IMF OFFICIALS DISCUSS SBA NEGOTIATIONS, ELECTIONS

C O N F I D E N T I A L SECTION 01 OF 02 STATE 096447

SIPDIS

E.O. 12958: DECL: 09/16/2019
TAGS: EAID ECIN ECON EFIN EPET IZ PREL
SUBJECT: IMF OFFICIALS DISCUSS SBA NEGOTIATIONS, ELECTIONS
WITH AMBASSADOR HILL

REF: BAGHDAD 1633

Classified By: NEA DAS Michael H. Corbin for reasons 1.4 (B) and (D)


1. (C) SUMMARY: A number of senior IMF officials met with
Ambassador Christopher R. Hill on September 11 to discuss
ongoing negotiations for a new Stand-By Arrangement (SBA)
between the IMF and the Government of Iraq (GOI) and the
current situation in Iraq. IMF officials noted that
negotiations are progressing, although they remain acutely
aware of how the January elections affect the SBA timeline.
The new SBA, from which the GOI will draw budgetary support,
will focus primarily on public financial management reform
and financial sector reform. IMF officials did note,
however, that they need additional data from the GOI before
coming to agreement on some of the program numbers. IMF
staff will conduct an Iraq mission to Amman later this month,
followed by annual IMF/World Bank meetings in Istanbul in
early October.


2. (C) IMF Director for the Middle East and Central Asia
Masood Ahmed, Senior Advisor for the Middle East Juan Carlos
di Tata, Iraq Mission Chief Ron Van Rooden, and IMF Iraq
staff met with Ambassador Christopher R. Hill on September 11
to discuss ongoing negotiations for a new SBA between the IMF
and the GOI and the current situation in Iraq. Ambassador
Hill opened the meeting by noting his deep concern about
Iraq,s economy and the statist legacy that persists. And,
despite recent progress in the first oil bid round, Iraqi
officials still face many barriers, both economic and
political, to economic development.


3. (C) Mr. Ahmed observed that, despite fluctuations on world
oil markets, Iraq has made progress over the past three years
and that Iraq,s macro aggregates are "not bad." The IMF is
now assessing what the substantive focus of its relationship
with the GOI will be over the next two years and how the
GOI,s need for budgetary support shifts the dynamic of the
relationship. Mr. Ahmed noted that the IMF does not normally
provide budgetary support, and that they would need
assurances that the World Bank will provide similar support
before presenting a program to the IMF Board of Directors.
(Note: Per Ref A, the GOI and IMF are negotiating an 18-24
month, $5.5 billion SBA with conditionalities. End Note.)
Mr. Ahmed also said that the January elections factor heavily
in the timing of the presentation of a new Iraq program to
the IMF Board. The IMF wants firm assurances that the SBA
will be implemented by a new government in Baghdad, should
that be the election outcome, and would not want to present a
new program too close to the elections. As such, Mr. Ahmed
pointed to the Christmas break as the cut-off point for Board
presentation. Ambassador Hill urged them to reach agreement
with the Iraqis and bring the program to the Board as soon as
possible in order to minimize any Board members, concerns
that upcoming elections would derail the agreement.


4. (C) Mr. Van Rooden then outlined the key areas in which
the IMF will establish benchmarks for the GOI, noting that
the IMF doesn,t want to make a new SBA as broad as previous
agreements. The first focal point will be public financial
management reform, which tracks closely with the World
Bank,s priorities in Iraq. This would include benchmarks on
accounting controls, transparency, a successor to the
Development Fund for Iraq (DFI),and more efficient
procurement practices. Because oil makes up such a large
part of Iraq,s revenue base, the IMF would also focus on
transparency in the domestic oil sector. A second area of
emphasis, following on work under previous SBAs, would be
financial sector reform. This would focus primarily on
financial restructuring of Rafidain and Rasheed, Iraq,s two
state-owned banks, as well as building capacity in these
institutions. When Ambassador Hill asked for further
clarification about conditionality, Mr. Van Rooden said that
the IMF will look for focused benchmarks and quantitative
criteria, against which Iraqi performance can be measured.
IMF staff will conduct semi-annual program reviews, and will
release the budgetary support in tranches based on Iraqi
performance.


5. (C) With respect to oil and the economy, Ambassador Hill
underscored the importance of the oil sector and the critical
need to get the oil out of the ground. He said that he has
seen some signs that PM Maliki and Oil Ministry officials
understand this, and have learned some of the right lessons
from the first oil bid round in June, and pointed out that
the U.S. Embassy continues to encourage the GOI to bring in
foreign investment to the oil and gas sector. He also said

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that although it is important for the Iraqis to pass the
package of hydrocarbon laws, he predicted it was unlikely any
of the laws would pass before the election.


6. (C) Mr. Ahmed thanked Ambassador Hill for his assessment,
and said that the IMF would appreciate U.S. help to move SBA
negotiations forward. In particular, he noted that the GOI
needs to provide IMF staff with some important data. (Note:
At a prior meeting between NEA/I, Treasury, and IMF staff,
IMF staff identified the required data as (1) final fiscal
data for 2008, (2) fiscal data for the first half of 2009,
(3) data on government balances in Iraqi banks, (4) progress
on the 2008 external audit of the central bank, and (5)
information on the 2009 budget supplemental. End note.) Mr.
Ahmed also mentioned that public financial management reform
will be a particularly difficult sell, and U.S. support would
be very helpful.


7. (C) Ambassador Hill offered his support, and suggested
that the October U.S.-Iraq Business and Investment Conference
and Dialogue on Economic Cooperation in Washington could act
as action-forcing events, as well as provide opportunities
for IMF officials to finalize SBA details with GOI officials.
Mr. Ahmed agreed, saying that the next two months are
crucial. Mr. Van Rooden noted that he will lead a mission to
Amman in late-September, which will then move to Istanbul on
the margins of the IMF-World Bank annual meetings. When
Ambassador Hill inquired whether they would travel to
Baghdad, Mr. Ahmad noted that IMF policy still prohibits
travel to Baghdad.
CLINTON