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Cablegate: Revised 2009 Budget Endorsed by Council Of

VZCZCXRO7954
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #4077/01 3661411
ZNR UUUUU ZZH
P 311411Z DEC 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 1079
INFO RUCNRAQ/IRAQ COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 04 BAGHDAD 004077

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PGOV EFIN IZ
SUBJECT: REVISED 2009 BUDGET ENDORSED BY COUNCIL OF
MINISTERS: REALITY OF LOWER OIL PRICES BITES

SENSITIVE- PLEASE HANDLE ACCORDINGLY

1. (SBU) Summary and Comment: A further revised proposed GOI
budget for 2009 endorsed by the Council of Ministers on
December 23, reflects the reality of lower oil prices.
Revenues are projected to be USD 42.5 billion based on
exports of 2 mbpd at USD 50 per barrel, expenditures planned
to be USD 59.5, leaving a deficit of USD 17 billion. The
budget will be submitted to the Council of Representatives
for consideration when it reconvenes January 10.
2. (SBU) Total expenditures in this latest version of the
proposed 2009 budget are lower than the USD 79.8 billion
initially agreed by the Council of Ministers and lower even
than the USD 67 billion in the IMF-agreed revised budget
submitted to the Council of Representatives as the price
assumed for oil slid from USD 80 per barrel to USD 62.50 to
USD 50.
3. (SBU) The Finance Minister's budget transmittal message
indicates that security is the top priority but it is to be
balanced with capacity building in the government and capital
investment in critical areas such as oil, electricity and
infrastructure. He urges more attention to efficient
implementation of investment projects, recognizes the need
for foreign investment to help develop Iraqi oil production,
and expresses the intention to broaden the revenue base and
promote the private sector.
4. (SBU) Tracking this proposed budget in the Council of
Representatives should prove interesting as there are likely
to be many contentious points, such as revenue distribution,
allocations to provinces, and the oil price/export
assumptions. From a broader perspective, the current 2009
proposed budget is not out of line with the initial 2008
budget, before higher oil prices provoked a supplemental
budget which, in the end, was not fully executed and did not
lead to a sustainable budget path. A tighter budget adds to
the pressure on the GOI to pursue greater efficiencies in
government programs, reduce waste, and put greater attention
on ways to encourage foreign investment to help GOI achieve
its reconstruction and development goals. The Minister's
budget message echoes these goals, but without commitment and
dedication by all GOI Ministries and provincial authorities,
it is the sound of one hand clapping. End Summary and
Comment.
Headline Figures: Popping the Oil Price Bubble
--------------------------------------------- --
5. (SBU) The Iraq budget proposal for 2009 that was submitted
to the Council of Representatives in November after
consultations with the IMF was withdrawn by the GOI earlier
this month. With further sharp declines in oil prices since
the summer, that budget looked increasingly unrealistic.
After reworking the proposal, and with the advice of the High
Economic Council, the Ministry of Finance submitted a revised
proposed budget to the Council of Ministers, which was
endorsed on December 23, 2008. The Ministry will submit this
new proposed budget to the Council of Representatives for
consideration when it reconvenes on January 10.

6. (SBU) The new revised proposal forecasts revenues of USD
42.5 billion and expenditures of USD 59.5 billion,
establishing a budget deficit of USD 17 billion. It is based
on an average oil price of USD 50 per barrel and average
exports of 2 million barrels per day. This latest draft
proposal follows previous 2009 versions with expenditures of
USD 79.7 billion and USD 67 billion based on oil prices at
USD 80 and USD 62.50 per barrel, respectively. See tables at
QUSD 80 and USD 62.50 per barrel, respectively. See tables at
the end of this message.

General Principles: Security First but Striking a Balance
--------------------------------------------- ------
7. (SBU) The introductory section of the Finance Minister's
transmittal message presents general foundations and
principles upon which the proposed 2009 budget was prepared.
Generally, priority was given to security and supporting
national reconciliation and improved operation of the
ministries (capacity building to deliver services, prepare
budgets, and improve operations and budget implementation).
More specifically, the budget seeks to improve capacity in
the areas of security, national defense, oil sector,
electrical power, services, basic infrastructure,
unemployment, and human rights. In doing so the budget aims
to achieve a balance between operating and capital
expenditures. Capital expenditures sustained at 2008 base
levels will help with reconstruction and infrastructure
projects which can help attract investment and promote job
creation, according to the Minister's message.

Revenues: Slick Oil Assumptions
--------------------------------
8. (SBU) Oil revenues are budgeted to account for 86 percent
of total revenues. The budget assumes an average oil price

BAGHDAD 00004077 002 OF 004


of USD 50 per barrel with sales averaging two million barrels
a day. Finance Minister Jabr acknowledges that, with current
oil prices in the high -USD 30,s, this may seem optimistic.
He has seen some forecasts of prices in the high USD 40s, but
also admits that he has seen forecasts in the USD 20,s.

Oil: The Need for More
----------------------
9. (SBU) The Minister's budget transmittal message recognizes
that the GOI will remain dependent on oil revenue to finance
investment projects. Accordingly, he suggests that the
production and export of oil be increased through: (a)
continuing budget allocations for oil sector investment; (b)
accelerating project implementation; and (c) ratifying the
legal framework to open the way for foreign investment.

Non-Oil Revenue: Great Expectations
-----------------------------------
10. (SBU) Revenue from non-oil sources is projected to be USD
6 billion, a rather large leap from the USD 2.6 billion
collected in 2007. The Minister's budget message, noting the
need to expand the revenue base beyond oil, mentions the
possible introduction of a customs tariff law and sales tax
as well as improvements in tax administration. (Comment: A
customs-tariff bill, which will raise duties, has been stuck
in the Finance Ministry for months. It will be possible --
but optimistic -- to expect it to pass in 2009. Even more
optimistic is the expectation that a Customs Service that
lacks experience and training and does not currently use a
modern, internationally recognized valuation system -- and is
widely held to be riddled with corruption -- will be able to
implement any new law quickly enough to make an impact on
2009 customs receipts. End Comment.) In practical terms,
the major revenue generators for the state are expected to be
transfers from state owned corporations * oil, banks, and
telecommunications. Such transfers would total USD 2.5
billion. The flat 5 percent 8reconstruction fee8 on
imports is expected to increase to 10 percent "after the
legislation to amend the fee" is passed to yield USD 431
million in revenue, a 25 percent increase from 2008. The
Minister's message also notes the need to accelerate the use
of grants from donor countries.

Expenditures: Salaries and Security for Today, Investment
Tomorrow
--------------------------------------------- ---
11. (SBU) Expenditures are programmed to total USD 59.5
billion. Operating costs in the proposed budget would
account for 79 percent of total expenditures compared to
70-75 percent in the 2007 and 2008 budgets.
12. (SBU) Operational expenditures reflect recent salary
increases, resulting in almost $21 billion, or 35 percent of
total expenditures, dedicated to employee compensation and
pensions. The Minister's budget transmittal message warns
that the government should avoid making public service a
"subsidy or refuge for the accumulation of staff" which would
turn the budget into an 8income redistribution plan.8 To
avoid this, the Minister encourages investment programs
driven by the private sector and labor training that meets
the needs of the marketplace.
13. (SBU) Security services, the proposed budgets of the
Ministry of Defense and Ministry of Interior, would account
for 18.5 percent of expenditures, a higher share than in the
2007 (17.5 percent) and 2008 (17 percent) budgets. The
Minister's message notes that the 2009 budget will ensure
adequate funding for the security services to reduce their
reliance on MNF-I which, he noted, has been decreasing for
Qreliance on MNF-I which, he noted, has been decreasing for
several years.
14. (SBU) Investment expenditures are projected to be USD
12.1 billion in 2009 accounting for 21 percent of total
expenditures as compared with 25-30 percent in the last two
years. In absolute terms the proposed budget would be
slightly less than the base 2008 budget of USD 13.3 billion
(without the supplemental), and a step up from 2007,s USD
10.1 billion.
15. (SBU) The Minister points out that "public investment
programs are one of the most important tools of economic
policy aimed at accelerating economic growth." To combat the
low implementation rate of capital spending the Minister
suggests that the GOI (a) develop comprehensive indicators of
investment projects; (b) undertake projects that have had
feasibility studies completed; (c) complete projects on time;
(d) emphasize the importance of local firms implementing the
contracts; and (e) give priority to projects in the oil,
electricity, public service areas.
16. (SBU) Another major expense is the payment of 5 percent
of oil revenues to the United Nations Claim Commission to
settle claims in Kuwait. The Minister's message points out
that this cost is not within the control of the MOF but is
8within the political framework.8

BAGHDAD 00004077 003 OF 004

PDS: Reducing the Items in the Basket?
--------------------------------------
17. (SBU) Government support of the Public Distribution
System (PDS) food basket (ration card), services such as
electricity, water and sewage, and agricultural inputs are a
&significant burden8 on the budget, according to the
Minister's transmittal statement. He suggests reducing
support in 2009, noting, in particular, that it may be
8appropriate to work on reducing some of the ration card
items8 while still supporting materials such as flour, baby
milk, rice and tea. Nonetheless, the PDS has a proposed
budget of USD 3.6 billion, which is slightly higher than the
original 2008 budget request of USD 3.3 billion, but
significantly lower than the budgeted 2008 PDS outlay of USD
$5.8 billion, which includes the 2008 supplemental.
(Comment: PDS officials add, separately, that lower worldwide
food commodity prices will not fully offset the significant
projected reduction to their 2009 budget. We predict that
any GOI decision to implement sharp cuts to the PDS ration --
for the first time in decades -- during an election year will
face significant opposition. End Comment.)
Provincial Allocations: Lower
-----------------------------
18. (SBU) Allocations to the provinces other than the KRG are
programmed to be USD 2.2 billion for development and
reconstruction. This is a significant decline from the USD
3.3 billion contained in the base 2008 budget. MOF officials
confirm that they will retain using 17 percent as the KRG,s
share of the budget pending results of the national census
that they expect to be completed in August 2009.
Deficit: To Be Funded, Somehow
------------------------------
19. (SBU) The projected deficit of USD 17 billion is
substantially greater than that of previous years. The
Minister's message does not mention how the deficit will be
financed.
COMMENT
-------
20. (SBU) Some observations about the new proposed budget are
warranted:
-- Somewhat More Realistic: Comparing the current revised
proposed budget to the initial budget of September is
unwarranted. The initial proposal was based on sustained
high oil prices and, therefore, was never realistic. Thus,
no one has lost in the revision process because there was
never the money to match their aspirations. The new budget
is more realistic, although projected revenues remain
optimistic given current oil prices and declining export
levels.
-- In Line: Broadly speaking, the new proposed budget is
roughly in line with moderate growth from previous year's
budgets (disregarding the 2008 supplemental that was based on
extraordinarily high oil prices); spending would steadily
rise from USD 41 billion (2007) to USD 51 billion (2008) to
USD 59.5 billion (2009).
-- Economic Performance: One rationale for keeping spending
high by running a deficit is to keep Iraq's economic growth
on track. The GOI accounts for half of domestic consumption
and the bulk of domestic investment. There is a fairly broad
GOI consensus -- with the notable exception of CBI Governor
Sinan Shabibi -- that the GOI should not be overly concerned
at the inflationary portent of high GOI spending that is
funded, if need be, by drawing down reserves.
-- Deficit: Whether the 2009 deficit will actually be USD
17 billion will depend not only on oil prices and exports,
but also whether the GOI fully executes their entire 2009
budget. Financing of the deficit will rely on GOI own
resources in the Development Fund of Iraq, MOF balances with
Qresources in the Development Fund of Iraq, MOF balances with
the Central Bank of Iraq, and MOF balances in the banking
system that remain unspent after the 2008 budget closes.
-- Focus: A tighter budget could help focus GOI attention on
increasing efficiencies and drawing upon external resources,
such as direct foreign investment, to achieve some of their
development and reconstruction goals.
-- Execution: We note that the projected investment budget
for both the Iraqi central government and the provinces is
about what they were able to spend in 2008. Greater
effectiveness from the end products of this capital spending,
rather than simply pushing more money through the system
(a.k.a. execution) will be a key goal, as Jabr noted. We
will still need to press the Iraqis for speedier in addition
to better capital budget execution as this relatively austere
budget was presented to the COR so late in the budget cycle.
The COR will have to accept difficult compromises, which are
certain to stimulate contentious debates before a final
budget is passed.
BUDGET FIGURES (in M/USD):
--------------------------------------------- -------
2007 2008 2008/supp 2009

BAGHDAD 00004077 004 OF 004


Total Revenues 35.7 43.0 $70.1 $42.5
Oil 33.1 36.0 0.1 36.5
Other 2.6 7.0 7.0 6.0
Oil Exports(mbpd) 1.7 1.9 1.9 2.0
Price /barrel (USD) 50 62 91 50
--------------------------------------------- ------
Total Expenditures 41.1 50.7 72.2 59.5
Operating 31.0 37.5 51.1 47.3
Capital 10.1 13.3 21.1 12.2
Operating
Min. of Defense 4.1 4.8 4.9 4.6
Min. of Interior 3.1 3.8 5.2 5.4
Capital
Min. of Oil 2.4 2.0 2.3 2.2
Min. of Electricity 1.4 1.3 2.3 1.1
Other Mins and KRG 4.2 6.7 10.1 6.3
Non-KRG Provinces 2.1 3.3 6.4 2.6
CROCKER

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