RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -

UNCLAS SECTION 01 OF 02 BAGHDAD 001471 SIPDIS STATE FOR NEA/I, EEB/TPP/ABT/ATP FOR JSPECK USDA FOR OFSO/RVERDONK, OCRA/AALLEN, OGA/JLAGOS E.O. 12958: N/A TAGS: EAGR ETRD ECON EFIN PGOV IZ SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - IRAQ REF: A. STATE 39410 ¶B. BAGHDAD 1421 - - - - Summary - - - - ¶1. Iraq, like many other countries, must contend with rising world food prices. The Government of Iraq (GOI) supplies the bulk of staple food needs to the Iraqi people essentially free of charge under the auspices of the Public Distribution System (PDS -- also referred to as the "ration card" in Arabic) food subsidy program. The vast majority of commodities provided in the PDS basket is imported. As a result, the GOI must budget for food supplies and faces tough policy decisions regarding how much of its additional revenue it will utilize to ensure PDS outlays are fully funded. End Summary. - - - - - - - - - - - - - - - - PDS Budget and Purchases Growing - - - - - - - - - - - - - - - - ¶2. The PDS food subsidy program is the second largest single line item (with salaries the largest) in the GOI federal budget, with outlays of nearly USD 3.1 billion in 2007 (of an approximately USD 41 billion budget). The approved allocation for PDS in the 2008 budget for PDS is nearly USD 3.3 billion (from a total budget of nearly USD 50 billion),which Ministry of Trade (MoT) officials expect to be sufficient for the first half of the year. A supplemental appropriation is currently under discussion (reported septel). ¶3. Due to rising international commodity prices, the MoT predicts this year's PDS spending will likely exceed USD 7 billion, assuming that the system is fully funded and does not undergo significant reform. The Ministry of Trade requested a budget of USD 6.4 billion for 2008, but was allocated the same amount in Iraqi Dinar (ID) as had been allocated for PDS outlays in 2007. According to Ministry of Finance data, PDS was overspent by ID 178 billion (approximately USD 148 million at an exchange rate of 1200 ID/USD). The 2008 federal budget law explicitly commits the Ministry of Trade to "supply all (PDS) items to the (Iraq) citizens" in Article 27 of the law. Additionally, the Article notes that any PDS funding shortfalls be addressed in a supplemental budget, with the added proviso that commits the Council of Ministers to endeavor to reform the program, implicitly in order to reduce program inefficiencies while simultaneously ensuring support for the most vulnerable segments of society. ¶4. In an attempt to get ahead of the curve on rising world food prices, the GOI has stepped up its pace of wheat imports since December 2007. Wheat imports in the current marketing year (MY) 2007/2008 (July/June) are estimated at 3.5 million tons, up 17 percent relative to last year. The growth in rice imports is even stronger, up from an estimated 615,000 tons imported in calendar year 2007 to a projected 900,000 tons in ¶2008. - - - - - - - - - - - - - - - - Inflation Under Control, So Far - - - - - - - - - - - - - - - - ¶5. While the PDS food basket accounts for a sizable portion of caloric intake of the average Iraqi, free market forces do prevail in sectors such as fresh fruits and vegetables, meat and dairy, animal feed grains and processed food products. Headline inflation, according to the Iraqi Central Organization for Statistics and Information Technology (COSIT -- the GOI's primary statistics agency),in the 6-month period from September 2007 to March 2008 was negative, as the Consumer Price Index (CPI) fell 2.1 percent. Food prices during that same period experienced moderate growth increasing by 4.3 percent. Food comprises 63.2 percent of COSIT's monthly-generated CPI. The aforementioned trends notwithstanding, we anticipate that inflation may have accelerated in April, given heightened kinetic operations in Basra and Sadr City in Baghdad that complicated GOI efforts in ensuring the provision of basic services to those areas, including PDS distribution. ¶6. Anecdotal reports suggest that, to the extent that PDS rations are successfully delivered, individual Iraqi citizens may be largely insulated from rising global food prices. The system in its current form provides sufficient quantities of staple foods; however, those Iraqis who are unable to obtain BAGHDAD 00001471 002 OF 002 their PDS allotments on a consistent basis bear the brunt of increasing food prices. Furthermore, locally engaged staff report that the MoT has resorted in recent months to substituting lower quality (and cheaper) locally-procured products in PDS allotments for higher quality imported products. - - - - - - - - - - - - - Difficult Decisions Ahead - - - - - - - - - - - - - ¶7. The GOI is facing difficult decisions with regard to PDS. Already, Finance Minister Bayan Jabr has told us (ref B) he will provide the MoT only a further USD 1-2 billion for PDS outlays, which could force the MoT to accelerate plans for PDS reform. Still we have seen in the past strident public calls by Iraqi officials for PDS reforms, but those calls to this point have largely been ignored. This most recent global rise in commodity prices may, however, finally force the issue. ¶8. For decades the GOI has pursued a policy of input subsidization, and even today farmers continue to look to the government to supply them with seed, fertilizer and farm machinery. The system is slowly changing, and the government's stated policy is to move away from input subsidies, but more time will be needed to recover from some 30 years of dependence, mismanagement and neglect. The shift to greater private sector investment in agriculture is further hampered by security concerns and the lack of agricultural credit programs, key services and utilities. The impact of this year's drought is having a bigger influence on farmers' planting decisions than are rising international food and agricultural input prices. CROCKER