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. -------------- "The Oil Law is a Good Law" -------------- ¶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. -------------- Ministers Negotiate the 2007 Budget -------------- ¶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." -------------- -------------- Budget Execution and the New Supreme Reconstruction Board -------------- -------------- BAGHDAD 00004616 002 OF 002 ¶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. -------------- -------------- No Allocation for Fuel Imports in the 2007 Budget -------------- -------------- ¶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. -------------- The International Compact -------------- ¶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