DPM SALEH EAGER TO MOVE ON HOUSING AND FUEL

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 002001 SIPDIS SIPDIS E.O. 12958: DECL: 06/11/2016 TAGS: ECON ENRG EPET EFIN PGOV PREL IZ SUBJECT: DPM SALEH EAGER TO MOVE ON HOUSING AND FUEL Classified By: Economic Minister Counselor Tom Delare, for reasons 1.4 (a) and (d). ¶1. (C) Summary: Deputy Prime Minister Dr. Barham Saleh told us June 8 that he hopes to develop and implement comprehensive strategies on housing and fuel (combining subsidy reform and import liberalization) that can be implemented within three to six months. He says he is eager to "use rather than defuse" Iraq's current crises to move these issues and wants to use the newly-formulated core economic committee to coordinate GOI efforts. Describing the Ministers of Oil and Finance as reluctant to move on fuel price increases before the fall, we are told that Dr. Barham nevertheless convinced his counterparts to support a combined March-June price increase by June 30. On housing, Dr. Barham said he hopes to oversee the issuing of the first loan to construct housing on land transferred from the GOI within three months. End Summary. -------------- Fuel Price Rises: "Not so Bad" -------------- ¶2. (SBU) In a June 8 meeting with ECON Counselor and Treasury Attache, "Economic" Deputy Prime Minister Dr. Barham Saleh called the GOI "shaky" and wondered aloud whether it will have either the ability or the will to address difficult economic issues. Dr. Barham expressed frustration at "continued excuses" and said he is urging the government to "use rather than defuse" Iraq's current crises to move issues. We told Dr. Barham that, although Iraq must negotiate directly with the IMF regarding its Standby Arrangement (SBA),movement on fuel prices will undoubtedly be critical. After we provided him with a copy of the IMF price schedule, Dr. Barham remarked that the June increases are small and that "he did not understand what the GOI is afraid of." The DPM said he would do his best to push them through the GOI core economic committee, which he is using to coordinate GOI reform efforts. (NOTE: Informal reports June 12 from an IMF-GOI meeting over the weekend in Amman say that the GOI has agreed to carry out the March and June price increases by June 30. END NOTE). -------------- Fuel is More Than Price Increases -------------- ¶3. (SBU) Despite what he called reluctance on the part of Minister of Oil (MoO) Shahristani and Minister of Finance (MoF) Jabr in particular to raise fuel prices as per Iraq's agreement under the IMF Standby Agreement (SBA),Dr. Barham Saleh told us June 8 that price increases were an integral part of his own overall strategy. Under Dr. Barham's broad plan for fuels -- which he says does not require new legislation -- "ten or so reputable companies" (which will be of suitable size and capitalization to ensure success) could be authorized to both import fuel and buy and/or manage service stations, bringing them up to international standards and largely getting the GOI out of the retail fuel business. Iraqis would see higher prices at privately owned or managed stations, but they would also see no lines and would receive high quality services. Dr. Barham freely admitted his intention is help the GOI dodge the bullet of responsibility for raising the price of fuel. "A couple" of government service stations would be left selling gas at the subsidized prices, for any willing to wait in line. Dr. Barham said he plans to create a "beginning to end system" that details the state facilities on offer, how the service station strategy would work and how the state would eventually exit the process. -------------- Comprehensive Approach to Housing -------------- ¶4. (SBU) Dr. Barham also said he plans to develop a comprehensive housing strategy "within the next month." Among several components to his strategy, he said he favors having the government allocate small plots of GOI-owned land or land owned by large cooperatives on the outskirts of urban areas to Iraqis who do not own homes or property. Title to the land would be transferred to the individual on the condition that the individual retain the property for no less than one year and construct a home. Dr. Barham said he favored low- or no-cost mortgages being made available via a combination of the existing Iraqi Housing Finance Fund (IHFF) and private banks. To further vest the recipient in the process, Dr. Barham stressed the importance of an individual financial contribution to the project, "to bring Iraqi money out from under the bed." In another, possibly parallel, BAGHDAD 00002001 002 OF 002 effort, recipients would purchase a home from developers (preferably private) rather than self-build. An advantage to this variant would be that larger developments are more likely to generate economies of scale, access to existing infrastructure, and more widespread job creation. The GOI intends to look to donors for funds with which to connect these new developments to essential services. The DPM's timeframe for handing over the first property and loans is three months. -------------- Intentional Knock-On Effects -------------- ¶5. (SBU) Comment: Dr. Barham has consciously focused on two areas that require urgent GOI attention, but will also pay substantial economic dividends. Employment generation and land redistribution will be immediate results from new housing starts; decreased fuel subsidies will not only lessen market distortions and ease budgetary pressure, but foreign investment in Iraq's fuel distribution network will modernize the network, get the state (and, we hope, a good number of smugglers) out of fuel business, and spur investor confidence. At the DPM's request, we will assist in developing these two strategies, mindful that, although his own enthusiasm for these ideas is clear, interministerial coordination will be decisive. High-level USG intervention may be necessary at times to break any logjams. It is also not clear how widespread support for such sweeping action is within the GOI and among the ministries of Oil, Finance, Trade, and Housing and Construction, among others. ¶6. (C) Comment cont'd: Barham Saleh's exuberance is refreshing, but the devil will be in the details. On housing finance, Iraq would be better served in the long run by getting the IHFF out of the retail lending business and having it instead provide loan guarantees to commercial banks. The banks then do the retail lending themselves, bolstering the banking sector. In fuel, Barham's sweeping approach may not adequately take into account the time needed to transition between subsidized and actual prices; time during which importers may be reluctant to enter a market in which they may lose money initially. And even though widespread black marketing of fuel means that most consumers are already paying something like market prices, it will be argued that the poor will have little protection from higher prices. Finally, Dr. Barham's thinking shared with us thus far takes no account of the drain that providing SOEs, including power plants, with subsidized fuel places on the budget. End Comment. KHALILZAD