VZCZCXRO9919
RR RUEHBC RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHGB #3028/01 3210608
ZNR UUUUU ZZH
R 170608Z NOV 09
FM AMEMBASSY BAGHDAD
TO RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/SECSTATE WASHDC 5471
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 03 BAGHDAD 003028 
 
SENSITIVE 
SIPDIS 
 
E.O.12958: N/A 
TAGS: EFIN ECON EAID PGOV PREL IZ
SUBJECT: GOI PROPOSED 2010 BUDGET: RIDING THE OIL ROLLER COASTER 
 
¶1. (SBU) Summary:  The GOI has proposed a 2010 budget to the Council 
of Representatives (CoR) that would increase expenditures by 22 
percent.  While security remains a budget priority, as do the 
essential services of oil and electricity, more resources are 
proposed for health, education, municipalities, water, and culture. 
Investment expenditures, key to long-term economic growth and job 
creation, are intended to increase a hefty 55 percent to account for 
28 percent of the total budget, up from 22 percent last year. 
Higher prices and exports of oil are assumed to support these higher 
expenditures, but full budget implementation would still leave a 
deficit of 22 percent of GDP.  Accumulated balances and domestic 
financing would only partially finance the deficit, leaving a gap to 
be filled by possible IMF and World Bank loans or, if the market 
continues to climb, higher oil prices.  The Chair of the CoR Finance 
Committee hopes that the budget can be adopted by early December. 
 
¶2. (SBU) This year's budget was the Minister of Finance's (MoF) 
first attempt to develop a medium-term budget framework and link 
policies to budget expenditures.  The MoF also sought to hold 
spending steady, but rising oil prices, the prospect of signing 
major oil contracts, and electioneering conspired to raise planned 
expenditures.  A modest spending plan that realistically could be 
implemented would allow for long-term planning and avoid the 
disruptive "on-again-off-again" cycle of spending that has 
characterized GOI budget implementation in the last two years. 
Given the pent-up demand and upcoming national elections, it seems 
that the GOI would prefer to push the spending envelope than follow 
the staid, practical approach of under promising but over 
delivering.  They are riding the roller coaster of oil prices.  End 
Summary. 
 
PROPOSED 2010 BUDGET: EXPENDITURE BASICS 
 
¶3. (SBU) The Council of Ministers (CoM) sent a proposed budget to 
the CoR in mid-October with total expenditures of USD 71.3 billion, 
revenues of USD 52.8 billion, and a resulting deficit of USD 18.5 
billion.  Expenditures are slated to increase 22 percent from 2009's 
budgeted levels, and revenues are expected to increase around 31 
percent, largely based on an assumed oil price of USD 62.50/barrel 
and exports averaging 2.1 million barrels per day (mbpd). 
 
¶4. (SBU) The proposed 2010 budget would increase the share of 
investment expenditures to 28 percent of total expenditures, up from 
22 percent in 2009's budget, to total USD 19.7 billion.  The GOI, 
encouraged by the International Monetary Fund, wanted to channel 
more resources to investment, which helps generate employment 
through projects and engenders long-term economic growth.  About 
one-third of the increase in proposed capital expenditures is for 
electricity investment. 
 
¶5. (SBU) Operational expenditures would rise 12 percent, with 
employee compensation declining as a share of the overall budget 
from 30.5 percent in 2009 to 27.6 percent.  Last year, the 
government sought to cap employment, concerned that it would become 
a refuge for all unemployed.  That policy seems to have been 
reversed this year with the proposed creation of 148,075 new 
positions that will be funded by the budget (45,291 in Ministry of 
Interior; 47,549 in Ministry of Defense).  The draft budget law 
would authorize the Minister of Finance to create positions and 
amend the work force to rehire politically dismissed employees, 
integrate former militia members, and receive transfers from 
self-funded companies.  Wages and salaries increased only eight 
Qself-funded companies.  Wages and salaries increased only eight 
percent, however, as 20 percent salary reductions are proposed for 
the highest executives  (President of the CoR, President of the 
Republic, Prime Minister and their deputies) with 10 percent 
reductions for other senior officials (CoR members, Ministers, Under 
Secretaries and Directors General and equivalent staff). 
 
PROPOSED 2010 BUDGET: REVENUE BASICS 
 
¶6. (SBU) The story of the proposed 2010 budget revenue stream boils 
down to oil.  True, oil has always accounted for the lion's share of 
revenues.  The GOI, however, had previously sought to pump up 
non-oil revenues -- but not this year. While the government still 
stresses the need to increase non-oil revenues, such estimates for 
the 2010 budget are marked down 22 percent from 2009's budget to a 
more realistic USD 4.9 billion.  Oil is expected to generate USD 
47.9 billion or 91 percent of total revenue. 
 
THE DEFICIT AND ITS FINANCING 
 
¶7. (SBU) The MoF does not provide a precise indication of how the 
programmed deficit of USD 18.5 billion is to be financed other than 
to say it will use accumulated balances (which depends on 2009's 
budget execution and oil prices) and borrowing.  However, the 
proposed budget authorizes the MoF to borrow USD 4.5 billion from 
the IMF and USD 2 billion from the World Bank and to use Iraq's 
Special Drawing Rights (USD 1.8 billion) from the IMF to help cover 
the deficit.  This is a particularly important provision since it 
would signal to the IMF that the Parliament approves the IMF program 
conditions and the associated borrowing. 
 
BAGHDAD 00003028  002 OF 003 
 
 
 
POLICY PRIORITIES 
 
¶8. (SBU) According the proposed 2010 budget, GOI policy goals are 
to:  (1) achieve security; (2) meet basic needs of citizens; (3) 
increase investment in human capital; (4) rebuild and construct new 
infrastructure; and (5) reduce unemployment.  These policy 
priorities are confirmed by the numbers.  Security budgets (MoI and 
MoD) account for 15.4 percent of total expenditures, still the 
highest single priority area, but down one percentage point from 
2009's budgeted number.  The oil sector accounts for 3.8 percent, 
unchanged from last year, and electricity five percent, up from two 
percent in 2009.  The reason for the increase is to bring on the 
2010 budget the payments already made this year of USD 2.4 billion 
to GE and Siemens that were not on 2009's budget.  Expenditures on 
health, education, water, municipalities, environment, and youth, 
together up 38 percent, reflect investment in human capital and 
infrastructure that could contribute to job creation. 
 
MEDIUM TERM STRATEGY 
 
¶9. (SBU) An interesting development in building this year's budget 
was the first concerted attempt to create a medium-term budget 
strategy that linked expenditures to policy measures.  With 
assistance from international donors, the MoF delivered a draft 
framework to the CoM in early June.  The CoM then created a 
committee to review details with the Minister of Finance, and 
produced a report to guide 2010 budget preparation. 
 
¶10. (SBU) The CoM committee made several recommendations that have 
been included in the proposed budget. These include: 
   (a) any increases in revenue be channeled to investment rather 
than operating expenditures; 
   (b) no automatic annual salary increases for officials at the DG 
level or higher rank; 
   (c) higher priority to health, education and culture during the 
next three years; 
   (d) Trade Ministry to produce a new plan to target the Public 
Distribution System to the truly needy (the budget provides for a 
reduction of expenditures for PDS by 16 percent to USD 3 billion); 
   (e) fees to be collected by the Ministries of Electricity, 
Communications, Municipalities and Public Works for services 
rendered; 
   (f) eight companies to be dropped from the budget that are under 
the Ministry of Industry and Minerals and urge the Ministry to 
create economic partnerships or privatize the companies; and 
   (f) self-funding companies to fund any deficit spending with 
loans from Iraqi banks based on a business plan rather than the 
budget. 
 
¶11. (SBU) Some of these issues emerged in the budget debate after 
ministries had discussed them in the context of preparing the Iraqi 
Poverty Reduction Strategy (PRS) sponsored by the World Bank.  The 
PRS covers such issues as health, education, environment, and the 
social safety net, including the public distribution system.  Many 
of these recommendations are in the proposed budget, but some would 
require supplementary legislation for implementation.  Still, the 
effort to link policy to budget expenditures is an important step in 
budget preparation and planning. 
 
PROCESS: COR AT WORK 
 
¶12. (SBU) The Chair of the Finance Committee of the CoR would like 
to have the budget passed no later than December 15, by which time 
she suspects CoR members will return to their districts to campaign 
for the scheduled January national elections.  She engineered the 
first budget bill reading on November 2 and has begun the serious 
work of analysis, building upon the experience in passing the 2009 
budget law.  The Chair also has established a mutually respectful 
Qworking relationship with the MoF, which has provided more 
information to the Committee at this stage of the budget process 
than in previous years.  Organizing a CoR vote is not an easy task, 
but last year, many members deferred to the expertise of the Finance 
Committee on technical issues and did not engage in an extended 
political debate. 
 
OBSERVATION: GOOD INTENTIONS AND THE PRICE OF A DEAL 
 
¶13. (SBU) The MoF drafters of the 2010 proposed budget started out 
with good intentions.  The initial medium-term budget strategy 
delivered to the CoM in early June was conservative, showing no 
increase in spending with revenue based on a USD 58/barrel price and 
exports of 2.15 million barrels a day, on average.  The CoM expert 
group recommended increasing the price assumption to USD 60.  When 
the MoF sent instructions to Ministries, they indicated that 
proposed spending for 2010 should not exceed that of 2009, but did 
not impose "hard" budget ceilings. 
 
¶14. (SBU) Budget numbers starting spinning up in August when 
Ministries were negotiating with the MoF.  Rather than respect 
nominal spending ceilings of the 2009 budget, Ministries stuck to 
 
BAGHDAD 00003028  003 OF 003 
 
 
their usual practice of opening their request with a negotiating bid 
rather than a well-considered realistic request. In the event, the 
MoF received requests totaling USD 149 billion, more than twice the 
budget finally agreed within the CoM.  Rising oil prices, the 
prospect of major oil contracts, and the elections also played a 
role in escalating expenditures.  Oil revenues have increased 
steadily from May, when drafting began, to October, when the 
proposed budget was finalized.  The Prime Minister began to pledge 
to pass benefits of higher oil prices to the people to meet basic 
needs. 
 
¶15. (SBU) When the CoM agreed on a budget on October 13, total 
expenditures had risen to USD 67.3 billion.  This was the level 
agreed to with the IMF earlier in the month.  Some Ministries, 
however, were not pleased with their budgets.  The Minister of 
Planning proposed reallocations based upon execution rates of the 
2009 budget.  When the Cabinet met on October 16 to consider the 
revised allocations, some members balked.  Wanting to get the budget 
to the CoR for action this year and reach a final agreement with the 
IMF on a Stand By Arrangement, the Finance Minister offered the 
Ministries a deal.  He offered to increase the budget by 
incorporating USD 4 billion of a proposed USD 5.7 billion 2009 
supplemental budget and covering part of the increased expenditures 
by increasing the oil price assumption to average USD 62.50 and 
exports to average 2.1 mbpd.  He reportedly told the CoM that if 
they didn't agree to the new USD 71.3 billion in expenditures, he 
would stick with the USD 67.3 billion budget, as agreed with the 
IMF.  The Cabinet acquiesced in this "take it or get less" stand. 
(Note: Accordingly, the MoF stated that as far it was concerned, the 
proposed supplemental budget is no longer on the table.)  Thus, the 
budget deal was cut, but at an expenditure level nearly 22 percent 
higher from where the MoF started in May. 
 
IMF ANGLE 
 
¶16. (SBU) The IMF believed that the GOI faced a financing gap due to 
lower oil prices and therefore pressed the MoF to demonstrate budget 
discipline.  As oil prices rose towards the end of the year, the 
financing gap would narrow if the higher prices held.  The final USD 
4 billion bump-up of the budget came as a surprise to the Fund. 
While the Minister was in Washington for the Business and Investment 
Conference, he had intense discussions with the Fund, which wanted 
some budget reductions.  The Minister's response was that the budget 
had already been sent to the CoR, and moreover, reopening the budget 
with the Cabinet while oil prices were rising would lead to pressure 
for increasing expenditures, not reducing them.  The Fund dropped 
its demand for budget reductions.  The Fund and the MoF recognized 
that the oil prices could fall again, and tentatively have agreed 
that if the price of oil that Iraq receives is above an average of 
USD 73 dollars a barrel (to be calculated according to an IMF 
methodology) the SBA would become precautionary in 2010 rather than 
disbursing. 
 
MORE OBSERVATIONS 
 
¶17. (SBU) The MoF deserves credit for beginning a more serious 
medium-term budget strategy exercise and working hard to keep the 
timing of the budget process on track.  The Minister is keen for a 
budget to be enacted this year, a view shared by the Chair of the 
Finance Committee.  Failure to pass a budget before early December 
when parliamentarians start drifting away to campaign for the 
January national elections would mean no budget until a new 
government is formed, possibly as late as mid-year.  By then, 
Qgovernment is formed, possibly as late as mid-year.  By then, 
preparations for the 2011 budget will be underway.  The GOI would 
still be able to allocate 1/12 of 2009's budget for expenditures 
each month per ministry, but would lose any benefits of the proposed 
increase spending.  Moreover, failure to agree to a budget by early 
December would mean no agreement with the IMF, which needs to know 
budget details and the financing gap to be filled. 
 
¶18. (SBU) While this year's budget process showed admirable 
improvements, it was also a missed opportunity.  A more moderate 
budget that would be fully implemented would allow ministries to 
plan and execute strategically important programs and allow MoF to 
build up a reserve fund to buffer expenditures from oil price 
swings.  Instead, the GOI is riding the roller coaster of oil 
prices: high expenditures in good times and low expenditures in bad. 
 The Minister of Finance demonstrated his ability to rein in budget 
allocations in early 2009 when oil prices were well-below budgeted 
amounts.  However, the "on-again-off-again" cycle of expenditures 
undermines the intention of policy makers when set national 
priorities through the budget. 
 
HILL