IRAQI BUDGET NOT YET PASSED, CONTINUING RESOLUTION

UNCLAS SECTION 01 OF 02 BAGHDAD 000350 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN ECON PGOV IZ SUBJECT: IRAQI BUDGET NOT YET PASSED, CONTINUING RESOLUTION KEEPS THE GOVERNMENT WORKING REF: A. BAGHDAD 280 ¶B. BAGHDAD 244 ¶C. BAGHDAD 195 ¶D. BAGHDAD 206 ¶1. (SBU) Summary: The GOI has yet to pass a budget for FY 2009, which began on January 1. GOI operations continue under an automatic continuing resolution, according to Iraqi law, that maintains spending at a monthly rate based on the previous fiscal year's budget. Delays have been caused by both successive revisions of the budget in the Council of Ministers (CoM) and the race for the speaker of the Council of Representatives (CoR). The GOI is faced with tough political decisions on spending, and the proposal submitted to the CoR on February 4, has increased expenditures to total USD 62.9 billion, up from the USD 59.5 billion in December. Iraq's accumulated fiscal assets should be sufficient to fund the anticipated 2009 budget deficit. End summary. Budget Back to CoM: Another Look -------------- ¶2. (SBU) Following CoR Finance Committee hearings in January (refs A-C),the 2009 draft budget was sent back to the Council of Ministers (COM) for adjustment on January 18. The Finance Committee was concerned that that the budget rested on overly optimistic revenue assumptions and that provinces should be given larger allocations. While under the Constitution the CoR has the authority to reduce or reallocate expenditures, CoR members tend to rely on the Ministry of Finance rather than making such technical changes themselves. The CoR does not have the right under the Constitution to increase expenditures, but can recommend such increases to the CoM. Easy Target: Stuck in the CoM, Budget Expenditures Rise -------------- -------------- ¶3. (SBU) In response to the CoR Finance Committee's request, the Ministry of Finance produced a new draft budget that increased expenditures from USD 59.5 billion to USD 61.7 billion. The anticipated deficit rose correspondingly to USD 19 billion as revenue assumptions did not change (average price of oil of USD 50 for the year and export sales averaging 2 million barrels a day). ¶4. (SBU) When the MoF's latest draft went back to the CoM for approval (ref B),it proved to be an easy target for further haggling. Emboffs have seen Ministers, specifically the Electricity Minister and the Defense Minister, visit the Finance Minister and press reports told of visits by provincial governors all looking for increases. According to MOF contacts, the budget continued to be tweaked on February ¶2. Or, as the Finance Minister observed, "a million here, a million there..." The new, COM-approved budget proposal sent to the COR raised expenditures to USD 62.9 billion, with an anticipated deficit of USD 20.1 billion. Compared to the budget the CoM sent to the CoR in December, operating expenses increased USD 2.8 billing and investment expenditures rose by USD 0.5 billion. The budget was sent back to the CoR on February 4. Continuing Resolution: Budget Funds Flow -------------- ¶5. (U) Under Iraq's Financial Management Law, if a budget is not approved by the CoR by December 31st, the Minister of Finance is obliged to approve funds for spending units on a monthly basis up to one twelfth of the appropriations of the previous fiscal year until a budget is approved. These funds can be used only for "liquidation of existing commitments, salaries, pensions, social security payments and debt service," according to the Law. (Note: This is effectively a GOI "continuing resolution." End note.) ¶6. (SBU) Emboffs met in mid-January with the MOF Director Q6. (SBU) Emboffs met in mid-January with the MOF Director General of Accounts to discuss budget implementation in general and, more specifically, implementation of this year's budget. He confirmed that the MoF would proceed with the approval of funds as indicated by the law. He clarified, however, that the allocations would equal one twelfth of either the 2008 budget (with supplemental) or the 2009 budget, whichever is less. The 2008 budget, with the added Supplemental, had expenditures totaling USD 72.2 billion. Thus, some budget lines in the proposed 2009 budget would be less than those in 2008 and be used for the monthly allocations. He also noted that investments (capital expenditures) that were started in 2008 would continue to be funded. Spending units could draw up to one twelfth of their total investment budget on a monthly basis. BAGHDAD 00000350 002 OF 002 ¶7. (SBU) When asked whether any units had requested allocations for this year, he explained that most units have cash balances in government owned bank accounts at their disposal. These were funds to be used in 2008 but were not spent by year's end, he said. (Note: According to CBI data, as of the end of November total GOI deposits in state banks totaled around USD 15 billion. End note) Headless CoR to Proceed: Quick Action or Not? -------------- ¶8. (SBU) The budget is one of the main issues currently before the CoR, but, without a Speaker (ref D),many Representatives have argued that the CoR could not consider legislation. At the CoR's February 5 session, however, the Acting Speaker reported that the Federal Supreme Court had held that it would be legal for the CoR to carry out a session without a Speaker as long as the Deputies remained in their positions. The court also held that CoR bylaws permit CoR sessions to be chaired by one of the Deputies. Nevertheless, it appears that the CoR is more focused on deciding its leadership than passing a budget. Significantly, the Chair of the Finance Committee, Ayyad Sammarai, a leading candidate for the Speaker job, has delayed discussions of the budget in the CoR by linking the election of a new Speaker to consideration of the Budget bill. The CoR recessed for a week's break on February 9, and will reconvene on February 18. Comment -------------- ¶9. (SBU) Delays in passage of the FY 2009 budget have not created a crisis in Iraq, as under its continuing resolution, government spending and operations continue. The GOI has substantial cash balances to fund expenditures under the continuing resolution process. Budget preparation began on schedule, but declining oil prices have resulted in several downward revisions of the draft budget, and increased political wrangling for pieces of the smaller pie. Further delays could have longer-term consequences as plans and commitments for new capital spending to meet Iraq's essential services needs cannot start until the budget is passed. Though planned expenditures in 2009 will not be the USD 79 billion first envisaged in the September 2008 initial budget draft, they will be greater than the estimated USD 50 billion that the GOI actually spent in 2008. In practical terms, therefore, the FY 2009's budget will result in increased spending. CROCKER