DPM SALIH ON 2009 BUDGET, OIL LAW, AND A NEW

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 003067

SIPDIS

TREASURY FOR U/S MCCORMICK

E.O. 12958: DECL: 09/24/2018
TAGS: ECON EFIN EINV ENRG EPET PREL IZ
SUBJECT: DPM SALIH ON 2009 BUDGET, OIL LAW, AND A NEW
DIALOGUE ON ECONOMIC COORDINATION

REF: BAGHDAD 1061 AND PREVIOUS

Classified By: Economic Minister Counselor Marc Wall for reasons 1.4(b)
and (d)


1. (U) This is an action request. Please see paragraph 16.


2. (C) Summary: Deputy Prime Minister Barham Salih told EMIN
September 22 that he would like to host a second session of
Dialogue on Economic Cooperation before the end of 2008 to
bring both senior U.S. government and business leaders to
Baghdad. EMIN noted the Ambassador's desire to hold another
such gathering, but urged that Iraq to take several concrete
steps to improve its business climate before such a meeting
could be a success. The DPM described the 2009 Budget
negotiations in the Council of Ministers and expressed
concern over Iraq's lagging oil exports. Iraq has wasted
time not moving forward on oil deals at a time when it needs
money to meet its basic infrastructure needs. Iraq is facing
"a perfect storm" of political and economic problems such as
the need to pass Hydrocarbons Legislation (HCL),the issue of
Kirkuk, wrangling over power sharing within the GOI, the
U.S.-Iraq Strategic Framework Agreement, and the outcome of
the U.S. elections. Given the "poisonous political
environment," Salih was not sanguine that the GOI would be
able to make the hard decisions required. End summary.

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Dialogue on Economic Cooperation
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3. (C) EMIN and Econ Counselor met with Deputy Prime Minister
Barham Salih on September 22. Salih was enthusiastic at the
prospect of organizing a second U.S./Iraq Dialogue on
Economic Cooperation (DEC) "before the end of the year." He
proposed that a two-day event be held at the Rasheed Hotel in
Baghdad in mid-December. The first day of the conference
would be devoted to U.S.-GOI bilateral discussions and the
second day would focus on highlighting business opportunities
for American companies with both Iraq's public and private
sectors. He hoped that both the U.S. Government and "major
American companies" would be represented at very high levels.
Salih proposed that the overall theme of this DEC be "Iraq
is Open for Business" and that it highlight improvements in
Iraq's business environment and demonstrate to the world that
U.S. companies are coming to Iraq for both government and
private business opportunities.


4. (C) EMIN noted that Ambassador Crocker is very supportive
of holding the next DEC as soon as possible. (Note: During a
later call with EMIN on September 22, Treasury Deputy
Secretary Robert Kimmitt raised the possibility of holding
the DEC in conjunction with his planned visit before the end
of October. End note.) To make this DEC worthwhile, the GOI
needs to focus on taking tangible steps to improve Iraq's
business climate (i.e. addressing the lack of investment
regulations, the ongoing suspension of foreign company
registration in Iraq, pending legislation in the Council of
Representatives (COR) on customs and tariff issues, as well
as the confirmation of National Investment
Commissioner-designate Ahmed Ridha.) Actions on these types
of issues, and others outlined in the recent World Bank's
Doing Business Report would lead to improvements in the
perception of Iraq's business climate, said EMIN.

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2009 Budget Negotiations
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5. (C) "There are serious problems" with the 2009 Budget
Proposal said Salih, outlining his two major areas of
concern. His first concern was that operating expenses have
gone up too much; especially with regard to the civil service
pay raise and payroll expansion. There need to be "specific
regulations and stipulations" in the budget to limit these
and to set ceilings. The increase in salaries is too much,
though "this is political and we are in an election year."


6. (C) Salih's second area of concern was the rate of budget
growth. "It is a big budget," he said, wondering how Iraq
will pay for it given recent lagging trends in the monthly
production and exportation of oil. (Note: The 2009 Budget
proposal is for USD 79 billion, roughly 10 percent more than
the combined total of the 2008 Budget and 2008 Supplemental.
End note.) Citing figures from a Ministry of Oil report, he
noted that Iraq's oil exports declined to 1.7 million bpd in
August and are on track to decline to 1.4 million bpd in
September. (Note: More recent figures indicate an increase

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in exports in September to 1.9 million bpd. End note.)


7. (C) Salih said there had been discussions within the
Council of Ministers (COM) as to baseline revenue assumptions
for oil exports in 2009. The Minister of Finance's original
submission anticipated that Iraq would export an average of 2
million barrels per day (bpd) at USD 80 per barrel. The
budget the COM sent to the COR assumes that the average price
per barrel exported would be USD 75 and Iraq would export 2
million bpd. Minister of Oil Sharistani had lobbied for the
lower export rate assumption of 1.9 million bpd, but was
overruled by the COM.


8. (C) There will be "major political wrangling" over the 17
percent amount set aside for the KRG, said Salih. However,
"a lot of money in the budget will be designated as sovereign
funds, so really we are just talking about 9-10 percent of
the budget," he added.


9. (C) Allocations to the provinces and for capital execution
will be higher than the numbers released by the Ministry of
Finance. Parliament will be "pushing hard" to get more funds
for the provinces. Salih expected that the 2009 Budget will
have capital spending at about the same percentage (23
percent) as in fiscal year 2008.

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Budget Execution: "Generally Speaking Okay"
--------------


10. (C) "Generally speaking, our budget execution numbers are
"okay," said Salih, though he asked for information from the
USG for confirmation of exact numbers. Salih expected that
in 2009, budget execution and capacity will continue to
improve. But Iraq is still not capable of fully utilizing
its resources. With the stabilization in security, capacity
is growing, but health care, schools, and electricity need
greater attention.


11. (C) "Iraq needs money," Salih continued. In 2005 Iraq
forecast that it needed USD 250 billion to bring basic
infrastructure up to the level of the countries around us.
Now, in 2008 dollars, this figure has most likely gone up to
USD 500 billion. Since Iraq is increasingly able to spend
its money effectively, said Salih, there is no reason to
support those who argue that Iraq has enough money now and
should not be investing in producing more oil. In an aside,
Salih commented, "The Minister of Finance has a tough job,
but he could be doing much better at it."

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Hydrocarbon Legislation & Political Issues
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12. (C) Iraq faces "a perfect storm" of economic and
political problems that are coming to a head at the same
time. We are at the "inflection point," said Salih. Wrapped
up in discussions on the Hydrocarbons Legislation (HCL) are
the issues of Kirkuk, power sharing in Baghdad, the U.S.-Iraq
Strategic Framework Agreement, and the outcome of the U.S.
elections.


13. (C) Salih was not optimistic that the HCL would be passed
this year. This is a "key issue, but the political
environment is poisonous." There is no political will to
solve it now. However, the 2009 budget process will heighten
the need for this agreement as the Minister of Oil "is
talking about deducting KRG oil revenues from the budget," he
said. "Brinkmanship on these political issues has now
reached a critical stage and there are no good alternatives
to not having a deal." Iraqis, however, "have a history of
being stupid and letting things fall apart," he said. There
is insufficient trust and confidence between the players, but
perhaps after Eid al-Fitr (the Islamic holiday which will
fall at the beginning of October),the "leaders will be in a
better position to solve these political problems," he hoped.

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Oil Issues
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14. (C) Returning to the issue of declining oil production
figures, Salih noted that this is happening despite the fact
Iraq has spent "lots of money on oil (production)." Iraq is
"wasting time, six months" negotiating technical services
agreements (TSAs) that have not come to pass.


15. (C) Salih said that he had reservations about the

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just-announced Royal Dutch Shell gas agreement, however Iraq
"needs the money," he repeated. "If a company wants to come
in and tell us that they will give the GOI USD 12 billion for
this field, USD 11 billion for that field, then we should
sign those deals." The Minister of Oil has admitted that
Iraq's capacity to improve its oil fields and infrastructure
is insufficient. "These are heroic people, but they do not
have the ability," he said.


16. (C) Action Request: We urge Washington agencies to look
hard at options for participating in a DEC and Business Forum
in the next few months. Deputy Secretary Kimmitt's proposed
visit in October offers an opportunity for addressing the
economic agenda. USDOC's invitation to Trade Minister Sudani
could provide an occasion to host an event for U.S. and Iraqi
business representatives. A combined event in December or
January, either in Baghdad or Washington, could be another
possibility. Whatever the timing and venue chosen, we hope
Washington agencies will take advantage of the opportunity to
engage Iraqis on improving economic policy and promoting
business prospects.

CROCKER