TREASURY DEPUTY SECRETARY KIMMITT,S DISCUSSIONS

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 003652

SIPDIS

TREASURY FOR DEPUTY SECRETARY KIMMITT

E.O. 12958: DECL: 11/17/2018
TAGS: PREL PGOV ECON EFIN EAID IZ
SUBJECT: TREASURY DEPUTY SECRETARY KIMMITT,S DISCUSSIONS
WITH KEY IRAQI ECONOMIC OFFICIALS

Classified By: EMIN - Marc Wall, Reason E.O. 12958 1.5 (b,d)


1. (SBU) Summary: Deputy Secretary of Treasury Robert
Kimmitt had a series of meetings with key Iraqi economic
officials at events surrounding the Dialogue on Business and
Investment Climate (DBIC),including a large dinner hosted by
Finance Minister Bayan Jabr at his home in the International
Zone on the evening of October 31, 2008, and a breakfast on
November 1 hosted by Vice President Adel Abdul-Mahdi, a
former finance minister. These events were attended by
senior officials on both sides, including Ambassador Ryan
Crocker, CETI Coordinator Ambassador Marc Wall, Central Bank
Governor Sinan al-Shabibi, and Minister of Planning and
Development Cooperation, Ali Baban. During these meetings, a
wide variety of economic issues were discussed, including
investment issues, fiscal policy and the IMF program. End
Summary.

Foreign Investment Issues
--------------


2. (SBU) D/S Kimmitt made the point that successful
conclusion of a Status of Forces Agreement (SOFA) will have
positive implications for investment. If Iraq is unable to
conclude a workable agreement with the United States,
investors are likely to conclude that they too will have
trouble structuring satisfactory agreements with the GoI.
Iraqi interlocutors, including VP Mahdi and Minister Jabr,
concurred with this conclusion.


3. (SBU) D/S Kimmitt noted that U.S. funds alone could not
rebuild Iraq, as had been shown in the 2003 - 2006 period.
Moreover, the GoI could not satisfy Iraq's needs, even on the
back of record oil prices in 2007 and 2008. With the
hundreds of billions of dollars needed to rebuild Iraq's
industry and infrastructure, investment was needed as a
source both of expertise and capital. The DBIC would be a
good opportunity for Iraqi government officials to better
understand what was needed to make Iraq more attractive as a
target for investment, and to develop a program to address
these issues.


4. (SBU) Finance Minister Jabr reported that Iraq has
satisfied the qualifications of the Multilateral Investment
Guarantee Agency (MIGA),a member of the World Bank Group.
Iraq's membership in MIGA will allow investors in Iraq to
apply for MIGA political risk insurance on their investments
in Iraq.


5. (SBU) CBI Governor Shabibi noted that Iraq had also
agreed to abide by the IMF's Article VIII foreign exchange
convertibility standards. This standard is often described
as full convertibility for current account transactions.
While most "bricks and mortar" investment falls outside the
definition of current account transactions, it is indicative
of the success of Iraq's open foreign exchange environment.
TREASATT noted that several countries in Eastern Europe in
the 1990s had opened their economies to foreign investment,
but had continued to restrict foreign exchange flows. This
left investors with profits which could not be repatriated,
something which deterred investment.

Monetary Issues
--------------


6. (C) CBI Governor al-Shabibi told Kimmitt that the
central bank is under pressure from other Iraqi officials to
allow its reserves to be used for fiscal purposes. In
particular, with declining oil prices, the Finance Ministry
is looking for other potential pools of funds to tap.
Kimmitt noted that Shabibi should consider ways to help
protect the CBI's reserves from political pressures. For
example, the creation of a savings fund or stabilization fund
may help insulate reserves from demands to spend the money.
Kimmitt noted to several Iraqi officials that Iraq needs a
strong cushion of reserves to protect the currency and that
fiscal balances rather than reserves should be the first
resort for dealing with potential budget deficits. (Note:
The Iraqi Finance Ministry and various spending units are
reputed to have funds in bank accounts of over $45 billion.
The Central Bank has another $40 billion in its foreign
exchange reserves.) Shabibi noted that some Iraqi officials
do not put enough importance on Iraq's ability to keep the
dinar exchange rate stable.


7. (C) When asked, CBI Governor al-Shabibi confirmed that
he had been re-appointed for another five-year term. He
acknowledged that there was a gap between the end of his
first term and his re-appointment for a second five-year

BAGHDAD 00003652 002 OF 002


term, but this all related to legislative inertia, and not
opposition to his continued service in this role. When asked
about a Council of Representatives vote, al-Shabibi claimed
that the CBI Governor only needs a vote of the Presidential
Council for confirmation.

Fiscal and IMF Issues
--------------


8. (SBU) Finance Minister Jabr noted strong growth in GoI
budgetary resources. Asked about GoI plans to re-build Iraq,
Finance Minister Jabr noted that the original base GoI budget
for 2008 was nearly $50 billion, predicated upon a $59/bbl
price for oil exports. Based on increasing oil prices, the
GoI was able to add a $22 billion supplemental budget on top
of that, increasing the 2008 expenditure envelope to $72
billion. When the initial 2009 budget was formulated this
year, the plan called for expenditures of $79 billion, based
on an $80/bbl oil price. This budget represented a dramatic
increase in Iraq's government spending, with planned outlays
nearly doubling from the $41 billion budget in 2007.


9. (C) However, with world oil prices halved from the
$140/bbl high earlier in the year, Minister Jabr indicated
that such budgetary largess could not be sustained. After
meeting with the IMF in late October, Minister Jabr agreed to
cut the 2009 budget by 16 percent to approximately $67
billion. This new budget will be developed around projected
Iraqi exports of 2.0 million barrels per day and a $62.50
price per barrel, providing estimated revenue of $46 billion.
However, Jabr provided only limited details regarding where
cuts will occur. With generous public sector pay raises
granted in 2008, and provincial elections slated for early
2009, he said it would be difficult to achieve significant
cuts in the operating budget. The temptation would be to
hollow-out the capital budget; however, Jabr pledged to keep
the capital budget at the $15 billion level. He added that
it will be a difficult balancing act to shepherd this new
budget through the Council of Ministers and the Council of
Representatives, especially as it may become a vehicle for
regional political disputes.


10. (C) In subsequent conversations, Minister Jabr
confirmed that his strategy for reducing the operating budget
is to reduce transfers to the Public Distribution System
(PDS) based on lower agricultural commodity prices. Pay
increases for workers in state-owned enterprises - which are
off-budget, but which affect subsidy levels - will be reduced
or deferred, and in some cases canceled. He is considering a
20 percent across-the-board cut in capital expenditures, but
individual ministries may experience deeper cuts. He added
that the security ministries - Defense and Interior - will
experience budget cuts, but they will be relatively less than
other ministries.


11. (C) Minister Jabr confirmed that Iraq and the
International Monetary Fund remain in agreement that the
draft 2009 budget needed to be cut given the fall in oil
prices. This will pave the way for a successful conclusion
of the current IMF program in March of 2009, which in turn,
unlocks the final round of Paris Club debt relief. Asked
about Iraq's future relationship with the IMF, Minister Jabr
said that he was strongly considering a new IMF program that
would include "hard conditionality" and IMF Board review.
Both Jabr, and his Senior Advisor Azez Jafar, emphasized that
the IMF agreement was one of the few effective tools they had
to rein in excessive governmental spending. He planned to
negotiate the new program after the current program expires.
However, Jabr noted that many in the Government did not feel
the same way, and they would press to limit Iraq's
relationship with the Fund to the annual Article IV Review.
CROCKER