TRADE MINISTRY SEEKS BILLIONS TO FUND PDS IN 2008

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 001481

SIPDIS

DEPT PLEASE PASS DEPT OF AGRICULTURE WASHDC

E.O. 12958: DECL: 05/12/2018
TAGS: ECON EAGR EFIN
SUBJECT: TRADE MINISTRY SEEKS BILLIONS TO FUND PDS IN 2008
AND REFORM IT IN 2009

REF: A. BAGHDAD 1421

B. BAGHDAD 789

C. BAGHDAD 95

Classified By: Economic Counselor Todd P. Schwartz for reasons 1.4 (b)
and (d).


1. (C) SUMMARY: Deputy Minister of Trade Abdul Hadi Kadhim al
Hameiri told Emboffs that the Ministry of Trade (MinTrade)
needs USD 4 to 4.5 billion to fund the Public Distribution
System (PDS) for the remainder of 2008; increased commodities
and shipping costs will consume MinTrade's roughly USD 3.3
billion 2008 budget allocation by the end of June. Abdul
Hadi was cautiously optimistic that the Council of Ministers
(CoM) and the Council of Representatives (CoR) would approve
MinTrade's supplemental request. (NOTE: Finance Minister
Bayan Jabr recently told us MinTrade would receive no more
than USD 1 to 2 billion in 2008 supplemental appropriations
for the PDS (reftel A). END NOTE.) Abdul Hadi was also
guardedly sanguine about MinTrade's plans to means-test PDS
beneficiaries and monetize their benefits beginning in 2009
(reftel B): he noted that the High Economic Committee (HEC)
and the Prime Minister's Office (PMO) have approved the
reform roadmap but that increasing public concerns about food
security would challenge implementation efforts. He said
MinTrade would need USD 10 to 10.5 billion to carry out its
reform plans in 2009 but that, if the plans unfolded as
envisioned, PDS costs would fall significantly in 2010 and
thereafter. He agreed with Emboffs that MinTrade would need
a strong public relations campaign to educate PDS
beneficiaries, as well as private sector food importers,
distributors, and retailers, so that they understood their
respective roles under the reform agenda. MinTrade appears
on track to implement PDS reforms in 2009, but significant
political challenges lie ahead. The GOI should be encouraged
to move forward on this International Compact with Iraq (ICI)
benchmark with important ramifications for Iraq's fiscal,
economic, and political wellbeing. END SUMMARY.

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UNFUNDED MANDATE: HIGH FOOD PRICES HIT MINTRADE'S BUDGET
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2. (C) Abdul Hadi told Emboffs that MinTrade needs USD 4 to
4.5 billion to fund the PDS for the remainder of 2008. He
complained that the Ministry had been strapped with an
unfunded mandate: during negotiations over the 2008 budget,
the CoM and the CoR rejected MinTrade proposals to eliminate
some PDS benefits and beneficiaries (reftel C) but then
merely straight-lined the 2007 budget PDS allocation for this
year, taking no account of rising global commodities and
shipping prices. Abdul Hadi said FinMin Jabr had assured him
then that MinTrade would receive adequate mid-year
supplemental appropriations for the PDS, but Jabr was now
proving stingier. (NOTE: Article 27 of the FY2008 budget
legislation confusingly mandates that MinTrade provide the
whole PDS basket of goods and fund the program fully,
including through supplemental appropriations, but provides
no concomitant instructions to the Finance Ministry to
provide the additional funding. END NOTE.) Abdul Hadi told
us that MinTrade recently presented the HEC with a report
justifying its supplemental budget request and claimed there
was "consensus" among HEC members that the appropriation is
necessary. MinTrade contracts for PDS supplies through June
2008 totaled roughly USD 3.6 billion, putting the program's
current supply situation in good stead but its finances in
the red. Abdul Hadi said he implored the HEC to fund the PDS
fully, given high food prices and the potential for political
backlash if rations were cut.

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MOVING DOWN THE PDS REFORM ROADMAP
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3. (C) Abdul Hadi said MinTrade's plans to begin
means-testing PDS beneficiaries and monetizing benefits in
2009 are moving forward. He said the HEC and the PMO have
approved the plans; he was unsure, however, whether the CoM
would submit the proposal to the CoR for approval. He told
us Deputy CoR Speaker Sheikh Khalid Attiyah also supports the
plan and has instructed the CoR Economic Committee to study
the roadmap.


4. (C) MinTrade has developed the income declaration form it
intends to use to identify and document eligible
beneficiaries and has stipulated a monetary penalty for
falsifying information on it. Abdul Hadi said the Ministry
would initially establish an income threshold that would
entitle roughly 75 percent of Iraqis to PDS benefits. (NOTE:
Virtually all Iraqis presently qualify for PDS benefits. END

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NOTE.) He told us MinTrade would use the income declaration
form for the 2008 registration period (generally in November
of the current year for the following year's benefits) and
update the rolls by year end 2008. He noted that the
Interior Ministry's national identification "smart card,"
which MinTrade had planned to use as a stored-value card to
distribute monetized PDS benefits, would not be ready by next
year. MinTrade therefore would instead circulate the new
beneficiary rolls to regional branches of state-owned and
private banks nationwide, where next year's PDS beneficiaries
would proceed to receive their payments in cash.


5. (C) COMMENT: This adjustment to the reform plans Abdul
Hadi had briefed to us (reftel B) has potential upside and
downside risks. No longer reliant on new technology that
would have required substantial resources to roll out,
operate, and maintain, MinTrade's reform plans should be
easier to implement by next year. Cash benefits would also
be more liquid than stored value on a smart card, giving PDS
beneficiaries greater freedom as consumers. Using
state-owned and private banks as conduits should also further
development of the retail banking sector. At the same time,
using cash will present challenges. Injecting trillions of
Iraqi Dinars into the economy could put pressure on
inflation, which the Central Bank of Iraq (CBI) has worked
diligently--and, so far, successfully--to keep in check.
Moreover, moving more truckloads of cash around the country
will increase the opportunities for insurgents and militias
to interdict and misappropriate them. Monetizing PDS
benefits with cash--as opposed to vouchers, coupons, or a
stored-value smart card--will require MinTrade to coordinate
closely with Iraq's fiscal and monetary policymakers as well
as the security forces. END COMMENT.

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A USD 10 BILLION ONE-OFF FOR PDS IN 2009
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6. (C) Abdul-Hadi said MinTrade would need USD 10 billion to
fund the PDS reform plans in 2009 but that the program's
costs should fall significantly by 2010 if the plans unfolded
as envisaged. As reported in reftel B, in 2009 MinTrade
plans to distribute monetized benefits to the means-tested
list of beneficiaries, empowering them to purchase their
estimated demand for PDS commodities at prices reflecting the
total cost of importation and distribution, plus a 15 to 20
percent profit (the figure remains to be determined) for the
retailers. In addition, MinTrade intends to procure and
distribute through its existing state-owned channels 50
percent of the program's total forecast demand--opening the
door for the private sector to import and distribute the
other 50 percent, presumably more efficiently and at better
prices. MinTrade will provide the goods it procures to PDS
food agents on contract, obligating the agents to remit to
the Ministry the revenues from the retail sale of these
items, less the agents' pre-agreed 15 to 20 percent profit.


7. (C) In 2009 MinTrade's initial cost for funding the PDS
will therefore be more than 150 percent of the retail cost of
goods to supply the program. Abdul Hadi forecasts that
MinTrade would need roughly USD 6 billion to empower the
means-tested beneficiaries to purchase their basic needs and
another USD 4 to 4.5 billion for the Ministry to supply
retailers with 50 percent of the goods to meet those needs.
As the beneficiaries purchased MinTrade-supplied goods at
their local food agents, however, the agents would remit back
to the Ministry much of its upfront outlays. By 2010,
MinTrade intends to purchase only 25 percent of the program's
needs, allowing the private sector to supply the other 75
percent; Abdul Hadi thought the 2009 food agents' remittances
would fund much of the program in 2010.

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EDUCATING THE PUBLIC WILL BE ESSENTIAL
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8. (C) Abdul Hadi agreed with Emboffs that MinTrade will need
an effective public education campaign to advise PDS
beneficiaries, as well as private sector food importers,
distributors, and retailers of the challenges and
opportunities the reforms will present in 2009. Emboffs
queried whether the Ministry had the expertise needed to
launch such a campaign and suggested MinTrade contract a
private public relations firm to assist them. Abdul Hadi
seemed receptive to the idea. He hoped the Ministry would
begin educating the public by mid-year, once the HEC had
approved the income threshold and the amount of monetized
benefit to be awarded, giving all concerned a full six months
of lead time. Emboffs observed and Abdul Hadi agreed that
the public education campaign should also reach Iraqi farmers

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before the late-summer planting season, so that they could
make informed decisions about what to plant and whether to
sell their harvest to MinTrade or to private sector PDS
suppliers. Emboffs also noted that MinTrade would need a
robust private sector price tracking capability so that
MinTrade could adjust its own prices for PDS goods
periodically during the year.

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COMMENT
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9. (C) Abdul Hadi said repeatedly that MinTrade's goal with
its reform roadmap is to "get out of the business" of the
PDS. While clearly proud of his team's efforts to create the
reform plans, which also enjoy support from the World Bank,
he soberly assessed that significant political challenges lie
ahead. He opined that many of his colleagues in government
and the CoR "have no patience" for multi-step, medium-term
approaches to problem solving, preferring instead "quick
fixes" that do nothing to address the heart of the matter; he
put proposals to cut PDS rations and prosecute fraudsters in
this latter category. "This is about economic reform," he
stressed. He observed that food security fears in the
current climate of high international commodities prices
could weaken the resolve of GOI leaders who until now have
supported MinTrade's plan. Though it has its shortcomings,
MinTrade's roadmap remains the most viable alternative,
presently enjoying high-level GOI support, for achieving this
important ICI benchmark over the next two years. The GOI
should be encouraged to fund the PDS adequately this year to
forestall potential social and political unrest that could
result if ordinary Iraqis felt more acutely the strain of
high international food prices. The GOI should further be
encouraged and assisted to continue implementing MinTrade's
roadmap.
CROCKER