Identifier
Created
Classification
Origin
09BAGHDAD882
2009-03-31 10:33:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Baghdad
Cable title:  

IRAQ LACKS CAPACITY FOR OIL TRUST FUND

Tags:  EPET ENRG PGOV EINV IZ 
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VZCZCXRO4912
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #0882/01 0901033
ZNR UUUUU ZZH
P 311033Z MAR 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 2478
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 02 BAGHDAD 000882 

SIPDIS

SENSITIVE BUT UNCLASSIFIED

E.O. 12958: N/A
TAGS: EPET ENRG PGOV EINV IZ
SUBJECT: IRAQ LACKS CAPACITY FOR OIL TRUST FUND

REF: 02/13/2009 Shapiro/Wall e-mail

UNCLAS SECTION 01 OF 02 BAGHDAD 000882

SIPDIS

SENSITIVE BUT UNCLASSIFIED

E.O. 12958: N/A
TAGS: EPET ENRG PGOV EINV IZ
SUBJECT: IRAQ LACKS CAPACITY FOR OIL TRUST FUND

REF: 02/13/2009 Shapiro/Wall e-mail


1. (SBU) Summary: A common mechanism to manage revenue from natural
resources is the establishment of a form of natural resources fund,
such as an "oil trust fund." However, Iraq currently does not have
the resources or capacity to establish such a stabilization fund.
The Government of Iraq's (GOI) struggle to adjust its 2009 budget to
the drop in global oil prices shows it has little flexibility. As a
legacy of the UN controls over the Coalition Provisional Authority
(CPA),Iraq currently has the Development Fund for Iraq (DFI) into
which oil revenues are deposited and from which government
expenditures are paid. The bilateral Strategic Framework Agreement
provides a process whereby the U.S. can pursue post-DFI mechanisms
with the GOI, including the near-term priority of a stabilization
fund and the potential future benefits of a distributive fund. End
Summary.

A Natural Resource Fund
--------------


2. (U) Many resource rich countries have devised mechanisms to
manage revenue from their natural resources, including establishment
of an "oil trust fund." Such a fund can take several forms -
stabilization, savings, or distributive. A stabilization fund is
designed to shield the national budget from revenue uncertainty and
volatility for limited periods. A savings fund creates a store of
wealth for present and/or future generations and receives a constant
share of oil revenues that is held for future distribution or
investment, especially when oil resources are exhausted. A
distributive fund disburses oil revenues within a limited timeframe
and is not structured to provide explicit intergenerational
transfers. Trust funds can also be hybrids that combine two or all
three of the main forms. An oil trust fund for Iraq could also be a
way to resolve the political stalemate over revenue distribution.

Oil Revenues and DFI
--------------


3. (SBU) As a legacy of the UN controls over the CPA, Iraq currently
has the Development Fund for Iraq (DFI) into which oil revenues are
deposited and from which government expenditures are paid. The
immunities and international oversight associated with the DFI will
expire on December 31, 2009. The Government of Iraq will need to

consider a mechanism to substitute when the DFI expires. Since over
90% of government revenues come from oil exports, Iraq must first
reduce the impact of price volatility as well as invest heavily in
its energy infrastructure, which points to the need for a
stabilization fund before a distributive fund. However, because
Iraq currently does not have the resources or capacity to implement
even a stabilization fund, discussions should be focused towards
long-term planning.


4. (SBU) The GOI's struggle to adjust its 2009 budget to the drop in
oil prices shows the government's lack of flexibility in what is
essentially a one export economy. Its budget programs a $16 billion
deficit by assuming 2 million barrels per day in oil exports at $50
per barrel. The first two months of 2009, oil revenues were $3.7
billion, or $2.2 billion below budget assumptions. Oil prices
averaged $39.69 per barrel. Thus, the deficit could likely be much
greater than budgeted predictions and absorb most of the GOI's
accumulated fiscal balances. The Ministry of Finance hopes to
diversify its revenue by expanding its domestic Treasury bill
offerings in the short term and improving its tax collection.
Nevertheless, should oil prices and/or oil output remain stagnant or
decline, Iraq will have fewer resources to finance large deficits in
Qdecline, Iraq will have fewer resources to finance large deficits in
2010 and beyond. Iraq will not have enough revenue to establish any
type of fund. The GOI faces difficult budget cuts, which could have
destabilizing influences on Iraq's fragile economic recovery.

Current Revenue-Sharing Mechanisms
--------------


5. (SBU) So far, the lower price of oil has not pushed Erbil or
Baghdad to compromise on revenue sharing or hydrocarbons
legislation, which would establish a new framework for transparent
management of the oil and gas industry. The revenue sharing bill is
centered on the entire budget process. According to the June 2007
draft, the Kurdistan Regional Government views revenue sharing as
taking place before the national budget and thereby completely
avoiding either the Ministry of Finance or parliament. The central
Government of Iraq views that revenue sharing will be handled
through the national budget. Since neither side is willing to
concede or compromise on its view on revenue sharing, the two sides
have primarily focused on resolving the hydrocarbons law.


6. (U) In the absence of a formal revenue sharing law, oil income is
nevertheless shared. The Iraqi budget de facto distributes revenue
directly to the Kurdistan Region and all provincial governments.
The Kurdistan Region has received 17% of the Iraqi budget since

2003. The distribution to the provinces has occurred every year

BAGHDAD 00000882 002 OF 002


since 2006 based on population estimates. From 2006 to 2009, the
GOI allocated $12.8 billion directly to provincial governments for
investment projects to improve infrastructure and delivery of
essential services to the Iraqi people. Furthermore, while not
exactly the same as an oil trust fund, the GOI provides a basket of
goods to all Iraqis via the Public Distribution System (PDS). From
2005 to 2009, the GOI allocated $18.9 billion for the PDS.

The Way Forward
--------------


7. (SBU) The Strategic Framework Agreement provides a process
whereby the U.S. can pursue post-DFI mechanisms with the GOI,
including the near term priority of a stabilization fund and the
potential future benefits of a distributive fund. The Economic and
Energy Joint Coordination Committee, established in the agreement,
provides an opportunity to promote GOI outreach to such experts as
the World Bank and the Government of Norway. The World Bank has
expertise in establishing resource funds, and has also expressed an
interest in helping design a post-DFI mechanism. The Government of
Norway has provided assistance to other countries developing natural
resource funds.
BUTENIS