IMF DISCUSSIONS WITH IRAQ: CHALABI

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 004447

SIPDIS

STATE PASS TO USAID

E.O. 12958: DECL: 10/30/2015
TAGS: ECON EFIN PGOV PREL MCAP IZ IMF
SUBJECT: IMF DISCUSSIONS WITH IRAQ: CHALABI

REF: BAGHDAD 4407

Classified By: CDA David M. Satterfield for reasons 1.4(b) and (d).


1. (C) Summary: In a wide-ranging discussion with CDA
Satterfield, DPM Chalabi emphasized the need for a less
alienating security posture vis--vis the minority Sunni
population, including the use of lower tier former Baathist
officers to lead operations in sensitive areas. On security
of infrastructure, Chalabi was downbeat, noting the ability
of the insurgents to target pipelines and electrical towers
with impunity. Concerning the 2006 budget, Chalabi expressed
frustration about security estimates and flagged procurement,
life support, and operational needs (for both MoD and MoI)
for thorough examination. Finally, despite recent
commitments made by the GOI to initiate major changes in its
major subsidy programs -- the Public Distribution System
(PDS) for foodstuffs and the state fuel sales system --
Chalabi was dismissive of possibilities for more rapid reform
to stem budget outflows and curb corruption. End Summary.

Concern about Sunni Alienation
--------------


2. (C) CDA Satterfield, accompanied by EconMinCouns and
Treasury Attache met with Deputy PM Ahmad Chalabi October 23.
Chalabi opened the discussion with a short description of
several recent audiences with members of the public. One of
these, with the families of 36 Sunnis recently executed by
individuals passing themselves off as members of the Volcano
Brigade of the MOI, Chalabi found particularly appalling.
Chalabi noted that those executed were "simple people, not
terrorists." He flagged the need to get the Sunni community
around Baghdad positively engaged. Toward that end, he is
encouraged by the recent recruitment and results achieved by
a Sunni battalion commander in Latafiya, a former officer in
the old regime army. Chalabi acknowledged that he was a "4th
level Baathist" but emphasized that the way forward
necessitated using such people who could drastically cut back
on the level of alienating incidents. He also noted that he
had already spoken to the UK Ambassador and CG Casey about
the need to get "action" on this issue before the December
election.

Losing the Battle on Infrastructure Security
--------------


3. (C) The constant cutting with "impunity" of power lines
and pipelines in recent weeks led Chalabi to observe that "we
have lost this battle," even though he conceded that the
"perfectly reasonable (protection) plan" drawn up by MNSTC-I
probably would show results in a few weeks' time. He added
that, as a result of deficient intelligence, the GOI still
does not know who is planning, funding or executing the
attacks. Chalabi argued that it is a mistake to depend on
infrastructure security battalions (SIBs),since local
"penetrated" elements within them are part of the problem.
He recommended their integration into the army and their
regular rotation - although not to tribal areas. Chalabi
also sought the introduction of better technology:
inexpensive UAVs (not Predators) for surveillance; creation
of a command and communication center to quickly dispatch
react teams to trouble spots (n.b., already done); and a
combination of hardening and redundancy to add to the
physical security of the lines. To cope with the
intimidation of repair crews by insurgents, Chalabi agreed
that it would make sense to move these workers to areas where
their families could not be targeted. Finally, he stressed
the need to change the incentive structure for SIBs and
tribes charged with pipeline security. At present, they are
paid whether or not the pipelines or transmission towers in
their areas of responsibility are hit, leading to suspected
"double dipping" (i.e., insurgents paying security elements
to destroy towers and lines).

Security Budget and Lagging Capacity
--------------


4. (C) Turning to the subject of the pending agreement with
the IMF on a Standby Agreement (SBA),Chalabi expressed some
frustration with the cost estimates submitted for security
needs. He observed that procurement, life support and
operational needs for both MoD and MoI would need to be
thoroughly studied. Otherwise, he opined, expenditures for
security would quickly rise to levels seen over the last two
years - perhaps reaching $11.0 billion. In this area,
Chalabi expected little assistance from within MoD, calling
it "moribund" and lacking Director Generals with the ability
to identify and deal with problems. Regarding MoI, he flagged
major problems, including padding of the active duty rolls as
well as major equipment and infrastructure needs.
Subsidy Conundrums
--------------


5. (C) Taking a cue from Chalabi's budget discussion, we
pushed to see if he could be interested in more rapid reforms
to the two major subsidy programs - the Public Distribution
System (PDS) for foodstuffs and the state fuel sales system.
In both cases, commitments have been made that aim at major
changes. Nevertheless, with just weeks remaining before the
national election, Chalabi was clearly in no mood to
entertain politically risky moves. On the PDS, he agreed
that monetization of the assistance package currently
provided needed to be pursued as expeditiously as possible
(Note: Nothing new there. End Note.) but offered that the
pace of change would be seriously slowed by the lack of
banks, post offices or other governmental offices capable of
issuing vouchers in lieu of assistance in kind. On fuel
price reform, he also did not want to go beyond modest steps
recently taken to inch up retail prices paid for all fuels,
even though subsidies continue to claim ever-greater shares
of the state budget. Nevertheless, he did recognize the
debilitating impact of corruption in fuel sales, with state
supplies siphoned out of official channels for black market
sale. His solution, however, is a desire to reinstitute a
system of inspectors first initiated by the CPA to audit
government fuel storage facilities and distribution.

Comment
--------------


6. (C) Chalabi's alarm about infrastructure security is
familiar to us from our once a week participation in his
Critical Infrastructure Working Group. His concerns to seek
concrete solutions to ongoing threats to infrastructure and
to adopt a less threatening posture toward the minority Sunni
are both worth our cooperation. In addition, we detect
genuine frustration, as we have in discussions with MinFin
Allawi, over the details of the security budget for 2006.
There is real uncertainty over what sort of security package
is needed for the Iraqi military. Both Chalabi and Allawi
want to streamline the security budget by focusing on
priority tasks and ensuring that the budget is not just a
mirror image of U.S. outlays. Finally, we attribute some of
Chalabi's hesitation to move more rapidly on subsidy reform
to simple political calculation, despite the increasing
gravity of the budget and fuel situations. However, he also
exhibits no understanding of the possibility of using the
market as a tool or incentive to secure his goals. As we
explained, letting state retail prices float toward black
market levels would gain revenues, curb subsidies, encourage
investment and inhibit possibilities for insurgency financing
from black market activity. Increasing the number of state
inspectors instead is a familiar fallback but one unlikely to
have any measurable impact.
Satterfield