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Cablegate: 2010 Government of Iraq Budget

VZCZCXRO8264
PP RUEHBC RUEHDA RUEHDH RUEHKUK
DE RUEHGB #0317/01 0380647
ZNR UUUUU ZZH
P 070647Z FEB 10
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 6493
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 03 BAGHDAD 000317

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON PGOV IZ
SUBJECT: 2010 GOVERNMENT OF IRAQ BUDGET

1. (SBU) Summary: The Council of Representatives (CoR) passed a
Federal Public Budget Law for Fiscal Year 2010 (2010 Budget Law)
that made significant amendments to the draft budget law submitted
to the CoR by the Council of Ministers (CoM) in October 2009. The
2010 Budget Law increased the stated budget to $72.4 billion,
approximately $1.1 billion over the October 2009 draft budget.
However, the final 2010 Budget Law also introduced new revenue
streams for provincial governments that will increase federal
government outlays by several billion dollars, but were not factored
into the final budget figures. Provincial governments also received
the authority to request the transfer to their control of capital
investment projects from several ministries. Further complicating
the 2010 Budget Law is a provision freezing the hiring of 115,000
new civil servants. Despite some unanswered questions about the
2010 Budget Law, we expect the staffs of the IMF and the World Bank
to recommend that their boards approve the Stand-By Arrangement and
the Development Policy Loans. End Summary.

84.7 Trillion Dinar Federal Budget
----------------------------------

2. (U) On January 26, 2010, the CoR passed a 2010 Budget Law
authorizing expenditures of 84.7 trillion IQD, equaling
approximately $72.4 billion. This figure is $1.1 billion higher
than the $71.3 billion total in the draft budget submitted to the
CoR in October 2009. $52.1 billion would be for operating
expenditures and $20.3 billion for capital expenditures, with
capital expenditures increasing 60 percent over the figure in the
2009 budget.

3. (U) Based on oil exports of 2.1 mbpd at an average price of
$62.50/barrel, the budget assumes oil revenue of $47.9 billion and
non-oil revenue of $4.9 billion, for total revenues of $52.8
billion. The planned deficit would be $19.6 billion. [Note: An
average oil price of $70/barrel would result in oil revenue of $53.6
billion, reducing the expected deficit to $13.9 billion. As of
January 26, 2010, the export price of Basrah Light crude oil to the
U.S. was $69.31/barrel. End note.]

Dollars for the Provinces
-------------------------

4. (SBU) The 2010 Budget Law creates new revenue streams for certain
provinces, denominated in dollars rather than in Iraqi dinars like
all other expenditures in the 2010 Budget Law. Article 43 of the
2010 Budget Law states that, on a monthly basis, the Ministry of
Finance (MoF) will add the following amounts for hydrocarbon
production or oil refining to the budgets of the relevant
provinces:

-- $1 for each barrel of crude oil produced in a province;

-- $1 for each barrel of crude oil refined in a province; and


-- $1 for each 150 cubic meters of natural gas produced in a
province.

The same article states that the MoF will allocate $20 from each
entry visa for a foreign visitor to a holy site to the relevant
province to be spent for development of the cities of the holy
sites. All provinces appear to be eligible for these transfers, not
only provinces not associated with the Kurdish Regional Government
(KRG). [Note: In 2009 Iraq produced approximately 874 million
barrels of crude oil and 64 billion cubic meters of natural gas,
refined approximately 103 million barrels of crude oil, and was
visited by approximately 6.5 million foreign tourists. The same
figures in 2010 would result in $1.5 billion in transfers from the
federal government to the provinces. End note.]

5. (SBU) Article 42 of the 2010 Budget Law adds a further revenue
stream based on customs revenues. This article requires the
Qstream based on customs revenues. This article requires the
Ministry of Finance to allocate 5 percent of customs revenues from
each land, air, or sea port of entry to the province of the port of
entry. [Note: The 2010 Budget Law estimates customs revenues of
approximately $434 million; 5 percent of that amount will be
approximately $22 million. End note.]

6. (U) These revenue streams are separate from, and in addition to,
the regular provincial government budget allocations that are
included in the nominal $72.4 billion budget authorization. The
2010 Budget Law allocates approximately $9.1 billion for the KRG and
$3.5 billion for provincial governments outside the KRG. There are
no provisions for reconciling the newly added revenue streams with
the existing provincial budget allocations, other than a requirement
that provincial governments amend their budgets and present them to
the MoF for approval.

KRG Crude Oil Penalties
-----------------------


BAGHDAD 00000317 002 OF 003


7. (SBU) The KRG continues to receive a 17 percent share of total
expenditures, but with the possibility of penalties for withholding
crude oil from the federal government. Article 16 continues the 17
percent share for the KRG, with exclusions for sovereign
expenditures that include fees for transportation of crude oil
through Turkey. Article 17 has a provision declaring that a
resolution should be initiated to determine the damages caused by
misappropriation of crude oil by any entity - a declaration aimed
primarily at the KRG. Since further legislation will be required
for damages to be imposed on the KRG, this provision of the 2010
Budget Law will most likely not be put into effect until after the
seating of the new CoR.

Devolution to the Provinces - You Must Whip It
--------------------------------------------- -

8. (U) The 2010 Budget Law appears to devolve several federal
government ministry responsibilities to provincial governments. The
provincial governments are expected to assume the social safety net
obligations of the Ministry of Labor and Social Affairs, and as a
result the $3.5 billion allocation for provincial governments
outside the KRG is approximately $1 billion higher than in 2009.
Moreover, Sections 3 through 5 of Article 23 direct the Ministry of
Finance to transfer the allocations for capital investment projects
of the Ministries of Electricity, Municipalities and Public Works,
Health, Education, and Housing and Construction to provinces outside
of the KRG, at the request of a province and the approval of the
provincial council. The provincial councils will supervise the
implementation of transferred projects, and the provinces will
implement new investment projects. Article 23 also requires
provincial councils to submit reports on June 1 regarding transfer
requests and any reluctance by ministries to comply. [Note: Under
the 2010 Budget Law, the ministries affected by Article 23 have
capital investment budgets totaling $7.0 billion (Electricity: $3.5
billion, Municipalities and Public Works: $1.3 billion, Health: $963
million, Education: $427 million, Housing and Construction: $598
million), or $4.6 billion if the $2.4 billion allocated for
repayment of 2009 General Electric and Siemens t-bills under the
Ministry of Electricity budget is excluded. End note.]

9. (U) Article 23 of the 2010 Budget Law accelerates an existing
trend toward decentralization of ministerial budgets and powers to
the provinces. The CoR earlier passed a law to abolish the Ministry
of Municipalities and Public Works and transfer its functions and
budget to the provincial governments. In the draft and final 2010
Budget Law, Article 16 included a provision that commits ministries
to distribute their operating and capital investment budgets to the
provincial governments outside of the KRG, based on their
percentages of Iraq's population. The CoR added Sections 3 through
5 of Article 23 to the final 2010 Budget Law to expand the
decentralization process, by going beyond a general commitment to
decentralize and creating an opportunity for provincial governments
to mandate the transfer of investment projects and budgets.

Hiring of 115,000 Civil Servants Frozen
---------------------------------------

10. (SBU) The 2010 Budget Law authorizes approximately 148,000 more
government employees than the 2009 budget law. However, a provision
added to Article 21 prohibits hiring 115,000 authorized civil
servants until the formation of a Federal Service Council. This
organization does not currently exist, and creating it would require
Qorganization does not currently exist, and creating it would require
a law enacted by the CoR. Since the CoR has gone into recess prior
to the upcoming election, this provision in effect would freeze
hiring of 115,000 civil servants. [Note: The CoM has issued an
executive order establishing a Civil Service Joint Coordinating
Committee that will perform the role of the Federal Service Council
until the latter is created. It is not yet certain whether this
committee will be considered a sufficient substitute prior to the
formation of a Federal Service Council. End note.]

11. (SBU) The 2010 Budget Law does not specify which civil servant
positions cannot be filled or how to identify them. Discussions
with GOI officials, however, indicate that they include multiple
groups, some to be newly hired and others currently paid by the GOI
as temporary employees rather than as full-fledged civil servants.
The latter includes substantial numbers of transitioned Sons of Iraq
members and provincial government employees. These groups will
probably remain on the government payroll without an upgrade to
civil servant status until the creation of the Federal Service
Council. [Note: Sources in IFCNR and the CoR have stated that
funding for continued temporary employment of the transitioned Sons
of Iraq is secure. End note.]

12. (SBU) Prime Minister Maliki's State of Law coalition has voiced
its opposition to the restriction on civil service hiring and has
called for a veto of the 2010 Budget Law by the Presidency Council.
Maliki's political opponents contend that the restriction is
necessary to prevent him from hiring new employees as a means to
strengthen his position in the upcoming national elections. We deem
a veto unlikely.

BAGHDAD 00000317 003 OF 003

Comment
-------

13. (SBU) As adopted, the budget law creates complicated political
issues for the GOI. Enactment of a 2010 GOI budget was the final
condition for the IMF and World Bank to consider approval of the IMF
Stand-By Arrangement (SBA) and World Bank Development Policy Loans
(DPLs). World Bank staff in Baghdad has indicated that despite the
$1.1 billion increase in the budget figures and the further
undetermined increase caused by the new federal government transfers
to provincial governments, World Bank and IMF staff will recommend
approval of the SBA and DPLs to their respective boards. However,
the call for penalties for misuse of crude oil and the restriction
on hiring 115,000 civil servants until creation of a Federal Service
Council will be issues for the next CoR after the election.
Furthermore, the federalism issues created by the new revenues and
powers given to the provinces will need to be addressed in 2010 and
possibly beyond. These complications are a consequence of making
decisions with significant political implications, and
constitutional implications as well, in a budget law.

HILL

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