VZCZCXRO1091
RR RUEHBC RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #3478/01 3070924
ZNY CCCCC ZZH
R 020924Z NOV 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 0181
INFO RUCNRAQ/IRAQ COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 003478 
 
NOFORN 
SIPDIS 
 
E.O. 12958: DECL: 11/02/2028 
TAGS: EFIN ECON PREL EPET EINV IZ KU
SUBJECT: FALLING OIL PRICES FORCE TOUGH IRAQI BUDGET 
DECISIONS 
 
REF: A. BAGHDAD 2944 
     ¶B. BAGHDAD 3364 
     ¶C. BAGHDAD 3417 
 
Classified By: Economic Minister Counselor Marc Wall for reasons 1.4(b) 
 and (d) 
 
¶1. (C/NF) Summary: Given the sharp fall in the price of oil 
and declining exports, Iraq's budget situation had radically 
changed and cuts would be made to both Iraq's FY 2009 capital 
expenditures and operating costs, according to Minister of 
Finance Bayan Jabr in an October 27 meeting with EMIN.  Given 
that the bulk of GoI operating costs are salaries, and salary 
increases were just put into effect in 2008, most of the 
budget cuts will fall on the capital budget.  The revised 
budget baseline would emerge from talks with the IMF later in 
the week, said Jabr.  While funds to pay the Kuwait Airlines 
debt had been in the initial budget proposal, Jabr was not 
sure it would be in the final budget sent by the Council of 
Ministers to the Council of Representatives.  The GOI was 
waiting for the Kuwaiti Prime Minister to visit Iraq before 
reengaging on bilateral debt issues.  End summary. 
 
¶2. (SBU) EMIN and Treasatt discussed the upcoming USG-GOI 
Dialogue on Business and Investment Climate, Kuwaiti debt 
issues, and Iraqi budget problems with Minister of Finance 
Bayan Jabr on October 27.  Jabr opened the meeting by 
discussing how interested Iraqi media was in the effects of 
the international financial crisis on Iraq.  Jabr believes 
that the only effect on Iraq will be the impact falling oil 
prices has on Iraq's budget process. 
 
------------------------------ 
Debt Issues: Waiting on Kuwait 
------------------------------ 
 
¶3. (C) In response to a question about any developments on 
debt issues with Kuwait, Jabr responded that there was 
"nothing new with Kuwait."  The Iraqis were waiting for the 
promised, but not yet planned, Kuwaiti Prime Minister visit 
to Iraq.  Jabr noted that there had been funds in the 
original 2009 budget to pay for the Kuwait Air claim (ref A). 
 However, given the budget upheaval Iraq has faced with the 
sharp decline in oil prices, he was no longer certain that 
such funds would be in the final budget. 
 
¶4. (C) Returning to a theme he raised in September (ref A), 
Jabr noted that Kuwait and Iraq "should be" natural allies in 
this region due to the fact that they are: (1) both friends 
of the United States, (2) neighbors, and (3) Iraqis owe a 
debt to the Kuwaitis for allowing the United States to 
liberate Iraq through Kuwait.  Without the help of the 
Kuwaitis, he said, "we would still be in opposition and 
Saddam would still be in power."  "Illiterates and peasants" 
believe that there is a natural enmity between Iraq and 
Kuwait due to propaganda "during the Saddam time" that Kuwait 
was the 19th Province of Iraq.  Actions by the Kuwaitis such 
as placing liens on Iraqi aircraft only feed this mindset in 
Iraq.  The Kuwaitis should be "careful not to take advantage 
of Iraq's weakness now.  They need to look to the future when 
Iraq will be strong again," he warned and asked that this 
message be passed by the USG to the Kuwaiti Government. 
 
--------------------------------------------- ------- 
Upcoming Dialogue on Business and Investment Climate 
--------------------------------------------- ------- 
 
¶6. (C) Noting that he was pleased that the upcoming U.S.-Iraq 
Dialogue on Business and Investment Climate was being held in 
Baghdad, Jabr said that "it is a very positive sign" that 
Treasury Deputy Secretary Kimmitt is coming and bringing U.S. 
investors with him (ref B).  "It is very important for 
American companies to come and invest in Iraq.  They should 
not wait while investments are being made with companies from 
other countries.  If they are concerned about the security 
here, they should enter into joint ventures with Iraqis."  He 
observed that the recently established correspondent 
relationship between Citibank and Iraq's Al Warka Bank is an 
"excellent development." (ref C) 
 
--------------------------------------------- -------- 
Budget Woes: Falling Oil Prices, Declining Production 
--------------------------------------------- -------- 
 
¶7. (C) Jabr said that the FY 2009 Iraqi budget process had 
begun when oil was at USD 150 per barrel and Iraq was 
exporting about 2 million barrels per day (bpd).  However 
given the fall in oil prices and Iraq's declining oil 
exports, Jabr said that Iraq's budget assumptions at the 
moment called for exports of 1.7 million bpd and a price of 
USD 50 per barrel.  (Note: This amounts to revenue of roughly 
 
BAGHDAD 00003478  002 OF 002 
 
 
USD 31 billion about half the USD 61 billion in the original 
FY 2009 budget projections.  End note.)  Jabr is traveling to 
Amman, Jordan for budget discussions with the IMF on October 
30 and said that the outcome of these meetings will determine 
the size and shape of Iraq's FY 2009 budget. 
 
¶8. (C) "The price of oil is not the real problem," said Jabr. 
 "The real problem is the fact that our oil production is 
falling."  "If we could produce more, it would not matter 
what the price was," he emphasized.  Jabr blames falling oil 
production on "technocratic oil ministers" who have wasted 
five years trying to fix the problems themselves, he said, 
"they should have allowed private companies to solve their 
problems; government cannot." 
 
--------------------------------------------- ---- 
Cutting Capital Expenditures Easier than Salaries 
--------------------------------------------- ---- 
 
¶9. (C) Jabr prefaced his remarks on the current state of FY 
2009 budget negotiations in the Council of Ministers by 
stating that "Operating expenses cannot be reduced, only the 
investment budget will be affected."  The USD 60 billion 
operating budget is "politically difficult" to cut given that 
the majority of this budget is used for salaries.  That being 
said, he had identified about USD 3-4 billion in cuts that he 
could make from the operating budget: USD 1 billion from 
salary increases for state owned enterprise employees since 
"they are not real civil servants and don't do that much 
work;" USD 1-1.5 billion in a "civil service salary surplus 
fund" to hire new government workers, meaning that the budget 
would allow for an increase of only roughly 30,000 new 
employees, not the original 140,000; and roughly USD 1 
billion from reducing provincial capital expenditure 
(investment) budgets from the original USD 6 billion to USD 5 
billion.  Jabr added that it was also likely that USD 500 
million could be cut from the Public Distribution System 
budget given the fall in food prices on the international 
market.  Jabr was not concerned about cutting provincial 
budgets since they have money left over from previous budget 
years that they have not yet spent. 
 
¶10. (C) Jabr said that he intended to cut FY 2009's 
ministerial investment budgets, or capital expenditures, 
funds by 20 percent across the board.  He anticipated that 
this would cause consternation amongst the ministers who have 
become accustomed to Jabr approving every budget request they 
have placed before him.  "I know the ministers will fight me, 
but this is a tough time so I will be tough," he said 
smiling.  Adding, "We will take painful measures in the next 
budget to protect the budget of Iraq."  That being said, Jabr 
did not anticipate problems meeting Iraq's capital 
expenditure needs in 2009. 
 
¶11. (C/NF) Jabr said that there were approximately USD 22 
billion in the Development Fund for Iraq (DFI) account at the 
Federal Reserve Bank of New York, and an additional USD 5 
billion of MoF funds on deposit with the CBI (typically, 
these are held for conversion into Iraqi Dinar), and these 
could be used to fund any deficit spending in the 2009 
budget.  Jabr also raised the possibility of selling bonds to 
the Central Bank of Iraq in order to utilize Central Bank 
reserves to finance capital expenditures, but such a move 
could be expected to raise serious objections from the IMF 
and others. 
 
¶12. (C) In response to a question from Treasatt, Jabr said 
that he had authorized USD 2 billion for expenditures on 
Provincial Investment Councils (PICs) in the FY 2008 budget. 
"This money is available, all they have to do is ask for it." 
 
¶13. (C/NF) Comment: Iraq's failure over the past five years 
to address its oil production and export infrastructure 
needs, when coupled with declining oil prices, will have a 
significant impact how it shapes its 2009 budget.  Jabr is 
prepared to make substantive budget cuts to bridge the gap 
between revenues and expenses, however the bulk of the cuts 
will have to occur in Iraq's capital budget at a time when 
there are pressing needs to continue the rebuilding of the 
country.  Moreover, Jabr indicated that he is prepared to 
spend from GOI reserves held in the DFI, as well as at the 
Central Bank.  If the situation deteriorates too badly, we 
may see attempts to utilize the CBI's substantial reserves to 
finance the budget deficit.  However, this would be 
inconsistent with the CBI statutory independence, and it 
would undermine the value of the IQD by reducing the reserves 
that back the currency.  We will report septel on Planning 
Minister Baban's reaction to the likely capital budget cuts. 
End comment. 
CROCKER