US embassy cable - 05BAGHDAD2588

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002588 
 
SIPDIS 
 
E.O. 12958: DECL: 06/16/2015 
TAGS: EFIN, ECON, EAIR, PREL, PGOV, PTER, IZ, ECON Development, IMF 
SUBJECT: IRAQ: MINISTER OF FINANCE ON CONFERENCES, ARTICLE 
IV, BUDGET, ASSET RECOVERY, SECURITY AT BIAP, TF TRAINING 
 
Classified By: Charge d'Affaires James F. Jeffrey for reasons 
1.4 (b) and (d) 
 
1. (U) THIS IS AN ACTION REQUEST.  PLEASE SEE PARAGRAPH 16. 
 
2. (C) SUMMARY: Finance Minister Allawi stressed to Charge 
and DCM on June 16 his readiness to engage fully in ensuring 
the success of the upcoming Brussels and AMMAN conferences 
and the July 10-11 Joint Economic Commission (JEC), and 
confirmed Prime Minister Ja'afari has agreed to a face saving 
solution to allow Planning Minister Saleh to maintain the 
donor coordination lead within the Iraqi Transitional 
Government (ITG).  Article IV discussions with the IMF went 
very well, according to Allawi, and the IMF will not insist 
on additional revenue producing measures in 2005 other than 
oil subsidy cuts.  While there is consensus within the ITG on 
the need for reform, the timing and extent of subsidy cuts is 
still being debated.  Given Iraq's budgetary pressures, late 
payments of bills (e.g., fuel purchases from Turkey) have 
become a de facto form of cash management.  Skeptical of 
Syrian Finance Minister Hussein's ability to resolve a 
"political issue," Allawi indicated he would nonetheless 
telephone Hussein on asset recovery.  Allawi acknowledges the 
security implications, but is opposed to a renewal of the 
Global security contract for the Baghdad International 
Airport.  MoF is prepared to accept a Terrorist 
Finance/Anti-Money Laundering assessment team sometime in the 
late summer/early fall -- action request in para 16.  END 
SUMMARY. 
 
3. (C) During a wide-ranging discussion at the Embassy on 
June 16 with the Charge and DCM (also attended by Economic 
Minister Counselor and Treasury Attache), Minister of Finance 
Allawi outlined an ambitious agenda facing him over the next 
several months.  Commenting first on Iraq's political 
situation, Allawi said he expected the current impasse over 
the composition of the drafting committee n the constitution 
to be resolved within the next few days, noting that many 
problems in Iraq end up being resolved at the last minute. 
He stressed the constitutional process must go forward and 
that only insurgents want to see it delayed. 
 
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CONFERENCES 
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4. (C) Observing that Allawi will be heavily involved in a 
number of important upcoming events (Brussels Conference, 
JEC, Amman Donors Conference), the Charge stressed the 
positive role the conferences can play to further the image 
of the new Iraq and its accomplishments.  In particular, the 
Charge highlighted Washington's strong desire to see full 
participation by relevant Iraqi Ministers in the JEC 
discussions.  Allawi replied he had already discussed this in 
a meeting with Prime Minister Ja'afari on June 15. 
Responding to a question from the Charge, Allawi remarked he 
had also already raised with the Foreign Ministry the issue 
of delegation of legal authority to sign agreements.  Allawi 
said he should have authorization from both the Presidency 
Council and the Prime Minister in time for the JEC.  Allawi 
acknowledged the Charge and DCM's comments as to the venue 
and likely timing of the JEC, indicating that a mid-July JEC 
would not present a problem. 
 
5. (C) Allawi confirmed Ja'afari agreed on June 15 to a 
face-saving compromise that would allow Minister of Planning 
Barham Saleh to retain the lead on donor coordination issues. 
 Both Saleh and Allawi get along well personally and they 
will work closely together to present a coherent and unified 
vision on donor assistance at Brussels, he said.  Allawi 
added, however, it would likely not be possible to present 
all details of a new donor coordination mechanism at the 
Brussels conference.  Allawi took credit for the PM's 
decision, saying it had been his proposal:  he told the PM 
that for Iraq to get the most effective use out of donor 
assistance an "elite" group of government officials directly 
under the Prime Minister should be established, but given 
that there is not time to establish and make functional such 
a group in the tenure of the ITG, it would be better to 
"leave things as they are," with MOPDC in charge. 
 
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ARTICLE IV DISCUSSIONS; BUDGETARY PRESSURES 
------------------------------------------- 
 
6. (C) Allawi characterized his recent Article IV discussions 
with the IMF in Abu Dhabi as very positive.  He expects the 
IMF to file a good report on Iraq that will note Iraq is 
generally on the right track towards an SBA.  While 
cautioning that new expenditures should be linked to revenue 
flows, the IMF has accepted Iraq's need for a supplemental 
budget.  With the exception of oil subsidy cuts, according to 
Allawi, the IMF has agreed other possible revenue generating 
mechanisms can be postponed until 2006. 
 
7. (C) Allawi observed that Iraq does not yet face a fiscal 
crisis, but must remain vigilant in its management of the 
budget. Iraq will face a financing gap, and has only two 
significant sources of revenue:  oil and donor assistance. 
The Central Bank of Iraq will also have to be careful to 
maintain sufficient reserves to defend Iraq's currency. 
Adding that Iraq is treading a very fine line, Allawi said he 
hoped to use the need for fiscal restraint as a scare tactic 
to convince others in the government to agree to cuts in oil 
subsidies.  He is advocating the price of gasoline be raised 
to 250 Iraqi Dinars per liter.  Allawi cited by way of 
comparison an equivalent price of 400 ID for gasoline in 
Saudi Arabia, but said the Ministry of Oil is nevertheless 
pushing for a less significant subsidy cut in Iraq. 
 
8. (C) Referring to the decision of the Iraqi Interim 
Government to return to government payrolls thousands of 
former state employees as political, Allawi said it would of 
course have a negative impact on Iraq's budget situation. 
Pension reform also remains an important budgetary question 
mark.  While acceleration of assistance disbursements is of 
course good, according to Allawi, it is not likely to have a 
significant budgetary effect. 
 
9. (C) In response to a question from the DCM, Allawi said 
the ITG would be prepared prior to the Brussels Conference to 
make a policy decision that fuel subsidies should be cut, but 
would not be ready to issue any kind of administrative 
implementation instructions in the near future.  Allawi has 
explained at Cabinet meetings Iraq's only sources of income 
are oil and donor assistance and that the payment of 35% of 
the budget as handouts is unsustainable.  While Allawi 
believes most ministers agree with him, his remarks have so 
far elicited only silence. 
 
10. (C) Agreeing with the Charge's comments about the 
importance of efficient and effective budget expenditure 
mechanisms to avoid delays in critical payments, Allawi said 
there remains great confusion within the Iraqi bureaucracy as 
to what constitutes legitimate expenditures within a proper 
budgetary framework. Many think a decree or promise by a 
minister constitutes an approved expenditure.  Cash flow is 
also a real problem, and payments delays sometimes reflect a 
fundamental lack of sufficient funds available.  Allawi cited 
the example of the State Oil Marketing Organization (SOMO) 
that has run up debts because higher fuel prices have 
increased the cost of its monthly purchases abroad from its 
budgeted $200 million to $250 million.  Bill payment delays 
have become a de facto form of "crude" cash management for 
Iraq. 
 
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ASSET RECOVERY 
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11. (C) Allawi accepted the DCM's recommendation he telephone 
Syrian Finance Minister Hussein later in the day to discuss 
recovery of Iraqi assets, but commented the issue is 
primarily a political one over which Hussein has little 
control.  He acknowledged the DCM's comments that Syria 
should not be given the opportunity to try to claim Iraq 
appears unwilling to engage on the topic.  Allawi also 
observed that a number of countries still hold significant 
amounts of frozen Iraqi assets, including the United Kingdom 
($250 million), Bahrain ($150 million), and Jordan ($450 
million).  With regard to Lebanon, Allawi recently discussed 
by phone claims against Iraqi assets in Lebanese commercial 
banks with the chairman of a new Lebanese committee tasked 
with looking into the issue, adding that the chairman Ghassan 
Bulbol happens to be his daughter's father-in-law. 
 
12. (C) Allawi agreed with Emincoun's comment that the 
Brussels Conference represented an opportunity to leverage 
asset recovery issues.  Allawi also indicated Iraq intends to 
ask the UN for a five-year moratorium on reparations 
payments, a measure that could give Iraq an additional $1 
billion in budget flexibility. 
 
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GLOBAL'S CONTRACT FOR SECURITY AT BIAP 
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13. (C) Treasury Attache noted ongoing negotiations between 
the Ministry of Transportation and the private security firm 
Global (note: Global provides security at the Baghdad 
International Airport, has not been paid since March, and has 
been operating without a contract since the beginning of the 
year).  Both the Charge and DCM also stressed the critical 
importance of reaching a settlement between the two parties 
so that adequate security coverage at the airport can 
continue.  Otherwise, BIAP civilian operations would likely 
have to be shut down. 
 
14. (C) Allawi, who complained of having recently been 
treated with disrespect by Global personnel while going 
through BIAP, replied that foreign security firms do not have 
a good reputation with the Iraqi people. While Allawi accepts 
the argument that security must be maintained, he made clear 
that he does not like Global trying to hold the security of 
Iraq hostage to its commercial dispute with the Ministry of 
Transportation.  Allawi dismissed any closing down of the 
civilian side of BIAP as mostly inconveniencing government 
officials departing for foreign trips and seemed willing to 
accept a temporary cessation in civilian operations if 
needed.   Allawi will pass along the USG's concerns, but will 
recommend to the Prime Minister that a new contract for 
Global not be considered. 
 
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TF TRAINING; UN DUES 
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15. (C) Allawi accepted Emincouns offer to have a U.S. team 
visit Baghdad sometime in the late summer/early fall to 
conduct an assessment of what kind of training would be most 
applicable to assist MoF and CBI on terrorist finance and 
anti-money laundering.  While he was not aware of issues 
related to the payment of Iraqi dues to the United Nations, 
Allawi said he would look into it and consult with the 
Ministry of Finance. 
 
16. (U) ACTION REQUEST: Please propose dates for an 
assessment team visit on on terrorist finance and anti-money 
laundering training. 
 
17. (U) REO Hillah, REO Basra, REO Kirkuk, and REO Mosul 
minimize considered. 
Jeffrey