INITIAL ANALYSIS OF COR-APPROVED 2008 FEDERAL

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 000449 SIPDIS SIPDIS E.O. 12958: DECL: 02/15/2018 TAGS: ECON EFIN PGOV IZ SUBJECT: INITIAL ANALYSIS OF COR-APPROVED 2008 FEDERAL BUDGET REF: A. 07 BAGHDAD 3897 ¶B. 07 BAGHDAD 3894 ¶C. 07 BAGHDAD 3841 ¶D. 07 BAGHDAD 3665 ¶E. 07 BAGHDAD 3088 Classified By: Economic Minister Charles P. Ries for reasons 1.4 (b/d) ¶1. (C) Begin Summary: After more than two and a half months of legislative branch deliberations, the Council of Representatives (CoR) voted to pass the 2008 General Federal Budget law on February 13 as part of an overall package which included Amnesty and Provincial Powers laws. The Presidency Council must endorse the bill before publication in the Official Gazette, upon which it will be considered formally enacted, retroactive to January 1, 2008. In the end, the Council of Ministers-approved budget remained largely intact, with overall expenditure expanding from USD 48.4 billion to almost USD 49.9 billion (USD 1 = ID 1200). The Kurdistan Regional Government (KRG) received 17 percent of the budget (after deduction of "sovereign expenses") as it has since ¶2004. The capital investment budget increased more than 30 percent from 2007 to USD 13.2 billion. Once again, the budget law addressed the funding of the peshmerga by leaving it to PM Maliki and KRG PM Nechirvan Barzani to negotiate. A similar provision was used in 2007, but the two sides failed to reach an agreement, leaving the KRG to shoulder the entire cost of this force. We will be engaging Presidency Council (PC) members to press for endorsement of the Budget, Amnesty and Provincial Powers laws. End Summary. -------------- Carryover Adopted -------------- ¶2. (SBU) As promised by MoF Bayan Jabr, the 2008 budget permits the carryover of unspent 2007 provincial capital investment funds into 2008. The budget law also notes that the approximately USD 7.6 billion deficit will be financed by unspent 2007 funds. In addition, the budget contains language aimed at permitting multi-year contracting, a reform that may increase flexibility in the contracting process. ¶3. (SBU) Similar to the 2007 budget law, a "use or lose" provision aimed at spurring budget execution appears in Article 14 whereby the Minister of Finance may transfer allocations from spending units who have not executed more than 25 percent of their capital budgets by mid-year. The same article provides leniency for laggards who are prevented from executing their capital budgets due to security concerns. -------------- PDS Reform -------------- ¶4. (SBU) Funding for the public distribution system (PDS) remains constant compared to 2007 at approximately USD 3.3 billion. However, Article 27 of the law formally commits the Council of Ministers and Ministry of Trade to reform the PDS in order to increase efficiency and ensure the most vulnerable Iraqi citizens receive assistance. Moreover, the Article explicitly states that any shortfall in the PDS allocation should be addressed in a supplemental budget. Given price increases in grains and other commodities in the PDS basket, the PDS will certainly require additional funding or face distribution reductions. -------------- Possible Budget Supplemental -------------- ¶5. (SBU) Confirming what many of our interlocutors had repeated, Article 26 states that the Ministry of Finance, contingent upon higher than expected oil revenues, should submit to the CoR during the middle of the year a supplemental budget. The 2008 budget is based on a projected realized oil price of USD 57 per barrel. Should oil prices maintain current levels and Iraq's export volume remain relatively stable, we expect Development Fund for Iraq (DFI) balances to increase, putting the GOI in position to afford a significant supplemental budget later in the year. -------------- -- Kurds Win Their 17 percent; New Census Mandated -------------- -- ¶6. (SBU) In spite of spirited opposition, the Kurdistan Regional Government (KRG) succeeded in maintaining the 17 percent share of the budget (after deducing sovereign expenses). The controversial question of peshmerga funding, according to Article 17, is to be resolved by negotiations between PM Maliki and KRG PM Barzani. (NOTE: Previous BAGHDAD 00000449 002 OF 003 iterations had specified the KRG interlocutor as President Masoud Barzani. END NOTE) For 2008, the KRG's 17 percent equals approximately USD 5.5 billion, a sum which comprises roughly 11 percent of the total budget. ¶7. (SBU) Furthermore, Article 18 explicitly states that the KRG must submit to an audit by the federal Board of Supreme Audit (BSA) for the years 2004-2007 and authorizes the federal Minster of Finance to deduct from the KRG's share of the federal budget the amounts owed to the federal treasury upon completion of the audit. Finally, Article 19 of the law commits the GOI to conduct a general census throughout Iraq by December 31, 2008, after which the KRG's share of the budget will be revisited. -------------- Potentially Divisive: Social Benefits -------------- ¶8. (C) Among the most controversial amendments in the 2008 budget law, Article 29 stipulates instructions aimed at preventing abuse of the so called "social benefits" allocations for the Iraq Presidency Council (President and two vice presidents),Prime Ministry Directorate (PM and two DPMs),and CoR Presidency Council (Speaker and two Deputy Speakers). We have heard frequent complaints from Iraqi interlocutors that the social benefits funds are slush funds used primarily to dispense patronage to political cronies. Article 29 provides for auditing of these funds by the Board of Supreme Audit such that the CoR Finance and Economic Committees should receive quarterly reports for oversight purposes. -------------- Comment -------------- ¶9. (C) For the second consecutive year, our goal of improving Iraqi budget execution will be negatively affected by the inability of the CoR to pass the budget at the very beginning of the year. However, in 2007, spending units were at a distinct disadvantage due to then-new procurement regulations, which further retarded budget execution. Compared to 2007, the budget negotiation process in the CoR took almost one additional month before a successful vote. Given the current political climate, the budget might have taken even longer to pass in the absence of the provincial powers and amnesty bills, which the Shia and Sunni blocs desired enough to swallow the bitter pill of conceding once again the Kurds' 17 percent. ¶10. (SBU) Comparative Annual Budgets* 2007 2008 Percent Budget Budget Change -------------- -------------- Revenue Oil Exports 1.7 1.7 0 (Million barrels per day) Oil Price Realization 50 57 14 (Price per barrel) Oil Export Revenues 31.0 35.5 14 Other Revenues 2.4 6.8 183 Total Revenues 33.4 42.3 26 -------------- -------------- Expenditures Operating Expenditures Non-Security 23.6 28.2 19 Security: Ministry of Defense 4.2 4.8 14 Ministry of Interior 3.3 3.8 15 Subtotal Security 7.5 8.6 15 Total Operating Expenditures 31.0 36.8 19 Investment Expenditures Direct Provincial 2.4 3.3 38 Ministry of Oil 2.4 2.0 -17 Ministry of Electricity 1.4 1.3 -7 Other 3.9 6.5 67 Total Investment Expenditures 10.1 13.1 30 BAGHDAD 00000449 003 OF 003 Total Expenditures 41.1 49.9 21 -------------- -------------- Overall Fiscal Deficit (7.7) (7.6) -1 *Amounts expressed in USD billion unless otherwise noted. For 2007 budget calculations, the official exchange rate of 1260 ID/USD was adopted and for 2008, the official exchange rate of 1200 ID/USD was adopted. CROCKER