US embassy cable - 05BAGHDAD4204

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 004204 
 
SIPDIS 
 
STATE FOR D, E, NEA/I AND EB 
STATE PASS TO USAID 
 
E.O. 12958: DECL: 10/12/2015 
TAGS: EFIN, ETRD, PREL, PGOV, ECON, IZ, Security, IMF 
SUBJECT: IRAQ - AMBASSADOR KHALILZAD DISCUSSES THE IMF, 
CONSTITUTION, AND SECURITY ISSUES WITH DPM CHALABI 
 
Classified By: AMBASSADOR KHALILZAD FOR 
REASONS 1.4 (b) and (d) 
 
1. (C) SUMMARY:  DPM Ahmed Chalabi invited Ambassador 
Khalilzad to break the Ramadan fast with him October 7. 
During wide-ranging discussions, Chalabi expressed 
confidence that Iraq will succeed in negotiating a 
Standby Arrangement (SBA) with the International 
Monetary Fund (IMF) before year's end - significantly 
helped by new government action to somewhat liberalize 
the petroleum sector and reduce food subsidies to 
the non-poor. On the Constitution, the Ambassador 
described energetic Embassy efforts to secure support 
or at least non-opposition to the document from key 
groups.  In the area of security, Chalabi was concerned 
about poor control exercised over certain Ministry of 
Interior (MOI) units by the government, leading to 
alienation of part of the Sunni population.  Regarding 
the security budget, Chalabi pegged maximum proposed 
expenditures for combined Ministry of Defense (MOD) 
and MOI at about $12 B but then mistakenly claimed 
that the 2005 budget has a $5 B surplus.  The DPM 
agreed with the Ambassador's assessment that more 
needed to be done in the area of sustainment by the 
GOI, admitting that a ministry-by-ministry transition 
plan is probably essential. Touching upon post battle 
cities' needs, Chalabi acknowledged that more 
flexibility was probably required to permit the 
shifting of allocated funds to meet pressing needs. 
Seeking cost savings in the area of agricultural 
imports, Chalabi asked for the USG's support to 
negotiate with Archer Daniels Midland and Cargill to 
permit wheat imports Free On Board (FOB), allowing 
cheaper deliveries through Umm Qasr in the South. 
Finally, in the critical area of corruption, Chalabi 
stressed his commitment to fully investigate MOD 
procurement scandals and asked for Embassy assistance 
in obtaining Jordanian bank records of a key suspect. 
END SUMMARY. 
 
2.  (C)  Dr. Chalabi invited Ambassador Khalilzad to 
break the Ramadan fast at the Chalabi family farm on 
Friday, October 7, 2005.  The attendees were Econ 
MinCouns, IRMO Director, Treasury Attache7 and members 
of Chalabi's family (including nephew Hussein Al-Uzri, 
President of the Trade Bank of Iraq). 
 
3. (C) IMF Standby Arrangement (SBA):  Dr. Chalabi was 
confident that Iraq will succeed in negotiating its 
SBA with the IMF before the end of the year.  He said 
steps are being made to liberalize Iraq's market for 
the private sector to refine and market oil products. 
A new law to open the market to private refiners is 
being drafted. BP, Royal Dutch Shell and Chinese oil 
refining interests have already expressed interest in 
starting ventures in Iraq. On October 6, Iraq's 
Council of Ministers accepted recommendations by the 
Minister of Finance (MOF) Allawi to reduce fuel 
subsidies by raising the price of regular and premium 
gasoline, respectively, from 20 to 50 and from 50 to 
150 Iraqi Dinars per liter. The DPM was confident that 
Iraq would meet IMF expectations for making 'good 
faith progress' in its negotiations with non-Paris Club 
creditors such as Saudi Arabia and Kuwait.  In the case 
of Saudi Arabia, however, he noted that very little of 
the $46 B in debt claimed by the Saudis is actually 
documented, but rather the money was given to Iraq in the 
form of transfers that might as well be viewed as grants. 
4   C)  Dr. Chalab also felt hat Ia woud be 
ableto met IF expectations for it to move away from 
its universal entitlements (e.g., the fuel and food 
subsidies) to a system for 'means-tested' welfare.  He 
said that the 2006 budget would include an allocation of 
$500 M to be distributed "only to Iraq's poor people." 
He said defining who is 'poor' should be easy.  It would 
exclude anyone who has a government job or receives a 
pension or stipend and anyone who owns property.  He doubts, 
however, whether the census needed to quantify poverty in 
Iraq could be done before October 2006. 
 
5.  (C) Constitution:  Ambassador Khalilzad asked Dr. 
Chalabi's support for a number of small changes that would 
help to improve support for the Constitution.  He noted 
that he had already gained from the Kurds acceptance for 
language to reinforce that Iraq is and would remain one 
country.  He suggested that the Constitution should defer 
the creation of new federal units until six months after 
the new Iraqi National Assembly is seated, under a fair 
and open set of executive procedures for establishing such 
units.  He also suggested that citizenship should be 
automatic for people whose parents are both Iraqi and 
otherwise should be regulated by law.  On 
de-Baathification, the DPM and the Ambassador agreed that 
a distinction should be drawn between the former Ba'athists 
who were very senior in the party or had criminal records 
and junior members who had no criminal involvement.  Dr. 
Chalabi requested that the Embassy provide an example of 
language for the Constitution that could draw that 
distinction.  Both men agreed that it was important for 
the Constitution to be viewed as a national compact, and 
the Ambassador agreed to provide Dr. Chalabi with a 
write-up covering all the final changes to the Constitution. 
 
6.  (C) Internal Security:  Dr. Chalabi expressed 
concerns over whether certain elements of the security 
forces were being properly controlled and coordinated. 
He focused on the 'Zoological Brigades' - such as the 
elite 'Wolf Brigade' of the Police Commando Battalions. 
He pointed to an incident in Mahmodiyah as an 
example where the brigade appeared to have been out of 
control. He also pointed to problems with certain police 
chiefs and said more care needed to be taken in their 
selection.  He urged MNF-I to do more to protect 
electric power lines, as well as oil infrastructure. 
 
7.  (C) Sustainment:  Chalabi said that some ministries 
are probably already planning to sustain the many 
reconstruction and development projects that are being 
completed and transferred to Iraq, while others are not. 
The Ministry of Electricity (MOE), for example, is probably 
doing well to include sustainment needs in its budget 
estimates while the Ministry of Public Works and Municipal 
Affairs is probably not.  He said that to ensure that all 
sustainment needs are met there will need to be a 
ministry-by-ministry transition plan. 
 
8.  (C) Security and the Budget:  Dr. Chalabi said that 
various figures had been discussed for the 2006 budgets of 
the MOD and MOI, ranging on the high side to about $7 B 
and $5 B, respectively.  He added that the budgets of 
about $4 B each for the food and fuel subsidies programs 
would be cut.  He said that the 2005 budget "has a $5 B 
surplus."  (COMMENT: DPM Chalabi misspoke about there being 
a "$5 B surplus."  MOF Allawi told the Treasury Attache7 
and the IRMO Director on October 9 that Iraq has no such 
surplus.  He explained that DPM Chalabi was probably 
referring to the MOF's available balance in the Development 
Fund for Iraq (DFI) account at the Federal Reserve Bank of 
New York.  That balance totals about $6 B.  After allowing 
for keeping a $1 B minimum balance, this points to an 
available balance of $5 B.  The $5 B, however, is already 
obligated to pay for items in the 2005 budget. Taking all 
into account, the Finance Minister now expects that there 
will be a $1-2 B deficit for 2005 -- down from the $5 B 
estimated deficit that appeared in the 2005 budget plan -- 
but nevertheless a deficit.  Total budget expenditures will 
be about $22 B (about 10 percent below planned expenditures 
of about $24 B).  Total 2005 budget revenues will be 
$20-21 B ($1-2 B above planned revenues of about $19 B). 
According to the Central Bank of Iraq's records of actual 
payments into the DFI covering January-September 2005, 
budget oil revenues totaled $15.8 B and averaged about 
$1.8 B per month.  If this monthly average is sustained 
through the fourth quarter, 2005 budget oil revenues will 
total $21.2 B, leaving a deficit of $1 B to be financed 
mainly by recoveries from the now defunct Oil for Food 
program.  END COMMENT.) 
 
9.  (C) Quality of Life Projects:  Dr. Chalabi urged the 
Embassy to support re-opening and cleaning-up the Basrah 
canals as an example of the kind of project which, for 
relatively little expenditure, would substantially improve 
the quality of life of Iraqi citizens. 
 
10.  (C) Tal Afar and Other Post Battle Cities:  Dr. 
Chalabi said that an amendment to the Financial Management 
Law would be sought to give the MOF greater flexibility to 
reapportion funds to meet the needs of post-stabilization 
action compensation and reconstruction.   He said the 
present law's 5 percent limit on reallocations is too 
restrictive.  He also said that many of the terrorists 
that had occupied Tal Afar appear to have fled south 
toward Baghdad and are encamped on the shores of Lake 
Thar Thar, not far from Balad and Taji. 
 
11. (C) Imports of U.S. Grains:  Chalabi asked for the 
Embassy's help to work with Archer Daniels Midland and 
Cargill to permit Iraq to negotiate wheat imports on an 
FOB basis (i.e., exclusive of shipping costs).  Previously, 
the contracts were written on a cost, insurance, plus 
freight (CIF) basis (i.e., inclusive of shipping costs), 
with the result that the grain was shipped to ports in 
Syria and Jordan and then trucked overland, leading to 
major delays at the borders.  In addition, he offered that 
the shift in shipping pattern would hurt the insurgency. 
(COMMENT: Chalabi appeared to be alluding to eliminating 
the possibility of cargo seizures and/or shakedowns of 
shippers.  However, reality is more complex.  Chalabi 
and many of his close associates are from Basrah province, 
also the location of Umm Qasr, making this something of a 
probable pitch for his home base.  Moreover, Chalabi has 
a longstanding problem with the Jordanians, in part 
linked to allegations of financial impropriety and a 
conviction by a Jordanian Court in the matter of a 
$200 M banking scandal. END COMMENT.) By ordering the 
grain FOB and then providing its own transportation, 
Iraq could import the grains into Umm Qasr in the 
South, thereby avoiding delays and perhaps paying less 
for shipping.   Trade Bank of Iraq President Al-Uzri 
mentioned that the food import program would be improved 
if the Ministry of Transportation (MOT) dropped its 
requirement for food exporters to post performance bonds 
and if inspection requirements were dropped as condition 
for letters of credit payments in favor of a 
pre-certification requirement.  Such MOT requirements 
complicate contracting in ways that add to Iraq's costs 
and delay shipments, as well as delaying payments to the 
exporters. 
 
12. (C) Anti-Corruption:  The DPM described at length 
what he believes to be a conspiracy under former Minister 
of Defense Sha'alan to misuse more than $1 billion.  He 
accused several of the Minister's closest aides of being 
co-conspirators. He noted that the Central Criminal 
Court of Iraq has issued some 23 arrest warrants aimed 
at the conspirators at the request of Iraq's Commission on 
Public Integrity.  He asked for U.S. assistance to obtain 
the account records from the Housing Bank of Amman of one 
of the central figures in the alleged conspiracy, one 
Naaer Ahmed Ali Jumali, owner of Al Saybb Brokerage Company. 
(COMMENT: Embassy IRS Attache is looking into this matter. 
END COMMENT.) Chalabi also alleged that evidence pointed 
toward price manipulation in the Iraqi oil exports market, 
implicating both well-placed Iraqi officials and at least 
one Middle Eastern private concern, Crescent Oil, a UAE 
headquartered firm.  Chalabi will chair a committee 
looking into the specific problem of corruption in oil 
contracts. 
 
13. (C) COMMENT:  Chalabi was particularly satisfied at 
being able to point to the Council of Ministers' decision 
in favor of raising gasoline prices and to the other ways 
Iraq would be able to meet the IMF's expectations for an 
SBA.  He was amenable to the Ambassador's suggestions for 
improving the Constitution and appeared confident that it 
would be accepted by the upcoming referendum.  He did not 
hesitate to ask for the Embassy's help to shape the 
security ministries and their activities as he would like 
them.   In the anti-corruption area, he appears to have 
found a prominent platform for pressing grievances 
against his political rivals, which at the same time 
would conform with Embassy urgings that Iraq do more to 
ensure the integrity of its leaders and governance. 
END COMMENT. 
Khalilzad