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OO RUEHBC RUEHDA RUEHDE RUEHDIR RUEHIHL RUEHKUK
DE RUEHKU #4308/01 3051423
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O 011423Z NOV 06
FM AMEMBASSY KUWAIT
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7413
INFO RUCNRAQ/IRAQ COLLECTIVE IMMEDIATE
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UNCLAS SECTION 01 OF 02 KUWAIT 004308 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: PGOV PREL EAID ECON EFIN ETRD EINV
 
SUBJECT: TREASURY DEPUTY SECRETARY KIMMITT BILATERAL DISCUSSIONS AT 
THE IRAQ COMPACT PREPARATORY GROUP MEETING 
 
 
¶1. (SBU) Summary:  Treasury Deputy Secretary Robert M. Kimmitt held 
a series of meetings on the margins of the October 31 International 
Compact with Iraq (ICI) Preparatory Group (PG) meeting in Kuwait 
between October 30 and November 1.  The meetings focused on 
preparation for the PG and key follow-up actions leading to the 
Compact Ministerial.  Notable discussions included the EU/EC, the 
GOI and a small dinner the evening before the PG. 
 
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October 30: Pre-PG Dinner 
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¶2. (SBU) At a small dinner meeting hosted by D/S Kimmitt the evening 
before the PG meeting, DPM Salih said the Compact would not be a 
"Madrid II," although Iraq does have large needs, citing the figure 
of $100 billion over the next five years. Salih said the Compact 
would help Iraq meet these needs in a variety of ways, including 
resolving Iraq's outstanding debt and implementing tough reforms 
which will help attract investment.  Salih repeatedly stressed the 
importance of technical assistance to improve Iraq's ability to use 
its existing resources, promising that budget execution in 2007 will 
be better.  As part of this effort, Salih was enthusiastic about 
establishing a supreme reconstruction board, which will undertake 
important projects under the current budget.  Azez Hassan, the 
adviser to Finance Minister Jabr, explained that Iraq will need to 
work through the technicalities of what can, and cannot, be included 
on the budget with the IMF.  Salih also explained that the Compact 
will improve relations with Iraq's neighbors, which in turn will 
help improve the security of Iraq's borders. 
 
¶3. (SBU) In the same meeting, D/S Kimmitt made a strong plea for 
Iraq to address its increasingly serious inflation problem.  While 
Salih made positive noises about the need to act quickly, he also 
noted that the Central Bank Governor is independent. 
 
¶4.  (SBU) Also at this dinner meeting, Special Advisor to the 
Ministry of Finance Azez Hassan indicated that he expects the MOF to 
allocate $8 billion for internal security. 
 
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October 30: EU/EC Bilateral 
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¶5. (SBU) D/S Kimmitt also met with EC Middle East and Southern 
Mediterranean Director for DG RELEX, Christian Leffler, EU 
Ambassador to Baghdad Ilkka Uusitalo and Finish EU Director General 
for Africa and the Middle East, Aapo Polho in a bilateral discussion 
in advance of the ICI PG meeting.  Participants exchanged views on 
status of the Compact document and discuss planned financial 
support.  The EC and EU noted the improved process for the Compact 
since the September 10 Abu Dhabi PG meeting, highlighting increased 
inclusiveness and participation.  Leffler said the document is solid 
overall with a few minor edits needed.  The EC sought USG views on 
the way forward after the Kuwait meeting toward a signing at the end 
of November. 
 
¶6.  (SBU) D/S Kimmitt noted that next steps after the PG meeting 
will include broadening the Compact supporters beyond the 
Preparatory Group.  To begin this process, Mark Malloch Brown had 
agreed to host a Compact briefing in New York on or about November 
¶10.  Attendees are expected to be Permanent Representatives though 
capitals are welcome to send attendees.  In addition, the UN and GOI 
would begin a "road show" to key capitals -- particularly in the 
Gulf -- to develop support for the Compact.  The goal for the 
Ministerial meeting remains in late November or early December. 
 
¶7.  (SBU) D/S Kimmitt inquired about planned 2007 EC assistance to 
Iraq, citing his October 16 conversation in Brussels with 
Commissioner Benita Ferrero-Waldner in which the Commissioner said 
EC assistance would drop substantially next year.  Leffler confirmed 
the EC's planned phasing down of assistance over the next five 
years.  Noting the GOI has planned for less donor assistance in its 
own budget over the next four years in the funding table currently 
in the Compact draft, and that the EC had heavily front-loaded its 
assistance, Leffler asserted that the EC's ramp-down in assistance 
was not a sign of dampening EC support for Iraq.  D/S Kimmitt noted 
that the EU had achieved many of its goals for Iraqi commitments in 
the text of the Compact document and now needed to step forward to 
fulfill its side of the agreement.  There is a clear need for 
additional financing, as evidenced by the budget gap in Iraq's 
budget; while currently fully financed, the GOI is reliant on past 
year carryovers, donor grant financing and off-budget support for 
security to fill this financing gap.  While all donors will be 
ramping down over the coming years, D/S Kimmitt opined that the 
timing and severity of the EC 2007 reduction are particularly 
troublesome since this will be the first funding decision the EC 
will make for the Maliki government. 
 
 
KUWAIT 00004308  002 OF 002 
 
 
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October 30: GOI Minister Baban 
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¶8.  (SBU) D/S Kimmitt also met with Iraqi Minister for Planning and 
Development Cooperation (MOPDC) Baban.  During the session Baban 
made clear that his ministry expects to play a central role in 
planning and executing the capital investments contemplated under 
future budgets of the Government of Iraq and in coordinating GOI 
spending with donor contributions under the Compact.  He sees 
capital spending - particularly in the productive sectors - as key 
to addressing a broad swath of Iraq's economic problems.  He 
recommends spending the bulk of DFI funds.  Baban believes the new 
hydrocarbon law will be passed very soon.  Along with expected gains 
in Iraqi oil revenues he looks to international donors to provide 
the additional resources needed in order for MOPDC to maintain its 
aggressive capital spending plans over the medium term.  While not 
disputing needs for increased capital spending, D/S Kimmitt pressed 
for clarification on how Iraq plans to address its all too evident 
impediments to effective budget execution, impressed upon Baban that 
Iraq must use all the tools available to it to fight inflation 
(monetary, fiscal and financial) while counseling against depleting 
the foreign exchange reserves, and explained that Iraq had much work 
to do demonstrate that it can effectively use the funds available 
under its budgets and from prior donor pledges (e.g., Madrid) before 
expecting to receive new donor pledges. 
 
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November 1: GOI FOLLOW-UP MEETING 
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¶9.  (SBU) To follow-up on key actions leading to the Compact 
Ministerial (to be scheduled for late November or early December), 
D/S Kimmitt met with GOI DPM Salih, Central Bank Governor Shabibi 
and Planning Minister Baban. D/S Kimmitt stressed the need for Iraqi 
authorship of the Compact "Resolution" (NOTE: this is Section 2 of 
the ICI document) and to keep the text action-oriented and sharply 
focused.  Kimmitt urged Salih to be in touch with UNDSYG Mark 
Malloch Brown to host the meeting in New York to broaden Compact 
participation on November 10.  Kimmitt also stressed the need for 
the GOI to address budget execution and inflation issues. 
 
¶10.  (SBU) DPM Salih agreed to contact Malloch Brown and suggested 
that Minister Baban lead the GOI delegation to New York.  Shabibi 
noted GOI had raised Kuwaiti debt with the Emir, who had responded 
that no one was asking them to pay the debt at this time.  Shabibi 
had noted that agreeing to ignore the debt does not help with 
international investors who will be looking at Iraq's balance sheet 
when considering investments.  Kimmitt proposed discussing this with 
Kuwait's Central Bank Governor, who had made these same points 
during an earlier meeting with Kimmitt (septel) which Shabibi agreed 
to do.  Participants noted various conversations with Kuwaiti 
officials indicating domestic politics in Kuwait are not now 
conducive to a debt deal, and that securing an international and GCC 
consensus to relieve Iraq's debt through the Compact would help the 
Kuwaitis move forward. 
 
¶11. (SBU) On inflation, Shabibi conveyed that he is hopeful the 
September drop in inflation will hold and that he is waiting for 
October figures.  Kimmitt opined that the GOI needs to be seen 
moving definitively through monetary, fiscal and banking reform 
measures.  He also stressed that measures like ensuring GOI 
contracts are paid in dinars, and the USG using dinars in its 
contracting to the maximum extent possible would help send the 
signal that the dinar is a strong currency. 
 
¶12.  (SBU) Finally, Kimmitt noted that Ali Al-Dabbagh's public 
statement that Iraq needs $100 billion over the next five years was 
not helpful in convincing donors that Iraq is serious about reform. 
Kimmitt urged DPM Salih to be careful in public comment on Iraqi 
needs and to ensure that whatever needs exist are clearly 
articulated via a credible process.  DPM Salih agreed this was the 
best course of action and said he was unhappy with Al-Dabbagh's 
statement.