Supplemental Budget worth USD 3.3 billion submitted to the

UNCLAS SECTION 01 OF 02 BAGHDAD 002097 SENSITIVE SIPDIS AIDAC DEPT PASS USTR STATE FOR NEA/I/ECON AND EEB/IFD/OMA E.O.12958: N/A TAGS: ECON EFIN PGOV ETRD EAIR IZ SUBJECT: Supplemental Budget worth USD 3.3 billion submitted to the Council of Representatives REF: (A) Baghdad 2008 (B) Baghdad 1633 (C) Baghdad 1488 ¶1. (SBU) SUMMARY: Iraq's Council of Ministers (CoM) submitted a USD 3.3 billion supplemental 2009 budget to the Council of Representatives (CoR) on July 22. (Note: The CoR has adjourned for its summer recess and will reconvene on September 8.) If passed by the CoR, the supplemental budget would cover additional government operating expenses, such as for elections, the census, salaries (including funds to reimburse the Ministry of Interior for Sons of Iraq payments, and to pay air traffic controllers) and investments, including a number of provincial projects carried over from 2008. The supplemental budget is a sore spot in ongoing GOI negotiations with the IMF, which is concerned about Iraqi intentions to take on new expenditures as the country seeks a USD 5.5 billion Stand By Arrangement geared toward budget support. Even with higher oil prices and export levels over the last two months, Iraq's programmed deficit for 2009 still exceeds USD $16 billion. Any supplemental funds that the GOI spends this year would only increase next year's 2010 budget dependency on oil revenues and debt financing. End Summary. Outlines of the 2009 Supplemental Budget -------------- ¶2. (SBU) According to press reports, on July 19 the CoM approved a supplemental budget for 2009. The Finance Minister stated that the supplemental would cover expenses such as Sons of Iraq payments (by reimbursing the Minister of Interior's employee compensation fund, which is covering these expenses),the upcoming national elections, some electricity and water power projects, and increased allocations to certain provinces. Reportedly, there was no detailed discussion within the CoM before the Council sent the supplemental to the CoR on July 22. ¶3. (SBU) The supplemental calls for USD 4.6 billion in additional expenditures - with USD 1.3 billion in extra revenues - leaving net expenditures of USD 3.3 billion. The additional revenues would come from license fees that mobile phone companies are expected to pay this year. (Comment: There is some uncertainty over how much the companies will pay the GOI in 2009 as their payments were reportedly to be spread over several years. End comment.) With the supplemental, the government's operational budget would increase by USD 1 billion and investment by USD 3.6 billion. Provinces would be significant beneficiaries, gaining about USD 1.9 billion in direct transfers, primarily for investment. ¶4. (SBU) Operational expenditures under the supplemental include extra employee compensation for the (1) Ministry of Interior to pay salaries for the Sons of Iraq (about USD 250 million); (2) Independent High Elections Commission (IHEC) (USD 175 million); (3) Ministry of Transportation to pay for air traffic controllers and related programs (USD 17 million); (4) Ministry of Planning to pay for the census (USD 55 million); and (5) Ministry of Justice to cover expenditure shortages in Iraqi prisons (USD 80 million). There are about USD 1.5 billion in new investment projects, including USD 500 million for the Ministry of Electricity. Most of the remaining projects were on the books for the 2008 budget, and almost all are located in the provinces. Next Steps and Reactions -------------- ¶5. (SBU) The CoR will take up the supplemental when it returns from summer break on September 8. According to an observer of CoR's Qsummer break on September 8. According to an observer of CoR's procedures, the proposed supplemental budget will be studied by three committees (Finance, Economics, Legal) and could be debated by the CoR in October. The CoR debate could be contentious. In March 2009 the CoR, based on the recommendation of the Finance Committee, had voted to reduce expenditures in the 2009 budget by USD 3.2 billion. And in July Finance Committee Chairperson Alaa al-Sadoon publicly said his committee "believes there is no need to present a supplementary budget with such a huge deficit." ¶6. (SBU) The topic of the supplemental budget also arose in recent negotiations between Iraqi authorities and IMF staff on the proposed USD 5.5 billion Stand By Arrangement that would be targeted to provide budget support. Fund staff reportedly urged the Iraqi authorities to reconsider any additional spending, while recognizing the need for possible reallocations to priority areas. Observations -------------- ¶7. (SBU) If 2010 budget preparations follow schedule, the CoR will be considering next year's spending plan and the 2009 supplemental at the same time in mid-October. Keeping issues separate between the two spending bills could be a challenge for the CoR. Moreover, the CoR Finance Committee took a more conservative line on budget expenditures than the CoM in the 2009 budget and has already pronounced its skepticism about 2010 budget assumptions. BAGHDAD 00002097 002 OF 002 ¶8. (SBU) MoF officials state that positive trends in oil prices and export sales should help cover the supplemental budget deficit. Higher oil prices, however, have not pulled Iraq's budget out of deficit. As of the end of June, oil revenues for 2009 were about USD 3.8 billion below projected 2009 budget estimates. If oil prices held steady for the rest of 2009 (at an export price of USD 61 per barrel),exports held at their first half average (around 1.8 million barrels a day),and Iraq executed 100 percent of its 2009 budget, this year's deficit would be USD 18 billion, or USD 2 billion higher than budgeted. Ford