Identifier
Created
Classification
Origin
06BAGHDAD1244
2006-04-17 11:08:00
CONFIDENTIAL
Embassy Baghdad
Cable title:  

BEGINNING MUCH-NEEDED FOOD SUBSIDY REFORM

Tags:  EAGR ECON ETRD KCOR KDEM KPRV PGOV IZ 
pdf how-to read a cable
VZCZCXRO5169
RR RUEHBC RUEHDE RUEHIHL RUEHKUK RUEHMOS
DE RUEHGB #1244/01 1071108
ZNY CCCCC ZZH
R 171108Z APR 06
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 3927
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEHC/DEPT OF AGRICULTURE WASHDC
C O N F I D E N T I A L SECTION 01 OF 04 BAGHDAD 001244

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/17/2016
TAGS: EAGR ECON ETRD KCOR KDEM KPRV PGOV IZ
SUBJECT: BEGINNING MUCH-NEEDED FOOD SUBSIDY REFORM

REF: A. BAGHDAD 375


B. BAGHDAD 241

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C. 2005 BAGHDAD 5079

D. 2005 BAGHDAD 4559

E. 2005 BAGHDAD 4108

Classified By: Economic Section Minister Counselor Thomas Delare, reaso
ns 1.4 b/d

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ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR
PLEASE CANCEL BAGHDAD 1244 AND ALL ASSOCIATED MCNS. WILL RESEND
UNDER NEW MRN. SORRY FOR THE INCONVENIENCE.
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U.S. military field reports confirm that most Iraqis do not
receive their entire allotted ration basket each month. This

is particularly damaging in the poorest areas of Iraq --
located mainly in the far western regions of Anbar and Ninewa
provinces and pockets of southeast Iraq -- where according to
the 2003 UN WFP Baseline Food Security Analysis (the most
recent available),about a third of the population is highly
dependent on the PDS for survival.


6. (C) The PDS is reportedly rife with corruption at every
stage of its operation, from procurement contracting to final
distribution of items to the Iraqi public. DG Kareem has
stated that PDS-laden trucks sometimes disappear enroute to
food distribution points, and that MoT officials sometimes
sell PDS food articles to enrich themselves. A previous Iraq
Reconstruction Management Office (IRMO) Trade Senior
Consultant strongly suspected that foreign wheat shipments
were being resold to fund terrorist operations and indicated
that the MoT Inspector General office was likely involved in
corrupt activities. Recent Iraqi press reports credit MoT
with being the most corrupt ministry in the GOI.


7. (C) The PDS hinders agricultural and private-sector
development by sapping entrepreneurial initiative and
encouraging dependence on the government. Deputy Prime

Minister Chalabi has told us that he instructed MoT to offer
higher prices to Iraqi producers for wheat and rice (ref B).
(Note: We do not have evidence beyond verbal assurances from
MoT officials that they actually pay higher prices to Iraqi
producers. End note.) However, using Ministry of
Agriculture production estimates and MoT procurement records,
we estimate that less than half of Iraqi wheat production is
considered fit for PDS procurement, and the farmers are
currently only capable of producing about 12% of annual PDS
wheat needs. In addition, as ration recipients and corrupt
MoT officials reportedly sell PDS items into the marketplace,
they deflate and distort true market prices, making it
difficult for Iraqi farmers to recover production costs on
wheat and rice that they do not sell to MoT. In effect, MoT
has set itself up as the dominant buyer of high-grade wheat
and rice in Iraq, providing no incentive to private-sector
buyers to enter the market, and decreasing the need for GOI
investment in distribution infrastructure that would benefit
small farmers and private distributors.

--------------
Cutting "Nonessential" Items
--------------


8. (C) According to DG Kareem, the most important items of
the PDS are flour, rice, sugar, and cooking oil, mainly
because Iraqis most need these items for daily living and
because Iraqi farmers are currently incapable of producing
sufficient quantities. "Nonessential" PDS items, according
to Kareem, make up 25% of PDS expenditures and include adult
milk, infant milk, baby food, beans, salt, tea, soap, and
detergent. According to Kareem and local sources, Iraqis
generally view these "nonessential" items as inferior in
quality and prefer to buy higher-quality replacements in
local retail markets. These same sources indicate that the
Iraqi recipients sometimes sell the "nonessential" items for
income, though the income they receive is significantly lower
than what the GOI paid to provide the item initially. Kareem
has told us that MoT plans to discontinue providing
"nonessential" PDS items in 2006. (Note: Though press
reports state that the MoT has done this, MoT sources
indicate it has not happened.)

--------------
Providing Freedom of Choice
--------------


9. (C) Deputy Prime Minister (DPM) Chalabi recently told us
that the GOI plans to monetize the PDS, giving Iraqis the
opportunity to procure what they believe they need and
spurring private-sector development in areas that the market
(and not the government) dictates. Minister of Planning
Barhim Salih has echoed this position to Embassy officials.
According to recent Baghdad market prices, the annual cost to
the GOI to provide every Iraqi with the monetary equivalent
of a PDS basket would be approximately $2.7 billion. Embassy
supports the monetization decision and believes that the GOI
should monetize gradually, starting in a province where
private food distribution and marketing channels are already
fairly strong, and then expanding to other provinces over
time. As the monetization program spreads, the GOI will
likely need to continue providing flour, rice, sugar, and
cooking oil to the provinces where monetization has not yet
been implemented.


10. (C) The GOI recently completed a "catch-up" voucher
program, through which they compensated all Iraqi households

BAGHDAD 00001244 003.2 OF 004


for food shortages from January thru August 2005. The GOI
distributed approximately $450 million through over four

million vouchers, which Iraqis cashed at the nearest branch
of the Rafidan or Rashid state-owned bank. According to
Embassy, DFID, and GOI officials, initial indications are
that the program has been successful, despite glitches in a
few cities. DPM Chalabi said the program demonstrates the
GOI's ability to successfully monetize the PDS.


11. (C) According to USAID's Agriculture Reconstruction and
Development Program in Iraq (ARDI),most of Iraq's retail
markets would likely be capable of providing sufficient
quantities of most PDS items in the absence of a
government-operated PDS. The main exception would possibly
be flour. Embassy Econ has collected market surveys that
monitor price and availability of PDS items across Iraq, and
though the recent fuel-price increases have caused food
prices to go up in some areas, most PDS items have been
readily available during "spot" surveys. (Note: It is
uncertain how much of the local markets' food comes from PDS
items sold into the market by undesiring recipients or
corrupt MoT officials. End note.)


12. (C) As the GOI gradually discontinues procuring immense
amounts of food, initially there may be supply shortages and
price spikes in certain areas as private markets become fully
functional. DPM Chalabi has said that the GOI plans to
maintain reserves of flour and rice to sell on the open
market at predetermined price marks (above market prices) to
help hedge against food-price inflation. Embassy supports
this action and believes that the GOI should also maintain
reserves of cooking oil and sugar because there is no
domestic production of these key PDS items. The GOI could
also distribute the reserves to impoverished areas if food
shortages occur.

--------------
Encouraging Private-Sector Growth
--------------


13. (C) DPM Chalabi told us that he has instructed MoT to
procure domestically as much of its flour and rice reserves
as possible, exhausting all Iraqi procurement options before
turning to foreign suppliers. Iraq's population is projected
to grow to 43 million by 2030, and it will need to import
food supplies for the foreseeable future; however, this
policy of maximizing domestic procurement will encourage
Iraqi farmers to produce more wheat and rice, traditionally
strong agricultural products for Iraq. It will also
indirectly encourage private-sector development in Iraq's
food distribution and marketing channels.


14. (U) Embassy PDS Reform Team will encourage the GOI to
institute additional policies and programs to encourage
private-sector development in Iraq's food distribution and
marketing channels. One way would be for the GOI to sell its
imported wheat to Iraq's 120 privately-owned flour mills, and
for millers to in turn make a market in the flour they
produce through developing private-sector distribution
channels. Currently, MoT provides wheat and pays the mills
to produce flour, which MoT then distributes through the PDS.
Another way for the GOI to encourage private-sector growth
would be to target loan programs to entrepreneurs who want to
establish small- to medium-sized food-processing or
distribution companies. The GOI could also use the savings
from the declining PDS budget to improve infrastructure and
support programs that would contribute to improved
private-sector activity.

--------------
Eliminating the PDS
--------------


15. (C) The GOI has said it intends to eliminate the PDS
over a four-year period, gradually drawing down the budget as
food production, processing, and distribution strengthen, and
freeing up resources for increased public investment.
Several GOI officials, including Finance Minister Allawi,
have said the PDS budget should be cut by 25% per year for
four years and then eliminated. The 25% budget reduction
from 2005 to 2006 supports the seriousness of these official
statements.


16. (SBU) Saddam appears to have created the PDS by
executive decree in the early 90s. (Note: Attempts to track
down relevant authorizing documents at the MoT have been
unsuccessful because such documents, according to the MoT,
were destroyed during the war. End note.) As a result, it
may be possible for the GOI to reform and eliminate the PDS
through Executive branch actions, such as Council of
Ministers directives.


BAGHDAD 00001244 004 OF 004


--------------
Educating the Iraqi Public

--------------


17. (U) As the GOI reforms and eventually eliminates the
multi-billion dollar PDS subsidy, Embassy will encourage the
GOI to link the recently implemented Social Safety Net to PDS
reform in the public mind (ref A). This new Safety Net (ref
D) is intended to protect the poorest Iraqis as economic
reforms are implemented, and according to Iraqi public
affairs officials, Iraqis will not be supportive of subsidy
reductions unless they believe the Safety Net works. We will
also encourage the GOI to educate average Iraqis on how
corruption and inefficiency have plagued the PDS system,
outweighing any benefits.


18. (SBU) Embassy Econ and MoF co-chair the Economic Reform
Public Education Working Group, which also includes Embassy
Public Affairs, Treasury, USAID, DFID, the Iraqi Government
Communications Directorate (GCD),and representatives from
most Iraqi ministries. PDS reform public-education messages
could be effectively coordinated through this working group,
which is currently developing public messages and delivery
strategies to support fuel-subsidy reductions and
anti-corruption efforts.

-------------- --
Comment: Stopping the Cultural Damage for Good
-------------- --


19. (U) Two of the main impediments to Iraq's development of
a healthy market-driven economy are massive government
subsidies and endemic government corruption. The PDS
contributes significantly to both of these. Most critically,
however, there is no objective measure for how damaging the
current PDS is (and has been) to Iraq's development into a
free and democratic society. As long as the GOI continues to
pour billions of dollars into the PDS, average Iraqis will be
faced with a corrupt government bureaucracy that saps
personal initiative without supplying any real benefit to the
population. To achieve the transparency and citizen
self-reliance necessary for successful democratic government,
the GOI should eliminate the PDS and continue to strengthen
the new Social Safety Net that supports Iraq's truly needy.
The GOI's recent actions and statements demonstrate increased
GOI commitment to this line of thinking.


20. (U) Our uncertainty about the permanency of this line of
Iraqi thinking matches that of DPM Chalabi, Finance Minister
Allawi, and other current Iraqi leaders. We will do
everything in our power to encourage the new Iraqi government
to continue the PDS reform policies of its predecessor,
following the established principles of cutting
"nonessential" items, providing freedom of choice through
monetization, encouraging private-sector growth, gradually
eliminating the PDS, and educating the Iraqi citizenry.
KHALILZAD