Cablegate: Salah Al Din: Progress in the Economic Situation

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RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #2713/01 2370857
ZNR UUUUU ZZH
R 240857Z AUG 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 9020
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 04 BAGHDAD 002713

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EINV EAGR IZ
SUBJECT: SALAH AL DIN: PROGRESS IN THE ECONOMIC SITUATION

1. (U) This is a PRT Salah ad Din reporting cable.

(U) Summary
------------

2. (SBU) Improved security conditions have had a positive
impact
on the economic situation in Salah-ad-Din (SaD); it is easier
for
goods to reach markets; produce prices are dropping and
progress
is being made in attracting outside investment which will
spur
growth and help provide jobs. Despite high unemployment and
drought, the economic situation in SaD is buttressed by an
expanding banking system, cash flow from state owned
enterprises,
and the public distribution system. END SUMMARY

OPEN ROADS INCREASE SUPPLY OF GOODS
-----------------------------------------
3. (U) The great improvement in the security situation means
that roads are open and with that the SaD economy is
experiencing
a supply side surge of resources and commodities such as
basic goods,
energy products and general merchandise making their way to
markets
and to dozens if not hundreds of small shops. Khalaf Alwan,
the
Director General for Food Distributions/PDS, told the PRT
that he
is seeing an increase in the number of shipments being made
to and
from his warehouses. &The highest number in the last five
years,8
Khalaf said, &The security situation is very good. Trucks
are
bringing up shipments from Basra now.8 As a result of this
supply side boom, the CPI inflation rate for June which came
in
at negative 6.3 percent over last year, no doubt a result of
increased supplies of goods making it to the market.

4. (SBU) Costs have also been reduced by removing a series of
middlemen who had been exacting &security costs8 prior to
the
improved security conditions, local sources say. This has
been
most evident in the produce markets, where the prices of
vegetables
and fruit have dropped. Locals are also telling PRT members
that
the combination of increased government salaries and recent
supply
side surge of resources and commodities has led to a rise in
the both
incomes of salaried business people and in the real living
standard
in SaD.

IMPROVED SECURITY MAKES ROOM FOR OUTSIDE INVESTMENT
-----------------------------------
5. (U) The improved security situation has already created
a commodity surge, and local hopes are high that it will soon
also lead to increased investment. Until recently, the
adverse
security situation had limited SaD,s ability to attract
outside
investors. Without their involvement, financing needed for
large
development projects that spur growth and help provide jobs
has
been lacking. This is important because unemployment rates
have a
close relationship to the security environment. Security has
now
improved so much that SaD officials have decided to seek
funding
to build the first commercial airport in the province. They
believe
that building an airport will allow contractors to fly
directly
into SaD to arrange investor meetings and conduct site
surveys.
In private conversations, provincial officials have told PRT
members
that 10 more investment projects will follow the airport.

6. (U) Bayji, the home of Iraq,s largest oil refinery and
its
second-largest power plant, could prove particularly
attractive

BAGHDAD 00002713 002 OF 004

to outside investors. A majority of the employment in the
Bayji
area comes from government institutions such as the refinery,
thermal power plant, vegetable oil plant and other government
facilities. With an improved security environment, the
greater
Bayji Region could provide an attractive opportunity for
foreign
firms seeking sites for new industry.

HIGH UNEMPLOYMENT BUFFERED BY OTHER FACTORS
--------------------------------------------- --
7. (u) Unemployment is one of the primary economic concerns
in SaD.
The exact rates are not known, but estimates run anywhere
from 25%
to over 60%. Despite these high estimates, living conditions
are
not as poor as we might expect. Infant and elderly health
care
appears to be largely adequate, malnutrition is not in
evidence,
local markets basically appear able to meet economic needs,
and
essential services are generally adequate. Local contacts
suggest
that this is because of a number of additional factors that
help
mitigate the potentially catastrophic effects of such high
unemployment, to include the expansion of both public and
private
banks, cash flow from State owned enterprises, and the Public
Distribution System.

BOTH PUBLIC AND PRIVATE BANKS EXPANDING
--------------------------------------------- --
8. (SBU) In SaD the state owned banks are providing impetus
in
an indirect way for the emergent private sector. These state
owned banks are being used as conduits to deploy GoI funds
into
the private sector. For example, in 2008 SaD has had
assigned
to it $36 million worth of unsecured credits to would-be
entrepreneurs in the form of Ministry of Labor and Social
Affairs (MOLSA) loans. In addition, another $24 million for
SaD is being supplied through state owned banks directed to
larger credits to existing Iraqi private businesses for
working
capital and equipment loans. These loans range in size from
25,000 to 75,000 dollars. Also, moneys to the private sector
are making their way there through any number of
micro-finance
grants to would-be small business owners and entrepreneurs.
So far over one million USD has been committed to
micro-finance
loans in SaD. Repayment rates on micro-finance credit
extension
in SaD are almost 100 percent.

9. (SBU) The private banking system within SaD is expanding
both
in terms of physical structure and technological platform at
a
rapid rate. For example, Al-Warka Bank currently has 110
branches
throughout the country and plans to open a total of 17 within
the next calendar year. The big unknown factor in terms of
quantification is the extent to which SaD (and Iraq) will be
able to leverage increased amounts of credit and income flows
making their way to the general population. Our contacts
suggest
that this leveraging of economic activity in SaD is taking
place.
It is visible in the form of the crowded markets, bazaars and
streets congested by both people and vehicles. The only
remaining question is the quantification of the change.

STATE OWNED ENTERPRISES MOVING CASH TO ACCOUNTS
--------------------------------------------- --
10. (U) Even with the expansion of the banking sector, cash
is
still the key to the local economy. Large numbers of public
sector employees get paychecks every month at large,
state-owned
banks. This is important because the strongest sources of
regular
wages in SaD come from the public sector, and Salah ad Din
households
report that regular wages are their main income source.
Compared
to the development of private enterprise in SaD, public
enterprise

BAGHDAD 00002713 003 OF 004

is strong. This does not mean the public system is without
challenges.
It is poorly managed on the local level and there is hardly
any
accountability; tracking funds is difficult. The GoI still
retains
control of many key facilities in Bayji, including the oil
refinery,
food processing facilities, and even mosques. Yet, despite
all the
challenges, state money channeled to families in SaD is
significant
and represents redistribution of oil revenues; this is
against the
backdrop of very high global oil prices.

PUBLIC DISTRIBUTION SYSTEM
---------------------------
11. (U) An important buffer against the effects of poverty in
SaD
is the Public Distribution System. The PDS is estimated to
feed
nearly two thirds of Iraq,s population, according to our
contacts
in SaD. They estimate the contribution the PDS makes to
&real8
income in SaD at around 30-40 percent, which they believe to
be
consistent with the rest of the country, at. By distributing
basic
commodities evenly across society without regard to religion,
or
ethnic factors, the PDS has played an important role in
keeping a
food crisis from developing in SaD. Although the IMF has
repeatedly
urged the GOI to reform the expensive and unweildy PDS, the
rise in
oil prices means the country can continue to afford the PDS,
SaD
leaders argue.

Entrepreneurship accelerating
--------------------------------------
12. (SBU) Local officials cannot give hard data, so much
remains
unknown, but there is a general feeling that the private
sector in
SaD is doing much better than previously thought.
Entrepreneurship
is accelerating. And the transition to a capitalist economy
has opened
a large window for private entrepreneurs in SaD. The current
private
market is growing rapidly, ranging from traditional small
markets and
shops to the private gas stations.

13. (U) One example of growing entrepreneurial interest
occurred at
a recent &business loan day8 held in Siniyah. The purpose
of the event
was to explain and make available ICERP micro-grants for
small-business
owners and entrepreneurs. 40 people were invited, and
unexpectedly 250
showed up. In the end, 65 ICERP applications were filed, of
which 62
were approved. With the improvement in security conditions,
there are
also growing opportunities for contractors. At a recent
meeting between
CF and Provincial contracting officials and local
contractors, the
contractors explained that whereas before their employees
were leaving
work early in the afternoon due to security concerns, due to
the improved
security situation they can now work continue working into
the late
afternoon and evenings. USG contractors like KBR, Parsons,
and USACE
have been actively hiring sub-contractors for building
repairs and projects.

COMMENT
-------
14. (SBU) Prior to the last six months, SaD was in the midst
of a vicious
cycle where lack of security destroyed the social fabric and
impeded the
economic dynamic. By contrast, today we are in what appears
to be the

BAGHDAD 00002713 004 OF 004

beginning stages of a virtuous cycle ) a self-generating
upward surge )
where gains in security have emboldened Iraqis to engage in
economic
activity generally but more importantly in entrepreneurial
activity.
This represents the genesis of belief among SaD residents
that individual
Iraqis can generate positive change for themselves and their
families.
This is admittedly fragile and tenuous, but real; if it
persists for
another 6-12 months it will generate cumulative and
exponential gains.
In order to adapt to a decentralized bottom-up economy, there
is no
substitute for the new risk-taking behavior that must be
learned to adapt.
We are seeing ample indications of the first steps of this
entrepreneurial
behavior in SaD. End Comment.
BUTENIS

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