DEPUTY PRIME MINISTER DISCUSSES THE OIL LAW AND

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 004616

SIPDIS

SIPDIS

E.O. 12958: DECL: 12/18/2016
TAGS: ECON EFIN IZ
SUBJECT: DEPUTY PRIME MINISTER DISCUSSES THE OIL LAW AND
THE DRAFT 2007 BUDGET

Classified By: Deputy Chief of Mission Daniel V. Speckhard for reasons
1.4 (b) and (d).


1. (C) Summary: Deputy Prime Minister Barham Salih met with
Charge d'Affairs Daniel Speckhard on December 18 and
discussed the issues raised in Prime Minister Maliki's speech
at the National Reconciliation Summit on December 16.
Specific topics include the oil law, the 2007 GOI budget
negotiations, fuel imports, and the importance of the
International Compact with Iraq. Both the oil law and the
draft budget are nearing approval by the highest levels of
the Iraqi government, and should soon be submitted to the
Council of Representatives. End Summary.

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"The Oil Law is a Good Law"
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2. (C) Deputy Prime Minister (DPM) Barham Salih said that
the Kurds and the central government were very close to an
agreed text of the hydrocarbon law for submission to the
ministerial legal committee and then the Council of
Ministers. He said that the Prime Minister and Nechirvan
Barzani met that morning, and agreed to replace central
government's "right to approve" with the "right to veto", a
difference that DPM Salih characterized as purely political.
Shahristani is currently out of the country, and the DPM
requests post's assistance in encouraging him to return to
Iraq to finalize negotiations on the law. "We should be
behind this law," DPM Salih said, "and we need you to help
convince Shahristani and the Sunnis."


3. (C) DPM Salih emphasized that the negotiated solution was
the basis of a good law that would help to unify the country.
He characterized the process as having "flipped the Kurds'
position on revenue sharing", where now the Kurds have agreed
that the revenues should go to the central budget, and then
be distributed to the regions, rather than using an automatic
deduction of revenues from oil exports. "The Kurds realize
that this is in their interest, and it happens also to have a
unifying force for the country," he said. The DPM predicted
that the law would be endorsed by the Council of Ministers by
the second week of January 2007 at the latest.

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Ministers Negotiate the 2007 Budget
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4. (C) The Council of Ministers plans on endorsing a draft
2007 budget by Thursday December 21. DPM Salih said that the
budget as currently drafted will be hard to sell to his
constituents because there is not enough funding allocated
for economic development. The DPM wants to add allocations
of $300 million for the Housing Program, $150 million for
Disarmament, Demobilization and Reintegration (DDR),$100
million for an employment program, $250 million for school
construction nation-wide, and $100 million for public
universities. He also plans to increase funding for
investment in the oil and electricity sectors and funding for
the provinces. This budget, DPM Salih said, is one that he
can sell. (Note: These numbers for Housing, DDR, and
Employment are all lower than earlier estimates of the costs
of these programs, but would still be enough to initiate work
and meet some of the goals highlighted by post. End note.)


5. (C) DPM Salih agreed that the implementing mechanisms for
some of the programs needed to be developed. At this point
the DPM is suggesting that the funding for these programs
come from the security allocation, which could be made up in
the middle of the year in a supplemental budget with funds
from the unexecuted portion of budgets from other ministries.
He said that the IMF, unlike in 2006, has agreed that the
GOI can have supplemental budgets in 2007. While unexecuted
funds are supposed to be shifted to the Supreme
Reconstruction Board, he suggested that the budget could
include the security ministries as other recipients of the
unused funds.


6. (C) The DPM also said that he has added a program to the
budget to reduce the government payroll. While the details of
the program are under development, the idea is to transition
some government employees to the private sector by paying a
percentage of their salaries for three years. "This program
is like a cash injection for the private sector," the DPM
said, "and even if it doesn't work perfectly, getting some of
these employees off of the government payroll is worth it."

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Budget Execution and the New Supreme Reconstruction Board
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7. (C) The Deputy Prime Minister gave the Prime Minister a
draft law on December 18 authorizing a "National
Reconstruction and Development Commission," the new name for
the Supreme Reconstruction Board. This commision would be
allocated zero or a small amount in the 2007 budget, and
would receive its money from the unspent funding from line
ministries discovered in a mid-year review. This process
would provide incentives for better GOI budget execution
throughout the year. The DPM seemed convinced that
successful execution of the budget execution had increased
noticeably in the past few months, but acknowledged that more
improvement is needed and requested post's support to do so.

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No Allocation for Fuel Imports in the 2007 Budget
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8. (C) The Charge highlighted that there was no allocation
for fuel imports in the 2007 budget, even though the
implementing regulations of the new Fuel Import Legalization
Law are not yet enacted, and the private sector is unlikely
to be ready to meet demand by January 1 2007. The DPM said
that the IMF insisted that there be no allocation for fuel
imports in the 2007 budget. He added that Minister of Oil
Husayn al-Shahristani thought he could find $300 million from
the sale of heavy fuel oil, a residual product, to use for
importing fuel for the first few months of 2007. The Charge
urged DPM Salih to review the topic, as the IMF would likely
not want a good policy to fail because of bad implementation.

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The International Compact
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9. (C) DPM Salih downplayed the need for more regional input
to the International Compact with Iraq (ICI). He said that
the ICI is an Iraqi document that most ministers are happy
with, and more negotiations would be neither welcome nor
productive. He said that the signing ceremony will not be in
early January. During the conversation the DPM received a
phone call inviting an Iraqi delegation to discuss the ICI
with the Saudi government.
KHALILZAD