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 
 
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Summary 
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¶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 
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¶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. 
 
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Inflation Under Control, So Far 
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¶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. 
 
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Difficult Decisions Ahead 
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¶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