JABR CLARIFIES SAUDI DEBT ISSUE, REVEALS PLANS FOR

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 001421 SIPDIS E.O. 12958: DECL: 05/07/2018 TAGS: EAID ECON EFIN IZ PGOV SUBJECT: JABR CLARIFIES SAUDI DEBT ISSUE, REVEALS PLANS FOR SUPPLEMENTAL REF: RIYADH 708 Classified By: Economic Minister Charles P. Ries for reasons 1.4 (b/d) ¶1. (C) Begin Summary: During a wide-ranging conversation May 5, Finance Minister Bayan Jabr clarified the Government of Iraq (GOI) position on the Saudi debt issue. He explained that the GOI believed the total principal amounted to USD 15.7 billion, of which the GOI was prepared to pay 20 percent, in line with Paris Club terms. (Note: Saudi Arabia is not a Paris Club member but has stated it would offer debt relief on Paris Club terms. End Note) EMIN provided a readout of his meetings with Saudi Arabia Government (SAG) officials in which they conveyed the SAG position that the GOI owed USD 39.7 billion, illustrating the enormous gulf separating the two sides. Jabr also was dismissive of the ability to execute DPM Barham Salih's plan to allocate USD 5 billion through a special Construction Committee with supplemental funding allocated by the Ministry of Finance. Jabr anticipates the supplemental budget bill will be prepared for introduction to the Council of Ministers by early June for eventual transmission to the Council of Representatives (CoR). A suitable home for the Central Bank of Iraq (CBI) remains elusive. End Summary. - - - - - - - - - - - SAG Assistance Welcome - - - - - - - - - - - ¶2. (C) EMIN began the May 5 meeting with Finance Minister Bayan Jabr by recounting his meetings in Riyadh with several senior SAG officials (for details see reftel). Jabr expressed interest in seeing Saudi assistance, potentially in the hundreds of millions, channeled through the ICERP mechanism, and agreed with our assessment that ICERP was more flexible and quicker-disbursing than a 607 type arrangement. EMIN noted that we will update the GOI as the situation evolves. - - - - - - - - - - - - - - - - - - - Wide Gulf Between GOI and SAG on Debt - - - - - - - - - - - - - - - - - - - ¶3. (C) On outstanding debt, EMIN said the SAG's position that negotiations would not begin until an agreement on the amount of principal was reached, which the SAG believed to total USD 39.7 billion. Jabr and senior advisor Azez Hassan Jafar outlined the GOI's position. The debt, according to the GOI, was incurred during the Iran-Iraq war by Saddam Hussein. Azez claimed that USD 9 billion was provided in three distinct loan tranches of USD 3 billion each. The documentation, which Azez noted the GOI could produce, states clearly that the loans are free of interest. Azez added that the SAG unilaterally began to claim interest following Iraq's invasion of Kuwait in 1990, which partially explains the large discrepancy between the GOI and SAG positions. ¶4. (C) The remainder of the USD 15.7 billion results from Saudi oil (valued at USD 6.7 billion) that the SAG allowed Iraq to sell for its own account, also dating back to the same time period. Jabr and Azez stated that they were already prepared to make a huge concession, in their minds, of paying back 20 percent of the USD 15.7 billion that the GOI believes it owes the SAG. The Iraqi people believe, according to Jabr, that Iraq fought Iran and paid for it in blood. Other Arab states, including Saudi Arabia, paid in cash, and the value of the oil allocations, according to this reasoning, constituted a gift. For the GOI to repay any of the debt incurred during the war with Iran would be politically damaging for the GOI, but Jabr and Azez were nevertheless prepared to offer to repay 20 percent of the entire USD 15.7 billion. - - - - - - - - - - - - - - - - - Supplemental Budget Ready in June - - - - - - - - - - - - - - - - - ¶4. (C) Moving to the supplemental budget, Jabr confessed that the May 1 deadline for spending units to submit their requests was not really a final deadline. Many spending units have yet to make their requests. He said that he believed the budget would be assembled by early June. Lamenting the numerous public promises made by GOI officials, notably Deputy Prime Minister Barham Salih, for additional funds, Jabr dismissed the notion that, buoyed by record world oil prices, the GOI could afford them all. He recounted a laundry list of items for which additional funding was needed: the USD 5 billion supplemental budget for ministries and provinces that he had promised; USD 3 billion for a suspense account suggested by the USG from which creditors with sovereign debt claims would be paid, and would be available through 2013; USD 5 billion for large-scale infrastructure (proposed by DPM Salih); emergency funds for post kinetic BAGHDAD 00001421 002 OF 002 cities including Basra, Mosul, Sadr City, Shulla, "and perhaps Baquba to come;" USD 4 billion for the Trade Ministry to ensure sufficient funding for the Public Distribution System (PDS -- for which Jabr said that he would allocate at most an additional USD 1-2 billion); and the recent request for significant additional operational expense allocations for the Interior and Defense ministries to purchase equipment. The total cost for the aforementioned list already exceeds the USD 11 billion that Jabr claimed was currently freely available in Development Fund for Iraq (DFI) accounts. Jabr was particularly dismissive of DPM Salih's much publicized reconstruction initiative, noting that the country lacked the expertise to execute the project's ambitious aims. ¶5. (C) A planned Iraqi Governors Conference originally scheduled for May 7 had been postponed, Jabr explained, because of difficulty in securing a venue. While he wanted to reschedule, timing will be difficult since he now would be traveling to Kuwait at the direction of Prime Minister Maliki to explore debt reduction and reduction in UNCC allocations. Jabr said the trip would likely take place after the upcoming Kuwaiti elections. After the Kuwait trip, Jabr will be going to Stockholm for the International Compact with Iraq Ministerial scheduled for May 29. ¶6. (C) Jabr said that closing of the 2007 books was delayed because of a problem with the Ministry of Justice concerning funding for the Rusafa Rule of Law complex. Additionally, Foreign Military Sales (FMS) associated with the Ministries of Defense and Interior are a complicating factor. Jabr promised to provide us with the final tallies once the problems are resolved, but did not mention when he thought this might occur. - - - - - - - - - - - - - - - - Red Building Promised...For Now - - - - - - - - - - - - - - - - ¶7. (C) On the subject of granting the CBI permission to move into a a new facility, Jabr said that the proposed venue, the Red Building, was the property of the Ministry of Planning and Development Cooperation (MoPDC). The Minister, Ali Baban, now wants the building to be renovated and occupied by the MoPDC. However, Jabr noted that PM Maliki has promised to reallocate the building to the CBI should the MoPDC fail to begin renovation work on the Red Building within two months. - - - - Comment - - - - ¶8. (C) Iraq's position as characterized by Jabr and Azez on Saudi debt illustrates how difficult the issue will be to resolve. We will continue to press Jabr to provide copies of the purported loan agreements expressly indicating that the loans were free of interest. Jabr's prediction that the supplemental budget will be prepared by early June is probably overly optimistic, given the Ministry of Finance's history. He also said that he anticipated smooth passage upon introduction in the CoR, which might be perhaps another unrealistic assumption. End Comment. CROCKER