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.

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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