US embassy cable - 05BAGHDAD4893

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 004893 
 
SIPDIS 
 
E.O. 12958: DECL: 12/04/2015 
TAGS: ECON, EFIN, ETRD, PINR, PGOV, KBCT, MOPS 
SUBJECT: AMBASSADOR DISCUSSES BUDGET, BANK RESTRUCTURING, 
ARAB LEAGUE BOYCOTT WITH MINISTER OF FINANCE 
 
REF: BAGHDAD 3132 (NOTAL) 
 
Classified By: Ambassador Zalmay Khalilzad for reasons 1.4 (b) and (d). 
 
1. (C) SUMMARY: Ambassador urged Minister of Finance Allawi 
on December 1 to ensure the passage of the 2006 budget in 
order to fulfill the GOI's commitment to the IMF. (NOTE: The 
Transitional National Assembly (TNA) passed the budget on 
December 4. END NOTE.)  The Ambassador also pressed the 
Minister to halt illegal enforcement by Iraq of the Arab 
League secondary and tertiary boycott of Israel, in order to 
allow registration of the Pepsi trademark.  The Minister said 
that he expected the budget to pass and that the GOI will 
meet IMF conditions to allow an IMF Standby Arrangement (SBA) 
signing later this month.  Reform of the State Banks, 
however, will have to wait until the next government, he 
said.  Allawi was receptive to our Development Fund for Iraq 
(DFI) proposals, including using them for post-kinetic 
operations reconstruction.  Allawi will not return to the 
next government and offered views on his possible successors 
and predictions for the December 15 election.  END SUMMARY. 
 
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Meeting IMF Requirements 
------------------------ 
 
2. (C) The Ambassador, accompanied by the Joint Contracting 
Command for Iraq and Afghanistan (JCC-I/A) Commanding 
General, the Economic Deputy-Minister and Treasury Attache, 
met December 1 with Minister of Finance Ali Allawi to urge 
him to keep the GOI's 2006 budget on track during TNA debate 
in order to enable Iraq's IMF precautionary Standby 
Arrangement (SBA) to be signed o/a December 22.  Allawi said 
that passage of the budget, fuel price increases, the Central 
Bank audit, and submission of fuel imports liberalization 
legislation to the TNA will meet the IMF's requirements.  He 
told us that: 
 
-- He had withstood TNA demands to reprogram 50 percent of 
the national budget to the provincial governates; instead he 
proposed a 2006 budget that will give the provinces $1.6 
billion vice the original $1 billion. 
 
-- He will recommend that the next government approve a 
supplemental budget in 2006 once the Constitution is firmed 
up. 
 
-- The budget should be approved by the TNA on Sunday, 
December 4. (NOTE: It was.  END NOTE.) 
 
-- Subsidy reform is on track with a range of fuel price 
increases scheduled to go into effect December 18. 
 
-- The IMF wants the GOI to submit to the TNA and (ideally) 
pass a fuel imports liberalization law.  The bill has been 
submitted but passage is unlikely. 
 
-- The IMF-required audit of the Central Bank is well 
underway and should be completed soon. 
 
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Banking Reform: "Nothing has been decided" 
------------------------------------------- 
 
3. (C) Allawi stressed that "nothing happened" on banking 
reform on December 1.  He said he had hoped for, but did not 
receive, Council of Ministers authority to let him and the 
next MinFinance begin the process of reforming Iraq's banking 
system.  Allawi said he has a lot of ideas but that there are 
"no GOI policies on bank restructuring," that "nothing has 
been decided," and that this will be an issue for the next 
government to decide.  In light of this, Allawi noted that 
both he and the Central Bank President were "perplexed" to 
receive a call from the IMF expressing concern over GOI bank 
restructuring programs. 
 
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PepsiCo and Arab League Boycott 
------------------------------- 
 
4. (C) The Ambassador urged Allawi to join others in the ITG 
to find a way to halt illegal enforcement of the Arab League 
secondary and tertiary boycott, in order to let PepsiCo 
provide Iraq with badly needed foreign investment (reftel). 
The Ambassador said that PM Ja'afari supports the idea but, 
so as not to go out on a limb, needs support from Cabinet 
members.  The Ambassador emphasized that DPM Chalabi and the 
Minister of Industry are ready to support the effort.  Allawi 
agreed to work to allow PepsiCo to register its trademark if 
other Ministers are also on board. 
 
--------------------------------- 
DFI Extension and Post-Kinetic 
Operations Reconstruction Funding 
--------------------------------- 
 
5. (C) Allawi agreed to a proposal put forward by JCC-I/A and 
Treasury Attache asking for an extension of the delegation of 
authority under which JCC-I/A and the Chief of Mission 
administer and pay for CPA contracts written against the DFI 
(the so-called DFI liabilities).  Allawi also was agreeable 
to setting $150 million from the remaining DFI transition 
account balance (currently used to cover DFI liabilities) to 
pay for post-kinetic operations reconstruction needs in 
cities like Tal Afar and Ramadi. 
 
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Future Plans/Next Minister 
-------------------------- 
 
6. (C) Allawi stressed that he does not want to be in the 
next government in any capacity.  His plan is to return to 
his private life as soon as the next government is in place. 
He said that he would not stay on even for one additional 
year. He revealed that leaders are giving some thought to 
merging the Ministries of Planning and Finance into a 
super-Ministry, which could be a political plum for an 
ambitious politician. (NOTE: Minister of Planning Barham 
Salih has also suggested that these two Ministries be merged. 
 END NOTE.)  He also said that there are a number of capable 
politicians, businessmen, and technocrats who could replace 
him as the next Minister of Finance.  Possible contenders, he 
said, include Mohammed Ali Al-Hakim, Muwafaq Al-Ruba'i 
(National Security Advisor and former business partner of Ali 
Allawi), Faiq Abdul Rasool (Deputy Minister of Planning), and 
Azez Hassan Jaber (former Deputy Minister of Finance, now an 
advisor to Deputy President Abdul Mahdi). 
 
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Joining the Election Pool 
------------------------- 
 
7. (SBU) On the December 15 election, Allawi's predictions 
are: the Shia Alliance: 115-120 seats ("they'll do better 
than predicted"); Sunni moderates: 45-50; Kurdish Alliance: 
45 seats at first but will increase to 50 when out-of-country 
votes are counted; and Chalabi: between 5-10 seats.  He 
called former PM Ayad Allawi the "biggest question mark." 
Minister Allawi expects that 40-50 seats will be determined 
by undecided Shia voters and that in the end many of these 
will go to the Shia Alliance. According to Allawi, the Shia 
Alliance will be charged with forming the first government. 
He would not predict if the Shia Alliance could form a 
government within 30 days.  Nonetheless, he said he expects 
there will be many returning faces in whatever government is 
formed next year. 
 
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Comment 
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9. (C) Allawi will be missed.  He has been a driving force in 
getting the GOI to meet its IMF Emergency Post-Conflict 
Assistance (EPCA) requirements in order to get an SBA. 
Without his efforts, the GOI budget would have remained a 
wishlist for spending oil revenues rather than a serious 
document based on sound budgeting and accounting procedures. 
He had hoped that he could start a policy process whereby 
State Bank reform and restructuring would be considered, but 
he ran out of time.  This will be an issue for the next 
government to tackle, he told us. Regarding Allawi's idea on 
merging the Planning and Finance Ministers, we believe that 
this would be a good idea in the mid-term since the concept 
of a Minister of Planning is a holdover from previous 
governments. In the current government, however, we were glad 
to have had both a Ministry of Finance and a Ministry of 
Planning because the two men occupying those positions were 
important promoters of economic reform in Iraq and greater 
regional and international economic cooperation.  END COMMENT. 
KHALILZAD