VZCZCXRO7323
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