US embassy cable - 05BAGHDAD4084

UNCLAS SECTION 01 OF 04 BAGHDAD 004084 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR NEA/I, EB/EX WAYNE, D STAFF 
USAID FOR NATSIOS 
 
E.O. 12958: N/A 
TAGS: ECON, EAGR, EAID, EFIN, EINV, EPET, KBCT, IZ,  ENRG,  ETRD, Reconstruction 
SUBJECT:  JCRED - PROGRESS REPORT 
 
REF:  (A) BUCHAREST 1886 (B) BAGHDAD 3988 (C) BAGHDAD 
 
2972  (D) BAGHDAD 3672 
 
This cable is sensitive but unclassified.  For government 
use only.  Not for internet distribution. 
 
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Summary 
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1. (SBU) Summary.  Significant progress has been made 
with Iraq in many economic policy areas since the July 10- 
11 Joint Commission on Reconstruction and Economic 
Development (JCRED) in Amman, Jordan.  The Iraqis have 
moved toward the approval of their 2006 budget and 
beginning negotiations on an IMF Stand-By Arrangement. 
They are, however, behind on WTO accession, 
privatization, and moving to suspend implementation of 
the Arab League Boycott.  The Iraqis have taken modest 
steps to strengthen their private sector, often in 
response to broad efforts by USG entities seeking to move 
the economy away from its statist orientation.  End 
summary. 
 
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MACROECONOMIC AND STRUCTURAL REFORMS 
------------------------------------ 
 
2.  (SBU) 2006 Budget:  The Minister of Finance submitted 
his preliminary estimates for the 2006 Budget to the IMF 
as a follow-up to Iraq's Article IV consultations.  The 
Council of Ministers has endorsed this 2006 budget, which 
will tackle politically difficult fuel and food subsidies 
by reducing budget allocations for these subsidies by 25 
percent annually over 4 years.  The TNA is expected to 
approve this budget in October.  At the same time, the 
Government of Iraq (GOI) is working with the World Bank, 
USAID and donors to introduce social benefit and safety 
net measures, such as means-testing, so that the 
genuinely poor people will not be disadvantaged by 
reduced fuel and food subsidies.  The Iraqis also are 
looking closely at ways they can increase oil exports and 
reduce refined fuel imports in order to increase revenues 
available to general budget use. 
 
3.  (SBU) IMF Stand-By Arrangement:  During the World 
Bank/IMF Meetings in Washington on September 23 and 24, 
Iraq Finance Minister Allawi had productive discussions 
with IMF officials regarding Iraq's effort to secure a 
Stand-By Arrangement (SBA) with the IMF.  The IMF 
announced on September 23 that it is working with Iraqi 
authorities to move toward a SBA as a follow-on to their 
Emergency Post-Conflict Agreement (EPCA).  The IMF has 
approved starting negotiations with the Iraqis with the 
aim of completing the SBA by the end of the calendar 
year.  The current Iraqi Government is expected to 
endorse a reform policy framework that will obligate the 
next government to implement in order to retain the 
benefit of the Paris Club debt reduction agreement. 
 
4.  (SBU) Debt Relief:  Completion of an IMF Stand-By 
Arrangement will keep Iraq on track toward meeting its 
overall Paris Club debt reduction agreement.  Of Paris 
Club creditors, only the U.S. and Canada have signed 
bilateral agreements.  Since the July JCRED, the 
Government of Romania signaled its willingness to re- 
negotiate Iraq's debt in conformity with Paris Club 
principles, and on August 18, Romania's Ministry of 
Finance signed such a debt re-negotiation agreement with 
Iraq regarding $2.5 billion debt (ref A). 
 
5. (SBU) Banking Sector Reform:  The Embassy (USAID and 
IRMO) are two months ahead of schedule in preparing the 
balance sheets of Iraqi state-owned banks as well as 
their executive summary assessment.  Reform options for 
the banking sector will be presented to the Ministry of 
Finance by mid-November.  USAID and Treasury are 
gathering financial information requested by the Minister 
of Finance to support the development of a state-bank 
reform program.  We have begun to provide direction for 
the work of the Minister of Finance via a new Joint Task 
Force on Budget and Finance, led by the Treasury Attache 
Taecker and the Minister of Finance Allawi.  The first 
meeting on September 13 focused on expenditures in the 
2006 budget.  Treasury's interagency meeting with Iraqi 
officials on September 22 on the margins of the World 
Bank/IMF Meeting also helped to set the agenda and 
activities for the next task force meeting in Baghdad. 
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DONOR ASSISTANCE AND COORDINATION 
--------------------------------- 
 
6.  (SBU) Currently, donor coordination is occurring on 
multiple fronts.  The monthly Baghdad Coordination Group 
meeting between the Minister of Planning and Development 
Cooperation and Baghdad-based donor officials provides an 
effective forum for discussion and strategic level 
coordination.  Second, sectoral working groups have been 
established for education and health, and soon will be 
established for electricity and rule of law.  These 
working groups will be led by the Ministries of 
Education, Health, Electricity, and the Chairman of the 
Supreme Court.  Third, the Iraq Strategic Review Board 
(ISRB) meets on a more regular basis to ensure that donor- 
funded projects are consistent with national priorities 
as articulated in the National Development Strategy 
(NDS).  National priorities include those projects that 
are labor intensive and in essential services (i.e., 
water, electricity, road, bridges).  The ISRB also seeks 
to ensure equitable regional distribution of donor 
funding. 
 
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ENERGY POLICY 
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7. (SBU) Draft Oil Law:  The GOI has been taking steps to 
reform its energy policy by drafting a law to liberalize 
the import and distribution of refined fuel products (ref 
B).  If adopted and implemented, the law would end the 
State Oil Marketing Company's monopoly on fuel imports by 
enabling foreign companies to import and sell certain 
refined fuel products.  It is also our understanding that 
the Ministry of Oil intends by this law to liberalize the 
price at which imported fuel can be sold in Iraq, but the 
draft language on this point is ambiguous.  The Minister 
of Justice is currently examining the draft law. 
 
8. (SBU) Infrastructure Security:  Multinational Security 
Transition Command-Iraq (MNSTC-I) has completed the 
training of the first four Strategic Infrastructure 
Battalions (SIBs).  Training is underway for the next 
group and is expected to be complete in December.  The 
primary duty of these units is protecting critical linear 
infrastructure such as oil pipelines and electricity 
lines.  The GOI agreed in September to assume the cost 
(just over $80 million) of maintaining these units. 
 
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PRIVATE SECTOR DEVELOPMENT 
-------------------------- 
 
9. (SBU) SOE Privatization Plan:  On August, 29, 2005, 
the Council of Ministers signed a Privatization Decree, 
which calls for the formation of a ministerial committee 
that will oversee the research, identification, and 
feasibility of privatizing state-owned enterprises 
(SOEs).  The committee, led by the Minister of Planning 
and Development, will include the Ministers of Finance, 
Industry & Minerals, the Treasurer of the Central Bank of 
Iraq, the President of the Board of Supreme Audit, and a 
representative from the Prime Minister's Office.  The 
committee will present its recommendations to the General 
Secretary of the Council of Ministers by the end of 
 
SIPDIS 
October 2005.  USAID facilitated the development of the 
committee and continues to provide technical support on 
privatization, including developing an SOE database and 
SOE profiles at the Ministry of Minerals and Industry, as 
well as advising the Iraqis on how to address social 
safety net issues impacting redundant employees. 
 
10. (SBU) Investment Promotion Agency:  The Iraqi 
Investment Promotion Agency (IIPA), the establishment of 
which was announced at the JCRED, seeks to help Iraqi and 
foreign investors open businesses in Iraq.  With the 
support of USAID, the IIPA is still in the process of 
becoming operational.  Three ministries (Planning, 
Industry & Minerals, and Trade) are all involved in the 
staffing process.  USAID has tentatively scheduled visits 
for the new staff of the IIPA to economic development 
agencies in Georgia and North Carolina in late October or 
early November. 
 
11.  Investor Roadmap and Competitiveness Study:  Also in 
the area of investment, USAID has put together an 
"Investor Roadmap" to be completed before the end of 
October.  This document details the step-by-step process 
for foreign companies on how to invest in Iraq (i.e. 
register, taxes, etc).  There is also a "Competitiveness 
Study" due out about the same time that highlights the 
industry sectors in Iraq that have a competitive 
advantage vis-a-vis competitors.  Once these are 
completed, they will be housed at the IIPA as resources 
available to potential investors. 
 
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TRADE AND ASSISTANCE 
-------------------- 
 
12.  (SBU) WTO Accession:  The Ministry of Trade 
submitted Iraq's Foreign Trade Memorandum (FTM) on behalf 
of the GOI at the end of August 2005.  USAID's Izdihar 
Project, which assisted with the development of the FTM, 
has developed a set of approximately 600 questions that 
it estimates Iraq will receive from the members of its 
WTO Working Party and is working with government 
officials to prepare them for WTO accession requirements. 
However, the GOI must take additional steps in upcoming 
months to maintain the momentum for its WTO accession. 
These steps include selecting a WTO Chairman for their 
Working Party, appointing a WTO ambassador, and 
assembling a delegation to attend the WTO Ministerial in 
Hong Kong in December 2005.  Despite Post's pressure, the 
Iraqis have made little progress on these tasks.  For 
example, the Minister of Trade has not appointed a new 
Director General to replace Ahmed al-Mukhtar, who 
previously headed Iraq's WTO efforts and was recently 
dismissed.  The Deputy Director General, Abdul Salam, is 
currently running the office, but lacks the power to push 
WTO issues with Iraqi Trade Minister Karim. 
 
13.  (SBU) Iraqi Trade Information Center:  USAID's 
Izdihar Project also has been working with the Government 
of Iraq to develop an Iraqi Trade Information Center that 
will be part of the Ministry of Trade and located at the 
Baghdad International Fair Grounds in Al-Mansour.  It is 
modeled after the U.S. Department of Commerce's Trade 
Information Center and will serve as a one-stop-shop for 
private firms seeking information about trade and 
investment opportunities.  The new center is scheduled to 
open by the end of November. 
 
14.  (SBU) Arab League Boycott:  Post has engaged the 
relevant officials in the GOI, including at the highest 
level, numerous times over the past five months to press 
for non-implementation of the Arab League Boycott (ALB) 
(ref C).  While enforcement of the Arab League Boycott is 
not/not mandatory for Arab League members, Law No. 34 of 
1956 implements the ALB in Iraq.  CPA Orders have 
suspended or removed ALB requirements in trademark and 
company registration processes.  The Minister of Trade 
has indicated that he sent written instructions to the 
Council of Ministers regarding non-enforcement of the 
ALB.  Nevertheless, ALB enforcement by the GOI appears to 
continue in other areas of the economy, e.g. refusing 
docking privileges for ships that have used Israeli 
ports.  Post will continue to push the GOI on non- 
enforcement of the ALB, but the next JCRED provides an 
additional venue to press the GOI on this issue. 
 
15. (SBU) Generalized System of Preferences (GSP) and 
Iraqi Dates:  Iraq must take advantage of the GSP 
exception for certain categories of dates granted by the 
Administration on June 30, 2005.  Iraq was a major 
producer and exporter of dates, which before the 1990's 
ranked a distant second to oil and related products in 
its share of Iraq's total exports (ref D).  Post is now 
taking the next steps by finding interested Iraqi date 
exporters. 
 
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IMPLEMENTING AGREEMENTS FROM JULY JCRED 
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16. (SBU) Post delivered a letter to Vice President Mahdi 
on September 19 encouraging him to forward the three 
JCRED bilateral agreements (Trade and Investment 
Framework Agreement, Investment Incentive Agreement, and 
Economic and Technical Cooperation) from the Presidency 
Council to the TNA, with the recommendation that the TNA 
ratify them.  Post is arranging a meeting with the TNA 
Speaker to stress the importance of these agreements. 
Satterfield