DRAFT 2008 BUDGET NEARING CABINET APPROVAL

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 003665 SIPDIS SIPDIS E.O. 12958: DECL: 11/04/2017 TAGS: ECON EFIN PGOV IZ SUBJECT: DRAFT 2008 BUDGET NEARING CABINET APPROVAL REF: BAGHDAD 3088 Classified By: Economic Minister Charles P. Ries for reasons 1.4 (b) an d (d) ¶1. (C) Begin Summary: Budget negotiations continue in the Council of Ministers (CoM). DPM Barham Salih told EMIN in a 3 November telcon that the Economic Committee recommended that the Ministry of Finance (MoF) raise the budget's oil price from 50 to 55 USD/barrel, translating into a 3.1 billion USD revenue increase to the original MoF draft budget. Oil revenue forecasts with the new price for oil will be approximately 40.8 billion USD. Security expenditures (Ministries of Defense and Interior),with the higher price of oil, are now expected to total 9 billion USD, an overall increase of nearly 23 percent over 2007 levels. In a 4 November meeting, Finance Minister Bayan Jabr told U/S Jeffery that the capital investment provincial budget allocation would see an overall increase to 2007 levels. The budget currently is undergoing revisions at the MoF based upon the Economic Committee's recommendations. Both FinMin Jabr and DPM Salih stated that they expect the CoM to approve a budget to send to the CoR on or about 10 November, which would be a significant improvement from last year when the Council of Representatives (CoR) received the 2007 budget on 24 December 2006. End Summary. -------------- 2008 Exchange Rate: 1200 ID/USD -------------- ¶2. (SBU) The draft 2008 budget law assumes the continuing gradual appreciation of the Iraqi Dinar (ID) from 1260 ID/USD in 2007 to 1200 ID/USD in 2008, an appreciation of approximately 5 percent. This policy is in line with IMF recommendations to combat inflation. (Note: FinMin Jabr told visiting U/S Jeffery the GOI would sign a new Stand-By Arrangement (SBA) with the IMF in mid-December. End Note) ¶3. (SBU) Following the GOI's experience with budget deliberations for 2007, during which the late-December 2006 submission of the draft budget to the CoR was followed by more than a month of debate within the CoR, the MoF has issued instructions to the ministries and provinces that they should begin preparations now so that they are ready to execute their budgets on 1 January despite the lack of an approved budget. Jabr and DPM Salih reiterated that the MoF would send letters to the provinces and ministries again reminding them of this requirement once the CoM approves a 
draft budget to be submitted to the CoR. -------------- Non-oil Revenues Expected to Double -------------- ¶4. (SBU) With the higher assumed price of oil, and export levels assumed to remain constant at 1.7 million barrels per day (mbpd),oil revenue is forecasted to be approximately 40.8 billion USD. Higher export volumes are contingent on maintaining 1.5 mbpd from the South, which is likely, and consistent throughput from the northern pipeline, which is performing much better of late. Non-oil revenues are forecast to more than double to 6.7 billion USD, from the mobile phone license auction as well as tax revenue, including taxes on the cellphone companies. -------------- Security Inches Upward -------------- ¶5. (C) In the draft budget the MoF submitted to the CoM on 10 October, total expenditures by the ministries of defense and interior total 8.2 billion USD. However, with the increased revenue resulting from the decision to increase the assumed price of oil to 55 USD/barrel, FinMin Bayan Jabr told U/S Jeffery on 4 November that, while he could not commit to the 10 billion USD for security his Washington interlocutors were demanding, "why not make it 9 billion USD?" How the extra 800 million USD will be parsed between Interior and Defense is unclear (although in the earlier 10 October draft, the Ministry of Interior obtained a larger increase over 2007 than the Ministry of Defense). -------------- KRG Allocation Plummets -------------- ¶6. (C) Capital budget expenditures in the first MoF draft are down approximately 12 percent from 2007. However, FinMin Jabr indicated to U/S Jeffery that the remainder (after the amount earmarked for security) of the additional 3.1 billion USD in BAGHDAD 00003665 002 OF 002 revenue from the higher average price of oil would be allocated to capital investment budgets for the provinces. In the MoF's initial budget draft, the KRG seems to have taken the biggest hit, attributed to its poor execution rate for 2007 capital projects. Its initial capital investment allocation totaled 750 million USD, representing a drop of more than half from 2007. We anticipate that, should the CoM's final decision maintain this level of funding for the KRG, Kurdish votes in the CoR will amend the budget to restore much of what the KRG lost. -------------- Carryover Provision Still Unannounced -------------- ¶7. (C) Given the proven ability of the provinces to execute their capital budgets, FinMin Jabr's promise to institute a carryover provision that would permit unspent 2007 capital investment funds to be spent into 2008 is good news. Jabr hinted that he might extend the provision to the ministries as well, but said specifically that this provision only covered capital investment budgets. Jabr has said repeatedly that he intends to postpone any public announcement that he will permit the carryover of unspent funds in order to encourage the spending units to continue executing their budgets through the end of the fiscal (calendar) year. -------------- Comment -------------- ¶8. (C) Our message to the GOI that security expenditures must rise has resonated. Still, we will continue to push for more funds for security, including for programs to accommodate the Concerned Local Citizens program. Both DPM Salih and FinMin Jabr stated that the CoM would approve a budget on 10 November that would be presented to the CoR thereafter. We will continue to monitor this process closely and report new developments as they arise. End Comment. ¶9. (SBU) The table below represents the MoF's initial draft and does not reflect the Economic Committee's decision to increase the average price of oil to 55 USD/barrel. ¶10. (SBU) Comparative Annual Budgets* 2007 2008 Percent Final Draft Change Budget Budget -------------- -------------- Revenue Oil Exports 1.7 1.7 0.0 (Million barrels per day) Oil price realization 50 50 0.0 (Price per barrel) Oil Export Revenues 31.0 31.0 0.0 Other Revenues 2.4 6.7 179.2 Total Revenues 33.4 37.7 12.9 Operating Expenditures Non-Security 23.6 25.6 8.5 Security: Ministry of Defense 4.2 4.4 4.8 Ministry of Interior 3.3 3.7 12.1 Subtotal Security 7.5 8.1 8.0 Total Operating Expenditures 31.0 33.7 8.7 Investment Expenditures Direct Provincial 2.4 3.3 37.5 Oil Sector 2.4 1.7 -29.2 Other 5.3 3.8 -28.3 Total Investment Expenditures 10.1 8.8 -12.9 Overall Fiscal Deficit (7.7) (4.8) -37.7 *Amounts expressed in USD billions unless otherwise noted. For 2007 budget calculations, the official exchange rate of 1260 ID/USD was adopted and for 2008, the exchange rate adopted was 1200 ID/USD. CROCKER