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Cablegate: Response: Impact of Rising Food/Commodity Prices -

VZCZCXRO1477
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #1471/01 1330807
ZNR UUUUU ZZH
R 120807Z MAY 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 7300
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS SECTION 01 OF 02 BAGHDAD 001471

SIPDIS

STATE FOR NEA/I, EEB/TPP/ABT/ATP FOR JSPECK
USDA FOR OFSO/RVERDONK, OCRA/AALLEN, OGA/JLAGOS

E.O. 12958: N/A
TAGS: EAGR ETRD ECON EFIN PGOV IZ
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -
IRAQ

REF: A. STATE 39410
B. BAGHDAD 1421

- - - -
Summary
- - - -

1. Iraq, like many other countries, must contend with rising
world food prices. The Government of Iraq (GOI) supplies the
bulk of staple food needs to the Iraqi people essentially
free of charge under the auspices of the Public Distribution
System (PDS -- also referred to as the "ration card" in
Arabic) food subsidy program. The vast majority of
commodities provided in the PDS basket is imported. As a
result, the GOI must budget for food supplies and faces tough
policy decisions regarding how much of its additional revenue
it will utilize to ensure PDS outlays are fully funded. End
Summary.

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PDS Budget and Purchases Growing
- - - - - - - - - - - - - - - -

2. The PDS food subsidy program is the second largest single
line item (with salaries the largest) in the GOI federal
budget, with outlays of nearly USD 3.1 billion in 2007 (of an
approximately USD 41 billion budget). The approved allocation
for PDS in the 2008 budget for PDS is nearly USD 3.3 billion
(from a total budget of nearly USD 50 billion), which
Ministry of Trade (MoT) officials expect to be sufficient for
the first half of the year. A supplemental appropriation is
currently under discussion (reported septel).

3. Due to rising international commodity prices, the MoT
predicts this year's PDS spending will likely exceed USD 7
billion, assuming that the system is fully funded and does
not undergo significant reform. The Ministry of Trade
requested a budget of USD 6.4 billion for 2008, but was
allocated the same amount in Iraqi Dinar (ID) as had been
allocated for PDS outlays in 2007. According to Ministry of
Finance data, PDS was overspent by ID 178 billion
(approximately USD 148 million at an exchange rate of 1200
ID/USD). The 2008 federal budget law explicitly commits the
Ministry of Trade to "supply all (PDS) items to the (Iraq)
citizens" in Article 27 of the law. Additionally, the Article
notes that any PDS funding shortfalls be addressed in a
supplemental budget, with the added proviso that commits the
Council of Ministers to endeavor to reform the program,
implicitly in order to reduce program inefficiencies while
simultaneously ensuring support for the most vulnerable
segments of society.

4. In an attempt to get ahead of the curve on rising world
food prices, the GOI has stepped up its pace of wheat imports
since December 2007. Wheat imports in the current marketing
year (MY) 2007/2008 (July/June) are estimated at 3.5 million
tons, up 17 percent relative to last year. The growth in rice
imports is even stronger, up from an estimated 615,000 tons
imported in calendar year 2007 to a projected 900,000 tons in
2008.

- - - - - - - - - - - - - - - -
Inflation Under Control, So Far
- - - - - - - - - - - - - - - -

5. While the PDS food basket accounts for a sizable portion
of caloric intake of the average Iraqi, free market forces do
prevail in sectors such as fresh fruits and vegetables, meat
and dairy, animal feed grains and processed food products.
Headline inflation, according to the Iraqi Central
Organization for Statistics and Information Technology (COSIT
-- the GOI's primary statistics agency), in the 6-month
period from September 2007 to March 2008 was negative, as the
Consumer Price Index (CPI) fell 2.1 percent. Food prices
during that same period experienced moderate growth
increasing by 4.3 percent. Food comprises 63.2 percent of
COSIT's monthly-generated CPI. The aforementioned trends
notwithstanding, we anticipate that inflation may have
accelerated in April, given heightened kinetic operations in
Basra and Sadr City in Baghdad that complicated GOI efforts
in ensuring the provision of basic services to those areas,
including PDS distribution.

6. Anecdotal reports suggest that, to the extent that PDS
rations are successfully delivered, individual Iraqi citizens
may be largely insulated from rising global food prices. The
system in its current form provides sufficient quantities of
staple foods; however, those Iraqis who are unable to obtain

BAGHDAD 00001471 002 OF 002


their PDS allotments on a consistent basis bear the brunt of
increasing food prices. Furthermore, locally engaged staff
report that the MoT has resorted in recent months to
substituting lower quality (and cheaper) locally-procured
products in PDS allotments for higher quality imported
products.

- - - - - - - - - - - - -
Difficult Decisions Ahead
- - - - - - - - - - - - -

7. The GOI is facing difficult decisions with regard to PDS.
Already, Finance Minister Bayan Jabr has told us (ref B) he
will provide the MoT only a further USD 1-2 billion for PDS
outlays, which could force the MoT to accelerate plans for
PDS reform. Still we have seen in the past strident public
calls by Iraqi officials for PDS reforms, but those calls to
this point have largely been ignored. This most recent global
rise in commodity prices may, however, finally force the
issue.

8. For decades the GOI has pursued a policy of input
subsidization, and even today farmers continue to look to the
government to supply them with seed, fertilizer and farm
machinery. The system is slowly changing, and the
government's stated policy is to move away from input
subsidies, but more time will be needed to recover from some
30 years of dependence, mismanagement and neglect. The shift
to greater private sector investment in agriculture is
further hampered by security concerns and the lack of
agricultural credit programs, key services and utilities. The
impact of this year's drought is having a bigger influence on
farmers' planting decisions than are rising international
food and agricultural input prices.
CROCKER

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