COUNCIL OF REPS FINANCE COMMITTEE ON 2009 BUDGET

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 000195

SIPDIS

E.O. 12958: DECL: 01/26/2019
TAGS: EFIN ECON PGOV EPET IZ
SUBJECT: COUNCIL OF REPS FINANCE COMMITTEE ON 2009 BUDGET

REF: A. A. 2008 BAGHDAD 4077

B. B. 2008 BAGHDAD 1843

Classified By: Economic Counselor Michael Dodman for reasons 1.4(b) and
(d)


1. (C) Summary: The Iraqi Council of Representatives (COR)
hopes to pass the FY2009 budget "soon," but there is concern
that cuts in the capital budget will affect Iraq's future.
Falling oil revenues and uncertain oil markets highlight the
GOI's overdependence on a single source of income, but the
COR understands that it must continue investing in the
reconstruction of Iraq. The Council of Ministers' failure to
address underlying political issues means that funding for
both capital and operating expenses in the provinces will be
allocated according to their percentage of the population.
The GOI is sharing more information with the COR on budget
issues, and the Finance Committee hopes to increase
ministerial accountability in 2009 with televised hearings on
each Minister's budget execution performance. End summary.


2. (C) In a January 20 meeting with Econoff, COR Finance
Committee member Ala'a Alsadon (IIP, Sunni) said her
committee was reviewing the budget and would make
recommendations for amendments. According to the Iraqi
Constitution, Alsadon said, the COR can reduce the overall
size of the Council of Minister's submitted budget proposal,
transfer funds allocated in the budget proposal from one
project or priority to another, and send the budget proposal
back to the Council of Ministers with a request to increase
its size. "We hope to pass this budget very soon," she
added. (Note: As of January 26 the 2009 draft budget was
approved by the Council of Ministers, who marginally raised
the budget and added an article that will distribute
operational and investment portions of the budget directly to
the provinces. This will be reported further in septel. End
note.)

Worry About Iraq's Revenue Stream
--------------


3. (C) According to Alsadon, COR members are very concerned
about Iraq's ability to meet its budgeted needs and agreed
that the 2009 budget's assumptions that Iraq would earn USD
50 per barrel and export 2 million barrels per day were too
optimistic. The Finance Committee's assumption is that Iraq
would only average USD 40 per barrel and export an average of
no more than the current level of 1.85 million barrels per
day.


4. (C) There is no credibility in the Ministry of Finance's
expectation that non-oil related revenue will grow in 2009,
said Finance Committee Senior Advisor Talib 'Ayfan. "Iraq's
non-oil income is basically non-existent." There is no real
private sector to tax, no one is paying taxes, and we do not
expect the state-owned enterprises to be profitable, he
added. Iraq will have to raise tariffs on imports to at
least 10 percent, he added. "We have to find new sources of
revenue for the government," he said.

Budget Priorities and Deficit Spending
--------------


5. (C) Despite the budget deficit, Alsadon and 'Ayfan said
that the Finance Committee members agreed that Iraq needed to
spend more money on capital expenditures. "The investment
budget has been cut by 15 percent from last year," said
'Ayfan. "This is too much. If we don't spend money on
building the country, we will have no way to grow. Private
sector growth depends on having functioning infrastructure,
like electricity, water and roads." The COR, therefore,
understands the need for deficit spending, he added.


6. (C) Government salaries "have not been touched, and will
not be reduced in this election year" said Alsadon. Salaries
Qnot be reduced in this election year" said Alsadon. Salaries
will not, however, be increased further in 2009 and the only
new hiring allowed will be for unfilled slots that Ministries
have already budgeted for. The size of the civil service
will not increase.

Political Problems Unresolved
--------------


7. (C) The Council of Ministers did not address the
underlying political problems on how to allocate funds to the
provinces. Given the competing political parties and lack of
clearly-defined guidance from the Council of Ministers, there
is no other "fair way" to divvy up the funds, Alsadon said.
As a result, funds allocated for investment projects in
provinces will be distributed by the Ministry of Finance to
the appropriate implementing ministries based on the
population of the province.


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8. (C) Operating budgets for non-KRG provincial governments
will, likewise, likely be allocated by population. This is
not an ideal situation, said Alsadon, since each province's
situation and needs are different. Certain areas, like Anbar
Province, have greater needs for education and healthcare
than other provinces. "Iraq does not have any measure of
minimum health or education standards, and we don't know the
situation of the provinces, so what can we do?" she asked.

Holding the Government Accountable
--------------


9. (C) Alsadon said that the Finance Committee continues to
work on holding the government accountable for its spending.
She said that the Finance Minister's January 17 appearance
before the COR to answer questions on the budget proposal was
an important improvement. The previous two budgets had been
submitted to the COR "with no explanation." "This year, the
Ministry of Finance is giving much more information," she
said.


10. (C) Alsadon also said that the Ministry of Finance (MoF)
has invited the COR's Finance Committee to be more active and
involved in its budget processes. More information is coming
from the MoF to the COR, and she, as a COR member, attended
the October 2008 MoF-IMF Stand-By Arrangement discussions in
Amman. This is a good first step, she said.


11. (C) Work remains to be done, however. The Finance
Committee has asked each ministry to outline spending
objectives and strategic plans for FY2009 and FY2010, as well
as FY2008 budget execution accomplishments and failures. The
ministries have not yet responded, she said. The COR would
not press the ministries for responses this year given the
already-delayed budget process.


12. (C) In 2009 the Finance Committee plans to hold open and
televised hearings where each minister would be called to the
COR. At these hearings, the Board of Supreme Audit would
read its reports on the ministry, and then COR members would
be able to ask the minister questions. "We will hold every
minister accountable this year," Alsadon said.
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