RE: [casi-analysis] CPA 2004 Budget

["Colin Rowat" <c.rowat@DELETETHISespero.org.uk>]

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Dear Mike,

Thank you for your excellent e-mail.  I do not know the answers to many of
the questions, but will try to provide answers where I can.  Could I
recommend that the CASI committee address a version of your e-mail to Anne
Campbell, the Cambridge MP, with a request that she forward it to Sir Jeremy
Greenstock, the senior British occupation official in Baghdad?  To the
extent that the CPA is a partly British organisation, it is accountable to
the British electorate.  I think that the introduction should note both this
and the CPA's claims about the transparency of their budgeting process.

> 2) Since the budget's fiscal framework requires that deficits
> not be funded either through borrowing or through printing
> more money, what is the legal basis for using Oil for Food
> funds to finance the 2004 budget deficit (of 886.3 bn NID -
> p. 5, Budget Financing). I am assuming that this is separate
> from transferring OfF funds to the Development Fund for Iraq,
> as provided for by UNSCR 1483 - is this the case?

SCR 1483 gives the Occupying Powers the right to use Iraqi revenue.
Further, the OFF funds have been turned over, as part of the UN - OP
handover process that occurred in November.  Thus, OFF funds are now in the
'Development Fund for Iraq'.

> 3) How realistic is it to expect that Iraq's budget will be
> able to balance as early as 2005? (and, indeed, to run a
> small surplus, according to the CPA)

I would have to see the detailed bases of their predictions, but suspect
that there is little detail.  Very optimistic assumptions about oil
production, for example, have been made, probably in part for political
reasons.

> Is there any published evidence to substantiate the
> following:
>
> (i) that 10% of the face value of OfF contracts was required
> to be paid directly to the regime for funding palaces and
> military expenditure, and enabled by artificially inflating prices

Not that I have seen.  There are reports that are appearing now that draw on
seized Iraqi records which do provide more insight into the Iraqi
government's procedures during the OFF/sanctions period.  I am not familiar
with all the details of these, or their accuracy.  Thus, I may have missed
something.

My general sense, though, is that the above may be exaggerated.  For
example, the 21 December Washington Post ("More Than $1 Billion in Iraqi
Assets Found in Foreign Banks", Susan Schmidt) reported that: "Treasury,
Internal Revenue Service and Immigration and Customs Enforcement (ICE)
officials have spent nine months poring over financial records recovered
from the vault of the Central Bank of Iraq, including records they say show
how Saddam Hussein's government diverted at least $1.8 billion from the
United Nations' humanitarian oil-for-food program ..."

Of course, direct payment was not possible, with the sanctions' controls.
Indirect mechanisms of various sorts were developed, using foreign bank
accounts, front companies, etc.

> (ii) That substantial quantities of OfF goods were on-sold or
> smuggled by state-owned enterprises (this seems, on the face
> of it, more plausible)

I've seen nothing credible published on either of these.  Certainly
smuggling into Iraq was a widespread practice.  I'm sure, therefore, that
the SOEs engaged in this as well.  On re-exporting OFF goods, there was a
report in the late 1990s about some asthma inhalers (if I recall correctly)
that ended up in Beirut.  The US/UK charges were that this represented Iraqi
government planning at the highest level.  There was a UN investigation into
this, but I don't recall seeing its findings.

A practice that was widespread, and which was noted by FAO/WFP missions in
the early 1990s [1993?], was that of families re-selling elements of their
OFF rations.  Thus, a family that was particularly concerned about the
medical needs of one of its members might sell some of the food rations.

> (iii) that the Iraqi budget "mainly funded the military and
> the presidency) (p. 9), an assertion made in spite of the
> fact that "a key challenge in preparing the 2004 Budget was
> the lack of a clear base on where funds were spent by the
> previous regime....little detail exists on how or where
> military or Presidency appropriations were spent." (p.14)

Yes, I think that your "in spite of" observation is correct.

I've seen little on this.  On 20 May - after the fall of Saddam - Reuters
("Iraq Made $2 Billion a Year in Sanctions-Busting", Peg Mackey) interviewed
an anonymous Iraqi oil industry 'executive'.  This person claimed that:
"Some of the money went to the presidential account to build palaces and buy
luxury cars for Saddam's cronies. But the remainder was used for medicine,
spare parts and equipment."

Now: (i) this refers to non-OFF funds; and (ii) I don't know what the
relative proportions of "some" and "the remainder" are.  The executive did
go on to say that "Thanks to this trade we were getting most of the
contracts that were not approved by the U.N. sanctions committee, vital
spare parts for the refineries, chemicals and spare parts".

> 5) The budget shows an increase in a number of user-pay
> charges, including "fees from emergency services", "Social
> Security Rental Income", and "Pharmaceutical Scrip charges",
> this last being one of the largest at an anticipated 30 bn
> NID. Revenues from all of these are expected to increase in
> 2005 and 2006. Does anyone know if this is because charges
> are being introduced/increased, or because of anticipated
> better collection of charges? Certainly some are new,
> including the Prescription charges, at 1500 NID. In addition,
> does anyone have any information about whether such charges
> are likely to introduce any significant hardship, and what
> the exemption structure is likely to be - the CPA was
> supposed to have published details of the ministerial review
> of these charges by 31st December, but I couldn't find that
> document anywhere.

I would expect that the budget plans for both of mechanisms that you
propose: increase payment at point of use, as well as increased efficiency
in collection.  (As a guess, it seems that this should be an easy place to
collect the money: no payment leads to no delivery.)

>From an efficiency point of view, pay per service is felt to be superior to
payment through, say, income taxes, and then free at point of use: the
resources cost something to provide, but if users can draw on them 'for
free', then they will not face the same incentives to ration the use of
expensive resources.  From an equity point of view, this can be very
regressive: the poor and otherwise socially disadvantaged may be more likely
to fall ill or suffer from chronic illness.

I hope that this helps somewhat, and look forward to hearing from other
members as well,

Colin Rowat

work | Room 406, Department of Economics | The University of Birmingham |
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