US embassy cable - 05BAGHDAD3140

UNCLAS BAGHDAD 003140 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, PREL, PGOV, IZ, ECON Development 
SUBJECT: IRAQ'S DEVELOPMENT BUDGET--CHALABI'S CHART 
 
 
 1.(SBU) SUMMARY:  DPM Chalabi provided the Ambassador a 
copy of a "capital investment disbursement vs. allocated 
budget" bar chart written in Arabic on 27 July 2005.  This 
chart was used to portray the point that ITG ministries 
have currently disbursed 20% of their total capital 
investments. Chalabi indicated there is potential for 
significant unallocated funds to offset and reduce the 
deficit. END SUMMARY 
 
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ANALYSIS 
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2.    (SBU)  The chart provided by DPM Chalabi to portray a 
potential surplus of capital investment funds was partially 
misleading.  The chart actually portrays the percentage of 
Ministry of Finance (MOF) disbursed funds compared to 
ministry and program capital investment lines in the 2005 
budget.  The graph does not illustrate true value or scale 
of funds budgeted for each ministry or program.  The graph 
also does not include the Ministry of Defense (MOD) or the 
Ministry of Interior (MOI), thus is not a true reflection 
of the capital investment budget.  The issue that is most 
prominently evident from this chart is the low disbursement 
rate of MOF funds to the ministries and programs.  The 
question that requires additional research is why there is 
this low disbursement rate and variations between 
ministries (e.g. Ministry of Education 100 per cent vs. 
Ministry of Housing 5 per cent). (NOTE: there is a slight, 
but not significant variation between Embassy and the ITG 
budget numbers.  IRMO will more fully develop this 
analysis.  END NOTE) 
 
3.    (SBU)  Embassy Economic Section initial analysis using 
IRMO MOF data indicate that 27 per cent of the capital 
investment funds have been disbursed at this time. 
However, many ministries complain that they are requesting 
their capital investment and operational funds, but MOF is 
failing to release those requested funds.  IRMO MOF 
consultants state that the MOF has implemented new budget 
processing procedures to improve transparency. Many of the 
ministries have yet to adapt to the more rigorous methods 
for requesting fund release.   There are indications/rumors 
that the government is slowing disbursements to ensure a 
funding surplus, thus allowing possible re-prioritization 
to ministries such as MOD and MOI that are over-spent. 
(Note: A follow on meeting between IRMO MOF consultant, 
Acting ECON counselor with the MOF Chief of Staff denied 
that they were slowing release and that it was the failure 
of the ministries to make proper request for fund 
distribution. END NOTE) 
 
4.    (SBU) The slow formation of the government, historical 
last quarter spending (27% on average), and poor financial 
execution capacity in many ministries will likely result in 
some ministries being under-spent by the end of the fiscal 
year. In addition, the PM has added a contract review board 
to improve transparency on any project over $3 million and 
this has also slowed disbursement rates.   Assuming no 
deliberate slow-down of fund disbursals is occurring, it 
can be extrapolated that 66 per cent of the capital 
investment funds would be disbursed by year-end. 
 
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COMMENTS 
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5.     (SBU) COMMENT: Chalabi's assertions are partially 
valid 
in the sense that the budgetary shortfall could be reduced 
at the expense of the capital investments required to 
sustain further economic development. This would be a poor 
approach to reducing the deficit, as it would slow 
reconstruction, economic growth, and employment generation 
going into the election.  The failure to fully implement 
their capital investment programs will leave a significant 
shortfall in reconstruction spending and fall below the 
ideal absorptive capacity of the Iraqi economy. END COMMENT 
Khalilzad