LAUNCHING THE COMPACT WITH IRAQ

S E C R E T SECTION 01 OF 05 BAGHDAD 003058 SIPDIS SIPDIS FOR NEA/I, NEA/ARP AND C E.O. 12958: DECL: 08/20/2016 TAGS: PREL EAID PGOV IZ SUBJECT: LAUNCHING THE COMPACT WITH IRAQ Classified By: CDA DAN SPECKHARD, REASONS 1.4 (B) AND (D) -------------- SUMMARY -------------- ¶1. (C) Treasury Deputy Secretary Kimmitt and Department of State Counselor Zelikow met with Prime Minister Maliki, Deputy Prime Minister Salih, Finance Minister Jabr, Oil Minister Shahristani, Central Bank Governor Shabibi and other foreign delegation members in Baghdad during the July 19-21 informal launch of the International Compact with Iraq. In their meetings, DepSec Kimmitt and Counselor Zelikow briefed on their Compact consultations in Berlin, Paris and London and plans for subsequent stops to Kuwait, Saudi Arabia, the UAE, Italy, and Brussels. Discussions focused on moving forward with an ambitious agenda to prepare the ground for the Preparatory Group meeting rescheduled for early September. Iraqi interlocutors agreed that work still needs to be done to bind Gulf Arabs to the Compact. DepSec Kimmitt and Counselor Zelikow emphasized that the Compact should not be viewed as donor/pledging exercise but rather a comprehensive reform program that will move Iraq to economic self-sufficiency in the next five years. The international community's role in the Compact will be to provide assistance to bridge the gap between Iraq's resources and expenditure requirements and to encourage private sector investment flows in a revitalized Iraqi economy. End Summary. -------------- Prime Minister Maliki: -------------- ¶2. (C) During a call by Deputy Secretary Kimmitt and Counselor Zelikow, Prime Minister Maliki welcomed the prospect of strong U.S. support for the Compact process. He acknowledged that France and the Arab world had some hesitations about participation, but believed they would respond favorably. Maliki also took note of the close link of economic issues to reconstruction in both its security and political spheres. It cannot be split. He continued, investment will not come without increased security and political reforms will encourage countries to offer support. He defined GOI-UN collaboration as an umbrella with the U.S. contribution critical to ensure success. ¶3. (C) Deputy Secretary Kimmitt responded with a strong statement of support from the President and praised recent work by the GOI to bring the new investment law to the parliament. He also gave credit to Iraqi work with the IMF and emphasized that the international community would take note of such accomplishments. He also impressed upon the PM, and got his commitment, to get the full force of the GOI, i.e., a multi-ministerial effort behind the compact. Counselor Zelikow took up the theme of international support and called the compact a contract between Iraq and the world leading to political success and financial independence. He also encouraged the PM to take tough decisions as required and to overcome predictable resistance within his government. -------------- Oil Minister: Compact Needs Broad GOI Support -------------- ¶4. (C) Oil Minister Shahristani told the Deputy Secretary and Counselor that Iraq needed support from a broad spectrum of countries, including China, India and Russia: It is now time for Iraq to engage directly with the world. Within Iraq, he stressed that the Compact must be broadly supported across the Iraqi political spectrum. Shahristani advised that the Compact must be seen as an Iraqi initiative, but also recommended that the U.S. reach out to bring in the Ministers of Trade and Planning and Development Cooperation (MoPDC),particularly as MoPDC represents the Tawafuq faction in the government. Shahristani acknowledged that DPM Barham Saleh has doing an excellent job on the Compact, but cautioned that his BAGHDAD 00003058 002 OF 005 association with it could become a weakness later (presumably because of Saleh's Kurdish background). Deputy Secretary Kimmitt suggested that sectoral working groups might help address this, but promised to reach out to both the Trade and Planning ministers during the upcoming GOI visit to the U.S. -------------- -------------- Capital Budget Expenditures and Foreign Investment in Oil Sector -------------- -------------- ¶5. (C) In response to Deputy Secretary Kimmitt's question as to whether MoO could spend additional funds that might come to it under the Compact, Shahristani said that MoO would not spend its $3.5 billion 2006 capital budget. Under the current system, the Ministry of Finance (MoF) does not release funds until approximately April; but there was no cabinet in place to take decisions on spending priorities until May 20. On top of this and in an attempt to fight corruption, the GOI has tightened spending procedures to such an extent that it is almost impossible to spend any money at all. According to Shahristani, the contracting committee (which approves all contracts and purchases over $3 million) returns contracts repeatedly for the most minor revisions and now is requiring both bid bonds and performance bonds of all companies as a matter of course. It is difficult enough doing business in Iraq, Shahristani said. The cabinet must fix this, he concluded, as most oil companies that MoO would like to see working in Iraq have no need to fight for additional business here. In light of these difficulties, Shahristani said that MoO is focused on optimizing existing production this year, utilizing smaller sums of money and finishing up existing projects. ¶6. (C) Shahristani said that, given the current level of resources and given sufficient security, Iraq could be producing some 3 million barrels per day (BPD) and exporting 2.5 million BPD. Without additional resources, Shahristani said that MoO could raise this by some 500,000 barrels per year. If, as he intends, the hydrocarbon law is passed by the end of 2006, Shahristani said the situation will improve markedly. With international oil companies (IOCs) developing new fields and the GOI focused on existing fields, Iraq could produce some 6-8 million BPD within ten years. He predicted that, if the law is in place, IOCs will negotiate contracts in the first half of 2007; they will need 5-7 years to develop and slightly longer to optimize production. He added that many officials in MoO still have a very limited mindset, not seeing the need to reach outside world for assistance in developing Iraqi resources. This includes, he said, people in key positions. -------------- Oil's Woes: Politicos as well as Criminals -------------- ¶7. (C) Shahristani said that influential political groups cause as much difficulty in oil products and crude oil distribution as criminals. In order to get the sector going in the right direction, Shahristani said that it is essential that the USG help pass the right message to all groups that Iraq's development cannot be held hostage to political agendas nor to corrupt officials. Deputy Secretary Kimmitt welcomed Shahristani's emphasis on SIPDIS fighting corruption, noting that this helps the administration make a case for Iraq with the U.S. Congress. Shahristani asked whether the Compact could help Iraq gather information from the U.S. and other Compact members about past acts of corruption in an effort to uproot existing criminal networks and net some big fish. He also agreed that it would be useful to fold an emphasis on corruption into the Compact and with a wider focus than just the hydrocarbon sector. ¶8. (S) Shahristani referred to the kidnapping of the Director General of the Northern Oil Company (NOC) Adil Qazzaz as a concrete example. The U.S. has told the GOI verbally that Qazzaz may have been moved to Kurdistan. Calling this information explosive, Shahristani said U.S. unwillingness to officially pass information to the GOI that might indicate Kurdish involvement indicates U.S. reluctance to upset the Kurds. You have to choose, Shahristani said, and recognize that there are political groups that benefit from the status quo and resent MoO's BAGHDAD 00003058 003 OF 005 new, tougher line. -------------- -------------- CBI Shabibi on the Compact, Banking and Monetary Issues -------------- -------------- ¶9. (C) Governor of the Central Bank of Iraq (CBI),Sinan Shabibi discussed with DepSec Kimmitt and Counselor Zelikow the importance of the International Compact in bridging the gap between Iraq's budget and its resources. Governor Shabibi agreed that commitment from Iraq's neighbors was key and responded positively when DepSec Kimmitt shared that he would be meeting with King Abdullah of Saudi Arabia over the next week (Note: That meeting was subsequently postponed.) Shabibi also noted that Iraq's debt with Saudi Arabia had not been touched and that the public statement of the Saudis to produce $100 billion (sic) is a generous gesture that would contribute to good relations. Shabibi also added that Iraq is using the Paris Club as a benchmark and that international donors of the Compact should meet these same terms in providing debt relief to Iraq. ¶10. (C) On Iraq's economic progress, Governor Shabibi commented that he is in daily contact with the IMF and Federal Reserve on many issues. He added that Iraq is working in a brisk manner to restructure state-owned banks as well as other reforms in the financial sector. When Treasury DepSec Kimmitt noted that he thought the IMF conditions were reasonable under the Standy-By Arrangement, Governor Shabibi agreed and noted conditionality is important on both sides. ¶11. (C) In regards to the recent signing of the Central Bank audit by Governor Shabibi, Treas DepSec Kimmitt commented that this was an important benchmark. Shabibi agreed that the audit has opened his eyes to the process weaknesses of the CBI. Governor Shabibi welcomed the information from Treasury that there would be additional help from Treasury's Office of Technical Assistance in the upcoming month. Governor Shabibi emphasized in the meeting he would like to see advisors in the Central Bank. ¶12. (C) In discussing monetary affairs, Governor Shabibi said that the GOI is trying to create a market system. He noted there is difficulty in transferring money from the Federal Reserve to Baghdad. Treasury noted that it would work with the Central Bank to put contractual arrangements to help with these shipments of cash. On inflation, Governor Shabibi said reviews with the IMF has led the CBI to pursue a restrictive monetary policy, but the GOI has not made any changes in its exchange rate. When pressed by DepSec Kimmitt on this issue, Shabibi noted that it is a sensitive and delicate issue that the GOI is watching closely. He added that the GOI has a plan if inflation continues to "rear its ugly head." On raising interest rates, Shabibi commented that there have been two increases of interest rates in two weeks, but that the GOI hasn't publicly announced them yet. DepSec Kimmitt added that it would be important to announce these increases before PM Maliki's visit in late July to the U.S. - - - - - - - - - - - Finance Minister Jabr - - - - - - - - - - - ¶13. (SBU) During a lunch meeting with Finance Minister Jabr and Ambassador Khalizad, Deputy Secretary Kimmitt began by noting that Iraq had recently taken some steps in connection with Iraq's Stand-By Arrangement, including increasing fuel prices and advancing oil import liberalization and investment legislation. Jabr noted that mitigating the pension law passed at the end of 2005, which he described as very bad, was also an important issue for Iraq's SBA, but indicated that the issue was legally and politically difficult to resolve straightforwardly. He said that the MoF had been working on a priority basis in consultation with the IMF and World Bank to prepare amendments to the law that would mitigate the budgetary effect. However, Jabr reported the World Bank had recently made some further, sweeping requests that were difficult to accommodate and asked for U.S. help with the World Bank. ¶14. (SBU) Turning to the International Compact, Kimmitt noted that the fact that Iraq has performed so well under the SBA has BAGHDAD 00003058 004 OF 005 made people hopeful that Iraq will take the Compact as seriously. Jabr said that Iraq did not need easy money as much as project finance. Kimmitt indicated that the U.S. anticipated that financial support beyond Iraq's revenues would likely be required and that Iraq should not give up on additional international financial support. Counselor Zelikow observed that in light of the Compact it will be helpful to present Iraq's budget differently than it has in the past. Once the full cost of Iraq's security forces are taken into account (including those costs currently borne directly or indirectly by the Coalition),Zelikow noted a financing gap is likely to remain. ¶15. (SBU) Kimmitt noted that Jabr's discussions with Saudi Arabia about sending a technical delegation to discuss debt matters was important to making progress not only on debt relief but to Iraq's important relationship with the KSA, including in connection with the International Compact. Kimmitt noted that it is important for Iraq to take the lead in initiating a closer relationship with Saudi Arabia and the other Gulf states. Jabr agreed but emphasized that Iraq needs the help of the U.S. and Ambassador Khalilzad. Kimmitt noted that Saudi Arabia is unlikely to move on debt relief unless it sees that other countries are also supporting Iraq. Jabr said that along with debt Iraq wished to address Kuwait warreparations as a priority matter. ¶16. (SBU) Also on debt relief, Jabr said that the MoF had recently had contact with China and had received an indication that China might be willing to provide 100 percent relief on official/bilateral debt and 80 percent on private debt. Kimmitt noted that one of the criteria discussed for membership in the Compact Preparatory Group is providing $4 billion or more in debt relief and that China might qualify if debt relief could be confirmed. (Note: While China-Iraq debt figures have not been reconciled, the total has been estimated as high as $10 billion.) Jabr also noted that Iraq and Russia had recently confirmed the terms of their bilateral agreement providing debt relief in accordance with the November 2004 Paris Club agreement. Kimmitt encouraged Jabr to conclude the formal signing of the bilateral agreement with Russia as soon as possible. ¶17. (SBU) Kimmitt noted that while the government was paying subsidies, wages and pensions it had been less successful at executing investment budgets. In response, Jabr noted that he had recently approved the release of additional funds allocated to the 2006 budget to the provinces, bringing the total released to date to 40 percent. Jabr also noted that Iraq's 2007 budget would include more than $10 billion in investment: $4 billion for oil, $2 billion for electricity and $4.5 billion for other reconstruction ($2 billion direct to ministries and $2.5 billion to the provinces). -------------- Meeting Participants -------------- ¶18. (U) U.S. Delegation: Zal Khalilzad, Ambassador to Iraq Robert Kimmitt, Deputy Secretary of the Treasury Philip Zelikow, Counselor, State Department Robert Moeller, CENTCOM Evangelia Bouzis, NSC Tom Delare, Embassy Baghdad Jeremy Pam, Embassy Baghdad Karen Bronson, Embassy Baghdad (notetaker) Martha Patterson, Embassy Baghdad (notetaker) ¶19. (U) Separate meetings were held with the following Iraqi officials: Prime Minister Nuri al-Maliki Deputy Prime Minister Barham Salih Minister of Finance Bayan Jabr Minister of Oil Husayn al-Shahristani Central Bank Governor Sinan Shabibi BAGHDAD 00003058 005 OF 005 ¶20. (U) This cable was cleared by DepSec Kimmitt and Counselor Zelikow. SPECKHARD SPECKHARD