RIES REPORTS ECONOMIC PROGRESS, FACES HEADWINDS

C O N F I D E N T I A L SECTION 01 OF 03 STATE 033290 SIPDIS SIPDIS E.O. 12958: DECL: 03/26/2018 TAGS: ECON EAID EFIN IZ SUBJECT: RIES REPORTS ECONOMIC PROGRESS, FACES HEADWINDS FOR FUNDS Classified By: DAS Lawrence E. Butler for reasons 1.4(b) and (d). ¶1. (C) SUMMARY: Amb. Charles Ries met with congressional staff, business representatives, international financial institution (IFI) staff, journalists, and others interested in Iraq's economic situation during his March 10-14 visit to Washington and New York. Amb. Ries's interlocutors generally agreed that recent economic progress in Iraq has been impressive but remains fragile. Members of the press, the business community, and public audiences were primarily interested in the investment climate, budget execution, and legislative progress. Appropriations staffers were pleased with the greater emphasis on Iraqi cost-sharing in USG assistance to Iraq, but they remain concerned about slow Iraqi budget execution and insist that a still-greater share of the cost of our assistance efforts should be shouldered by Iraqis. END SUMMARY. -------------- -------------- Amb. Ries Delivers Economic Message to Hill, Business, Press -------------- -------------- ¶2. (U) Amb. Ries met with congressional staff from House and Senate appropriations subcommittees and authorizing committees; recent CODEL Rep. Peter Welch (VT-At Large); business representatives in closed forums hosted by the U.S. Chamber of Commerce and the Business Council for International Understanding and in private meetings with ExxonMobil, JPMorgan Chase, and Pepsi; staff from the World Bank and International Monetary Fund; and editorial staff from the New York Times and the Wall Street Journal. He also gave public addresses at the U.S. Institute of Peace and the Center for Strategic and International Studies and met with several other USG officials. ¶3. (U) At the core of Amb. Ries's remarks to various audiences was a positive but cautious message about the economic progress being made in Iraq. Amb. Ries credited the improved security situation with having opened a window for economic activity. Several indicators, including favorable IMF projections of GDP growth for 2008, improved capital budget execution by the central government, greatly diminished inflation rates, and increased domestic trading and reconstruction activity, suggest that tangible progress has been made during this opening. Amb. Ries emphasized, however, that the current progress is reversible, that it cannot be sustained without more foreign and domestic investment, and that it remains contingent on improved security. -------------- -------------- Iraqi Budget Execution: More is Good, But Still More Would Be Better -------------- -------------- ¶4. (C) In discussions with Amb. Ries, congressional staffers and members of the press raised the issue of Iraqi capital budget execution more often than any other topic. Congressional perspective on the issue remains largely framed by press reports of Iraqi coffers flush with oil revenues and by the excessively negative conclusions of January's GAO study on Iraqi capital spending. Amb. Ries relayed the Iraqi Ministry of Finance's projections, which more accurately capture capital spending and show that investment expenditures in 2007 are substantially improved from previous-year levels. He confirmed, though, that further improving the spending capacity of Iraqi ministries remains a necessary central focus of USG capacity-building efforts. IMF staff reported that they expect the GOI to execute between 60 and 70 percent of its 2008 capital budget this year, before taking into account letters-of-credit commitments. ¶5. (C) Some interlocutors, including congressional staff, were surprised by some basic facts about the Iraqi budget. Many were unaware that the operating budget, with its recurring expenditures for salaries and other costs, is significantly larger and has been more fully expended than the capital budget. Many were also unaware that the national budget and its provincial allocations are wholly Iraqi-funded with a built-in deficit, and that Baghdad is already allocating oil revenues to the provincial governments. This additional context did not entirely alleviate congressional staff's concerns or their preferences for reduced USG assistance funding. One staffer asked why Iraq's oil revenue could not simply be tapped to fund the programs covered in STATE 00033290 002 OF 003 the administration's FY08 supplemental budget request. Congressional staff also expressed concern that certain wealthy allies and neighbors of Iraq have not fully delivered their pledged assistance. -------------- -------------- What Business Wants: A Good Investment Climate, Services, and Oil Legislation -------------- -------------- ¶6. (U) Amb. Ries's interlocutors in many audiences -- but particularly in the business community -- were strongly interested in assessments of the political and regulatory climate for investment, the provision of essential services, and the progress of hydrocarbon legislation. In response to questions from corporate representatives at a private Chamber of Commerce forum, Amb. Ries described corruption as a "pervasive and debilitating problem" for the Iraqi government; confirmed that commercial logistics have benefited from the improved security environment in Anbar Province and elsewhere; and argued that, with the exception of foreign ownership of land, foreign investment is not currently a politically sensitive issue. ¶7. (C) Amb. Ries was questioned in other venues about specific essential services sectors. He confirmed that 800 megawatts of electricity could come online between now and the summer with progress on the Mussayib topping plant and other projects; that high food prices will require either a reform of the Public Distribution System or a supplemental budget for the program; and that attacks on oil infrastructure had successfully been reduced through hardening projects and negotiated security arrangements. He also confirmed in response to corporate inquiries that visas would shortly be available in Baghdad for business groups traveling to the United States. ¶8. (C) Iraq's stalled hydrocarbons legislation was a subject of broad interest. Amb. Ries declined to predict when a hydrocarbons package would be passed but reported that the negotiation of technical services agreements with international oil companies was a positive step in that direction. Most interlocutors tended to focus on the political obstacles to securing legislative approval for this issue rather than on the policy's implementation. Many congressional staffers were unaware that the draft law's revenue-sharing provisions had already been adopted as policy. ¶9. (C) Amb. Ries's IFI interlocutors agreed that economic progress in Iraq remained fragile and contingent on improved security and significant investment. IMF staff confirmed that Iraq's economic policies had been "markedly successful," but that continued success would require investment in the non-oil sector as well as the protection of oil infrastructure. IMF staffers expect inflation to rise in 2008 and expressed some concern at the size of the wage increase called for in the 2008 Iraqi budget. In a meeting with World Bank staff, Amb. Ries encouraged the Bank to expand its presence in Iraq. Among other issues, he suggested that the Bank could lend its considerable expertise to help the Iraqi government rationalize utility rates, improve bill collection, and apply badly needed market incentives to the electricity sector. -------------- -------------- Appropriators Foresee Role as "the Heavy," Likely to Impose Cost-Sharing Requirements -------------- -------------- ¶10. (C) Congressional appropriations staff expressed support for the general direction of current USG assistance programs in Iraq. Staff appeared supportive of the five priorities of U.S. assistance that Amb. Ries identified (ministerial capacity, energy, investment, employment, and agriculture) and responded favorably to his descriptions of instances in which small amounts of U.S. funding have served as leverage to encourage much larger Iraqi outlays and initiatives. Some previously critical staffers, particularly among minority staff on the foreign operations subcommittee of the Senate Appropriations Committee (SACFO),commented favorably on what they described as a "sea change" in the degree of candor and openness shown by post in communicating with Congress regarding assistance programs. ¶11. (C) Key appropriations staffers expressed frustration, however, that the transition to Iraqi funding is not already further advanced. The U.S. government should "walk away from" infrastructure projects, a SACFO majority staffer said, and facilitate the GoI's efforts to contract and pay for the necessary work themselves. SACFO staff greeted the one proposed infrastructure project under discussion, the use of reprogrammed money from the Iraq Relief and STATE 00033290 003 OF 003 Reconstruction Fund (IRRF) to complete the Mussayib power plant, with skepticism. ¶12. (C) More broadly, Senate appropriations staff said they are considering requiring in law that U.S. funding for assistance programs be more than matched by Iraqi funds. Insisting that "no one is talking about pulling the plug" on USG assistance, SACFO majority staff outlined a possible future role for Congress as "the heavy." Congress would impose cost-sharing requirements in an effort to trigger, at a minimum, discussions with the Iraqi government to secure its material buy-in for ongoing programs of all stripes. SACFO minority staff said that the ranking minority member would likely expect more than the 75 percent Iraqi cost-share outlined in the operations and maintenance cost- sharing arrangements proposed in the pending supplemental request. Amb. Ries emphasized, however, the importance of maintaining some level of USG funding. He argued that the Iraqi government might not choose to carry out some programs in the way or at the level of funding we believe necessary to achieve program and security objectives. -------------- -------------- Keep Scrubbing: IRRF Reprogramming and the FY08 Supplemental Request -------------- -------------- ¶13. (C) House and Senate appropriations staff said that they expect that the FY08 supplemental budget request will be "scrubbed" to ensure that its contents remain valid in the face of shifting conditions in Iraq, limited USG resources, and tighter prioritization. Several staffers were skeptical about the effectiveness of USG ministerial capacity development efforts in particular, with SACFO majority staff indicating that those programs were not likely to receive additional funding. Although the enterprise fund proposed in the supplemental was also said to be unpopular with the chair of the House appropriations subcommittee (HACFO),Amb. Ries made a case for the importance of providing equity finance for firms above the micro-level, which would help create jobs. ¶14. (C) Appropriations staff also expressed concern that some top-priority USG assistance programs were not slated to receive funds in the upcoming reprogramming of available IRRF resources. Amb. Ries countered that some future needs, such as provincial election funding, were not yet determined, and that some programs, including the Community Stabilization Program, required funding on a scale larger than the IRRF reprogramming could address. HACFO staff also informed Amb. Ries that they intend to request that Amb. Ryan Crocker testify before the subcommittee during his April visit. ¶15. (U) Amb. Ries has cleared this cable. RICE