US embassy cable - 05AMMAN2428

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 002428 
 
SIPDIS 
 
E.O. 12958: DECL: 02/08/2015 
TAGS: EFIN, EINV, EAID, PGOV, PREL, IZ 
SUBJECT: IMF IRAQ CHIEF SEES NEED FOR REMEDIAL ACTION TO 
ACHIEVE 2006 IRAQ STAND-BY AUTHORITY GOALS 
 
REF: BAGHDAD 1120 
 
Classified By: CHARGE CHRISTOPHER HENZEL,REASONS: 1.4 (B &D) 
 
Summary 
-------- 
 
1.  (C) Coordinator for Iraq Reconstruction Ambassador Robin 
Raphel met with IMF Iraq Resident Representative Ibrahim 
el-Tigani in Amman on March 17.  In a frank discussion Tigani 
provided his assessment of the government of Iraq's 
performance to date in meeting the policy and information 
provision commitments made in the Emergency Post-Conflict 
Assistance (EPCA) agreement it negotiated with the IMF in 
September 2004.  While indicating that presentation of 
Stand-by Authority to Iraq is still achievable by the end of 
2005, Tigani warned that this is unlikely to happen unless 
immediate actions are taken to begin reversal of what he 
depicted as Iraq's comprehensive failure to date to deliver 
on its EPCA assurances.  End Summary. 
 
Slippage on EPCA 
------------------ 
 
2.  (C) Tigani explained that he had just returned to Jordan 
from IMF meetings in Washington where he discussed the Iraqi 
government's progress in meeting its various EPCA 
commitments.  While acknowledging that both the World Bank 
and the IMF are under increasing pressure to expedite 
assistance to Iraq, Tigani stressed that the IMF can do 
little until at least some of the Iraqi government's present 
slippage in meeting its agreed EPCA commitments is reversed. 
In this context he listed what he called "missed milestones" 
and alleged Iraqi government failure to meet many basic 
programmatic commitments.  While not insisting that every 
milestone and policy measure be realized, Tigani warned that 
Iraq cannot expect to qualify for Stand-by Authority (SBA) by 
2006 without demonstrative progress in many of these areas. 
 
Fiscal Data Overdue... 
----------------------- 
 
3.  (C) Tigani divided Iraq's EPCA commitments into three 
categories: "fiscal data," "benchmarks," and "key policy 
measures," and then addressed the current status of each. 
Tigani claimed that none of the required Iraqi fiscal data, 
originally due by December 31, 2004, has been provided.  He 
said that the IMF is specifically waiting for data on the 
following: 
 
1)    Development Fund for Iraq (DFI) accounts; 
2)    Bank balances of government Ministries; 
3)    Capital spending in the oil sector; 
4)    Accounting Copies of Letters of Credit issued under the 
UN Oil for Food program; 
5)    Iraqi donor spending since the end of the war in 2003. 
 
4.  (C) Tigani stressed as particularly problematic the 
continuing lack of disclosure of Oil-for-Food Letters of 
Credit.  According to Tigani, all Iraqi government sources 
approached claim that "some other Ministry" or entity (e.g., 
the Central Bank) has these documents; none are producing 
them.  Ambassador Raphel opined that the Oil-for-Food 
supervisory bank, Bank National Paribas (BNP), and/or the 
World Bank, might be the best resource for these records. 
Tigani agreed that "someone" should check this out. 
 
...Structural Benchmarks Missed or Not Quantifiable 
--------------------------------------------- ----- 
 
5.  (C) Tigani gave a similar assessment of progress to date 
on Iraqi compliance with several structural benchmarks 
identified in the EPCA: 
 
A) Benchmark 1: Development of a summary monetary survey (due 
March 2005). 
Tigani comment:  Not done yet. 
 
B) Benchmark 2: Establishment of an automatic payroll system 
for all government employees (due June 2005). 
Tigani comment: No apparent progress. 
 
C) Benchmark 3: Issuance of regulations regarding Bank 
licensing, utilizing standard prudential ratios (due December 
2004). 
Tigani comment: No apparent progress. 
 
D) Benchmark 4: Enactment of a Payment Systems Law (due 
December 2004). 
Tigani comment:  Draft legislation currently being completed 
in the Ministry of Finance. 
 
E) Benchmark 5: Adoption of a plan to overhaul the tax and 
customs administration (due June 2005). 
Tigani comment:  The Iraqi government has established a tax 
unit to prepare the plan. 
 
Policy Measure Issues 
---------------------- 
 
6.  (C) Tigani also provided a read-out of his views on Iraqi 
progress in adopting several key policy measures specified in 
the EPCA: 
 
A) Policy Measure 1: Increase the domestic price of refined 
oil (due December 2004). 
Tigani comment: The Iraqi government is developing a 
discussion paper, but there appears to be no other forward 
movement. 
 
B) Policy Measure 2: An external audit of the Central Bank 
(due June 2005). 
Tigani comment: The Iraqis want the audit to be performed by 
Iraq's Supreme Audit Board; however, this organization has 
yet to establish international credibility and an audit by it 
is unlikely to be acceptable to IMF's Board. 
 
C) Policy Measure 3: Adoption and implementation of 
regulations for a public Financial Management System (FMS) 
(due December 2004). 
Tigani comment.  An FMS law has been passed, but  the 
proposed automated system designed by Bearing Point is not 
well understood by senior Ministry of Finance officials, and 
may be a "balancing" system rather than a true FMS.  The 
Ministry of Finance needs to ensure that it adopts a 
comprehensive FMS in keeping with international Government 
Financial Statistics (GFS) standards.  (Embassy Baghdad 
Comment: Our understanding is that the the new system 
will/will be able to disaggregate budget components and will 
be GFS compliant by January 2006, as agreed with the Deputy 
Finance Minister and now recommended by the IMF. While it may 
not be a "state of the art" system, the finished product will 
be able to provide the IMF with the information they require 
given the MoF's limited capacity and steep learning curve. 
End Comment). 
 
Bottom Line:  Significant Progress Needed 
-------------------------------------------- 
 
7.  (C) Tigani emphasized that, despite the government of 
Iraq's slippage, there is still time to retrieve the 
situation and put Iraq back on track for SBA by the end of 
2005.  However, for this to occur, he underlined that clear 
forward movement on a significant number of these issues 
needs to begin soon.  He related that he is attempting to 
arrange an "informal" person-to-person meeting with Deputy 
Finance Minister Azez before the end of March to 
comprehensively and frankly discuss the state of play and 
possible short to mid-term remedial steps that might be 
acceptable.  (Embassy Baghdad Comment: Deputy Finance 
Minister Azez sent the IMF a letter on March 10 requesting 
further technical assistance or coordination of technical 
assistance in 8 areas, with a particular focus on 3-4 areas 
to prepare Iraq for the 2006 budget process. See septel. End 
Comment) 
 
8.  (C) According to Tigani,s thinking, this would be 
followed by a formal Ministerial-level discussion of 
outstanding issues with senior IMF officials in Washington on 
the side of the annual Spring meeting in April.  If a 
satisfactory understanding is reached at this point, and 
appropriate progress demonstrated by the time of the IMF 
Executive Board's Article Four discussions in July, Tigani 
said that a recommendation to the IMF Executive Board to 
provide SBA status to Iraq could be submitted as early as 
November.   While presenting this schedule as still viable, 
Tigani reiterated that its achievement presumes rapid 
implementation by the Iraqi government of an effective plan 
of action to provide the IMF with credible basic fiscal data 
and meet (or credibly begin to meet) its agreed benchmarks. 
(Embassy Baghdad Comment: as reported in reftel, Deputy 
Finance Minister Azez still anticipates finalizing a SBA by 
the end of 2005. Early 2006 is too late as it would threaten 
to reopen up the debt deal with the Paris Club. End Comment.) 
 
 
9.  (U) This cable was cleared by Ambassador Raphel. 
 
10.  (U) Baghdad minimize considered. 
HENZEL