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