PREL PGOV PTER IZ ECON IMF
SUBJECT: IRAQ: MINISTER OF FINANCE ON CONFERENCES, ARTICLE
IV, BUDGET, ASSET RECOVERY, SECURITY AT BIAP, TF TRAINING

Classified By: Charge d'Affaires James F. Jeffrey for reasons
1.4 (b) and (d)


1. (U) THIS IS AN ACTION REQUEST. PLEASE SEE PARAGRAPH 16.


2. (C) SUMMARY: Finance Minister Allawi stressed to Charge
and DCM on June 16 his readiness to engage fully in ensuring
the success of the upcoming Brussels and AMMAN conferences
and the July 10-11 Joint Economic Commission (JEC),and
confirmed Prime Minister Ja'afari has agreed to a face saving
solution to allow Planning Minister Saleh to maintain the
donor coordination lead within the Iraqi Transitional
Government (ITG). Article IV discussions with the IMF went
very well, according to Allawi, and the IMF will not insist
on additional revenue producing measures in 2005 other than
oil subsidy cuts. While there is consensus within the ITG on
the need for reform, the timing and extent of subsidy cuts is
still being debated. Given Iraq's budgetary pressures, late
payments of bills (e.g., fuel purchases from Turkey) have
become a de facto form of cash management. Skeptical of
Syrian Finance Minister Hussein's ability to resolve a
"political issue," Allawi indicated he would nonetheless
telephone Hussein on asset recovery. Allawi acknowledges the
security implications, but is opposed to a renewal of the
Global security contract for the Baghdad International
Airport. MoF is prepared to accept a Terrorist
Finance/Anti-Money Laundering assessment team sometime in the
late summer/early fall -- action request in para 16. END
SUMMARY.


3. (C) During a wide-ranging discussion at the Embassy on
June 16 with the Charge and DCM (also attended by Economic
Minister Counselor and Treasury Attache),Minister of Finance
Allawi outlined an ambitious agenda facing him over the next
several months. Commenting first on Iraq's political
situation, Allawi said he expected the current impasse over
the composition of the drafting committee n the constitution
to be resolved within the next few days, noting that many
problems in Iraq end up being resolved at the last minute.
He stressed the constitutional process must go forward and
that only insurgents want to see it delayed.

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CONFERENCES
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4. (C) Observing that Allawi will be heavily involved in a
number of important upcoming events (Brussels Conference,
JEC, Amman Donors Conference),the Charge stressed the
positive role the conferences can play to further the image
of the new Iraq and its accomplishments. In particular, the
Charge highlighted Washington's strong desire to see full
participation by relevant Iraqi Ministers in the JEC
discussions. Allawi replied he had already discussed this in
a meeting with Prime Minister Ja'afari on June 15.
Responding to a question from the Charge, Allawi remarked he
had also already raised with the Foreign Ministry the issue
of delegation of legal authority to sign agreements. Allawi
said he should have authorization from both the Presidency
Council and the Prime Minister in time for the JEC. Allawi
acknowledged the Charge and DCM's comments as to the venue
and likely timing of the JEC, indicating that a mid-July JEC
would not present a problem.


5. (C) Allawi confirmed Ja'afari agreed on June 15 to a
face-saving compromise that would allow Minister of Planning
Barham Saleh to retain the lead on donor coordination issues.
Both Saleh and Allawi get along well personally and they
will work closely together to present a coherent and unified
vision on donor assistance at Brussels, he said. Allawi
added, however, it would likely not be possible to present
all details of a new donor coordination mechanism at the
Brussels conference. Allawi took credit for the PM's
decision, saying it had been his proposal: he told the PM
that for Iraq to get the most effective use out of donor
assistance an "elite" group of government officials directly
under the Prime Minister should be established, but given
that there is not time to establish and make functional such
a group in the tenure of the ITG, it would be better to
"leave things as they are," with MOPDC in charge.

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ARTICLE IV DISCUSSIONS; BUDGETARY PRESSURES
--------------


6. (C) Allawi characterized his recent Article IV discussions
with the IMF in Abu Dhabi as very positive. He expects the
IMF to file a good report on Iraq that will note Iraq is
generally on the right track towards an SBA. While
cautioning that new expenditures should be linked to revenue
flows, the IMF has accepted Iraq's need for a supplemental
budget. With the exception of oil subsidy cuts, according to
Allawi, the IMF has agreed other possible revenue generating
mechanisms can be postponed until 2006.


7. (C) Allawi observed that Iraq does not yet face a fiscal
crisis, but must remain vigilant in its management of the
budget. Iraq will face a financing gap, and has only two
significant sources of revenue: oil and donor assistance.
The Central Bank of Iraq will also have to be careful to
maintain sufficient reserves to defend Iraq's currency.
Adding that Iraq is treading a very fine line, Allawi said he
hoped to use the need for fiscal restraint as a scare tactic
to convince others in the government to agree to cuts in oil
subsidies. He is advocating the price of gasoline be raised
to 250 Iraqi Dinars per liter. Allawi cited by way of
comparison an equivalent price of 400 ID for gasoline in
Saudi Arabia, but said the Ministry of Oil is nevertheless
pushing for a less significant subsidy cut in Iraq.


8. (C) Referring to the decision of the Iraqi Interim
Government to return to government payrolls thousands of
former state employees as political, Allawi said it would of
course have a negative impact on Iraq's budget situation.
Pension reform also remains an important budgetary question
mark. While acceleration of assistance disbursements is of
course good, according to Allawi, it is not likely to have a
significant budgetary effect.


9. (C) In response to a question from the DCM, Allawi said
the ITG would be prepared prior to the Brussels Conference to
make a policy decision that fuel subsidies should be cut, but
would not be ready to issue any kind of administrative
implementation instructions in the near future. Allawi has
explained at Cabinet meetings Iraq's only sources of income
are oil and donor assistance and that the payment of 35% of
the budget as handouts is unsustainable. While Allawi
believes most ministers agree with him, his remarks have so
far elicited only silence.


10. (C) Agreeing with the Charge's comments about the
importance of efficient and effective budget expenditure
mechanisms to avoid delays in critical payments, Allawi said
there remains great confusion within the Iraqi bureaucracy as
to what constitutes legitimate expenditures within a proper
budgetary framework. Many think a decree or promise by a
minister constitutes an approved expenditure. Cash flow is
also a real problem, and payments delays sometimes reflect a
fundamental lack of sufficient funds available. Allawi cited
the example of the State Oil Marketing Organization (SOMO)
that has run up debts because higher fuel prices have
increased the cost of its monthly purchases abroad from its
budgeted $200 million to $250 million. Bill payment delays
have become a de facto form of "crude" cash management for
Iraq.

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ASSET RECOVERY
--------------


11. (C) Allawi accepted the DCM's recommendation he telephone
Syrian Finance Minister Hussein later in the day to discuss
recovery of Iraqi assets, but commented the issue is
primarily a political one over which Hussein has little
control. He acknowledged the DCM's comments that Syria
should not be given the opportunity to try to claim Iraq
appears unwilling to engage on the topic. Allawi also
observed that a number of countries still hold significant
amounts of frozen Iraqi assets, including the United Kingdom
($250 million),Bahrain ($150 million),and Jordan ($450
million). With regard to Lebanon, Allawi recently discussed
by phone claims against Iraqi assets in Lebanese commercial
banks with the chairman of a new Lebanese committee tasked
with looking into the issue, adding that the chairman Ghassan
Bulbol happens to be his daughter's father-in-law.


12. (C) Allawi agreed with Emincoun's comment that the
Brussels Conference represented an opportunity to leverage
asset recovery issues. Allawi also indicated Iraq intends to
ask the UN for a five-year moratorium on reparations
payments, a measure that could give Iraq an additional $1
billion in budget flexibility.

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GLOBAL'S CONTRACT FOR SECURITY AT BIAP
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13. (C) Treasury Attache noted ongoing negotiations between
the Ministry of Transportation and the private security firm
Global (note: Global provides security at the Baghdad
International Airport, has not been paid since March, and has
been operating without a contract since the beginning of the
year). Both the Charge and DCM also stressed the critical
importance of reaching a settlement between the two parties
so that adequate security coverage at the airport can
continue. Otherwise, BIAP civilian operations would likely
have to be shut down.


14. (C) Allawi, who complained of having recently been
treated with disrespect by Global personnel while going
through BIAP, replied that foreign security firms do not have
a good reputation with the Iraqi people. While Allawi accepts
the argument that security must be maintained, he made clear
that he does not like Global trying to hold the security of
Iraq hostage to its commercial dispute with the Ministry of
Transportation. Allawi dismissed any closing down of the
civilian side of BIAP as mostly inconveniencing government
officials departing for foreign trips and seemed willing to
accept a temporary cessation in civilian operations if
needed. Allawi will pass along the USG's concerns, but will
recommend to the Prime Minister that a new contract for
Global not be considered.

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TF TRAINING; UN DUES
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15. (C) Allawi accepted Emincouns offer to have a U.S. team
visit Baghdad sometime in the late summer/early fall to
conduct an assessment of what kind of training would be most
applicable to assist MoF and CBI on terrorist finance and
anti-money laundering. While he was not aware of issues
related to the payment of Iraqi dues to the United Nations,
Allawi said he would look into it and consult with the
Ministry of Finance.


16. (U) ACTION REQUEST: Please propose dates for an
assessment team visit on on terrorist finance and anti-money
laundering training.


17. (U) REO Hillah, REO Basra, REO Kirkuk, and REO Mosul
minimize considered.
Jeffrey