IRAQ'S DEVELOPMENT BUDGET--CHALABI'S CHART

UNCLAS BAGHDAD 003141

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON PGOV PREL IZ
SUBJECT: IRAQ'S DEVELOPMENT BUDGET--CHALABI'S CHART


SENSITIVE BUT UNCLASSIFIED GOVERNMENT DISTRIBUTION ONLY
NOT FOR INTERNET DISTRIBUTION


1.(SBU) SUMMARY: DPM Chalabi provided the Ambassador a
copy of a "capital investment disbursement vs. allocated
budget" bar chart written in Arabic on 27 July 2005. This
chart was used to portray the point that ITG ministries
have currently disbursed 20% of their total capital
investments. Chalabi indicated there is potential for
significant unallocated funds to offset and reduce the
deficit. END SUMMARY

--------------
ANALYSIS
--------------

2.(SBU) The chart provided by DPM Chalabi to portray a
a
potential surplus of capital investment funds was partially
misleading. The chart actually portrays the percentage of
Ministry of Finance (MOF) disbursed funds compared to
ministry and program capital investment lines in the 2005
budget. The graph does not illustrate true value or scale
of funds budgeted for each ministry or program. The graph
also does not include the Ministry of Defense (MOD) or the
Ministry of Interior (MOI),thus is not a true reflection
of the capital investment budget. The issue that is most
prominently evident from this chart is the low disbursement
rate of MOF funds to the ministries and programs. The
question that requires additional research is why there is
this low disbursement rate and variations between
ministries (e.g. Ministry of Education 100 per cent vs.
Ministry of Housing 5 per cent). (NOTE: there is a slight,
but not significant variation between Embassy and the ITG
budget numbers. IRMO will more fully develop this
analysis. END NOTE)

3.(SBU) Embassy Economic Section initial analysis using
IRMO MOF data indicate that 27 per cent of the capital
investment funds have been disbursed at this time.
However, many ministries complain that they are requesting
their capital investment and operational funds, but MOF is
failing to release those requested funds. IRMO MOF
consultants state that the MOF has implemented new budget
processing procedures to improve transparency. Many of the
ministries have yet to adapt to the more rigorous methods
for requesting fund release. There are indications/rumors
that the government is slowing disbursements to ensure a
funding surplus, thus allowing possible re-prioritization
to ministries such as MOD and MOI that are over-spent.
(Note: A follow on meeting between IRMO MOF consultant,
Acting ECON counselor with the MOF Chief of Staff denied
that they were slowing release and that it was the failure
of the ministries to make proper request for fund
distribution. END NOTE)


4.(SBU) The slow formation of the government, historical
last quarter spending (27% on average),and poor financial
execution capacity in many ministries will likely result in
some ministries being under-spent by the end of the fiscal
year. In addition, the PM has added a contract review board
to improve transparency on any project over $3 million and
this has also slowed disbursement rates. Assuming no
deliberate slow-down of fund disbursals is occurring, it
can be extrapolated that 66 per cent of the capital
investment funds would be disbursed by year-end.

--------------
COMMENTS
--------------


5. (SBU) COMMENT: Chalabi's assertions are partially valid
in the sense that the budgetary shortfall could be reduced
at the expense of the capital investments required to
sustain further economic development. This would be a poor
approach to reducing the deficit, as it would slow
reconstruction, economic growth, and employment generation
going into the election. The failure to fully implement
t
their capital investment programs will leave a significant
shortfall in reconstruction spending and fall below the
ideal absorptive capacity of the Iraqi economy. END COMMENT

KHALILZAD