FINANCE MINISTER ON THE 2010 BUDGET, THE

C O N F I D E N T I A L BAGHDAD 000125 SIPDIS E.O. 12958: DECL: 01/18/2020 TAGS: EFIN ECON ENRG PGOV BEXP IZ SUBJECT: FINANCE MINISTER ON THE 2010 BUDGET, THE DEVELOPMENT FUND FOR IRAQ, AND GENERAL ELECTRIC PAYMENTS REF: A. 2009 BAGHDAD 3028 ¶B. 2009 BAGHDAD 3049 Classified By: EMIN John Desrocher for reasons 1.4 (b) and (d). ¶1. (SBU) Summary: Minister of Finance Jabr and his Special Advisor Azez Jaffar reported that Ministry of Finance review of parliamentary amendments to the draft 2010 budget was almost completed, and that passage of the 2010 budget is expected by the end of January. Azez also stated that the Ministry of Finance is starting to plan for the successor to the Development Fund for Iraq, and that the government has decided against the issuance of debt for payments to General Electric and Siemens. End Summary. Status of the 2010 Budget -------------- ¶2. (SBU) Minister Jabr and Azez told the Economic Counselor and Acting Treasury Attache on January 13 that Ministry of Finance review of the amendments of the Council of Representatives (CoR) to the draft 2010 budget was almost complete, and that they expect passage of the budget by the end of January. Azez explained that the CoR had amended the draft budget to increase the allocations for the CoR, the Supreme Judicial Council, and other organizations. The Ministry of Finance had almost completed reviewing the amendments and making adjustments to the draft budget, and the Council of Ministers (CoM) would re-submit the draft budget to the CoR by the end of the week. (Note. We understand the budget was submitted to the CoR over the weekend. End note.) Minister Jabr and Azez expressed confidence that there would be no significant disagreement in the CoR about the revised draft budget and that the CoR would pass the budget by the end of January. ¶3. (C) The discussion left a number of important questions unanswered. Minister Jabr and Azez declined to go into detail on whether the CoM would increase the size of the draft budget or reduce the budget allocations of certain ministries to maintain the same total budget. They stated only that the amendments to the draft budget were insignificant. Minister Jabr and Azez also did not mention two other amendments to the draft budget that the CoR had approved, increases to the allocations for the Ministry of Martyrs and Prisoners Affairs and the Kurdish Regional Government (KRG). IMF Stand-By Arrangement -------------- ¶4. (SBU) An increase in the 2010 budget may affect IMF approval of the Stand-By Arrangement (SBA) for Iraq. The IMF expressed concern in October over the size of the $71.3 billion draft budget that the CoM submitted to the CoR, which was $4 billion higher than the amount agreed between the IMF and the GOI earlier in the month (ref A). The IMF demanded budget reductions to shrink the GOI's potential financing gap, then dropped its demand after discussions with Minister Jabr. If the 2010 budget increases significantly, the IMF will likely renew its concern. A possible mitigating factor is that the IMF and the Ministry of Finance reached a tentative agreement that if the price of oil that Iraq receives is above an average of $73 a barrel, calculated according to an IMF methodology, the SBA would become precautionary in 2010 rather than disbursing. Minister Jabr did not note any recent discussions with the IMF regarding the budget. KRG Budget Allocation -------------- ¶5. (SBU) Minister Jabr and Azez avoided the subject, but the budget allocation for the KRG has been a controversial issue. The draft 2010 budget submitted by the CoM in October provided for 17 percent of expenditures to be transferred to Qprovided for 17 percent of expenditures to be transferred to the KRG, net of national expenses, as in 2009. It also contained provisions controversial for Kurdish CoR members, including a provision allowing the Ministry of Finance to deduct the cost of damages caused by a region or province as a result of failure to deliver crude oil revenue to the Ministry of Oil, and a provision including the cost of the Bakhman dam in KRG expenditures (ref B). The provision on oil revenues had been an issue in the CoR, but it appears to be close to resolution. Development Fund for Iraq Successor Planning Moving Slowly -------------- -------------- ¶6. (SBU) Azez explained that the Ministry of Finance is starting to consider its approach to a successor to the Development Fund for Iraq (DFI). The Ministry of Finance has contacted the Central Bank of Iraq (CBI) about cooperating on a proposal for the DFI successor arrangement. It has not yet engaged with the Ministry of Foreign Affairs on the issue. Azez will lead the Ministry of Finance's work on the matter. ¶7. (C) GOI planning for the successor to the DFI has barely begun. The Governor of the CBI stated to the Acting Treasury Attache on January 7 that the CBI had not begun to consider its plans for the successor to the DFI. The Embassy will urge the Ministry of Finance and the CBI to consider next steps as soon as possible. General Electric Payments -------------- ¶8. (SBU) In response to a question from the Acting Treasury Attache about Minister Jabr's view on an expected request by the Ministry of Electricity to raise funds for turbine contract payments to General Electric (GE) and Siemens by issuing t-bills, Azez stated that the CoM decided last week not to raise funds outside of the 2010 budget for the Ministry of Electricity or the Ministry of Oil. This meant, Jabr stated, that the GOI would not be issuing t-bills to pay the next installment for the GE turbines. Azez said the CoM has decided that the Ministry of Electricity and the Ministry of Oil will need to look to the private sector to provide additional funding for capital investment in 2010, though Jabr noted that such an arrangement had not been tried before by the GOI. When the Acting Treasury Attache explained that the Ministry of Electricity had prepared a formal request for the issuance of t-bills to raise $2.5 billion for payments to GE and Siemens, Azez stated that the CoM had not yet received the request. He believed that the CoM will oppose issuing t-bills for this purpose. Comment -------------- ¶9. (C) Since the CoM had not yet even received the Ministry of Electricity's request, Azez's view was not a definitive statement on how the CoM will decide on the Ministry of Electricity's request to issue t-bills. In a recent conversation with the Economic Minister Counselor, Electricity Minister Hasan said nothing about a CoM decision that would preclude t-bills and made clear that that remains his preferred way to pay GE and Siemens. Experience with the t-bills issued for payments to GE and Siemens in 2009 established the legality of issuing t-bills, but it also demonstrated the political difficulty of raising large amounts of money this way. Hasan is due to meet GE in Istanbul next week to discuss the contract and payments. ¶10. (C) Comment continued. On the budget and SBA, Minister Jabr's unhurried attitude is not surprising because, even more than usual, he is focused on the politics of the upcoming national election. (He spent most of the meeting with his eyes glued to a TV news report on the exclusion of Sunni MP Saleh al Mutlaq from the election, and directed all questions to Azez.) Furthermore, with the price of oil buoyant over the past few months, the IMF SBA may appear less crucial to the GOI than it would have in mid-2009. Each week that passes without a budget pushes the IMF's decision on the SBA closer to the election, and the IMF may be reluctant to approve the SBA on the eve of the vote. HILL