ECONOMIC IMPACT OF IRAQ'S ONGOING SECURITY

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 001055

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/06/2023
TAGS: ECON ETRD EAGR ELTN ENRG PGOV IZ
SUBJECT: ECONOMIC IMPACT OF IRAQ'S ONGOING SECURITY
ENVIRONMENT

REF: BAGHDAD 01036

Classified By: Classified by: Economic Minister Counselor Charles P. Ri
es for reasons
1.4(b) and (d)


1. (C) Summary: Post contacts report that the recent Basra
security operations have led to economic disruptions
throughout Iraq. Basra Province itself has borne the brunt
of economic impacts. Supplies of health-related material
have been stretched, but the Ministry of Health reports
sufficient quantities to meet current needs. Iraqi Relief
and Reconstruction Fund projects are reportedly on track.
There has only been minimal disruption of essential services
like water and electricity, but the period of unrest, and the
real possibility of renewal of economically disruptive
fighting, reinforces the need for planning and spare parts to
mitigate against future cut-offs. Recent problems with the
Zubayr-Faw crude oil pipeline further emphasize the overall
vulnerability of Iraq's oil-export infrastructure. Security
risks at the Basra airport have been an inhibiting factor in
economic development in the south. Ongoing violence,
economic uncertainty, and problematic access to food supplies
are likely to make any efforts to reform the Public
Distribution System ration-system more difficult. Post
analysis of the situation at Umm Qasr port follows septel.
End summary.

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Health Issues: Strained Supplies
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2. (C) The current situation has strained medical supplies
and medicines. However, the Minister of Health reports that
his ministry can respond to the current needs. Post will
continue to emphasize that the USG is standing by to assist
if needed, but that the Ministries of Health (MoH) and
Defense (MoD) should take the lead. The MoH has a 24/7
crisis center manned to help coordinate its response. So
far, MoH and MoD have been working together to ship the
necessary supplies to where they are needed. Post has
assisted in arranging for the transfer of patients in Sadr
City to other facilities by providing the necessary
clearances at check points.


3. (C) At the Basra Children's Hospital, construction is well
along the road to completion and Iraq Transition Assistance
Office (ITAO) officers expect that the installation of
donated equipment will begin in July. However, given the
improvised explosive device (IED) attack on Project Hope's
Dr. Fox, and the recent fighting, it is possible that donors
may not feel comfortable donating the promised 24 million
dollars worth of medical equipment. This will be a topic of
discussion at an upcoming meeting in Oman of interested
parties -- the USG, UNDP, WHO, Project Hope and MoH. (Note:
The BCH performed a useful function as a casualty collection
point for the GOI during the recent fighting in Basra; the
private guard force also did a good job in keeping the site
secured. End note.)

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IRRF: No Impact Unless Problems Persist
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4. (C) The unrest in Basra will likely have little effect on
reconstruction programs in the short term. The completion of
several major Iraq Relief and Reconstruction Fund (IRRF)
projects might be affected if the unrest continues or spreads
to other areas since workers and engineers could face
difficulty getting to job sites. Some 200 projects are due
to be completed between now and the end of September 2008.
Projects undertaken by the Gulf Regional Division (GRD) are
of particular concern as GRD is expected to be severely
restricted in the work it is able to perform in FY-09.


5. (C) The Basra military operation may also slow down GOI
consideration of the recognition and transfer of capital
assets from the U.S. to the Iraqi Government. Prior to the
Basra operation, post engaged the Deputy Prime Minister and
the Ministry of Finance (MoF) to address the GOI's reluctance
to accept these assets. Any loss of authority by incumbent
ministers could hinder the process.

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Essential Services: Minimal Impact Thus Far
--------------


6. (C) There has been only minimal impact on the ability of
local governments to provide essential services thus far.
The Ministries of Electricity, Oil, and Water Resources
continue to function. Within the electrical sector, minimal
damage was sustained. However, the damage was local and not

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to the national infrastructure. The Ministry of Electricity
(MoE) has mobilized emergency repair teams and equipment to
repair this damage as soon as they are granted access to the
sites where the damaged occurred. Humanitarian issues in
Basra mainly centered on security concerns that prevented
access by the population to essential services.


7. (C) Contacts at the Ministry of Water Resources (MoWR)
report that there have only been minimal impacts on the water
sector. Like the MoE, the MoWR must continue to develop its
sustainability programs so that in instances where a critical
pump or facility is damaged, they have a plan as well as
resources available to minimize the impact on water supply
availability.

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Violence Highlights Vulnerable Oil Pipelines
--------------


8. (C) Recent events have highlighted the vulnerability of
the Iraqi oil industry and the nation's economy on the flow
of oil through the Zubayr-Faw pipeline at Basra to the ABOT
offshore oil platform. The single point of failure presented
by the current infrastructure exposes a crippling
vulnerability. If the existing lines were to be interdicted,
the country's income would be greatly reduced and the economy
dealt a severe blow. The reasons for development of the
Crude Redundancy Project to allow alternative means to export
oil have become more compelling. Oil smuggling through
pirate pipelines and other methods continues to be a factor
limiting optimal crude export.

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Transportation Problems: Mainly in Basra
--------------


9. (C) The impact on transportation infrastructure and assets
has been primarily limited to Basra Province with minor
fall-out in other regions caused by the inability of
employees to get to work due to curfew. Damage to
transportation infrastructure in Basra Province was
relatively minor and repairs are underway. Although
maritime, rail and civil aviation transportation was
suspended, we expect a rapid return to normal with no
long-term impact. However, ongoing indirect fire attacks
(IDF) at Basra International Airport have had a chilling
effect on economic development and civil aviation growth.
Corruption and criminal acts by armed militias limit the
growth and full utilization of maritime ports. It is not yet
clear whether or not a ceasefire will change this dynamic for
the better. A comprehensive development strategy for the
ports, especially Umm Qasr, needs to be implemented,
especially if the ceasefire does not hold.

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Unrest Means Continued Reliance on PDS System,
Hampering Private Sector Growth
--------------


10. (C) Should the GOI retain control of the Port of Umm Qasr
and limit/eliminate corruption and the diversion of grain and
other commodities imported by the Ministry of Trade for the
Public Distribution System (PDS),there could be significant
savings for the GOI. (Note: Septel analyzes the likely
consequences of the GOI decision to close the Port of Umm
Qasr for a month-long corruption investigation. End note.)
With continued unrest, however, long-term investments in
agriculture by the private sector, both domestic and foreign,
will lag. Stifling competition from subsidized Iranian
imports and trade barriers imposed by Kuwait will further
complicate Iraqi agricultural sector development. This will
particularly affect the value-added agro-processing
sub-sector. Investors will associate a higher level of risk
to investments due to potential for continued unrest,
destroyed infrastructure and unstable workforce. In fact,
the rural areas where agriculture takes place are desperate
for employment and are not the battlegrounds for the
militias. Development projects for date palms and tomatoes
there have faltered for lack of sustainability and attention
to marketing.


11. (C) Civil unrest, should it continue, would undoubtedly
increase public reliance on the PDS, which supplies over 70
percent of the country's nutrient content. It will also
increase resistance to the GOI's proposed reforms of the
system, which includes using means-testing and eventually
monetizing the food ration. PDS reform is an International
Compact with Iraq goal. As a significant portion of the
Iraqi diet is provided by the State at highly subsidized
prices, the private food retail sector cannot compete in
supplying these high volume items, slowing the development of
a more modern retail sector.

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Temporary Marketplace Shortages and Price Increases
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12. (C) Baghdad and Basra markets and market prices were
affected by the curfew, leading to temporary price increases
and shortages, especially in food and fuel. The curfew,
while it lasted, hampered the restocking of goods in shops
and markets. Those that could avoided shopping while prices
remain high (from three to five times normal prices),but
shop shelves appear to have been replenished. PRTs located
in other urban centers, with the exception of Basra, report
that once the curfew was lifted, business returned to normal.
In Basra, as of April 5, however, supplies in markets were
lower than normal and some civilians were still reluctant to
venture out to markets out of security concerns. In most of
Basra, shopping activity appears to have returned to normal,
but driving is still difficult. In the Jaysh al-Mahdi
strongholds that are surrounded by the Iraqi Army, civilians
continue to be reluctant to venture outside.


BUTENIS