DPM CHALABI ON AGRICULTURE AND FOOD DISTRIBUTION

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 000241 SIPDIS SIPDIS STATE PASS TO AGRICULTURE E.O. 12958: DECL: 01/27/2016 TAGS: ECON EAGR EAID EFIN ETRD PGOV PREL IZ SUBJECT: DPM CHALABI ON AGRICULTURE AND FOOD DISTRIBUTION SYSTEM REFORM Classified By: Deputy Chief of Mission David Satterfield for reasons 1. 4 (b) and (d). ¶1. (C/REL MNF-I) SUMMARY: In a January 14 meeting, Deputy Prime Minister Chalabi said he intends to continue to push substantive reform of the Public Distribution System (PDS) while simultaneously reinvigorating Iraq's struggling agricultural sector in order to better meet domestic demand and reduce the country's reliance on imports. He added that the GOI's success in making cash payments to each Iraqi family in fall 2005 (as compensation for goods not received via the PDS) "proved" that the capacity exists to push ahead with further monetization of the program. Chalabi said he has instructed the Ministry of Trade to purchase domestically as many food basket goods as possible, and he has pledged to raise prices paid to Iraqi farmers for wheat and rice to match those paid for imports. If Chalabi has an influential place in the new government and can sustain his initiatives, we may see substantive reforms across several sectors of the Iraqi economy in 2006. END SUMMARY. -------------- -------------- "Invigorating" Agriculture at the Expense of PDS -------------- -------------- ¶2. (C/REL MNF-I) In a January 14 meeting, DPM Ahmed Chalabi told DCM and Pol/Mil and Econ Counselors that the GOI had made cash payments to recipients of PDS benefits in late 2005 to compensate Iraqis for gaps in delivery of many products in the PDS food basket from January-August (septel reports on Chalabi's views on fuel prices and infrastructure security). Mosul, according to Chalabi, turned out to have been the most deprived area. Chalabi said that the GOI issued a check for 39,000 ID (approximately $26) to the head of each family in that province, along with instructions regarding which specific bank would cash the check. Other payments varied per province, based on what each province had been shorted during the period in question. (NOTE: Recipients in Baghdad, for example, report receiving only 19,000 ID. END NOTE.) Rafidain Bank received the lion's share of the business, Chalabi noted, processing over a million checks valued at $212 million (of an approximate total of $450 million). ¶3. (C/REL MNF-I) Chalabi said it is his intention to "invigorate" the agricultural sector. He added that, with the exception of wheat and rice (which Iraq is currently incapable of producing in amounts necessary to satisfy PDS needs),the Ministry of Trade has been instructed to purchase domestically all commodities supplied via the PDS as much as practicable; the GOI will facilitate imports if importers agree to work at their own risk. According to Chalabi, $100 million worth of commodities have been imported under the new system to date, and applications from a number of prospective importers are in process. Chalabi said it is important for multiple players to get involved in the bureaucratic process, estimating that "within six months, the private sector could be mobilized" to provide the country with $1.7 billion worth of wheat, $500 million worth of rice, and $1.18 billion worth of other consumables. (NOTE: According to Embassy calculations, Iraq only needs approximately $800 million worth of wheat for the PDS each year. All basket items besides flour, rice, sugar, and cooking oil amount to $700 million at current retail market prices. END COMMENT.) ¶4. (C/REL MNF-I) Chalabi said that the fall compensation payments proved two things: first, that the government has the capacity to reach out directly to Iraqi families; and second, that the private sector can function effectively to meet the country's needs. Chalabi said he intends to enact a policy whereby the GOI will maintain three months worth of strategic reserve, selling it at auction each quarter in order to prevent price gouging. He also said he intends to stop paying subsidies to families who make over one million ID/month. -------------- Making it Pay for the Iraqi Farmer -------------- ¶5. (C/REL MNF-I) Chalabi said he recognizes the need to crack the intertwined challenges of subsidies, destroyed production, and underdeveloped agriculture markets. He said, for example, that the Ministry of Trade pays Iraq farmers $400/ton for rice. (NOTE: In fact, we understand that Iraqi farmers received $650/metric ton in 2005. END NOTE.) Importers, he related, received $650/ton in order to cover BAGHDAD 00000241 002 OF 002 shipping costs. Chalabi said that he intends to offer local farmers the higher price to encourage production. (COMMENT: Chalabi's use of statistics is often a bit idiosyncratic. Although he has a Ph.D. in Mathematics, he often tosses off numbers for the sake of illustration that are not wholly accurate. However, the point here is that Chalabi believes and intends to act on the assumption that domestic producers regularly have been paid less than foreign importers, thus depressing domestic production. END COMMENT.) -------------- COMMENT -------------- ¶6. (C/REL MNF-I) COMMENT: Chalabi's place in the next government is uncertain. Despite his checkered reputation, he appears to be a bona fide advocate of fundamental economic reforms. Yet, even with his current authority, we are seeing push-back on several items on the agricultural reform agenda. For example, local media reported on January 19 that the Minister of Trade intends to avoid further monetization and has signed several "large" contracts with foreign companies to import food products for the PDS. Furthermore, the jury is still out on the overall success of the GOI PDS payout effort. Post has received reports of problems in several areas of the country where some banks did not have recipient lists and others did not have sufficient cash to distribute. Nevertheless, this first large experiment with monetization, despite its shortcomings, appears to lay to rest the view that it would be impossible to have an ambitious monetization scheme, given the rudimentary state of Iraqi banking. END COMMENT. KHALILZAD