VZCZCXRO3215
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #0501/01 0571229
ZNR UUUUU ZZH
R 261229Z FEB 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 1885
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 02 BAGHDAD 000501 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON IZ
SUBJECT: IRAQ'S ECONOMY GROWING IN 2009, BUT JOBS STILL A 
CONCERN 
 
REF: A. BAGHDAD 350 
     ¶B. BAGHDAD 423 
     ¶C. PARIS 195 
 
¶1. (SBU) Summary: There is some good news in Iraq's 
macro-economic data, despite the global downturn and the 
collapse of oil prices.  The economy should grow by at least 
5 percent this year in real terms, provided the GoI can 
sustain spending growth.  Core inflation should remain stable 
at about 12 percent.  Despite the downward revisions in the 
draft 2009 budget, the GoI stands a good chance of completely 
executing its budget and surpassing last year's spending. 
However, continued low oil prices could force the GoI to draw 
down its accumulated fiscal assets quicker than expected, 
creating serious concerns for out years.  Further, while real 
growth and public spending are likely to increase this year, 
the 2009 budget will not permit the GOI to make the 
investments necessary to improve long-term development, nor 
to meet the rapidly rising short-term expectations of a 
war-weary public.  Recognizing the need to diversify its 
economy, Iraq, with USG and other international assistance, 
has intensified its focus on private sector development and 
is moving to address underlying constraints in its legal and 
regulatory framework.  Unemployment is hard to measure, but 
creating more jobs remains the key short- and long-term goal 
for Iraq's economy.  End summary. 
 
Growth Slower But Still Strong 
------------------------------ 
 
¶2. (SBU) For Iraq's petroleum monoculture, a sharp fall in 
the price of oil counts as a serious shock.  In a typical 
year, oil accounts for over 90 percent of GoI revenue and 
about two-thirds of Iraq's gross domestic product.  As the 
bottom fell out of the oil market in the fourth quarter of 
2008, the GoI significantly cut its 2009 budget projections. 
The word has gone out from the Ministry of Finance that 
public-sector wish lists have been trimmed, and hiring 
freezes are reportedly in place across the board. 
 
¶3. (SBU) But even with Iraqi oil selling for less than 40 
percent of its 2008 peak, 2009 can be a good year for Iraq's 
economy.  In its most recent staff report, the International 
Monetary Fund (IMF) projected real growth of 7.7 percent in 
2009 for Iraq's economy.  The latest forecast from the 
Economist Intelligence Unit is 6.1 percent.  Both figures 
likely fail to take full account of slackening global demand 
for oil.  But as long as the GoI can sustain spending growth, 
Iraq's economy should expand by at least 5 percent this year. 
 That would be well below the 2008 growth of between 7 and 9 
percent. 
 
Core Inflation Stable at 12 Percent 
----------------------------------- 
 
¶4. (SBU) Iraq's core price index, which excludes volatile 
energy prices, grew by 11.8 percent in 2008, a shade lower 
than the 2007 rate of 12.3 percent.  Headline inflation for 
the 12 months through November was 6.8 percent.  With food 
accounting for nearly two-thirds of Iraq's current consumer 
price index, inflationary pressure should ease with the 
global decline in commodity prices. 
 
¶5. (SBU) Over the past two years the Central Bank of Iraq 
(CBI) has allowed the dinar to appreciate against the U.S. 
dollar to check money-supply growth and stabilize core 
inflation at a level Iraqis have not seen in decades.  In 
2008 the dinar appreciated 3.6 percent against the dollar, a 
little more than half the rate of appreciation seen in 2007. 
With the GoI soon to be unconstrained by IMF conditionality, 
the CBI may find itself exposed to political pressure to slow 
the appreciation of the dinar even further.  But this would 
not necessarily re-ignite the rampant inflation Iraq 
experienced in 2006 before the dinar's appreciation. 
Qexperienced in 2006 before the dinar's appreciation. 
 
Revenue is Down, But Spending Can Grow 
-------------------------------------- 
 
¶6. (SBU) The GoI's recent downward revisions in the 2009 
budget (Ref A) need not result in a decline in spending. 
Iraq has not yet fully executed a post-invasion budget, so 
the immediate effect of a cut in spending plans is to bring 
projected outlays closer to the level the GoI is able to 
spend.  Implementation of the 2008 budget supports this idea. 
 As of November 2008, USD 41 billion of the total USD 50 
billion budget had been spent.  By comparison, in November 
2007 the GoI had spent only USD 23 billion of that year's 
budget.  Thus, for 2009 the GoI stands a good chance of 
completely executing its budget of USD 60 billion or so.  In 
that event, spending would increase nearly 20 percent over 
2008's level, or about 8 percent in real terms. 
 
BAGHDAD 00000501  002 OF 002 
 
 
 
¶7. (SBU) Depending on the direction oil prices take in the 
coming months, the GoI could conceivably draw down quicker 
than expected its accumulated fiscal assets in the 
Development Fund for Iraq and on deposit at the CBI or in 
state-owned banks.  The draft 2009 budget foresees 
expenditures of USD 63 billion and a deficit of USD 20 
billion, assuming an average oil price of USD 50 per barrel 
and daily export sales of 2.0 million barrels per day.  If, 
as is likely, these budget assumptions prove to be 
optimistic, the GoI could curtail spending, as it presaged in 
the December review of its IMF Stand-by Arrangement, and 
possibly act to increase its domestic borrowing.  Indeed, the 
Finance Minister recently announced that the Ministry would 
activate the treasury-bill market to borrow up to USD 5 
billion (Ref B).  However, a senior MOF advisor advised us 
that such an offering would not be in the immediate future. 
 
Unemployment Hard to Gauge 
-------------------------- 
 
¶8. (SBU) Iraq's continued strong economic performance is 
largely a consequence of improved security conditions. 
Further improvement is needed, but already Iraqis are able to 
turn their attention to quotidian concerns beyond security. 
Like jobs.  Progress on this front is still hard to gauge, 
and is made more challenging by already-bloated public-sector 
payrolls.  The GOI's official estimate of the unemployment 
for 2006 was 17.5 percent, and the 2008 figure was reportedly 
18.2 percent.  The 2007 Iraq Household Socio-Economic Survey 
(IHSES), supported by the GoI and the World Bank, indicated 
an overall unemployment rate of 11.7 percent.  Other sources 
have suggested jobless rates three or even four times this 
level.  According to GoI figures, 48 percent of the Iraqi 
workforce is either unemployed or underemployed. 
 
Public Focus on Private Sector Development 
------------------------------------------ 
 
¶9. (SBU) The need to develop Iraq's private sector has been a 
theme the GoI has often mentioned, but rarely addressed in a 
concerted or dedicated manner.  Security improvements mean 
that "lack of security" can no longer be the scapegoat for 
all of Iraq's economic development woes.  The World Bank and 
the United Nations are focused on assisting Iraq with its 
private sector development, and Iraq insists it is making an 
earnest effort to streamline the bureaucratic obstacles (Ref 
C).  The USG is supporting these efforts through on-going 
programs and implementation of the Strategic Framework 
Agreement. 
 
Comment 
------- 
 
¶10. (SBU) Whichever unemployment number one chooses to 
believe, there is no dispute over the need to expand 
employment opportunities in Iraq.  As one of our Iraqi 
colleagues put it recently, "Everyone wants more electricity, 
but what Iraqis really need is jobs."  The dilemma is that, 
while five percent growth is respectable in the face of a 
global recession, it is not likely to be sufficient to meet 
the demand of Iraq's war weary population.  While Iraq's 
accumulated fiscal surpluses provide the means to keep public 
sector spending at the level required to generate positive 
growth (critical in an election year), the low oil prices 
will severely constrain the GOI's ability to invest in 
capital projects critical to long-term economic development. 
To its credit, the GOI is not resting on the fact that 2009 
will be a relatively good year for the economy:  officials 
from the prime minister down are emphasizing the need to take 
immediate steps to accelerate development of the non-oil 
economy (in addition to improving performance of the oil 
sector) in order to avoid more serious economic hardship down 
Qsector) in order to avoid more serious economic hardship down 
the road. 
BUTENIS