PLANS TO IMPROVE GOI BUDGET EXECUTION

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 003774

SIPDIS

SIPDIS

E.O. 12958: DECL: 10/08/2016
TAGS: EFIN ECON EINV ENRG PGOV IZ
SUBJECT: PLANS TO IMPROVE GOI BUDGET EXECUTION


Classified By: Ambassador Zalmay Khalilzad for reasons 1.4 (b) and (d).


1. (C) On October 7 the Ambassador discussed budget
execution issues with Deputy Prime Minister Barham Salih and
Finance Minister Bayan Jabr at the DPM's initiative. Barham
Salih made clear that he is determined to improve not just
budget implementation but the overall budgeting process and
its relation to the economy. He was equally clear that he
was looking for U.S. help in this process, both in terms of
political support and technical assistance. Key areas to
focus on include the oil ministry and Barham's Supreme
Reconstruction Board. It was agreed that the present Baghdad
Security Plan-related joint committee would be expanded to
include ministries and national-level projects. With respect
to the meeting schedule for the International Compact with
Iraq, Barham promised to call the Kuwaiti Foreign Minister in
the next days to confirm that Kuwait would host the final
Prep Group meeting at the beginning of November. He
solicited U.S. help in talking to the Saudis about possibly
hosting the signing meeting of the Compact at the end of
November.

--------------
Compact
--------------


2. (C) The Ambassador, accompanied by DCM, Econ MinCouns,
Treasury Attache and NCT Deputy met with DPM Barham Salih,
Finance Minister Jabr and Finance Minister Advisor Aziz at
Barham's suggestion to address how to improve budget
execution now, and with respect to the '07 budget. Barham
began the meeting by noting that UN Iraq envoy Qazi would be
talking to UN Deputy SecGen Malloch Brown about the UN
approaching the Kuwaitis to host the final Compact Prep Group
meeting, which would now be in early November vice October 30
because of the Eid holiday. Barham also later promised to
call the Kuwaiti foreign minister himself, and agreed that
time was pressing for a decision on that meeting and the
signing meeting of the Compact at the end of November. Barham
noted that it would be ideal if the Saudis hosted the latter
meeting, but if this proved impossible - and he said he would
need U.S. help to convince the Saudis to do so - then Rome
might be a good option.

--------------
Budget Execution
--------------


3. (C) Barham said that he intended to inaugurate in the next
few days the first of a series of special meetings with Key
ministries on budget execution; starting with the Ministry of
Oil. (Note: This was a U.S. Mission recommendation. End
Note.) Finance Minister Jabr averred that his ministry had
not turned down a single request from MinOil for funding, but
that the Oil Ministry was seriously under spending its budget
despite the urgency of investment needs. Barham added that
they were anxious to work with the U.S. to improve the '07
budget and its implementation. Barham was looking for
suggestions on how the GOI could do a better job of managing
the economy through the budget process. In response, the DCM
presented a number of specific suggestions to solve immediate
problems and set the stage for a better '07 budget record.
The goal was to get off to a good and early start on spending
for '07. He also advocated using the remainder of the '06
budget cycle to work with individual ministries to get as
much accomplished still this year as possible. He noted the
good results that had been produced by the joint committee on
the Baghdad SECURITY Plan (BSP). Working with ministries one
at a time with U.S. advisers would be a good way to start,
with the goal ultimately being better cross-ministerial
coordination on budget execution.

--------------
Oil Problems
--------------


4. (C) Jabr responded that the place to start was with the
Oil Ministry, which had a budget of $3 billion of which only
$300 million had been spent. He said that he, Planning
Minister Baban, and Oil Minister Shahristani would be getting
together in the next days to look at a systemic approach that
would get MinOil to adopt more market-based approaches on
funds for subsidies and a better system for purchasing
equipment as well as capital expenditures.

--------------
Practical Issues
--------------


5. (C) The DCM urged the DPM to have his STAFF follow up on
ways to expand the BSP contracting group to a broader
inter-ministerial level. Barham agreed that it was essential
to put an "Iraqi face" on the contracting group and discussed

BAGHDAD 00003774 002 OF 003


his likely choice to coordinate the process in his office.
The DCM said the initial focus should be on clearing up
Iraq's arrears to restore the country's creditworthiness.
Jabr said that a letter of credit (LC) for $200 million to
settle kerosene debt with Turkey had been opened, and Aziz
added that $300 million for the Public Distribution System
(PDS) had also just been made available, but that for this
amount approval of the COUNCIL of Representatives was needed
(and was being sought). Jabr said that the PDS still had
$180 million in reserve to use for spot market purchases. He
wanted the Trade Ministry to streamline its purchases. The
Ambassador replied that in his recent discussion with Trade
Minister Sudani, the same theme had been struck, that the PDS
needed to develop more of a market approach by using targeted
market purchases to encourage more of a trading system in
Iraq for basic foodstuffs. Aziz went on to describe various
bottlenecks in the system - the gap between what had been
allocated to the PDS and what it had spent; the gap between
what the Bayji refinery was capable of producing in refined
product, and what it actually produced and the fact that
MinOil always wanted more money to buy imported product than
to solve its own production problems. He gave the example of
MinOil's modest request for additional refining equipment for
the Doura refinery in Baghdad, when the facility could have
been greatly expanded with available funds.


6. (C) Barham expanded on this theme saying that the Economic
and Energy Committees he leads could serve as a joint
spending and planning committee. He especially wanted to
have the committees meet jointly to address the problem in
the Oil Ministry. He saw no reason why projects that made
economic sense and were politically important like the Erbil
pipeline could not get started. Jabr added that he wanted the
pipeline project that ran parallel to the old Haditha
pipeline started as well, since it would give Iraq another
export route and would be a signal to the population in Anbar
that they have a stake in Iraq's petroleum resource. The
pipeline would be capable of handling 500,000 bbls/day but
only take one year to complete.


7. (C) On money for Tal Afar, Jabr said he was prepared to
release funds but needed a request from the Prime Minister to
do so. There was some discussion of whether the letter from
Maliki hadn't already been issued, but Jabr confirmed that
the funds would be released soon. Aziz added he planned to
release the remainder of the $2 billion allocated for the
provinces as well. It was agreed that the U.S. should also
work with the provinces to improve their contracting
capacities. DCM proposed that the U.S. sponsor a conference
to explain Iraqi budgeting processes to ministries and to
provincial authorities. Both the DPM and Finance Minister
enthusiastically welcomed this idea.


8. (C) The DCM presented proposals for keeping funding
available for projects started in FY '06 if sufficient
progress had been made, obviating the need to re-fund such
projects. Jabr agreed saying he had a fix in mind for
streamlining the funding of ongoing projects. The U.S. side
also pushed the need to make '07 allocations as early as
possible so that funding could actually start at the
beginning of the year. Jabr agreed, saying his main goal was
to start spending money at the beginning of the year so that
budget implementation would be greatly sped up. The '07
budget will be presented to the CoR on October 15 as
required. The DCM also handed over a paper on the need to
get diesel generators in storage in Jordan delivered before
the start of the winter rains made transport a problem.

--------------
Defense Issues - FMS
--------------


9. (C) Barham said that the ministry with the most serious
budget problems was the MOD. The U.S. side presented a
proposal for spending up to $1.5 billion of the MOD's
remaining $2 billion through the FMS system. Jabr said that
he favored such a proposal, but that ministers, such as
Shahristani, were opposed. The Ambassador replied that if
the opposition was based on lack of understanding that FMS
involves no loss of sovereign Iraqi control of funding
choices and didn't tie Iraq exclusively to U.S. suppliers,
that these concerns could be addressed. Jabr thought such an
information campaign could largely resolve cabinet opposition
to use of FMS.


10. (C) Barham said that the Planning Ministry was being
tasked with reviewing all ongoing projects to come up with
ways to improve implementation. While the government needed
to speed up spending, it also had to be sure that projects
were not inadvertently serving as a way to sustain militias
with contracts. He thought the U.S. could serve a useful
role as a monitor, and the Ambassador replied that we could
pool our resources, to build political acceptance for the

BAGHDAD 00003774 003 OF 003


U.S. to play a role in assisting in contracting, procurement,
project oversight, and monitoring. Barham also thought that
resources could be provided by contributions through the
International Compact with Iraq, especially if Iraq
demonstrated in the coming weeks a better commitment to
implementation. The Compact could provide needed "interim
assistance" in Barham's words to capacity building. He
described in more detail the Supreme Reconstruction COUNCIL
from the days of the monarchy, and how it could be structured
to be headed by the Prime Minister, with key cabinet
ministers but also independent experts. The goal was to come
up with major multi-year projects such as railways, highways,
housing and upgrading the power system. Barham said he had
found a plan from the '80's for the railway system that was
still valid and could be put into implementation quickly.
Jabr added that he was seeking to find ways in the '07 budget
for multi-year funding, with projects funded for up to three
years. He returned to the idea for a conference on how to
work in the budgeting process and reiterated his offer to
work with U.S. experts to structure such an event.


11. (C) Barham concluded the budget implementation discussion
by saying that the '07 budget would effectively decide the
success or failure of Iraq's economic future. He was
counting on U.S. help both in how to structure the budget and
fundamentally improve implementation. He wanted to be able to
tell Iraqis that if the budget is implemented well, spending
can rise from $26 billion to $40 billion which would be a
good start on addressing Iraq's real needs. He wanted to
include bank reform and reform of the LC system into the
budget process as well. The Ambassador welcomed this bold
approach, but noted that Iraq needed to address the inflation
problem at the same time if increased spending wasn't going
to lead to even more serious inflationary pressures. Both
Jabr and Barham acknowledged that Central Bank Chairman
Shabibi was not very flexible on dinar appreciation, but they
would continue their efforts to get him to be more
supportive, within the framework of the Central Bank's
independence. Jabr added, however, that he did not think the
inflation figures really captured overall price rises in
Iraq. The shortages and SECURITY situation created many
statistical anomalies that tended to overstate inflation, in
his view. Nevertheless, there was a need to address the
problem. He attached great importance to getting the
regulation for the recently-passed Fuel Import Liberalization
Law (FILL) adopted quickly and proposed a conference with the
private sector to develop market-oriented regulations when he
and Shahristani are in Amman to meet with the IMF at the
beginning of November. He suggested November 6 as a good date
for such a conference.


12. (C) Comment. Both Jabr and Barham Salih came across as
genuinely committed to address and expand the budget
implementation issue. Building off the success of the
Ministerial Executive Steering Committee in assisting the
Baghdad SECURITY Plan in removing bottlenecks is a step in
the right direction in dealing with ministries. The idea of
a conference or series of conferences for Iraqi and
provincial officials will require quick turnaround to seize
the moment. But if the DPM and Finance Minister can really
energize the government to begin getting money spent and
projects started, this could be an important milestone in the
recovery of the Iraqi economy and the credibility of the
Maliki government. End comment.
KHALILZAD