U/S JEFFERY'S MEETING WITH DPM BARHAM SALEH

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 004005 SIPDIS SIPDIS DEPARTMENT FOR NEA-I; EEB E.O. 12958: DECL: 12/10/2017 TAGS: ECON EFIN EINV EPET ETRD PREL IZ SUBJECT: U/S JEFFERY'S MEETING WITH DPM BARHAM SALEH Classified By: U/S Reuben Jeffery for reasons 1.4 (b) and (d) ¶1. (C) Summary: During his December 5 meeting with U/S Jeffery, DPM Saleh underscored the importance of achieving needed political reforms to consolidate economic gains. U/S Jeffrey said KRG/oil company contracts give the impression of a lack of progress on hydrocarbons legislation. Saleh said that the impasse on the hydrocarbons legislation is political. He explained that the reality is that a common vision does not yet exist on management of Iraq's oil resources nor does there seem to be the political will to find a compromise solution. He added that contracting procedures and the role of INOC are key unsettled issues. The 2008 budget includes USD 19 billion in capital expenditures, a number which includes USD 4 billion in carryover funds. Budget execution capacity remains an issue. DPM Saleh said he is looking forward to the February 2008 launch of the U.S./Iraq Joint Economic Committee (JEC). He wants the GoI to use all available means to convince U.S. companies to invest in Iraq. He said the banking sector remains a significant "bottleneck" in the Iraqi economy. DPM Saleh said 2007 was a "year of transition" for the Iraqi economy and 2008 must build on this progress. Efforts continue toward reforming the PDS, including means testing and fewer items distributed. End Summary. ¶2. (C) DPM Saleh told the delegation on December 5 that he sees the present moment as a hopeful one in Iraq's history, but one requiring further progress on political reforms in order to consolidate the economic progress that has been achieved. Unfortunately, he added, improvement in the economy has not been accompanied by comparable advances in Iraqi politics. Saleh said the unfortunate reality is that a common vision does not yet exist on the management of Iraq's hydrocarbon resources nor is there the political will to find a solution to the current impasse. In this difficult environment he underscored the importance of continuing U.S. engagement on this issue. Even absent passage of the hydrocarbons legislation, he said Iraq needs to change the way it manages its oil resources. Contracting procedures and the role of the Iraqi National Oil Company (INOC) are key issues that remain to be settled. 2008 Budget -------------- �0A; ¶3. (C) In response to U/S Jeffery's query about the status of the 2008 budget, Saleh said the second reading had taken place that day in the Council of Representatives. He said he was pleased with the USD 19 billion in the capital expenditure budget (which includes USD 4 billion carried over from 2007). Still, he conceded, the capacity to execute the budget remains a problem. As to provincial-level budget execution capacity, Saleh said it is improving. He added that sheikhs from Anbar and other provinces have come to him recently to complain about not receiving government contracts - a circumstance that he sees as evidence that "things are taking off" in the provinces. He said he is also encouraged by recent drops in black market fuel prices to levels closer to official prices. Over time this will hinder the ability of insurgent elements to use this method of raising revenue. Joint Economic Committee -------------- ¶4. (C) Saleh said he is looking forward to the launch of the joint U.S./Iraq Joint Economic Committee in February 2008. He said the GoI should use all possible tools, including free trade zones, to induce American business to invest in Iraq. But this is another case, he added, where Iraq needs to "fix the politics" in order to give the economy a boost. Saleh acknowledged that the banking sector remains a "major bottleneck" in the Iraqi economy. He went on to say that, in his view, Rafidain and Rasheed (Iraq's state-owned banks) are not "reformable" and efforts to boost the Iraqi banking sector should move beyond a focus on these institutions. Picking up on U/S Jeffery's reference to the KRG, he noted the "paradox" that, while much of the KRG economy is still dominated by the public sector, the construction industry is mostly in private hands. He agreed that significant reforms are required throughout the KRG economy, including the banking sector. PDS Reform -------------- ¶5. (C) DPM Saleh articulated his view that 2007 was a "year of transition" for the Iraqi economy. The task in 2008 will be to maintain momentum and build on the progress achieved. With respect to the agricultural sector, U/S Jeffery asked BAGHDAD 00004005 002 OF 002 about efforts to push ahead with reform of the public distribution system (PDS),particularly since there is currently no agriculture minister. Saleh said Prime Minister Maliki's agricultural initiative, among other goals, is continuing this process. Progress towards means testing and a more limited list of distributed items are examples of the reforms being implemented in this large and expensive program. Saleh said his preference in the PDS would be to move toward monetary assistance for recipients rather than distributions in kind. This would simplify the administration of the program and diminish the opportunities for corruption. ¶6. (U) E staff cleared this cable before departing. BUTENIS