VZCZCXRO3899
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #0986/01 0991556
ZNR UUUUU ZZH
R 091556Z APR 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 2632
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 03 BAGHDAD 000986 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PGOV IZ
SUBJECT: GOI BUDGET - DRAMA WINDS DOWN, MORE TO FOLLOW 
 
REF: A. BAGHDAD 766 
     ¶B. BAGHDAD 756 
     ¶C. BAGHDAD 751 
     ¶D. BAGHDAD 585 
 
¶1. (SBU) Summary:  The Government of Iraq (GOI) 2009 budget is now 
on its way to be published in the Official Gazette and become the 
official GOI budget for 2009.  The budget reflects changes passed by 
the Council of Representatives (CoR) on the budget: expenditures 
down to USD 58.6 billion; revenues at USD 42.7 billion; and a 
deficit of USD 15.9 billion.  The CoR trimmed expenditures but did 
not lower its calculated revenues despite criticism of unrealistic 
economic assumptions.  Accordingly, the deficit will likely be much 
higher than planned.  Anticipating that a larger deficit will 
exhaust existing assets faster than expected, Finance Minister Jabr 
confirmed his intention to draft a "negative" supplemental in 
mid-year to trim expenditures and conserve assets for 2010.  The 
Ministry plans to go back to the CoR to addresssome technical and 
policy issues that arose in discussions over the final budget law. 
Budget drama is likely to continue.  Nonetheless, once the proposed 
budget appears in the Official Gazette, ministries should be able to 
begin drawing on their 2009 budget allocations.  End Summary. 
 
It's (almost) Official: 
GOI has a Budget 
----------------------- 
 
¶2. (SBU) The last step of the budget preparation process under the 
Federal Management Law is to publish the budget in the Official 
Gazette.  Although the Council of Representatives passed the budget 
law on March 4 (ref D), the final version  has not been published in 
the Official Gazette.  Post has received a copy of the version that 
we understand was sent by the Presidency Council to the Gazette for 
publication.  Post will provide more details after the text is fully 
translated and analyzed. 
¶3. (SBU) The principal reason for the budget delay was the extended 
negotiation between the Ministry of Finance and representatives of 
the Finance Committee.  The CoR budget law indicated that 
expenditures be reduced by 5 trillion Iraqi Dinar (IQD) (USD 4.2 
billion).  The law specified that salaries, pensions, contract 
employees, social benefits and the public distribution system should 
not be cut.  However, CoR members dodged the issue of what should be 
reduced. 
¶4. (SBU) Informally, members of the CoR Finance Committee demanded 
the Ministry of Finance show them the final budget schedules before 
sending the document to the Presidency Council.  After several 
rounds of discussion, the CoR members and Ministry of Finance 
reached agreement on most budget details on March 30.  The document, 
which was already signed by the Presidential Council, was sent to 
the Official Gazette on April 7.   This cable reports on numbers 
contained in that version of the budget. 
Budget Numbers: Expenditures - 
Down to Reality, but Still Rising 
--------------------------------- 
 
¶5. (SBU) Planned expenditures will total USD 58.6 billion, revenues 
USD 42.7 billion, with a forecasted deficit of USD 15.9 billion. 
Expenditures are considerably lower than first planned when oil 
prices were coming off their peak.  For example, expenditures for 
2008 were estimated to be USD 72.2 billion (2008 base plus 
supplemental budget enacted in August); the first 2009 budget 
prepared by the cabinet in early October 2008 estimated expenditures 
at USD 79.7 billion; while  the first budget submitted to the CoR in 
November was USD 67.0 billion.  Successive mark-downs in proposed 
budget expenditures reflected the continued decline in oil prices. 
Declines in proposed budget expenditures have given the impression 
of budget reductions.  However, compared with 2008's final figures, 
Qof budget reductions.  However, compared with 2008's final figures, 
expenditures in 2009 are set to rise by only USD 9.1 billion or 
about 18 percent. 
¶6. (SBU) The CoR noted that the budget's oil assumptions of USD 50 
per barrel and exports of 2.0 million barrels a day were optimistic. 
 Without changing revenue assumptions, the CoR reduced the USD 62.8 
billion expenditures that the cabinet had proposed in February by 
USD 4.1 billion.  While expenditures have not kept up with budget 
aspirations, they are rising and appear to be within the GOI's 
capacity to implement. 
Expenditures: Some Details 
-------------------------- 
 
¶7. (SBU) Of the total expenditures, USD 45.9 billion are allocated 
for operating costs and USD 12.7 billion are for the capital or 
investment budget.  The USD 17 billion allocated for salaries has 
not changed from the initial budget, representing about 30 percent 
of total expenditures. 
¶8. (SBU) Security continues to account for the largest portion of 
the budget, with combined Ministry of Interior (USD 5.5 billion) and 
Ministry of Defense (USD 4.1 billion) budgets totaling 16 percent of 
total expenditures.  The Ministry of Oil has the largest capital 
budget at USD 2.2 billion.  The Ministry of Electricity's capital 
budget is USD 1.1 billion, but may increase by another USD 1.4 
billion if the Ministry of Finance accepts the CoR's 
 
BAGHDAD 00000986  002 OF 003 
 
 
recommendation. 
¶9. (SBU) Provinces have USD 2.2 billion for their direct capital 
budgets, which supplement investment projects undertaken by central 
ministries in the provinces.   Only Defense, Planning, the Council 
of Ministers, and the Presidency fared worse than they did with the 
2008 base budget. 
¶10. (SBU) Authorized personnel levels will rise by 56,324.  This 
means that the proposed GOI budget would support 2,320,247 
employees, about 30 percent of the total labor force.  Ministries 
will enjoy an increase in staff: Education (11,500) and Higher 
Education (4,000), Health (9,784), Electricity (6,600), Justice 
(3,400), and Interior (2,000).  Notably, Ministry of Defense (MOD) 
will have no increases in personnel. 
Revenues: Oil is King, but not Midas 
------------------------------------ 
 
¶11. (SBU)  Fifteen percent of anticipated revenues are based on 
non-oil sources, the largest being expected profits from state owned 
enterprises (USD 2.5 billion), and taxes and other charges (USD 1.3 
billion).  These estimates are likely to prove optimistic.  The 
Finance Minister has talked about tariff increases (a new tariff law 
will be considered by the Cabinet) and awarding contracts to two new 
mobile phone providers, but  knows that any significant revenues 
from such actions would not materialize until 2010. 
¶12. (SBU) Oil exports are assumed to generate 85 percent of 
revenues, based on the estimates that oil prices would average USD 
50 per barrel for the year and exports average 2 million barrels a 
day.  The oil market, however, has not fallen in line with budget 
assumptions. 
¶13. (SBU) In the first quarter, recorded income from oil revenues is 
estimated to have been USD 5.6 billion, about USD 3.5 billion off 
the budgeted amount.  Export sales have hovered in the range of 1.7 
to 1.8 million barrels a day.   Although oil prices have recovered 
in recent weeks to around USD 50 a barrel, the price for the 
remainder of the year would have to average around the high USD 60 
per barrel range for Iraq to meet its revenue target. 
 
Deficit Financing: 
This Year's Terrible; Next Year Worse 
------------------------------------- 
 
¶14. (SBU) The programmed deficit of USD 15.8 billion that emerged 
from the CoR is within the same range of the deficit the GOI 
targeted in earlier budget drafts.  This is about the size of the 
deficit that the IMF had thought financeable back in November 2008. 
Nonetheless, it is likely to increase for both reasons of higher 
expenditures and lower revenues. 
¶15. (SBU) On the expenditure side, the GOI seems to have improved 
budget execution.  In 2008, total expenses were about as much as the 
2008 base budget.  True, some agencies implemented more than the 
base budget because they were able to tap into the supplemental 
allocations and/or receive reallocations from other ministries. 
This disguises the fact that some agencies still have difficulties 
with budget execution.  Nonetheless, broadly speaking, it is 
realistic to assume that most of the USD 58.6 billion will be spent, 
particularly since 78 percent of the budget is for recurring 
operating costs. 
¶16. (SBU) Actual expenditures are likely to exceed budgeted 
expenditures for two reasons.  The first will be the likely increase 
in the allocation to tH7KQFinance is still intent on introducing a negative 
supplemental to reduce expenditures. Even if oil prices and sales 
 
BAGHDAD 00000986  003 OF 003 
 
 
were to advance, the Minister would still be looking to salvage the 
2010 budget rather than this year's budget. 
Budget Law Features: 
Some Twists with Drama Sure to Follow 
------------------------------------- 
 
¶20. (SBU) The budget law contains more intriguing policy 
initiatives.  Some could lead to interesting developments and more 
budget drama.  A preview of some of these provisions follows.  The 
new budget law prohibits the Ministry of Finance from financing the 
deficit by issuing T-bills without approval by a simple majority of 
CoR members for each new auction.  This was apparently designed to 
block the Ministry of Finance from issuing a note requiring the 
Central Bank to fund the Ministry of Electricity contracts from its 
foreign exchange reserves, an illegal action.  However, the 
limitation of bills would impede the operation and development of 
the existing T-bill market.  Senior officials of both the Finance 
Ministry and the Central Bank have their differences, but they do 
agree that this prohibition should be lifted, perhaps by replacing 
it with a budget ceiling. 
¶21. (SBU) The budget law requires the Trade Minister to develop a 
plan within 50 days of publication of the budget law aimed at 
reforming the public distribution system (PDS) to provide for the 
most needy citizens (means-tested) with income of less than 1.5 
million IQD.  Many plans for reform of the PDS have been written; 
few have been implemented due to its political sensitivity. 
¶22. (SBU) Provinces may be given increased powers to manage funds of 
central ministries spent in their provinces, subject to the passage 
of a new law.  This would be a new development in federal fiscalism 
which has not received much attention but would be fundamental to 
building a strong federal system. 
 
Comment 
------- 
 
¶23. (SBU) Although this is not the first time the GOI has adopted a 
budget, it is the first time under very difficult and changing 
circumstances.  While financial problems will continue to plague the 
GOI, at least the process has produced a budget, which, for all of 
its problems, should be considered something of a milestone on the 
way towards building a functioning government. 
¶24. (SBU) Chart of GOI Budgets (USD Billion): 
Item/Year       2008 Base    2008 Base, Supp     2009 
Revenue             42.3           70.1           42.7 
    Oil             35.4           63.1           36.5 
Expenditures        49.9           72.2           58.6 
    Operating       36.8           51.1           45.9 
    Capital         13.1           21.1           12.7 
Surplus/(Deficit)   (7.6)          (2.1)         (15.9) 
 
BUTENIS