VZCZCXYZ0008
RR RUEHWEB

DE RUEHGB #2106/01 2170849
ZNR UUUUU ZZH
R 050849Z AUG 09
FM AMEMBASSY BAGHDAD
TO SECSTATE WASHDC 4209

UNCLAS BAGHDAD 002106 
 
SENSITIVE 
SIPDIS 
 
STATE PASS TO MILLENNIUM CHALLENGE CORPORATION SARAH ROSE 
 
E.O. 12958: N/A 
TAGS: EAID ECON IZ KMCA PGOV PHUM PREL
SUBJECT: IRAQ'S PROGRESS ON MCC INDICATORS: OUR ASSESSMENT 
 
REF: A. BAGHDAD 1085 
     ¶B. BAGHDAD 1838 
     ¶C. BAGHDAD 959 
     ¶D. BAGHDAD 1802 
 
¶1. (SBU) Summary: Iraq's post-conflict economy continues to 
improve but it remains challenged by deep-rooted problems of 
corruption, red tape, an ill-equipped workforce, and land 
disputes.  Although the GOI still focuses a lot of energy on 
the development of its oil sector, future foreign investment 
and diversified economic growth will only take place when 
these deep underlying issues are addressed.  Hard data are 
extremely difficult for any organization to collect in Iraq, 
but there is some anecdotal evidence that tangible progress 
is being made on some the USG Millennium Challenge 
Corporation (MCC) Scorecard Indicators.  To complement the 
few reliable statistics available, we offer the following 
narrative summaries of our assessment of Iraq's progress 
under the MCC's three pillars: Ruling Justly, Investing in 
People, and Economic Freedom.  End summary. 
 
Reliable Data are Difficult to Get 
---------------------------------- 
 
¶2. (SBU) Although Iraq's security situation has improved 
considerably over the past few years, it is still challenging 
to collect standard development data.  The United Nations and 
its family agencies have a relatively small presence in 
country and have published very few figures on Iraq since 
2006 on their UN Stats site for the Millennium Development 
Goals (See: http://mdgs.un.org/unsd/mdg/Data.aspx).  The 
World Bank has only two full time representatives on the 
ground and the IMF office for Iraq is based out of Jordan. 
Few international NGOs are capable of operating here  because 
the prohibitive security costs.  Their rankings and indices 
can only be considered as reliable as their primary data, 
which is difficult to obtain and objectively cross-check. 
 
¶3. (SBU) Given these difficulties, most of the data that are 
published in Iraq have been collected and published by GOI 
entities.  The Central Organization for Statistics and 
Information Technology (COSIT) and the Ministry of Planning 
are the principal data GOI collection agencies, but their 
work has also been limited by the security environment.  With 
some help and funding from the World Bank, COSIT was able to 
conduct the nationwide Iraq Household Socio-Economic Survey 
in 2007, which will become a baseline for comparisons with 
follow-up surveys starting next year.  COSIT intends to 
conduct a nationwide census starting this fall that will be 
published in 2010.  The Ministry of Education and the 
Ministry of Health, however, thus far have not been able to 
provide us any statistics related to the Millennium 
Development Goals.  (NOTE: The Ministry of Education official 
tasked with filling out the annual UNESCO report that would 
feed into the MCC education indicator was killed in a bombing 
July 10.  The Ministry of Education will be able to finish 
the report by July 31.  If not, Post will get all possible 
information on education expenditures for the MCC from the 
2009 budget.  END NOTE.)  Because of the need for better 
economic data, the Embassy has been funding the Iraqi 
Institute for Economic Reform in order to get them set up as 
an independent economic think tank in country and capable of 
cross-checking GOI figures. 
 
Ruling Justly 
------------- 
 
Political Rights 
 
¶4. (SBU) Iraq's democracy continues to mature, especially 
with successful provincial elections held in January 2009. 
The law provides for the free exercise of human rights, but 
violence, corruption, and organizational dysfunction 
undermined the government's ability to protect them.  Over 
the past year, however, violence has decreased significantly 
Qthe past year, however, violence has decreased significantly 
and some reconciliation occurred in several provinces. 
Disciplinary action, including prosecutions leading to 
convictions, was taken against some government officials 
accused of violating human rights (Ref: 2008 Iraq Human 
Rights Report). 
 
Control of Corruption 
 
¶5. (SBU) Corruption remains prevalent throughout the GOI and 
is one of the most significant obstacles to economic growth, 
but there have been some recent positive developments.  The 
GOI ratified the UN Convention Against Corruption in April 
¶2008.  There are three GOI anti-corruption entities - the 
Board of Supreme Audit (BSA), the Commission on Integrity 
(COI), and the Inspectors General Service (IGS).  The GOI is 
developing a draft GOI Anti-Corruption Strategy to help meet 
its Convention obligations and has sent a draft Comprehensive 
Anti-Corruption Law to the Council of Representatives for 
passage.  The COI has run public service announcements 
against corruption, set up an anti-corruption hotline (which 
has received more than 13,000 calls thus far in 2009), and 
held a conference with the Ministry of Education to discuss 
an Anti-Corruption curriculum for Iraqi pupils.  The 
underlying legal framework against corruption as part of the 
Iraqi Criminal Code is acceptable.  Enforcement or lack 
thereof, however, is largely a political question whereas 
party, sect, and favoritism still weigh more in the calculus 
than ethics.  For example, although the Minister of Trade was 
forced to resign for his alleged corrupt activities, it is 
not clear if he will ever be formally charged. 
 
Rule of Law 
 
¶6. (SBU) Ongoing violence has meant the GOI has generally had 
a weak performance upholding the rule of law.  Judges 
frequently face death threats and attacks.  Long delays, low 
standards of evidence, political interference, and inadequate 
access to representation hamper the judicial process.  Yet, 
there is anecdotal evidence to suggest that over the past 
year judges have been more objective in their decisions.  The 
success of the Iraqi High Tribunal is particularly 
noteworthy.  Since the Tribunal became fully independent from 
the Regime Crimes Liaison Office in September 2008, it has 
grown as a fully-functioning independent court, added three 
more trial chambers, and resolved cases more quickly while 
safeguarding defendants' rights to due process. 
 
Investing in People 
------------------- 
 
Health and Education Expenditures Rise 
 
¶7. (SBU) Health and primary/secondary education remain top 
GOI priorities and the GOI is clearly starting to invest more 
in its people despite decreased government revenues.  Budget 
expenditures in 2009 increased relatively and absolutely over 
2008 for both health and primary/secondary education.   Lower 
oil prices meant the final 2009 GOI budget was only 81% of 
the 2008 figure.  Yet, according to official budget figures, 
2009 GOI health expenditures increased by 55% (from $776 to 
$1210 per capita) and education (excluding higher education) 
increased by 80% (from $784 to $1411 per capita).  Health 
expenditures went from being a mere 3.1% of the total 2008 
budget up to 6% in 2009.  Education spending went from 3.1% 
in 2008 to almost 7% in 2009. 
 
Natural Resources: Oil, Water, and Marshland 
 
¶8. (SBU) Iraq is one of the lowest cost sources of crude oil 
on the globe and the Iraqi Ministry of Oil (MOO) is trying to 
attract foreign investment to more efficiently exploit it. 
However, because of stringent GOI conditions, the MOO's June 
30 bid round resulted in a winner for only one of the eight 
fields on offer (Ref. A).  Contract negotiations will take 
months to complete, meaning significantly increased 
production is unlikely before 2011.  To the GOI's credit, the 
bid round was conducted transparently without any hints of 
favoritism.  Due to this reputation for transparency, the GOI 
will be in a good position to conduct possible future rounds 
for the remaining fields. 
 
¶9. (SBU) Water is a vital resource that has been relatively 
scarce in Iraq because of a prolonged drought over the past 
two years.  Outdated irrigation practices have exasperated 
the effects of the drought and depleted Iraq's strategic 
water reserves.  Consequently, according to MCC indicator 
data, the percentage of people with access to an improved 
water supply decreased from 81% in 2006 and 2007 to only 77% 
in 2008.  The Iraq Relief and Reconstruction Fund (IRRF) 
Qin 2008.  The Iraq Relief and Reconstruction Fund (IRRF) 
projects completed to date by the USG have restored or added 
the capacity to treat 2.25 million cubic meters of potable 
water per day, with the potential to serve 8 million Iraqis. 
The Ministry of Water Resources is now instigating new 
infrastructure projects to improve irrigation facilities. 
After diplomatic pressure, Turkey has also increased the 
water flows through its dams in response to the drought, 
though it is unclear for how long this will continue. 
 
¶10. (SBU) The marshlands near the Persian Gulf are an 
important ecological resource and Iraq has recently taken 
significant steps to protect them.  (Ref. C)  Iraq acceded to 
the Convention on Wetlands of International Importance 
(Ramsar) on February 17, 2008 and designated 1377 square 
kilometers of the Hawizeh marshes in the south as its first 
Ramsar site. 
 
Economic Freedom 
---------------- 
 
Investment 
 
¶11. (SBU) Though the Iraqi market offers considerable 
opportunities for both domestic and international commerce, 
Iraq's investment and trade climate continues to prove 
challenging for both Iraqi and international concerns.  The 
GOI's stated policy is to work towards WTO accession, though 
it has demonstrated little progress on key, WTO-compliant 
laws and regulations that would form the basis of meaningful 
accession negotiations.  Significant security concerns, 
cumbersome procedures for new business registration, long 
regulatory delays, unclear land and property titling, 
unreliable mechanisms for dispute resolution, and allegations 
of endemic corruption are among the many issues which 
continue to deter domestic and international economic 
engagement.  More broadly, a legacy of central planning and 
inefficient state-owned enterprises continue to slow Iraq's 
attempts to transition to a more market-based economy. 
 
Land Issues 
 
¶12. (SBU) Land tenure is a key factor in improving Iraq's 
business climate.  Competing land titles from the Saddam 
regime and strict prohibitions on foreign ownership of land 
have discouraged investment (Ref. B).  Iraq's National 
Investment Law (NIL), which was passed in 2006, has a 
provision that permits Iraqi and foreign investors to rent 
(lease) lands for investment projects.  However, neither the 
Ministry of Finance (MOF) nor the Ministry of Municipalities 
(MOM), which hold 70% and 10-15% of all land respectively, 
currently recognize the NIL's land provisions.  Prime 
Minister Maliki has spoken publically on how clarifying land 
titles and allowing foreign ownership are urgent issues with 
respect to investment.  There is currently a draft amendment 
being deliberated in the Council of Representatives that 
would clarify foreign land ownership but the issue remains 
controversial. 
 
Inflation 
 
¶13. (SBU) Due to the Central Bank of Iraq's managed-float 
exchange rate policy, the Iraqi dinar has held steady at 
about 1170 to the dollar since the beginning of 2009.  Core 
inflation (headline inflation minus volatile fuel, 
electricity, transport, and communication prices) has 
decreased substantially over the past year, from 13.6% 
year-on-year in June 2008 down to 8.8% year-on-year in June 
¶2009.  Inflation has decreased substantially over the past 
few years in correlation with improved security.  Iraq's 
prices are now more vulnerable to global price trends such as 
increases in food and fuel prices.  A housing shortage of 
about three million units nationwide means increasing rents 
are contributing to recent inflation. 
 
Fiscal Policy 
 
¶14. (SBU) Eighty-six percent of the GOI's budget comes from 
oil revenues.  Unfortunately the GOI's revenue projections 
based upon an oil price of $50/barrel and production of two 
million barrels per day proved too optimistic for at least 
the first five months of 2009.  (Ref. D)  The GOI has enough 
reserves to cover the projected $15.9 billion deficit this 
year, but a potential positive 2009 supplemental budget could 
increase this figure.  The GOI has already had difficulty 
making payments to GE and Siemens on $5 billion electrical 
turbine deals.  Iraq may benefit from a new IMF Stand-By 
Arrangement to be signed in October, which would provide $5.5 
billion in finance to help cover a potential deficit in 2010. 
 But the government needs to take a serious look at its 
available resources in planning its expenditures for 2011. 
Iraq received a generous 80% cut in its debts to Paris Club 
members but still needs to renegotiate its outstanding debt 
Qto other non-Paris Club creditors (particularly Saudi Arabia 
and Kuwait) as more of its obligations come due in 2011 and 
beyond.  Balancing GOI political desires with budget 
realities will be difficult until oil production 
significantly increases. 
 
Comment 
------- 
 
¶15. (SBU) Because of the extreme difficulty of obtaining 
reliable data here, Iraq's progress on the UN Millennium 
Development Goals and the MCC indicators is hard to quantify. 
 But, it appears to be moving forward in some areas.  As the 
security situation improves, UN agencies, the IMF, World 
Bank, and other international NGOs should be able to better 
assess developments using their normal models.  This kind of 
data would allow one to analytically compare Iraq to its 
neighbors in the Middle East and other post-conflict emerging 
economies.  The GOI Census planned for October 2009, assuming 
it goes forward as planned, should also provide valuable 
insight.  Until then, the Embassy will continue to encourage 
the GOI to pursue the ideals of the MCC indicators for the 
benefit of the Iraqi people. 
 
HILL