VZCZCXRO4912
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #0882/01 0901033
ZNR UUUUU ZZH
P 311033Z MAR 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 2478
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 BAGHDAD 000882 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
 
E.O. 12958: N/A 
TAGS: EPET ENRG PGOV EINV IZ
SUBJECT: IRAQ LACKS CAPACITY FOR OIL TRUST FUND 
 
REF: 02/13/2009 Shapiro/Wall e-mail 
 
¶1. (SBU) Summary:  A common mechanism to manage revenue from natural 
resources is the establishment of a form of natural resources fund, 
such as an "oil trust fund."  However, Iraq currently does not have 
the resources or capacity to establish such a stabilization fund. 
The Government of Iraq's (GOI) struggle to adjust its 2009 budget to 
the drop in global oil prices shows it has little flexibility.  As a 
legacy of the UN controls over the Coalition Provisional Authority 
(CPA), Iraq currently has the Development Fund for Iraq (DFI) into 
which oil revenues are deposited and from which government 
expenditures are paid.  The bilateral Strategic Framework Agreement 
provides a process whereby the U.S. can pursue post-DFI mechanisms 
with the GOI, including the near-term priority of a stabilization 
fund and the potential future benefits of a distributive fund.  End 
Summary. 
 
A Natural Resource Fund 
----------------------- 
 
¶2. (U) Many resource rich countries have devised mechanisms to 
manage revenue from their natural resources, including establishment 
of an "oil trust fund."  Such a fund can take several forms - 
stabilization, savings, or distributive.  A stabilization fund is 
designed to shield the national budget from revenue uncertainty and 
volatility for limited periods.  A savings fund creates a store of 
wealth for present and/or future generations and receives a constant 
share of oil revenues that is held for future distribution or 
investment, especially when oil resources are exhausted.  A 
distributive fund disburses oil revenues within a limited timeframe 
and is not structured to provide explicit intergenerational 
transfers.  Trust funds can also be hybrids that combine two or all 
three of the main forms.  An oil trust fund for Iraq could also be a 
way to resolve the political stalemate over revenue distribution. 
 
Oil Revenues and DFI 
-------------------- 
 
¶3. (SBU) As a legacy of the UN controls over the CPA, Iraq currently 
has the Development Fund for Iraq (DFI) into which oil revenues are 
deposited and from which government expenditures are paid.  The 
immunities and international oversight associated with the DFI will 
expire on December 31, 2009.  The Government of Iraq will need to 
consider a mechanism to substitute when the DFI expires.  Since over 
90% of government revenues come from oil exports, Iraq must first 
reduce the impact of price volatility as well as invest heavily in 
its energy infrastructure, which points to the need for a 
stabilization fund before a distributive fund.  However, because 
Iraq currently does not have the resources or capacity to implement 
even a stabilization fund, discussions should be focused towards 
long-term planning. 
 
¶4. (SBU) The GOI's struggle to adjust its 2009 budget to the drop in 
oil prices shows the government's lack of flexibility in what is 
essentially a one export economy.  Its budget programs a $16 billion 
deficit by assuming 2 million barrels per day in oil exports at $50 
per barrel.  The first two months of 2009, oil revenues were $3.7 
billion, or $2.2 billion below budget assumptions.  Oil prices 
averaged $39.69 per barrel.  Thus, the deficit could likely be much 
greater than budgeted predictions and absorb most of the GOI's 
accumulated fiscal balances.  The Ministry of Finance hopes to 
diversify its revenue by expanding its domestic Treasury bill 
offerings in the short term and improving its tax collection. 
Nevertheless, should oil prices and/or oil output remain stagnant or 
decline, Iraq will have fewer resources to finance large deficits in 
Qdecline, Iraq will have fewer resources to finance large deficits in 
2010 and beyond.  Iraq will not have enough revenue to establish any 
type of fund.  The GOI faces difficult budget cuts, which could have 
destabilizing influences on Iraq's fragile economic recovery. 
 
Current Revenue-Sharing Mechanisms 
---------------------------------- 
 
¶5. (SBU) So far, the lower price of oil has not pushed Erbil or 
Baghdad to compromise on revenue sharing or hydrocarbons 
legislation, which would establish a new framework for transparent 
management of the oil and gas industry.  The revenue sharing bill is 
centered on the entire budget process.  According to the June 2007 
draft, the Kurdistan Regional Government views revenue sharing as 
taking place before the national budget and thereby completely 
avoiding either the Ministry of Finance or parliament.  The central 
Government of Iraq views that revenue sharing will be handled 
through the national budget.  Since neither side is willing to 
concede or compromise on its view on revenue sharing, the two sides 
have primarily focused on resolving the hydrocarbons law. 
 
¶6. (U) In the absence of a formal revenue sharing law, oil income is 
nevertheless shared.  The Iraqi budget de facto distributes revenue 
directly to the Kurdistan Region and all provincial governments. 
The Kurdistan Region has received 17% of the Iraqi budget since 
¶2003.  The distribution to the provinces has occurred every year 
 
BAGHDAD 00000882  002 OF 002 
 
 
since 2006 based on population estimates.  From 2006 to 2009, the 
GOI allocated $12.8 billion directly to provincial governments for 
investment projects to improve infrastructure and delivery of 
essential services to the Iraqi people.  Furthermore, while not 
exactly the same as an oil trust fund, the GOI provides a basket of 
goods to all Iraqis via the Public Distribution System (PDS).  From 
2005 to 2009, the GOI allocated $18.9 billion for the PDS. 
 
The Way Forward 
--------------- 
 
¶7. (SBU) The Strategic Framework Agreement provides a process 
whereby the U.S. can pursue post-DFI mechanisms with the GOI, 
including the near term priority of a stabilization fund and the 
potential future benefits of a distributive fund.  The Economic and 
Energy Joint Coordination Committee, established in the agreement, 
provides an opportunity to promote GOI outreach to such experts as 
the World Bank and the Government of Norway.  The World Bank has 
expertise in establishing resource funds, and has also expressed an 
interest in helping design a post-DFI mechanism.  The Government of 
Norway has provided assistance to other countries developing natural 
resource funds. 
BUTENIS