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RE: [casi-analysis] CPA 2004 Budget

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Thank you Colin for this analysis!

One more question:  As an economist, what do you envision would be possible
consequences of both: (1) the newly-created Trade Bank of Iraq (Order 20)
and its control by a US bank (JP Morgan will lead a group that includes 13
banks representing 13 countries to run the bank for three years); and (2)
the new bank law of Iraq? (Order 40: Under the recently promulgated Iraq
Banking Law, private banks may elect to sell a portion of their equity to
domestic or foreign investors. The new banking law permits six foreign banks
over the next five years the right to enter the Iraqi market. Two or more
banks may be "fast tracked," based on their agreement to accelerate the
availability of local credit.  An unlimited number of banks may purchase up
to 50% of an Iraqi bank.  Foreign banks may enter Iraq as branches,
subsidiaries, representative offices, or through partnerships with Iraqi



|-----Original Message-----
|From: [mailto:casi-analysis-
|] On Behalf Of Colin Rowat
|Sent: Tuesday, January 06, 2004 12:04 PM
|Subject: RE: [casi-analysis] CPA 2004 Budget
|[ This message has been sent to you via the CASI-analysis mailing list ]
|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
|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
|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
|> 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
|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
|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
|government planning at the highest level.  There was a UN investigation
|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)
|an anonymous Iraqi oil industry 'executive'.  This person claimed that:
|"Some of the money went to the presidential account to build palaces and
|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
|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 |
|Birmingham, B15 2TT, UK | | ( 44/0) 121 414 3754 |
|(+44/0) 121 414 7377 (fax) |
|personal | (+44/0) 7768 056 984 (mobile) | (+44/0) 7092 378 517 (fax) |
|(707) 221 3672 (US fax) |
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