VZCZCXRO5961
RR RUEHBC RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHGB #2115/01 2180619
ZNR UUUUU ZZH
R 060619Z AUG 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 4222
INFO RUCNRAQ/IRAQ COLLECTIVE
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BAGHDAD 002115 
 
SENSITIVE 
SIPDIS 
AIDAC 
 
DEPT PASS USTR 
STATE FOR NEA/I/ECON AND EEB/IFD/OMA 
 
E.O.12958: N/A 
TAGS: ECON EFIN PGOV ETRD EAIR IZ
SUBJECT: GOI Budget Update: 2009 Mid-Year and First Look at 2010 
 
REF: (A) Baghdad 2106 
     (B) Baghdad 2008 
     (C) Baghdad 1633 
 
 
¶1. (SBU) Summary:  The delayed enactment of the 2009 budget law 
until mid-April contributed to a low rate of budget execution for 
the first part of 2009.  Lower than expected oil prices and exports 
have contributed to significant deficit spending.  Oil revenues were 
USD 3.8 billion less than anticipated for the first half of the 
year.  While the Ministry of Finance (MoF) may look to rein in 
expenditures, oil revenues will be insufficient to prevent another 
deficit in 2010.  The Cabinet has begun linking policy objectives to 
budget planning, looking to trim subsidies and charging for 
utilities in an effort to realign its expenditures.  End Summary. 
 
2009 Budget: Mid Year Review 
---------------------------- 
 
Expenditures 
 
¶2. (SBU) Expenditures and revenues through May fell significantly 
below the expected levels for the first five months of the 2009 
budget.  (Note: the Iraqi fiscal year follows the calendar year.) 
Overall expenditures through May totaled about USD 12.4 billion, 
representing an execution rate of 21 percent, compared to an 
expected 41 percent.  According to Ministry of Planning statistics 
(which tend to be higher than MoF data), ministries and provinces 
had executed 19 percent and 18 percent of their investment budgets 
respectively. 
 
¶3. (SBU) A major reason for the low execution rate was MoF's 
reluctance to release funds until the Council of Representatives 
enacted the budget law in mid-April.  Another factor was the global 
recession and dim outlook for oil prices, which also led the MoF to 
husband its resources. 
 
Revenues 
 
¶4. (SBU) Revenues through May totaled around USD 13.4 billion, about 
75 percent of the projected amount in the budget.  Oil revenues 
through May were about USD 11 billion, or USD 4.1 billion less than 
projected.  Through the first five months of 2009, oil prices 
averaged USD 40 a barrel and exports averaged about 1.79 million 
barrels per day (mbpd), compared with the budget's projections of 
USD 50 a barrel and 2.0 mbpd, respectively.  In June, oil revenues 
rose to about USD 3.3 billion due to higher prices and sales. 
Nonetheless, oil revenues as of mid-year are still USD 3.8 billion 
below the budget's projections. 
 
Budget Outlook 
 
 
¶5. (SBU) Government expenditures are likely to increase in the 
coming months.  In May, the first full month after the budget law 
was passed, expenditures were about USD one billion higher than the 
monthly average during the first quarter.  Early returns from the 
Ministry of Planning (MoP) on investment expenditures in June also 
show a rise, with ministries and provinces raising the budget 
execution rate another 10 percentage points, having spent 30 percent 
of the total budget. 
 
¶6. (SBU) Even with recent increases in oil prices and sales, the GOI 
still faces a challenging budget year.  If: (a) oil prices stay at 
present levels (world prices at around USD 66 a barrel); (b) exports 
average 1.8 million barrels a day over the second half of the year; 
and (c) the GOI executes 100 percent of its budget, the deficit 
would likely reach USD 18 billion.  If July's oil revenue exports, 
which look likely to hit a recent record, are maintained for the 
rest of the year, the picture would improve only slightly.  Given 
these circumstances, MoF will likely keep a tight rein on 
expenditures, ensuring that ministries' balances have been drawn 
down and funds have been used for authorized expenditures before 
releasing more funds.  Any MoF savings would go toward funding the 
Qreleasing more funds.  Any MoF savings would go toward funding the 
2010 budget, which will be constrained by the GOI's limited means to 
address any financing gap. 
 
2010 Budget: First Look 
----------------------- 
 
Budget Strategy and 2010 Assumptions 
 
¶7. (SBU) In June, MoF submitted a budget strategy for 2010-2012 to 
the Council of Ministers.  The strategy's elements were gathered 
from weekly MoF-chaired meetings with ministries.  For 2010, MoF has 
assumed average oil prices of USD 58 a barrel and average export 
sales of 2.15 million barrels a day.  Even assuming that 
 
BAGHDAD 00002115  002 OF 002 
 
 
expenditures would not rise next year, the oil price/export 
assumptions (and the estimate of a modest USD 5 billion in non-oil 
revenues) would leave a budget deficit of around USD 8 billion. 
 
Cabinet Energized 
 
¶8. (SBU) The Cabinet has asked the High Economic Committee, composed 
of selected ministries and the Central Bank of Iraq, to examine the 
2010-2012 budget strategy.  According to one GOI official, the 
strategy came across as "a bunch of numbers," rather than reflecting 
longer-term plans and aspirations.  For example, subsidies, such as 
importing refined fuel for GOI use and the ration card, are not 
eliminated or reduced.  User fees are still not established for 
electricity and water.  And some investment projects should be 
funded either by public-private partnerships or the private sector. 
 
¶9. (SBU) Security would continue to be the budget's highest 
priority, according to a GOI official participating in the Cabinet 
discussions.  He added that greater emphasis should be given to 
health and education.  Commenting that operational expenditures have 
risen due to sizable salary increases in recent years, the official 
said the government should freeze hiring and trim automatic annual 
salary increases, thereby giving more room for necessary investment 
expenditures. 
 
¶10. (SBU) The Council of Ministers also has tinkered with the oil 
assumptions in the budget strategy, raising the projected price per 
barrel to USD 60 and exports to 2.2 million barrels a day.  Under 
these assumptions, oil revenues would add another USD 2.5 billion in 
the budget. 
 
Next Steps 
 
¶11. (SBU) The MoF asked spending units to submit their budget 
requests by mid-July and maintain expenditures to this year's 
levels.  According to MoF contacts, budget negotiations will begin 
earnestly this month.  MoF plans to submit a budget to the cabinet 
by September.  The cabinet, according to the Financial Management 
Law, should submit the budget to the Council of Representatives by 
October 10. 
 
Outlook 
 
¶12. (SBU) The relative lack of GOI resources will constrain 
expenditure spending for the rest of the year and into 2010. 
Whether the GOI will have sufficient resources in reserve to fund 
the deficit in 2010 remains unclear.  Negotiations on an IMF Stand 
By Arrangement (SBA) could yield USD 5.5 billion over the next 
eighteen months, which could fill much of the expected financing 
gap.  The Fund has suggested that GOI authorities encourage others, 
particularly the World Bank, to also lend budget support.  The 
introduction of supplemental budget legislation for this year (ref. 
A), however, has undermined GOI assertions that it is following a 
fiscal prudent policy and could complicate completing the SBA. 
 
Hill