US embassy cable - 05BAGHDAD4407

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 004407 
 
SIPDIS 
 
STATE FOR D, E, NEA/I, AND EB 
STATE PASS TO USAID 
 
E.O. 12958: DECL: 10/26/2015 
TAGS: ECON, EFIN, PGOV, PREL, MCAP, IZ, IMF 
SUBJECT: IMF DISCUSSIONS WITH IRAQ 
 
Classified By: CHARGE D,AFFAIRES DAVID M. SATTERFIELD FOR REASONS 1.4 ( 
B) AND (D). 
 
1. (C)  SUMMARY: GOI and IMF discussions in Amman on October 
20-22 for a Standby Agreement (SBA) were successful. 
Although there are few quantitative targets, significant 
areas for reform have been set out.  They include an emphasis 
on budgetary discipline; modest but required increases in 
fuel prices; and increased transparency in Central Bank 
operations.  On October 26, the Council of Ministers (CoM) 
approved a letter accepting the SBA conditions, including 
fuel price increases.  END SUMMARY. 
 
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General Budget Discussions 
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2. (C)  On October 25, U.S. and UK Embassy staffs received a 
joint briefing on results of GOI Ministry of Finance (MOF) 
discussions held with the IMF in Amman from October 20-22. 
The Iraqi briefer was MOF Chief of Staff Musab al-Khateeb, a 
participant in the SBA discussions and confidant of Minister 
of Finance Allawi.  Al-Khateeb confirmed that discussions had 
produced agreement on a Letter of Intent (LOI) for a Standby 
Arrangement (SBA).  Although the agreement will be for one 
year, two renewals of one year each are possible.  Four 
reviews are anticipated for 2006, with a fifth in spring 2007. 
 
3. (C) Main points of conditionality include: 1) concurrence 
by the IMF with an approved state budget; 2) fuel price 
increases; and 3) significant progress toward a transparent 
audit of the Central Bank of Iraq.  Quantitative targets for 
the overall deficit, wages, and pensions were suggested in 
the discussions, but al-Khateeb observed that they are for 
the most part bracketed.  Importantly for revenue 
projections, the parties accepted a baseline oil production 
number of 1.7 million barrels per day (mbpd) priced at an 
average $46.6 per barrel.  This yields a working number of 
$29.9 billion for petroleum-based revenue in 2006, or $27.5 
billion after allowing for 5 percent reparations to Kuwait. 
 
4. (C) While there appear to be few quantitative targets in 
the LOI, al-Khateeb stated that the IMF wishes to the see the 
2006 deficit limited to 5.3 trillion ID ($3.6 billion), 
compared to the deficit of $5.0 billion that appeared in 
MOF's earlier draft budget.  The IMF also suggested a limit 
to wages and pensions of 9.3 trillion ID ($6.2 billion), not 
including the security ministries.  Regarding the former, 
Allawi reportedly did not agree and said that it may increase 
and be covered by a 2005 carry-over.  The IMF was troubled by 
a GOI plan to introduce pensions for civil servants at 80 
percent of salary, an initiative that Minister Allawi claimed 
had been discarded.  Responding to an IMF suggestion that 
targeted assistance to the poor be provided, about $333 
million will be set aside for this purpose.  The IMF also 
proposed introduction of a sales tax and value-added tax, 
although no rates were mentioned.  The IMF expressed concerns 
on the security budget.  The planned budgets for MoD and MoI 
total $5.3 billion, which the IMF is watching carefully. 
 
5. (C) The IMF wants to review the budget before it is 
submitted to the CoM.  (COMMENT: According to our Iraqi 
source, the SBA will not hinge on budget approval by the TNA, 
although review and passage by that body would be desirable. 
If true, this provides a tremendous opportunity to the GOI, 
since it needs to fulfill terms of the SBA in order to 
proceed with Paris Club debt forgiveness and rescheduling. 
END COMMENT.) 
 
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Fuel Subsidies 
-------------- 
 
6. (C) The fuel subsidy issue received particular attention, 
with Minister Allawi enjoined to secure a commitment from the 
current government to increase prices of all fuels, effective 
December 16 (i.e., the day after scheduled national 
elections).  The price increases should include the following 
changes (strictly protect): 
 
-a) Regular gasoline: 20 ID per liter to 75 ID 
-b) Premium gasoline: 50 ID per liter to 150 ID 
-c) Kerosene: 5 ID per liter to 25 ID (by March 2006). 
-d) Diesel: 10 ID per liter to 20 ID (private consumers) 
 
(NOTE: These prices fall far short of current black market 
levels.  However, they basically track those prices already 
approved by the CoM to be introduced December 31.  END NOTE.) 
 
7. (C) Approaching the fuel subsidy problem from an angle 
that eventually could permit sale of imported fuels and 
petroleum products at market prices, the IMF has requested 
that the recent CoM action liberalizing fuel imports be 
submitted to the TNA, with the Minister of Oil also given 
authority to change prices as part of the law.  The IMF has 
stressed the importance of the government's commitment to 
increase fuel prices.  That message has been received, since 
as al-Khateeb noted, "if it does not go into effect, there 
will be no SBA." 
 
--------------------------------------------- - 
Introducing Transparency into the Central Bank 
--------------------------------------------- - 
 
8.  (C) Considerable attention was paid to measures to 
increase transparency and effectiveness of the Central Bank 
of Iraq (CBI).  Accordingly, conditions for the SBA include 
significant progress in the international audit of the CBI. 
The SBA also will quantify net national reserves as well as 
set targets for the CBI with specific performance dates. 
 
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Process 
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9. (C) Next steps should include approval of the LOI by the 
IMF board and then by the Council of Ministers.  Other 
preliminary conditions include: 
 
--Approval of the 2006 budget by the Council of Ministers; 
--TNA approval of legislation liberalizing the oil product 
import regime; and 
--Implementation of price changes for refined petroleum 
products sold in the domestic market. 
 
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Comment 
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9. (C) COMMENT: Although there are elements that still need 
clarification, it seems that the GOI has come off well in 
this discussion with the IMF.  The door is open for the SBA, 
the essential benchmark for Iraq to make further progress 
with its international creditors.  However, the ball is in 
Allawi's court to produce a budget that meets the IMF's 
concerns over limiting the deficit and implementing fuel 
price increases.  In this context, al-Khateeb's observation 
that the number of people in the government who see the 
benefit of the SBA is increasing is reassuring.  END COMMENT. 
Satterfield