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. -------------- Dialogue on Economic Cooperation -------------- ¶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. -------------- 2009 Budget Negotiations -------------- ¶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 BAGHDAD 00003067 002 OF 003 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. -------------- 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." -------------- Hydrocarbon Legislation & Political Issues -------------- ¶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. -------------- Oil Issues -------------- ¶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 BAGHDAD 00003067 003 OF 003 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