Iraqi-U.S. Cost-Sharing: Iraq Has a Cumulative Budget Surplus, Offering the Potential for Further Cost-Sharing
Published: 2010-09-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 2003, the United States has reported obligating $642 billion for U.S. military operations in Iraq and provided about $24 billion for training, equipment, and other services for Iraqi security forces. To assist Congress in overseeing efforts to encourage the Iraqi government to contribute more toward the cost of securing and stabilizing Iraq, this report provides information on (1) the amount and availability of Iraq's budget surplus or deficit, (2) the amount of Iraq's financial deposit balances, and (3) the extent to which Iraq has spent its financial resources on security costs. To conduct this audit, GAO analyzed Iraqi financial data, reviewed U.S. and Iraqi documents, and interviewed U.S. and Iraqi officials.
section_title: What GAO Found
paragraphs: GAO analysis of Iraqi government data showed that Iraq generated an estimated cumulative budget surplus of $52.1 billion through the end of 2009. This estimate is consistent with the method that Iraq uses to calculate its fiscal position. Adjusting for $40.3 billion in estimated outstanding advances as of September 2009 reduces the amount of available surplus funds to $11.8 billion. In April 2010, a senior Ministry of Finance official stated that advances should be deducted from the budget surplus because they are committed for future expenditures or have been paid out. According to this official and Board of Supreme Audit reports on Iraq's financial statements, advances include funds for letters of credit, advance payments on domestic contracts, and other advances. However, Iraq's Board of Supreme Audit has raised concerns that weaknesses in accounting for advances could result in the misappropriation of government funds and inaccurate reporting of expenditures. Furthermore, the composition of some of these advances is unclear; about 40 percent of the outstanding advances through 2008 are defined as "other temporary advances." Under the terms of a February 2010 International Monetary Fund (IMF) arrangement, Iraq agreed to prepare a report on its outstanding advances, which will identify those advances that are recoverable and could be used for future spending, and set a time schedule for their recovery. This Iraqi report is to be completed by September 30, 2010. Another means of assessing Iraq's fiscal position is to examine its financial deposit balances. Iraqi government data and an independent audit report show that, through the end of 2009, Iraq had accumulated between $15.3 billion and $32.2 billion in financial deposit balances held at the Central Bank of Iraq, the Development Fund for Iraq in New York, and state-owned banks in Iraq. This range reflects a discrepancy between the amount of government-sector deposits reported by the Central Bank of Iraq to the IMF and the amount that the Ministry of Finance asserts is available for government spending. In November 2009, the Ministry of Finance reclassified $16.9 billion in state-owned banks as belonging to state-owned enterprises and trusts, leaving $15.3 billion of $32.2 billion available to the Iraqi government for other spending. The IMF is seeking clarification on the amount of financial deposits that is available for government spending. Under the terms of Iraq's 2010 arrangement with the IMF, the Ministry of Finance is required to complete a review of all central government accounts and return any idle balances received from the budget to the central Iraqi Treasury by March 31, 2010. As of August 2010, according to the IMF, this review was still under way. Iraqi government data show that Iraq's security ministries--the Ministries of Defense and Interior--increased their spending from 2005 through 2009 and set aside about $5.5 billion for purchases through the U.S. Foreign Military Sales program. However, over this 5-year period, these ministries did not use between $2.5 billion and $5.2 billion of their budgeted funds that could have been used to address security needs. The administration is requesting $2 billion in additional U.S. funding in its fiscal year 2011 budget request to support the training and equipping of Iraq's military and police. GAO believes that Congress should consider Iraq's available financial resources when reviewing the administration's fiscal year 2011 budget request and any future funding requests for securing and stabilizing Iraq. Also, GAO recommends that the Departments of State and the Treasury work with the Iraqi government to further identify available resources.

section_title: Letter
paragraphs: Since 2003, the United States has reported obligating about $642 billion for  U.S. military operations in Iraq and provided about $24 billion for training,  equipment, supplies, facility construction, and other services for Iraqi  security forces. The fiscal year 2009 National Defense Authorization Act  instructed the U.S. government to take actions to ensure that Iraqi funds  are used to pay the costs of training, equipping, and sustaining Iraqi  security forces. Under current plans, the United States will withdraw all  U.S. forces from Iraq by the end of 2011. However, the U.S.-Iraq Strategic  Framework Agreement affirms the desires of the two countries to  establish a long-term relationship of cooperation in the economic,  diplomatic, cultural, and security fields, among others. Iraq’s large oil  reserves offer the government the potential to contribute to the country’s  current and future security and stabilization requirements. Oil revenues  account for over 50 percent of the country’s gross domestic product and  about 90 percent of the government’s revenues. Prior GAO reports have  shown that Iraq reported substantial budget surpluses from 2005 through  2008.
To assist Congress in overseeing U.S. efforts to better leverage U.S.  funding and encourage the Iraqi government to contribute more toward  the costs of securing and stabilizing Iraq, this report provides information  on (1) the amount and availability of Iraq’s budget surplus or deficit,   (2) the amount of Iraq’s financial deposit balances, and (3) the extent to  which Iraq has spent its financial resources on security costs. In addition,  this report identifies examples of other governments’ contributions to the  cost of U.S. security support in their countries, which could inform future  Iraqi-U.S. cost-sharing arrangements. Due to broad congressional interest  in issues related to Iraq, we completed this report under the Comptroller  General’s authority to conduct evaluations on his own initiative.
To conduct this audit, we analyzed relevant data, reviewed documents,  and interviewed Iraqi officials in Baghdad, Iraq, including the Ministers of  Finance, Defense, and Interior; the Governor of the Central Bank of Iraq;  the President of the Trade Bank of Iraq; and the Deputies General of  Accounting at the Rafidain and Rasheed banks, which are Iraq’s two  largest state-owned commercial banks. We analyzed data on Iraq’s  reported revenues and expenditures from the Minister of Finance for 2005  through 2009, including reports on Iraq’s financial statements prepared by  Iraq’s Board of Supreme Audit for 2005 through 2007. We also analyzed  similar data on Iraq’s advances through September 2009. We obtained  data on Iraq’s cash deposits from the Ministry of Finance, Central Bank of  Iraq, and Rafidain and Rasheed banks, and reviewed audit reports of the  International Advisory and Monitoring Board on Iraq’s deposits in the  Development Fund for Iraq. We did not independently verify the reliability  of information provided to us. We also interviewed U.S. and other officials  in Washington, D.C., and Baghdad, Iraq, including officials from the  Departments of Defense (DOD), State (State), and the Treasury  (Treasury); the World Bank; the International Monetary Fund (IMF); and  the Federal Reserve Bank of New York. We completed an initial draft of  this report in January 2010. On the basis of preliminary comments on the  draft that we received from DOD and Treasury, we traveled to Baghdad,  Iraq, in April 2010 to interview Iraqi officials and obtain additional  information on Iraq’s fiscal position. This report reflects the additional  data collection and analysis that we conducted subsequent to our initial  draft report. The level of cooperation and coordination between GAO and  State, Treasury, and DOD was unprecedented and afforded U.S.  government officials the ability to obtain Iraqi financial data that  previously had not been available to the U.S. government. Appendix I  contains a more detailed description of our scope and methodology.
We conducted this performance audit from October 2008 through  September 2010 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings based on our audit objectives.
subsections: section_title: Background
paragraphs: In August 2008, GAO reported on the challenges that the Iraqi government  faced in spending resources to finance key reconstruction and  stabilization efforts, including those to develop Iraq’s security forces. We  also reported that from January 2005 through April 2008, Iraq’s Ministries  of Defense and Interior reported spending $2.9 billion of the $12.3 billion  they were budgeted for investment expenditures in support of the Iraqi  security forces. Iraq and other countries use the DOD-administered FMS  program to purchase defense articles, services, and training from the U.S.  government. In fiscal year 2009, more than 100 foreign governments spent  $38.1 billion through the FMS program.
According to State and DOD officials, the United States and Iraq have not  yet defined their longer-term security relationship. However, the United  States and Iraq signed two bilateral agreements in November 2008 that set  the stage for Iraq to assume a greater role in providing for its own security  and for cooperation between the two countries. The U.S.-Iraq Security  Agreement requires the withdrawal of U.S. forces in Iraq by December  31, 2011, and governs their presence in the interim. Within the security  agreement, the Iraqi government requests the temporary assistance of U.S.  forces to support its efforts to maintain security and stability in Iraq.  According to DOD and State officials, the U.S. and Iraqi governments may  amend the security agreement by mutual agreement. Such amendments  could include an extension of the withdrawal timetable or an authorization  of a residual U.S. force to continue training the Iraqi security forces after  2011.
Historically, Congress and U.S. agencies have sought to encourage host  nation contributions for U.S. security support activities worldwide.   (See app. IV for more information on cost-sharing with other countries for  security support activities.) For example, Congress authorized the  Secretary of Defense, in consultation with the Secretary of State, to accept  contributions from host countries to share in the cost of DOD  construction, supplies, and services in the country. Moreover, it is DOD  policy to offset the administrative and operating expenses of security  support activities to the maximum extent feasible through host country  contributions. The Secretary of Defense also provided an annual report  to Congress through 2004—under legislative provisions dating back to th Defense Authorization Act of 1981 and in more recent defense  authorizations—that compared the defense costs borne by the United  States, allies, and partner nations. In these reports, DOD officials stated  that they would urge allied and partner nations to increase their cost- sharing contributions.
section_title: Iraq’s Estimated Actual and Available Cumulative Budget Surplus through the End of 2009
paragraphs: Iraq generated an estimated cumulative budget surplus of $52.1 billion  through 2009, according to GAO’s analysis of data provided by the Iraqi  government. Adjusting for $40.3 billion in advances that were outstanding  as of September 2009 reduces the amount of available surplus to $11.8  billion. Iraq’s Board of Supreme Audit has highlighted weaknesses in Iraq’s  accounting for a large and growing amount of advances. Under an  arrangement with the IMF, Iraq is conducting a review of its outstanding  advances to identify funds that may be available for government spending.
subsections: section_title: Iraq Generated an Estimated $52.1 Billion Cumulative Budget Surplus through 2009
paragraphs: A key indicator of a government’s fiscal condition is its annual budget  surplus or deficit, measured primarily on a cash basis. According to Iraq’s  Board of Supreme Audit, the tracking of revenues and expenditures using  Iraq’s amended cash accounting is an important tool for fiscal planning  and oversight of budget execution. GAO’s analysis of Iraqi data indicated  that Iraq’s revenues exceeded expenditures through the end of 2009,  resulting in an estimated cumulative budget surplus of $52.1 billion (see  table 1). We calculated this estimate by adding (1) Iraq’s cumulative  budget surpluses through the end of 2004, as reported by the Board of  Supreme Audit; (2) Iraq’s reported annual surpluses from 2005 through  2008; and (3) an estimated $2.2 billion Iraqi budget surplus through  December 2009. The cumulative budget surplus in table 1 differs from the  sum of all annual surpluses due to the appreciation of the Iraqi dinar (see  table 1 note). Table 1 shows that Iraq’s reported revenues and  expenditures increased through 2008, particularly during the rapid  increase in oil prices in 2008. (See app. II for more information on Iraq’s oil  revenues.)
We estimated Iraq’s budget surpluses through the end of 2009 on the  basis of revenue and expenditure data obtained from the Ministry of  Finance. For 2005 through 2007, we based our analysis of Iraq’s revenues  and expenditures on the Board of Supreme Audit’s reports on the annual  financial statements of the Iraqi government, which the Ministry of  Finance provided to us. For 2008, we based our analysis of revenues and  expenditures on the final accounts for the Iraqi government, which the  Ministry of Finance submitted to the Board of Supreme Audit for review  and subsequently provided to us. For 2009, we based our analysis on  monthly revenue and expenditure data obtained from the Ministry of  Finance through Treasury. We based budget surpluses accumulated before  2005 on data included in the Board of Supreme Audit’s report on the  government’s 2005 financial statements.
section_title: According to the Ministry of Finance, Outstanding Advances Reduce Iraq’s Available Surplus
paragraphs: During April 2010, a senior Ministry of Finance official stated that funds  the ministry categorizes as “advances” are encumbered or have been paid  out. This official stated that we should therefore deduct these funds from  the cash surplus to more accurately represent funds available to the  government for future uses. He stated that advances include funds set  aside for FMS purchases and letters of credit as well as advance payments  to contractors. Our analysis of data provided by the Ministry of Finance  showed that the Iraqi government recorded about $40.3 billion in  outstanding advances as of September 2009. Deducting these funds  reduces Iraq’s available surplus to about $11.8 billion. Prior to February  2010, data provided to us by the Ministry of Finance through Treasury had  not included any information on advances.
Our analysis of Ministry of Finance data indicated that outstanding  advances have grown considerably over time (see fig. 1).
According to the Board of Supreme Audit report on Iraq’s 2005 financial  accounts, Iraq had about $6.4 billion in outstanding advances through the  end of 2004. By September 2009, the amount of outstanding advances had  grown to more than $40.0 billion, according to Iraqi government data. The  largest increase in the amount of outstanding advances occurred between  the end of 2007 and September 2009. Outstanding advances more than  doubled over this period from $16.7 billion to $40.3 billion.
section_title: Questions Remain about the Accounting for and Composition of Advances
paragraphs: The Board of Supreme Audit has noted weaknesses in Iraq’s accounting  for advances. In a March 2009 report on Iraq’s 2005 financial accounts, the  board stated that a failure to settle advances at the end of the fiscal year  had resulted in inaccurate expenditure data and created difficulty in  settling these increasingly large advances over time. The report also stated  that the Iraqi government had failed to comply with legal requirements and  regulations in executing advances. In a September 2009 report on Iraq’s  2006 financial accounts, the board again expressed concern about the  increase in the government’s use of advances. This 2009 report explained  that the increase in advances could indicate weaknesses in the  government’s follow-up procedures used to close out advances as  expenditures, which could lead to inaccuracies in individual ministries’  expenditure reports. It also noted that advances could provide cover for  ministries or other entities to exceed their budget allocations or to hide  the misappropriation of government funds.
The composition of advances is unclear. A senior Ministry of Finance  official stated that advances include funds set aside for FMS purchases  and letters of credit as well as advance payments to contractors. In  addition, the Board of Supreme Audit identifies 26 categories of advances.  However, 40 percent of total outstanding advances through 2008 was  categorized as “other temporary advances,” which are not fully defined  (see app. III). Furthermore, the board does not include a category of  advances that clearly identifies funds transferred for FMS purchases. We  did not collect data on which ministries or other entities had received the  advances, whether advances were intended for operating or investment  activities, and the amount of advances that are recorded as expenditures  annually. The senior Ministry of Finance official said that this type of  information is housed at more than 250 government spending units in Iraq.
Moreover, as part of a $3.6 billion IMF arrangement approved in February  2010, Iraq agreed to reform various aspects of its public finance  management system, including strengthening its accounting for advances.  For example, Iraq agreed to strengthen reporting and cash management by  requiring spending units to submit reports on all spending, including  advances, no later than 2 months after the end of each month, and to  reconcile these amounts with the cash balances at the beginning and end  of the reporting period. Iraq also agreed to follow procedures for  approving the release of cash to spending units as a way of reducing idle  balances in spending units’ accounts to the minimum required for the  continuity of government operations. Furthermore, Iraq agreed to prepare  a report on its outstanding advances, identify advances that are  recoverable, set a schedule for their recovery, and eventually write off  advances that are deemed irrecoverable. Under the terms of the IMF  arrangement, Iraq has committed to completing this report by   September 30, 2010.
section_title: Iraq’s Budgets Have Been Unreliable Indicators of Iraq’s Year-end Fiscal Balances
paragraphs: GAO’s analysis of Iraqi financial data indicated that Iraqi budgets are  unreliable indicators of the country’s fiscal balance at the end of each  year. As depicted in figure 2, from 2005 through 2009 Iraq began each year  with budgets that projected government spending would exceed  government revenue by $3.5 billion (2005) to $15.9 billion (2009). If the  government had spent funds in accordance with its budgets, and its  revenue projections had proved accurate, the government would have  generated more than $35 billion in cumulative deficits through the end of  2009. However, our analysis of Iraqi data showed that actual expenditures  for the past 5 years have consistently fallen short of budget projections,  while actual revenues, in general, have met or exceeded projections. On a  cash accounting basis, Iraq generated budget surpluses in each year from  2005 through 2009, rather than the deficits projected by its budget. Finally,  after adjusting for advances, Iraq generated budget surpluses from 2005  through 2007. In 2008 and 2009, Iraq produced adjusted deficits after  deducting advances, but these deficits were less than one-half of the  amounts that it projected in its budget.
In commenting on a draft of this report, DOD acknowledged that Iraq’s  budgets serve as imperfect predictors of the country’s year-end fiscal  balance. DOD noted that experience from 2008 and 2009 showed that  actual deficits were about one-half of what was projected by the budget.  Accordingly, DOD concluded that although Iraq budgeted for a $20 billion  to $25 billion deficit in 2010, it is more likely that Iraq will generate a $8  billion to $10 billion deficit.
section_title: Iraq’s Financial Deposit Balances
paragraphs: Iraqi government data and an independent audit report show that, through  the end of 2009, Iraq had accumulated between $15.3 billion and $32.2  billion in financial deposit balances held at the Central Bank of Iraq, the  Development Fund for Iraq in New York, and state-owned banks in Iraq.  This range does not include approximately $10 billion in JP Morgan Chase  and Citibank accounts to cover Iraq’s letters of credit and about $3.2  billion in a Federal Reserve Bank of New York account for Iraq’s FMS  purchases. The range reflects a discrepancy between the amount of  government-sector deposits reported by the Central Bank of Iraq to the  IMF and the amount that the Ministry of Finance asserts is available for  government spending. In November 2009, the Ministry of Finance  reclassified $16.9 billion held in state-owned banks as unavailable for  government spending, stating that these funds belong to state-owned  enterprises and government trusts, such as those that were established for  orphans and pensioners. Therefore, according to the Ministry of Finance,  only $15.3 billion of the $32.2 billion is unencumbered and available for  spending. The IMF is seeking additional clarity on the amount of financial  deposits that may be available for government spending.
subsections: section_title: Ministry of Finance Reclassified $16.9 Billion of $32.2 Billion in Deposits as Encumbered and Not Available to the Iraqi Government
paragraphs: Data from the Central Bank of Iraq and the International Advisory and  Monitoring Board show that Iraq began 2010 with $32.2 billion in financial  deposits held at state-owned banks in Iraq, the Central Bank of Iraq, and  the U.S. Federal Reserve Bank’s Development Fund for Iraq account (see  table 2). We obtained data on Iraq’s deposit balances in state-owned  banks from the Central Bank of Iraq during an April 2010 trip to Baghdad,  Iraq. These data separate central ministry accounts from state-owned  enterprises’ accounts. However, the Central Bank of Iraq consolidates  these categories in its reporting to the IMF. In turn, the IMF publishes the  consolidated accounts in its International Financial Statistics.
In April 2010, Iraq’s Minister of Finance and a senior Ministry of Finance  official stated that not all of the $21.4 billion in financial deposits in state- owned banks was available to the Iraqi government for future  expenditures for two reasons. First, according to Ministry of Finance data,  only $4.5 billion of the $12.2 billion in central ministries’ accounts at state- owned banks is available to the government (see table 2). Ministry of  Finance officials said that the remaining deposits—about $7.6 billion—are  set aside as government trust funds for the Iraqi people, such as worker  pensions and court funds to support orphaned infants. Second, the senior  Ministry official explained that none of the funds in state-owned  enterprises’ accounts—which the Iraqi government refers to as self-funded  or self-financing entities—belongs to the government, primarily because  these enterprises receive few funds, if any, from Iraq’s public Treasury.  The Ministry of Finance officials agreed with the Central Bank of Iraq data  on the amount of financial deposits in the Central Bank of Iraq and the  Federal Reserve Bank’s Development Fund for Iraq. Accordingly, the  Ministry of Finance data show that the Iraqi government had about $15.3  billion in financial deposits available for future expenditures through the  end of 2009.
We sought a more in-depth explanation regarding why the Ministry of  Finance excluded $16.9 billion in government-sector deposits as available  for governmental spending. According to a Ministry of Finance document,  in November 2009, representatives of the Ministry of Finance and Iraq’s  two largest state-owned banks—Rafidain and Rasheed—reviewed the  government’s deposits at the two banks. To do so, the Ministry of Finance  formed a committee that consisted of three officials from its accounting  department, one of whom served as the head of the committee; an official  from the ministry’s inspector general department; and one official from  each of the two banks. During the review process, the Ministry of  Finance’s accounting department developed a list of cash balances in  accounts that were available to the government for future spending. It then  asked the two banks to prepare similar lists for reconciliation purposes.  When the committee met in late November 2009, according to the meeting  minutes, the balances of the Ministry of Finance and the two banks did not  reconcile. The banks’ lists included accounts for state-owned enterprises  and others that, according to the committee minutes, were not financed by  Iraq’s public Treasury; the Ministry of Finance list did not include those  accounts. After the committee agreed to eliminate those accounts from  Rafidain’s and Rasheed’s lists of available funds, the Ministry of Finance’s  and banks’ balances reconciled. This review process effectively  reclassified $16.9 billion in Iraq’s deposit balances as unavailable for  government spending.
We could not corroborate the Ministry of Finance’s information on the  availability of financial deposits or the Central Bank of Iraq’s data on  financial deposits in state-owned banks. According to U.S. officials, the  government’s accounts in the two largest state-owned banks have not been  audited by an independent organization since November 2009, when the  Ministry of Finance and the two banks reclassified the deposits. Thus, we  did not have an independent audit to corroborate the status of the  reported financial deposits in the two banks. We note that an earlier  independent audit report on Iraq’s largest state-owned bank—Rafidain  bank—found significant deficiencies in the bank’s internal controls. Due  to the significance of these problems, the auditors could not validate the  existence or value of many of the bank’s account balances, nor could they  express an opinion on the bank’s financial statements. Moreover, Ernst  and Young independent audits of the Central Bank of Iraq could not  confirm or reconcile over $11 billion in the account balances of the  Ministry of Finance and other governmental entities as of the end of 2008  and about $800 million as of the end of 2009.
Furthermore, we requested other information that might help to clarify the  status of funds set aside for trust funds, but a senior Ministry of Finance  official did not provide us with any additional information. In addition, we  could not corroborate the committee minutes’ statement that state-owned  enterprises do not receive funds from Iraq’s public treasury, and,  therefore, the funds in their accounts are not available to the Iraqi  government.
The IMF is seeking greater clarity on the amount of Iraq’s financial  deposits that is unencumbered and available for government spending.  Under the terms of Iraq’s February 2010 arrangement with the IMF, the  Ministry of Finance is required to complete a review of all central  government accounts in the banking system, reconcile them with Iraqi  Treasury records, and return any idle balances received from the budget to  the central Iraqi Treasury. This review was due to be completed by March  31, 2010. However, according to the IMF, the review was still under way as  of August 2010.
section_title: Iraq’s Financial Deposits Decreased from $41.1 Billion in 2008 to $32.2 Billion in 2009
paragraphs: Overall, Iraq’s financial deposits increased by $11.7 billion from 2007 to  2008 and then decreased by $8.9 billion from 2008 to 2009, with most of the  fluctuation occurring in deposits in banks in Iraq (see table 3).
According to Central Bank of Iraq officials and data, Iraq’s financial  deposits at the Central Bank declined by $10.3 billion during 2009 due to  the Ministry of Finance transferring funds from the Central Bank to Iraq’s  two largest state-owned banks, Rafidain and Rasheed. The Central Bank of  Iraq’s data show no corresponding increase in government deposits at  state-owned banks. According to these data, government deposits at state- owned banks increased by $1.7 billion from 2008 to 2009, a difference of  $8.6 billion.
In commenting on a draft of this report, DOD stated that the adjusted  deficit in 2009 may explain at least $8 billion of the drawdown in deposits  from 2008 to 2009. However, we do not find a consistent relationship  between Iraq’s adjusted fiscal balance and fluctuations in Iraq’s financial  deposits, as could have been the case for 2009. For example, our analysis  of Ministry of Finance data showed that in 2008 Iraq generated a   $1.8 billion adjusted deficit, after deducting advances. However, over the  same period, Iraq’s financial deposits increased by $11.7 billion, from   $29.4 billion to $41.1 billion.
These problems are further amplified in independent audits of the Central  Bank of Iraq conducted by Ernst and Young. The auditors could not  confirm or reconcile over $11 billion in the account balances of the  Ministry of Finance and other governmental entities as of the end of 2008  and about $800 million as of the end of 2009. Because the Central Bank of  Iraq did not receive statements for these accounts, the auditors could not  ensure the completeness, valuation, and accuracy of the balances. As we  have previously noted, an Ernst and Young audit report of the 2006  financial statements of Iraq’s largest state-owned bank—Rafidain—found  significant deficiencies in the bank’s internal controls. Due to the  significance of these problems, the auditors could not validate the  existence or value of many of the bank’s account balances, nor could they  express an opinion on the bank’s financial statements.
section_title: Iraq Has Increased Its Spending on Security but Did Not Use All of Its Available Funds
paragraphs: Iraqi government data show that the Iraqi security ministries have  increased their spending from 2005 through 2009 and set aside about   $5.5 billion to purchase equipment, training, and services under the FMS  program. The Iraqi government has also funded the Iraq-Commander’s  Emergency Response Program (I-CERP) and assumed responsibility for  contracts to pay the salaries of the Sons of Iraq. However, we estimate  that, during this same period, the Ministries of Defense and Interior did not  spend or set aside for FMS and other purchases between $2.5 billion and  $5.2 billion of their budgeted funds that could have been used to address  security needs. Moreover, the Iraqi government did not provide any  additional funding for I-CERP, as originally expected. The administration  is seeking $2 billion in additional U.S. funding in its fiscal year 2011 budget  request to provide training and equipment to the Iraqi security forces.
subsections: section_title: Iraq’s Security Ministries Have Increased Spending Since 2005
paragraphs: Data from the Ministries of Finance, Defense, and Interior show that Iraq  has increased its security spending under the Ministries of Defense and  Interior from $2.0 billion in 2005 to $8.6 billion in 2009 (see table 4).  Spending by these ministries reflects the actual value of equipment that  has been delivered, buildings constructed, training provided, or salaries  paid. The Ministry of Defense, which is responsible for training and  equipping Iraq’s army, navy, and air force, increased its spending an  average of about 28 percent each year from 2005 through 2009. The  Ministry of Interior, which performs similar activities in support of Iraq’s  federal police, local police, and border enforcement, increased its  spending by 45 percent annually, on average.
Iraqi government data also indicate that the Ministries of Defense and  Interior have increased their spending as a percentage of budgeted funds  from 2005 through 2009 (see table 5). Although the percentages of their  budgets that the two ministries were able to spend has fluctuated from  year to year, both spent more than 90 percent of the funds made available  to them in 2009. By comparison, the Ministry of Defense spent about   64 percent of its budgeted funds from 2005 through 2009, on average; the  Ministry of Interior spent about 85 percent of its budgeted funds over the  same period.
section_title: Iraq’s Security Ministries Have Used the FMS Program to Purchase Equipment, Training, and Services
paragraphs: From January 2006 through December 2009, Iraq set aside about $5.5  billion to purchase equipment, training, and services through the FMS  program (see table 6). The FMS program provides an established  procurement mechanism through which the Ministries of Defense and  Interior can spend available Iraqi funds to address security needs.  Moreover, according to the Defense Security Cooperation Agency (DSCA);  the United States Forces-Iraq (USF-I); and the Iraqi Ministers of Finance,  Defense, and Interior, the program provides a way for the security  ministries to spend their money without risking the loss of funds to the  corruption and mismanagement that hamper Iraqi government  contracting. Under FMS, the Ministries of Defense and Interior must  identify their equipment or training needs, transfer funds to an account at  the Federal Reserve Bank of New York, and sign a purchase agreement.  DOD then oversees contracting with suppliers, billing, and delivery of  Iraq’s purchases.
From January 2006 through December 31, 2009, Iraq signed purchase  agreements with the United States to buy an estimated $5.1 billion in  equipment, training, and services through the FMS program. This  includes purchase agreements with the Ministry of Defense valued at  about $4.3 billion and purchase agreements with the Ministry of Interior  valued at about $840 million. Through these FMS agreements, Iraq has  purchased tanks, helicopters, naval patrol boats, training aircraft, and  other equipment to improve the capabilities of its army, navy, and air  force. To operate and maintain this equipment, Iraq also has used FMS to  purchase training, support equipment, spare parts, and maintenance and  repair packages. In addition, Iraq has purchased technical services for the  planning, designing, and constructing of security infrastructure, such as  buildings to house its General Directorate of Counterterrorism and a pier  and seawall for a naval base at Umm Qasr.
According to U.S. and Iraqi officials, the security ministries have used FMS  transfers as a means of setting aside funds that remained unspent at the  end of the fiscal year. For example, in April 2010, officials at the Ministry  of Defense said that they had received Ministry of Finance approval to  transfer $143 million of their unspent 2009 funds into the FMS account.  Similarly, officials from the Ministry of Interior said that they planned to  transfer $300 million to $350 million of their unspent 2009 funds into the  FMS account, and they noted that, if approved, this would be the 4th  consecutive year in which they executed a transfer after the end of the  calendar year.
The United States is also using U.S. funds to supplement Iraq’s FMS  purchases. Under seven arrangements, the United States contributed  about $550 million and Iraq contributed more than $880 million to provide  Iraq with more than $1.4 billion in equipment and services (see table 7).  For example, in June 2009, Iraq’s Ministry of Defense signed and funded a  $110 million agreement with the United States to purchase eight T-6A  training aircraft for the Iraqi air force. In July 2009, the United States  supplemented this purchase by signing an agreement to provide almost  $100 million in funding for seven additional training aircraft, spare parts,  training, and maintenance. According to officials from USF-I and U.S.  Central Command, these arrangements provide an incentive for Iraq to  purchase U.S. equipment, rather than equipment from foreign vendors,  thereby enhancing military interoperability and reinforcing the strategic  partnership between the two countries. Moreover, FMS purchases  include training, sustainment, spare parts, and logistics support to help  increase the likelihood that equipment will remain functional over time.
section_title: Iraq Has Funded I-CERP and Assumed Responsibility for the Sons of Iraq and Other Security Contracts
paragraphs: In addition to spending by the Ministries of Defense and Interior, the Iraqi  government also has funded I-CERP and assumed responsibility for paying  the salaries of the Sons of Iraq and other security-related support  contracts previously paid by the United States. In April 2008, Iraq  provided $270 million to fund I-CERP, an Iraqi-funded variation of the  Commander’s Emergency Response Program (CERP). CERP is a U.S.- funded and-managed program that enables local commanders to respond  to urgent humanitarian relief and reconstruction requirements by carrying  out programs that will immediately assist the local population. Although  neither I-CERP nor CERP directly supports the Iraqi military or police,  these programs contribute to a sustainable security situation and help  provincial governments win the support of the local population, according  to USF-I. Through I-CERP, Iraq provides funding for projects, which USF-I  subsequently carries out using the same procurement, disbursement, and  accountability mechanisms that it uses to implement CERP projects. As of  September 1, 2009, USF-I had obligated about $229 million of Iraqi funding  for I-CERP projects, ranging from road and school improvements to small  business grants.
Iraq has also assumed responsibility for some security contracts formerly  paid by USF-I, most notably, the contracts to pay the salaries of the Sons  of Iraq. In June 2007, USF-I incrementally began hiring Sons of Iraq as  security contractors to assist the Coalition and Iraqi forces in maintaining  security in their local communities. Iraq started to take responsibility for  some of the Sons of Iraq contracts in October 2008 and, according to an  official from USF-I responsible for monitoring these contracts, assumed  full control of almost 90,000 contracts in May 2009. From February 2009  through December 2009, Iraq paid more than $255 million for the salaries  of the Sons of Iraq. Before turning the Sons of Iraq contracts over to Iraq,  USF-I spent approximately $413 million of CERP funding to pay their  salaries.
Additionally, Iraq has begun to pay for security-related support contracts  previously paid by the United States, and USF-I plans to transfer additional  contracts as the United States reduces its presence in Iraq. According to  USF-I, the command transferred almost $132 million in security-related  contracts to Iraq between September 2008 and October 2009, including a  contract to manage the Bayji National Ammunition Depot and a contract  to provide maintenance for armored personnel carriers. From November  2009 through April 2010, USF-I planned to transfer another seven contracts  valued at about $10 million. These include a contract to provide training  for air traffic controllers in the Iraqi air force and a contract to provide  maintenance for flight simulators.
section_title: Iraq’s Security Ministries Have Not Fully Used Available Resources, and Funding for I-CERP Has Fallen Short of Expectations
paragraphs: Our analysis of data from the Iraqi Ministries of Finance, Defense, and  Interior; DSCA; and the Trade Bank of Iraq indicated that—despite  increases in spending by the security ministries since 2005—the Ministries  of Defense and Interior did not spend or set aside between $2.5 billion   and $5.2 billion that could have been applied to Iraq’s security needs (see  table 8). U.S. officials have cited several reasons that the security  ministries have been unable to fully use their budgeted funds, including  overly centralized decision making and weak procurement capacity. As  displayed in table 8, Iraqi government data show that the Ministries of  Defense and Interior spent $28.3 billion of the $38.4 billion they were  budgeted from 2005 through 2009, resulting in about $10 billion of unspent  funds. These ministries also set aside about $7.5 billion for advances,  including FMS purchases and letters of credit. This includes  approximately $5.5 billion transferred to an account at the Federal  Reserve Bank of New York for FMS purchases and about $1.8 billion in  letters of credit for purchases through foreign contracts. It also includes  more than $100 million in advances on domestic contracts made by the  Ministry of Defense through the end of 2009. With the exception of this  Ministry of Defense data on advances for domestic contracts, our analysis  does not reflect any additional funding that the security ministries may  have set aside to pay advances. We requested this information from the  Ministries of Defense and Interior through the USF-I advisors to these  ministries, but the ministries did not provide us with any additional data.
We report a range for outstanding advances and unused funds to reflect  uncertainty regarding what portion of the advances for FMS purchases  and letters of credit has been recorded as an expenditure by the Ministry  of Finance and is therefore already reflected in total expenditures. Our  low estimate for outstanding advances ($4.9 billion) assumes that about  $2.6 billion of the $7.5 billion set aside for FMS purchases, letters of credit,  or Ministry of Defense advances on domestic contracts is already reflected  in total expenditures. Our high estimate for outstanding advances ($7.5  billion) assumes that none of the $7.5 billion set aside for FMS purchases,  letters of credit, or other advances has resulted in an expenditure. To  determine the portion of funds set aside for FMS purchases that may have  resulted in the delivery of equipment or services, and that therefore may  have already been recorded as an expenditure by the Ministries of Defense  and Interior, we reviewed a report from the Defense Finance and  Accounting Service showing the value of FMS deliveries to the security  ministries, as of December 31, 2009. Similarly, to determine the value of  letters of credit that may have resulted in expenditures, we reviewed data  from the Trade Bank of Iraq on letters of credit that were closed as of  December 31, 2009. Finally, to determine the portion of other advances  that may have been expended, we reviewed data on advances for domestic  contracts provided by the Ministry of Defense. We determined that the  data used in this analysis were sufficiently reliable and made the  assumptions described in this section to generate estimates of unused  funds.
We also found that the Iraqi government had not provided additional  funding for I-CERP, as originally intended. The Memorandum of  Understanding between the United States and Iraq, establishing I-CERP,  stated that funding for I-CERP would eventually seek to match U.S.  funding for the CERP program—more than $1 billion in 2008. However, as  of September 1, 2009, USF-I had obligated $229 million of the $270 million  in funding provided by Iraq for I-CERP, and Iraq had not provided any  additional resources to support the program. By comparison, from fiscal  years 2004 through September 2009, USF-I obligated more than $3.6 billion  for CERP projects in Iraq and had forecast $300 million in additional CERP  needs for Iraq in fiscal year 2010. According to an official from USF-I who  is familiar with the negotiations over additional funding for I-CERP, Iraq  did not provide additional funding for I-CERP due to limited capital  budgets and competing spending priorities.
section_title: The Administration Is Requesting $2 Billion in Additional Funds for the Iraqi Military and Police Forces
paragraphs: In February 2010, the administration submitted a budget request for   $3 billion in additional U.S. funding to provide training, equipment, and  other services to the Iraqi military and police forces. This includes a   $1 billion request for fiscal year 2010 supplemental funding, which has  already been approved by Congress, and a $2 billion request as part of  the administration’s fiscal year 2011 budget proposal, which is currently  under consideration. According to USF-I, the Iraqi security forces will  need additional equipment, training, and sustainment to bolster their  capabilities as the United States begins to reduce its troop presence. USF-I  plans to meet these needs by transferring U.S. defense articles valued at  $600 million to the Iraqi government and using $3 billion in additional  U.S. government funds to purchase equipment, training, and services for  the Iraqi security forces. Under the administration’s proposal, about   $2.4 billion would be used to support Iraqi forces under the Ministry of  Defense, and almost $600 million would help to train and equip Ministry of  Interior forces. USF-I asserts that these equipment transfers and additional  funding will    bolster Iraq’s internal security and stability with police training,    provide the Ministry of Defense with a foundational capability for external    provide the Ministries of Defense and Interior with an institutional and  logistic sustainment capability.
Specifically, USF-I has stated that the $600 million in U.S. equipment  transfers would allow it to modernize one mechanized division and fully  equip three infantry divisions of the Iraqi army; provide additional air  surveillance capabilities; improve protection for naval infrastructure, such  as ports and oil platforms; and provide training and other support for  existing equipment. Additional funding would cover the costs of  refurbishing and shipping some of the equipment to be transferred to the  Iraqi security forces. It would also provide funding for the sustainment of  equipment previously purchased by Iraq, including tanks and rotary wing  aircraft; pilot training; long-range air defense radars; ammunition; and  contracts for advisors to the Ministries of Defense and Interior, among  other things.
In commenting on a draft of this report, State asserted that U.S.  government security assistance is necessary to help the Iraqi security  forces meet the minimum essential capability requirements associated  with the responsible drawdown of U.S. forces. Furthermore, in the budget  justification documentation accompanying its fiscal year 2011 budget  request, DOD stated that the United States faces the choice of making  additional investments to fill essential gaps in the capabilities of the Iraqi  security forces or accept the risk that they will fall short of being able to  fully secure Iraq from internal and external threats by the time U.S. forces  depart in accordance with the Security Agreement. However, USF-I  acknowledges that some equipment necessary for providing Iraq with a set  of minimum essential capabilities would not arrive in Iraq before  December 31, 2011, the final withdrawal date for U.S. forces. According to  USF-I, all purchases made using U.S. funding will be conducted through  the FMS process. Depending on the equipment or services being provided,  it could take from 6 months to 36 months after an FMS agreement has  been implemented for the items to be delivered. Consequently, some  equipment and services purchased using fiscal year 2011 funding may not  arrive in Iraq until 2013, well after the withdrawal of U.S. forces—with  some items, such as tank ammunition, potentially taking even longer to  arrive.
section_title: Conclusions
paragraphs: Congress has instructed the U.S. government to take actions to ensure that  Iraqi funds are used to pay for the costs of training, equipping, and  sustaining the Iraqi military and police. DOD has encouraged greater Iraqi  spending of its own funds, particularly through the FMS program, and Iraq  has consistently increased spending on its own security over the past   5 years. However, billions of dollars that Iraq has budgeted for security  have gone unused. As U.S. troops withdraw, the Iraqi government must  take a larger role in providing security throughout the country. Congress  recently provided the administration with $1 billion in new funding to  support Iraq’s military and police through its passage of a fiscal year 2010  supplemental appropriation. The administration is currently requesting an  additional $2 billion in fiscal year 2011 funding for similar uses. However,  our analysis of Iraqi government data showed cumulative budget surpluses  of $52.1 billion through December 2009, of which at least $11.8 billion is  available for future spending. These surpluses have enabled Iraq to  accumulate at least $15.3 billion in financial deposit balances. Moreover,  IMF-required reviews of Iraq’s outstanding advances and its balances in  government bank accounts will clarify the total resources available for  future spending. In light of these resources, Iraq has the potential to  further contribute toward its security needs, even as it addresses other  competing priorities.
section_title: Matter for Congressional Consideration
paragraphs: To ensure that Iraq continues to spend its own resources on security costs,  Congress should consider Iraq’s available financial resources when  reviewing (1) a fiscal year 2011 budget request and (2) potential future  funding requests to support the Iraqi security forces.
section_title: Recommendation for Executive Action
paragraphs: We recommend that the Departments of State and the Treasury work with  the Iraqi government to further identify Iraqi resources available for future  spending. This should include assisting Iraq in completing two reviews  required under Iraq’s arrangement with the IMF. First, State and Treasury  should assist Iraq in completing a review of its outstanding advances to  determine whether some of these advances may be recoverable and  available for future spending. Second, State and Treasury should help Iraq  complete a review of its central government accounts so that it can return  any idle balances to the central Iraqi Treasury.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Departments of Defense, State,  and the Treasury and the U.S. Agency for International Development  (USAID). We also provided a draft of this report to the International  Monetary Fund through Treasury. We received written comments from  State, Treasury, and DOD, which we have reprinted in appendixes V, VI,  and VII, respectively. USAID did not provide comments. State, Treasury,  and DOD also have provided technical comments, which we incorporated  throughout the report as appropriate. In addition, the IMF provided  technical comments, which we incorporated in the report as appropriate.
State and Treasury concurred with our recommendation. State agreed to  work closely with its Iraqi counterparts to identify available financial  resources, complete reviews of outstanding advances and central  government accounts, and secure Iraqi cost-sharing across a variety of  sectors. Treasury agreed, in principle that, while Iraq’s fiscal accounts are  not well ordered, Iraq potentially will have financial resources to engage in  greater cost-sharing in the future. Furthermore, Treasury asserted that it  continues to work with the Ministry of Finance and other Iraqi agencies to  obtain more accurate estimates of available fiscal balances and enhance  public financial management. However, State, Treasury, and DOD stated  that they believe that the Iraqi government’s available funds are closer to  the low end of GAO’s range. Given the substantial shortcomings  associated with Iraq’s accounting for advances and financial deposits, we  report a range for Iraq’s available surplus and financial deposits. We  believe that it would be premature to suggest that Iraq’s available  resources fall at the low end of this range until Iraq has completed reviews  of outstanding advances and central government accounts, as it agreed to  in its arrangement with the IMF. These reviews will clarify the total  resources available for government spending.
State, Treasury, and DOD also stated that Iraq needs to maintain a fiscal  reserve, given its dependence on oil revenues and the volatility of oil  prices. In its comments, DOD stated that the Iraqi government believes it  needs to keep about $10 billion to $12 billion, or about 2 to 3 months of  spending, in government accounts as a reserve. Under its arrangement  with the IMF, Iraq agreed to maintain $2.6 billion in the Development Fund  for Iraq to pay for 2 to 3 months of employee wages. Iraq was capable of  maintaining this amount with at least $15.3 billion in financial deposits  that it had at the end of 2009. Furthermore, through June 2010, Iraq  generated almost $2 billion more in revenue than it had predicted in its  budget. If this trend continues, Iraq may have about $4 billion in additional  oil export revenues by the end of the year.
DOD agreed that there is room for improvement in the Iraqi government’s  financial accounting and reporting, and noted that the growing amount of  outstanding advances presents a challenge to Iraq’s public financial  management. However, DOD also commented that it believes the overall  message of our draft report—that the Iraqi government currently has  significant cash reserves that would allow it to pay more of its security  costs now and in 2011—is inaccurate. We disagree. As our report states,  Iraq ended 2009 with at least $15.3 billion in financial deposits. When  completed, IMF-required reviews of Iraq’s outstanding advances and  central government accounts will clarify total resources available to the  government for spending in 2010 and beyond. The review of deposits in  central government accounts was due to be completed by March 31, 2010,  but, according to the IMF, it was still under way as of August 2010. The  review of Iraq’s outstanding advances is to be completed by September 30,  2010. We cannot yet project Iraq’s fiscal position through the end of 2010  or 2011. However, as we note in this report and as DOD acknowledged in  its comments to our draft, past data indicate that Iraq’s deficit in 2010 will  be far less than is projected in its 2010 budget.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of State, the Secretary of the Treasury, the  Secretary of Defense, the Administrator of the U.S. Agency for  International Development, and other interested parties. In addition, this  report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-8979 or christoffj@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made major contributions to this report  are listed in appendix VIII.
Joseph A. Christoff  Director, International Affairs and Trade  The Honorable Carl Levin  Chairman  The Honorable John McCain  Ranking Member  Committee on Armed Services  United States Senate  The Honorable Kent Conrad  Chairman  The Honorable Judd Gregg  Ranking Member  Committee on the Budget  United States Senate  The Honorable John F. Kerry  Chairman  The Honorable Richard G. Lugar  Ranking Member  Committee on Foreign Relations  United States Senate  The Honorable Joseph I. Lieberman  Chairman  The Honorable Susan M. Collins  Ranking Member  Committee on Homeland Security      and Government Affairs  United States Senate  The Honorable Daniel K. Inouye  Chairman  The Honorable Thad Cochran  Ranking Member  Subcommittee on Defense  Committee on Appropriations  United States Senate  The Honorable Patrick J. Leahy  Chairman  The Honorable Judd Gregg  Ranking Member  Subcommittee on State, Forei     and Related Programs  Committee on Appropriations  United States Senate  The Honorable Ike Skelton  Chairman  The Honorable Howard P. M Ranking Member  Committee on Armed Serv House of Representati ves  The Honorable John M. Spratt Chairman  The Honorable Paul Ryan  Ranking Member  Committee on the Budget  ves  House of Representati , Jr.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: In this report, we provide inform Iraq’s budg balances, and (3) the extent to which on security costs.  governments’ contributions to the co countries, which could This report builds on GAO’s e August 2008 report on Ir our March 2009 report in w of 2008.
subsections: section_title: Iraq’s Estimated Actual and Available Cumulative Budget Surplus or Deficit
paragraphs: To complete our analysis of the Iraqi government’s estimated actual and  available cumulative budget surplus, we analyzed financial data and other  information that we obtained from the Iraqi Ministry of Finance, including  reports by Iraq’s Board of Supr 2005, 2006, and 2007. During a trip to Baghdad in April 2010, we  interviewed the Minister of Finance and a senior Ministry of Finance  official to clarify data that we received on Iraq’s revenues, expenditures,  and advances. We also interviewed the President of the Trade Bank of Iraq  and obtained data on letters of credit issued and closed by the Iraqi  government. We a Agency (DSCA) on funds set aside by the Iraqi government for U.S.  Foreign Military Sales (FMS) purchases. For this analysis, we also  reviewed U.S. agency and Inter and interviewed officials from the Departments of State (State), Defense  (DOD), and the Treasury (Treasury); the World Bank; and the IMF.  eme Audit on Iraq’s financial accounts for  nalyzed data from the U.S. Defense Security Cooperation  national Monetary Fund (IMF) documents  To determine Iraq’s revenues and expenditures for 2005 through 2007, we  obtained translated copies of reports on Iraq’s audited accounts for each  of these years. These reports were prepared by Iraq’s Board of Supreme  Audit and provided to GAO by the Iraqi Ministry of Finance. The reports  include final revenue and expenditure data for each year, including  adjustments made by the Ministry of Finance during its end-of-year  reconciliation process. To determine Iraq’s revenues and expenditures for  2008, we obtained translations of the final Ministry of Finance account s  that it submitted to the Board of Supreme Audit for review. The data ontotal revenues and expenditures contained in Iraq’s final accounts for 2008  also include adjustments made by the Ministry of Finance during its end- of-year reconciliation process. To determine Iraq’s revenues for 2009, we obtained data on Iraq’s monthly revenues and expenditures through  Decembe r 2009 from the Ministry of Finance through Treasury. It is  unclear whether these data include adjustments made by the Ministry of  inance during its end-of-year reconciliation process. We found that the  F revenue and expenditure data from the 2005 through 2007 Board of  Supreme Audit reports were sufficiently reliable to determine Iraq’s cash- based budget surplus. To corroborate Iraqi oil revenue, we compared the  oil revenues data for 2008 and 2009 provided by the Ministry of Finance  with Central Bank of Iraq export oil revenue receipts.
To determine Iraq’s annual budget surpluses from 2005 through 2009 and  cumulative surplus through the end of 2009, we used revenues and  expenditures data denominated in Iraqi dinars. For each year, we  subtracted total expenditures from total revenues to determine the annual  cash surplus. To determine the annual cash surpluses in dollars, we u the annual Iraqi dinar-dollar budget exchange rates to convert each dinar-denominated annual surplus into dollars. To compute the dinar- denominated cumulative cash surplus through the end of 2009, we added  rd of  the cash surplus accumulated before 2005, as reported by Iraq’s Boa Supreme Audit, to the annual surpluses we calculated for each of the years  from 2005 through 2008 and the estimated surplus we calculated for 2009.  To calculate Iraq’s dollar-denominated cumulative cash surplus through  the end of 2009, we converted the dinar-denominated cumulative cash  surplus into dollars using the 2009 dinar-dollar budget exchange rate. Thi dollar-denominated cumulative cash surplus differs from the sum of  annual dollar-denominated cash surpluses due to the appreciation of the  Iraqi dinar.
Ministry of Finance to the Board of Supreme Audit and (2) Ministry o Finance data through September 2009. We interviewed officials from Iraqi Ministry of Finance and Trade Bank of Iraq to try and clarify the  composition and disposition of these advances. Finally, to better  understand concerns about the way in which the Ministry of Finance  accounts for advances, we reviewed reports issued by Iraq’s Board of  Supreme Audit and an IMF report on its arrangement with Iraq.
section_title: Iraq’s Financial Deposit Balances
paragraphs: To assess the amount of the Iraqi government’s financial deposit bala we interviewed and obtained documentation from the Iraqi Minister of  Finance, a senior Ministry of Finance official, the Governor of the Centra ain  Bank of Iraq, and staff from the two largest state-owned banks, Rafid and Rasheed. The Iraqi government’s financial deposits are held in Iraq’s  state-owned banks Federal Reserve Bank in New York’s Development Fund for Iraq. We also reviewed independent audit reports for the Central Ban largest state-owned bank, Rafidain.   as well as in the Central Bank of Iraq and the U.S.
According to Central Bank of Iraq data, a small amount of government-sector deposits are  also held in private commercial banks. These deposit balances total about $100 million  (approximately 0.4 percent of government-sector deposits in commercial banks). held in central government deposits in domestic banks is available for  operating and investment purposes. The Ministry of Finance based its  claim on a reclassification of accounts done in late November 2009 by  representatives from the ministry’s accounting and inspector general  departments and the two largest state-owned banks. We were unable t independently verify the statements by the Central Bank of Iraq and th Ministry of Finance; thus, we report a range using both sets of data.  he Ministry of Finance and the Central Bank of Iraq agree on the amount  T of cash balances available to the central government for operating and  investment budgets in the Central Bank of Iraq and the Development Fund  for Iraq. The Governor of the Central Bank provided data on the Ministry  of Finance’s account balance as of December 2009. For the account  balance of the Development Fund for Iraq, we report data through the end  of 2009, which are based on the preliminary estimates published by the  International Advisory and Monitoring Board in April 2010. We determined that these data were sufficiently reliable to determine the cash balance of  central government deposits at the Development Fund for Iraq.
section_title: Iraq’s Estimated Spending on Security
paragraphs: To determine the extent to which Iraq has spent its financial resources on  security, we analyzed data on amounts budgeted for and spent by the  Ministries of Defense and Interior. We determined expenditures by the  Ministries of Defense and Interior from 2005 through 2009 on the basis of  data from the 2005 through 2007 Board of Supreme Audit reports, 2008  Ministry of Finance accounts submitted to the board, and 2009 data  provided by the Ministries of Defense and Interior. Amounts budgeted to  the ministries are based on the 2005 through 2007 Board of Supreme Audit  reports, Iraq’s 2008 budget law and supplemental budget, and 2009 data  from the Ministries of Defense and Interior—the same three sources. We  did not receive 2009 data on expenditures by the Ministry of Interior for  projects and reconstruction. We therefore assume that all of the $216  million budgeted to the Ministry of Interior for projects and reconstruction  in 2009 was spent. We used Iraqi dinar-dollar exchange rates to convert  dinar expenditure figures to dollars. However, we calculated average  annual growth rates in expenditures for the Ministries of Defense and  Interior in Iraqi dinars to eliminate exchange rate effects on the growth rate in expenditures. We determined that these data were sufficiently  reliable to describe expenditures and spending rates by the Ministries o Defense and Interior.
To determine the value of FMS agreements signed by the Ministries of  Defense and Interior, we reviewed information provided by DSCA  detailing the value of Iraq’s FMS purchases that had been fully or partially  implemented as of December 31, 2009. We corroborated this information  by reviewing copies of the Letters of Offer and Acceptance for each of  Iraq’s FMS purchases, which we obtained from the Defense Finance and  Accounting Service in Indianapolis, Indiana, as of June 22, 2009, and  October 1, 2009. To determine the value of deposits made by the Min of Defense and Interior into Iraq’s FMS account from 2006 through 2009,  we also reviewed information provided by DSCA. We interviewed the  Country Program Director and Country Finance Director for FMS in Iraq  at DSCA and the Iraq Country Manager at the Defense Finance and  Accounting Service to learn about the FMS program and clarify aspects of  the information provided to us. We determined that these data were  sufficiently reliable for the purposes of this analysis.
To determine the value of Iraq’s FMS purchases in which the United St and Iraq shared the cost, we interviewed officials from DOD’s United  States Forces-Iraq (USF-I) during audit trips to Baghdad, Iraq, from  September 18 to 25, 2009, and from April 12 to 16, 2010, and reviewed  additional documentation provided subsequent to these trips. We  interviewed the Country Program Director for FMS in Iraq at DSCA and  reviewed the Letters of Offer and Acceptance for Iraq’s FMS purchases to  corroborate the accuracy of this information. We determined that these  data were sufficiently reliable to determine the value of Iraq’s FMS  purchases in which the United States and Iraq shared the cost. To  determine the extent to which Iraq has spent its resources through the  Iraq-Commander’s Emergency Response Program, Sons of Iraq contracts,  and other security contracts, we interviewed officials from and reviewed  information provided by USF-I and its subordinate commands.
To determine the amounts that the Ministries of Defense and Interior did  not spend or set aside for FMS and other purchases from 2005 through  2009, we reviewed data on budgeted expenditures and expenditures from the Board of Supreme Audit and Ministries of Finance, Defense, and  Interior, as previously described in this section of the report. We  subtracted dinar-denominated expenditures from the amounts budgeted to  these ministries in dinars from 2005 through 2009 to determine their  annual unspent funds during this period. We then calculated the sum of  these annual unspent funds to determine their cumulative unspent  resources. Finally, we used the 2009 Iraqi dinar-dollar exchange rates to  convert the cumulative total to dollars. To determine the additional  amounts set aside by these ministries for FMS purchases, we reviewed a  report provided by DSCA detailing the amounts deposited by the  Ministries of Defense and Interior in Iraq’s FMS account as of December  31, 2009. To determine amounts that the Ministries of Defense and Interior  have set aside to finance purchases from foreign vendors through letters  of credit, we obtained data from the Trade Bank of Iraq on letters of cr issued that remained outstanding as of December 31, 2009. Finally, we als received documentation from the Ministry of Defense indicating that it set  aside about $100 million for advances on domestic contracts through the  end of December 2009. With the exception of these Ministry of Defense  data on advances for domestic contracts, our analysis did not reflect any  additional funding that the security ministries may have set aside to pay  for advances. We requested this information from the Ministries of  Defense and Interior through the USF-I advisors to these ministries, but  the ministries did not provide us with any additional data. In our analysis,  we therefore assumed that other advances for the Ministry of Interior total  zero.
To calculate the amount of cumulative unused funds by these ministries  from 2005 through 2009, we subtracted the cumulative unexpended funds  set aside for FMS purchases, letters of credit, and other advances from the  total unspent funds over the same period. We calculated a range of unused  funds to reflect uncertainty regarding the portion of funds set aside for  FMS purchases, letters of credit, and other advances that had been  recorded as an expenditure. To determine the portion of funds set aside  for FMS purchases that may have resulted in the delivery of equipment or  services, and that therefore may have already been recorded as an  expenditure by the Ministries of Defense and Interior, we reviewed a  report from the Defense Finance and Accounting Service showing the  value of FMS deliveries to the security ministries, as of December 31, 2009.  Similarly, to determine the value of letters of credit that may have resulted  in expenditures, we reviewed data from the Trade Bank of Iraq on letters  of credit that were closed as of December 31, 2009. Finally, to determine  the portion of other advances that may have been expended, we reviewed  data on advances for domestic contracts provided by the Ministry of  Defense. Again, we did not receive any additional data on other advances  from the Ministries of Defense or Interior. Our low estimate of unused  funds assumes that none of the funds set aside for FMS purchases, letters  of credit, or Ministry of Defense advances on domestic contracts have  resulted in expenditures. Our high estimate assumes that $1.7 billion in  FMS deliveries, $0.9 billion in closed letters of credit, and about $0.1  billion in Ministry of Defense advances on domestic contracts are already  reflected in Ministry of Finance expenditures.
section_title: Examples of Other Countries’ Contributions to the Cost of U.S. Security Support
paragraphs: To identify examples of other countries’ contributions to the cost of U.S.  security support (see app. IV), we reviewed relevant documents and data,  including Letters of Offer and Acceptance for FMS purchases; military  assistance; cost-sharing and other implementing agreements that  document host country contributions to U.S. security costs; World Bank  country economic income classifications; and DOD security assistance  organization and security assistance program data. We also interviewed  officials from various DOD offices—including the Office of the Under  Secretary of Defense for Policy, DSCA, Central Command, European  Command, and Pacific Command. In addition, we interviewed officials  fic  from State, including officials in the Bureaus of East Asian and Paci Affairs, Near Eastern Affairs, and Political and Military Affairs and at U.S embassies in Manila, Seoul, and Tokyo. Furthermore, we interviewed  other knowledgeable military and academic experts, such as experts at the  Defen Baghdad, Iraq, in September 2009 and April 2010 and interviewed officials  from USF-I and the U.S. Embassy Baghdad Office of Political-Military  Affairs.  . se Institute for Security Assistance Management. We traveled to  In selecting countries as illustrative examples of cost-sharing for U.S. security support from the number of U.S. cost-sharing arrangements we ion,  reviewed, we considered several factors, including geographic locat economic income classification, whether the U.S. organization that  manages security support is under Chief of Mission or military command,  and the presence of a major U.S. military force. Although our review is  a comprehensive review of all cost-sharing agreements that the United  States has negotiated to share in the cost of U.S. security support  activities, we provide a range of examples of the type of host country  contributions that the United States has received to support security  support activities overseas.
section_title: Appendix II: Iraq’s Oil Revenues
paragraphs: This appendix provides information on Iraq’s oil revenues. Oil export the Iraqi government’s primary source of revenue. Since 2005, oil exports  constituted about 83 to 92 percent of the government’s annual revenues  (see table 9).
The price of Iraqi oil spiked during the summer of 2008 before dropping  precipitously at the end of 2008 and the beginning of 2009. Prices have  since rebounded, averaging $74.36 per barrel through the first 3 months of  2010 (see fig. 3). This exceeds the average price for Iraqi oil in 2009 ($56.54  per barrel) as well as the average for 2004 through 2009 ($58.70 per  barrel). According to DOD and the IMF, Iraq’s 2010 budget assumes an  average oil price of $62.50 per barrel.
Iraq possesses an estimated 115 billion barrels of proved crude oil  reserves, the world’s third-largest stock (see fig. 4). Iraq’s capacity to  further exploit its oil resources underlies the government’s ability to  generate additional revenue.
According to DOD, since June 2009, the Iraqi cabinet has approved   10 foreign investment contracts to develop or rehabilitate Iraqi oil fields  that account for 65 percent of Iraq’s estimated oil reserves. While U.S.  officials acknowledge that it will take some time for Iraq to begin  exporting oil extracted from these reserves, the contracts offer the Iraqi  government the opportunity to significantly increase its exports and  generate greater government revenue.
section_title: Appendix III: Amount and Categories of Iraq’s Outstanding Advances through 2008
section_title: Appendix IV: Cost-Sharing Arrangements for U.S. Security Support Activities in Other Countries
paragraphs: This appendix describes cost-sha ng arrangemen  for U.S. ecurity  support activities in selected partner nations. The United St a range of security support under State and D D authorities to many O countries representing a variety of income levels. To subsidize U.S.  activities, several countries share in their costs under bilateral security  and cost-sharing agreements with the United States.
subsections: section_title: The United Sta s Undertakes a Va iety r of Security Support Activities in Other Countries
paragraphs: The United  DOD authorities to many countries. per of  programs as FMS, Foreign Military Fi Secief of Mission.urity assistance activities include such  Ed of  and and training through FMS or Direct Commercial Sales channels. The  ists of tra. defense articles, servional organizchase U.S to purations internat ining p Int  U.S. facili for oreign military personnel in the  nited S at and participating countries on a grant basis.
States provides a variety of security support under State and  ies, U.S.  urity assistance under the direction and supervision  nancing, and International Military    nancing ts and loans to elig ition, In  in South Ko support activities, such as   organizations reaS. unde  and U. Forces uthor y, n, condu t  training foreign forces, i cluding joi special oper aining of U.
S.
For the purposes of this report, we use the term security support to describe a range of  Security assistance activities are generally codified in Title 22 of the United States Code.  ities are often referred to as Title 22 activities. Security cooperation activities  These activ are generally codified in Title 10 of the United States Code. These activities are often  referred to as Title 10 activities. logistics support for foreign militaries, including agreements with elig countries and regional or international organizations for the reciprocal  provision of logistic support, supplies, and services; and military contact and cooperation, including bilateral and multilateral  contacts with foreign militaries and payment of selec for certain training partners.
section_title: Countries at Varying Income Levels Contribute to the Cost of U.S. Security Support Activities
paragraphs: Several countries, represen and assistance-in-kind to share in the cost of U.S. security support  activities. According to State and DOD officials, the extent and type of  host government contributions for U.S. security support activ o ability and willingness to contribute to U.S. security support costs. The  United States and host countries also may renegotiate these cost-sharing  arrangements to reflect changes in a host nation’s economic income or the  nature of the bilateral security relationship. U.S. cost-sharing  arrangements with Kuwait, Saudi Arabia, Japan, The Philippines, South  ting a variety of income levels, provide cash  ities depend  n the U.S. and host country security relationship as well as the country’s  Korea, and Thailand represent a range of geographic locations, income levels, U.S. troop levels, and U.S. security support organizations   s, U.S. troop levels, and U.S. security support organizations   (see fig. 5).  (see fig. 5).
Because the U.S. government does not centrally collect information on cost-sharing  arrangements between the United States and other countries, we could not conduct a  comprehensive assessment of the various ways in which other countries subsidize the cost  of U.S. security support. These cost-sharing arrangements may be included in U.S. defense  assistance, cost-sharing, and implementing agreements or in FMS purchase agreements.  DOD last reported to Congress on contributions for defense costs from allied host nations  in 2004. See Department of Defense, 2004 Statistical Compendium on Allied  Contributions to the Common Defense (2004), which covers allied contributions in 2003. for U.S. military exercises. See table 11 for selected contributions six countries.
subsections: section_title: Kuwait
paragraphs: Under a 2009 agreement, Kuwait, a h istanc $28 million a d ass support the U.S. Office o office administers Kuwait’s FMS program, which totaled nearly   $315 million in sales in fi States with a cash transf which DOD reported wa Army and Air Force inst Cooperation Agreement.  military Kuwaiti facilities.
section_title: Saudi Arabia
paragraphs: Saudi Arabia, a high-income economy, provided approximately $35 million  in cash and assistance-in-kind in 2009 to support the two U.S. security  support organizations operating under State’s authority—the U.S. Military  Training Mission and Office of Program Management-Ministry of Interior.  The training mission oversees the FMS program in Saudi Arabia, valued at  $3.3 bildes training instruction ear 2009, and provin sales in fiscal ylion i and advisory services for Saudi Arabian Armed Forces personnel. The  United States established the Office anagement-Ministry of of Program M Interior in 2009 to prond services, including technvide articles aical  assistance, to develoudi Arabia Ministry of acity of the Sap the cap Interior’s Facilities Secur ti y Force in the areas of critical infrastructure  protection and United States approximately $285 million from 2009 to 2013 to pay for  srt activities managed by DOD’s Office of the Program ecurity suppo Manager-Saudi Arabia National Guard. The DOD office provides training  and services to assist Saudi Arabia in modernizing its National Guard.   public security.
section_title: Japan
paragraphs: Japan, a high-income economy, financially supports two U.S.  organizations—State’s Mutual Defense Assistance Office, a security  assistance organization that oversees the FMS program, and DOD’s U.S.  Forces–Japan, which administers bilateral defense activities. According t a PACOM official, Japan provides the Mutual Defense Assistance Office  with five Japanese foreign service employees and several vehicles and  drivers under a long-standing agreement to share in the cost of U.S.  security support. The office managed FMS cases valued at about   $460 million in fiscal year 2009. Japan also provided nearly $6.2 billion in  cash and assistance-in-kind to support U.S. Forces-Japan activities in  2009. For example, under a cost-sharing agreement, renewed in 2008,  Japan provided the United States with approximately $1.4 billion for labo and utility costs in 2009.
section_title: South Korea
paragraphs: South Korea, a high-income economy, contributes cash and assistance-in- kind to support two U.S. organizations—State’s Joint U.S. Military Aff airs  Group, a security a ssistance organization, and DOD’s U.S. Forces–Korea,  which has thousands of U.S. military personnel on the ground to pursue  bilateral defense goals. According to State and DOD officials, South Korea  contributes limited assistance-in-kind for housing to support the Joint U.S.  Military Affairs Group. The organization manages Korea’s FMS program valued at nearly $720 million in sales in fiscal year 2009. Under a cost- sharing agreement renewed in 2009, South Korea committed to provide  approximately $690 million in cash and assistance-in-kind per year from  2009 to 2013 for labor, logistics, and construction costs for U.S. Forces– Korea. According to a State official familiar with the negotiation, this  ,  contribution represents about 40 percent of nonpersonnel stationing  costs.
section_title: Thailand
paragraphs: nder a long-standing military assistance agreement with the United States.  09 included  Thailand, a lower-middle income economy, contributes annual assistance- in-kind and cash payments to support the Joint U.S. Military Advisory Group  u The security assistance organization’s activities in fiscal year 20 managing Thailand’s Foreign Military Financing grants, FMS cases, an International Military Education and Training program, which were valued at $1.6 million, almost $53.0 million, and almost $1.5 million, respectively.  Thailand provided cash payments of $285,000 for support such as drivers, vehicles, and utilities for the organization in 2009. DOD and State officials reported that Thailand also provides the United States with the use of  military grounds for the U.S. military to conduct live-fire exercises a training and the use of a Thai airfield. According to State and DOD officials, Thailand is the only country that provides the United States with live-fir training grounds—a substantial benefit to the United States.
section_title: The Philippines
paragraphs: The Philippines, a lower-middle income economy, contributes cash  payments and assistance-in-kind to the Joint U.S. Military Assistance  Group. The security assistance organization administers U.S. security  support programs, such as the $28.0 million Foreign Military Financing  and the $1.7 million International Military Education and Training  programs in fiscal year 2009. To financially support this organization, The  Philippines provided cash transfers of approximately $217,000 and  assistance-in-kind through office facilities and support personnel in 2009.  Although The Philippines provides smaller financial contributions to the  United States than other countries, State and DOD officials reported that  certain assistance-in-kind, such as training grounds, provide significant  additional benefits to the United States.
section_title: Appendix V: Comments from the Department of State
paragraphs: Following are GAO’s comments on the Department of State’s letter dated  August 4, 2010.
subsections: section_title: GAO Comments
paragraphs: 1.  We believe that it is premature to assert that the Iraqi government’s  available funds are closer to the low end of the ranges of surplus funds  and financial deposits noted in this report. Two reviews required under  Iraq’s arrangement with the IMF will clarify the total resources  available to the Iraqi government. First, Iraq has agreed to prepare a  report on its outstanding advances, identify those that are recoverable,  and set a schedule for their recovery. Iraq has committed to  completing this report by September 30, 2010. Second, the Ministry of  Finance must review all central government accounts in the banking  system, reconcile them with Iraqi Treasury records, and return any idle  balances received from the budget to the central Iraqi Treasury. This  review was due to be completed by March 31, 2010, but, according to  the IMF, it was still under way as of August 2010. 2.  We agree that it would be sensible for Iraq to maintain a fiscal reserve,  and it has agreed to do so under the terms of its February 2010  arrangement with the IMF. Iraq agreed to maintain $2.6 billion in the  Development Fund for Iraq to provide sufficient funds to cover 2 to 3  months in employee wages for government workers. Iraq was capable  of maintaining this amount with at least $15.3 billion in financial  deposits it had at the end of 2009. In addition, through June 2010, Iraq  generated almost $2 billion more in revenue than had been predicted  in its budget. If this trend continues, Iraq may have about $4 billion in  additional oil export revenues by the end of the year. Consequently,  Iraq should have sufficient resources at the end of 2010 to provide for  the fiscal reserve required by the IMF.
section_title: Appendix VI: Comments from the Department of the Treasury
paragraphs: Following are GAO’s comments on the Department of the Treasury’s letter  dated August 4, 2010.
subsections: section_title: GAO Comments
paragraphs: 1.  We report a range of available resources to reflect the uncertainty  regarding Iraq’s outstanding advances and government deposits.  Furthermore, we believe it is premature to assert that the Iraqi  government’s available funds are closer to the low end of our ranges  until Iraq has completed its IMF-required reviews of advances and  government deposits. These reviews will clarify the total resources  that are available to the Iraqi government. 2.  We agree that Iraq may need a fiscal cushion to address potential  variability in its fiscal revenues. As part of its arrangement with the  IMF, Iraq agreed to maintain $2.6 billion in the Development Fund for  Iraq to cover 2 to 3 months in employee wages for government  workers. Iraq was capable of maintaining this amount with at least  $15.3 billion in financial deposits it had at the end of 2009. In addition,  through June 2010, Iraq generated $2 billion more in revenue than it  had predicted in its budget. If this trend continues, Iraq may have  about $4 billion in additional oil export revenues by the end of the  year. Consequently, Iraq should have sufficient resources at the end of  2010 to provide for the fiscal reserve required by the IMF. 3.  Past data indicate that Iraq’s deficit in 2010 will be far less than  projected in its 2010 budget. From 2005 through 2009, Iraq began each  year with budgets that projected deficits from $3.5 billion to $15.9  billion, but ended each year with surpluses, measured on a cash basis.  Even after adjusting for advances, Iraq generated surpluses from 2005  through 2007 and in 2008 and 2009 produced deficits that were less  than one-half of the amounts projected in its budgets for those years.
section_title: Appendix VII: Comments from the Department of Defense
paragraphs: Following are GAO’s comments on the Department of Defense’s letter  dated August 10, 2010.
subsections: section_title: GAO Comments
paragraphs: 1.  We have not changed our estimates of Iraq’s cumulative adjusted  surplus from $41.1 billion to $11.8 billion. In fact, we have consistently  reported a range for Iraq’s available surplus on the basis of Iraq’s  cumulative cash-based surplus (high estimate) and Iraq’s budget  surplus adjusted for advances (low estimate). In a draft of this report,  we stated that we were able to independently corroborate about $15.6  billion of the $40.3 billion in advances that were set aside for FMS  purchases and letters of credit, but we were unable to corroborate the  remaining $24.7 billion. However, in comments on our draft report,  DOD noted that data on all advances are from the Board of Supreme  Audit and the Ministry of Finance and should therefore be treated  consistently. The Board of Supreme Audit raised concerns about all  advances, despite our attempt to independently corroborate a portion  of these advances. We therefore modified our report by deducting the  full $40.3 billion to estimate the low end of our range, but we also  noted that the composition of all the advances was unclear, and the  Board of Supreme Audit highlighted weaknesses in Iraq’s accounting  for them. Under its arrangement with the IMF, Iraq agreed to conduct a  review of all outstanding advances, which should further clarify what  portion of them is available for government spending. 2.  We disagree with DOD’s assertion that the message of our report is  inaccurate and not supported by the financial data. As this report  states, Iraq ended 2009 with at least $15.3 billion in financial deposits.  Moreover, IMF-required reviews of Iraq’s outstanding advances and  central government accounts will clarify the total funds available to  the government for spending in 2010 and beyond. The review of  deposits in central government accounts was due to be completed by  March 31, 2010, but, according to the IMF, it was still under way as of  August 2010. The review of Iraq’s outstanding advances is to be  completed by September 30, 2010. Furthermore, as we note in this  report and as DOD acknowledged in its comments on a draft of this  report, past data indicate that Iraq’s deficit in 2010 will be far less than  projected in its 2010 budget. From 2005 through 2009, Iraq began each  year with budgets that projected deficits from $3.5 billion to $15.9  billion, but ended each year with surpluses, measured on a cash basis.  Even after adjusting for advances, Iraq generated surpluses from 2005  through 2007 and in 2008 and 2009 produced deficits that were less  than one-half of the amounts projected in its budgets for those years. 3.  We report a range for Iraq’s available financial deposits on the basis a discrepancy betwe reported by the Central Bank of Iraq to the IMF and the amount that  the Ministry of Finance asserted is available for government spending.  Under the terms of Iraq’s February 2010 arrangement with the IMF Ministry of Finance is required to complete a review of all central  government accounts in the banking system, reconcile them with  Treasury records, and return any idle balances received from the  budget to the central Iraqi Treasury. This review was to be completed  by March 31, 2010, but was still under way as of August 2010. We  believe that it is premature to suggest that Iraq’s available resource fall at the low end of this range until the Ministry of Finance has  completed its review, as it will clarify the total resources available fo government spending. en the amount of government-sector deposits  4.  We agree that it may be prudent for Iraq to maintain a fiscal reserve t o  hedge against volatility in oil prices, its primary source of government  revenues. Under the terms of Iraq’s February 2010 arrangement with  the IMF, Iraq agreed to maintain $2.6 billion in the Development Fund  for Iraq to provide sufficient funds to cover 2 to 3 months in employee  wages for government workers. As we note in this report, Iraq ended  2009 with at least $15.3 billion in available financial deposits. This  amount should be sufficient to provide for a fiscal reserve and cover  an $8 billion to $10 billion deficit DOD predicts Iraq will generate in  2010.  5.  We note in this report that the security ministries spent more than  90  percent of the funds made available to them in 2009. This reflects the  actual value of equipment that has been delivered and training  provided to the security ministries. Data we obtained from the U.S. a Iraqi governments do not allow us to determine amounts disburs advances from these ministries’ budgets on an annual basis, including  in 2009. Rather, we accounted for advances on a cumulative basis by  estimating the total amount of funding spent or otherwise set asi FMS and other foreign and domestic contracts from 2005 through 2009.  6.  As we previously noted, Iraq’s arrangement with the IMF requires that  Iraq maintain $2.6 billion in reserve to cover 2 to 3 months of employee wages for government workers. Our analysis of Iraqi financial data  indicated that Iraq ended 2009 with at least $15.3 billion in available  financial deposits. Furthermore, as DOD acknowledged in its  comments, past experience suggests that any potential deficit in 2010  is likely to be far less than predicted by Iraq’s 2010 budget. This is  particularly likely given that—based on current oil prices and export  volume—Iraq may generate more revenue in 2010 than predicted by its  budget. Iraq’s 2010 budget was based on oil selling for $62.50 per  barrel. From January through June 2010, oil exported by Iraq average almost $75 per barrel, generating revenues almost $2 billion in excess  of that which was predicted by its budget. If this trend continues, Iraq  may have about $4 billion in additional oil export revenues by the e nd  of the year, even if export volume remains lower than expected. Thus,  even if Iraq generates an $8 billion to $10 billion deficit in 2010, as  expected by DOD, Iraq should have sufficient resources to provide for  a small fiscal reserve. DOD provided no documentation to substan Iraqi officials’ statements that a $10 billion to $12 billion reserve is no needed. The IMF does not require this reserve level, nor did any I raqi  official indicate to GAO that such a reserve level was needed. aq has some unsettled foreign debt obligations to neighboring  countries. However, according to Treasury data, creditors have  forgiven more than one-half of Iraq’s prewar debt since 2003, and  continued diplomatic efforts may reduce these obligations further.
DOD also stated that Iraq does not act like a country with a large fiscalbalance, since it has drawn upon external financing provided through a s  Stand-by Arrangement with the IMF. However, as Treasury noted in it lion  comments on this draft, the IMF has only disbursed about $455 mil of the $3.6 billion available to Iraq for budget support. It is unclear   whether Iraq will need to use the entire IMF financing arrangement in 2010-2011.  8.  We disagree that our report asserts that funds reclassified by the  Ministry of Finance are available for budget support. Rather, as we  point out in comment 3, we report a range for Iraq’s available financial  deposits on the basis of a discrepancy between the amount of  government-sector deposits reported by the Central Bank of Iraq to the  IMF and the amount that the Ministry of Finance asserted is available  for government spending. In our report, we note that in November  2009, the Ministry of Finance reclassified $16.9 billion as unavailable  for government spending, including $7.6 billion held in central ministry  accounts and $9.3 billion held in state-owned enterprises’ accounts.
We also disagree with DOD’s assertion that the Central Bank of Iraq  has already recognized that the $9.3 billion held in central ministries’  accounts at state-owned banks does not belong to the central  government. The Central Bank of Iraq consolidates these categ its reporting to the IMF, which the IMF in turn reports in its  International Financial Statistics. The Ministry of Finance is  currently undertaking a review of all central government accounts in  ories in  the banking system to reconcile them with Iraqi Treasury records and  ensure that any idle balances received from the budget are returne the central Iraqi Treasury. This Iraqi review should help to clarify  whether some of these government deposits that it reclassified are, in  fact, unencumbered and available for future spending. 9.  Our draft report clearly stated that, according to the Ministry of  Finance, at the end of 2009, outstanding advances should be deduc from available surplus funds, and that $16.9 billion in government  deposits that were reclassified by the Ministry of Finance was not  available for government spending. However, contrary to that which is  implied in DOD’s comment, the Ministry of Finance did not report an  amount of outstanding advances in any of the documentation t provided to us, nor did it calculate an adjusted budget balance by  subtracting out advances. Rather, GAO estimated outstanding  advances to be $40.3 billion as of September 2009 based on our  analysis of Ministry of Finance data and deducted these advances  estimate Iraq’s adjusted surplus.
Furthermore, we disagree with DOD’s suggestion that the potential  future availability of these funds—as determined by the results of IMF- required reviews of Iraq’s central government accounts and  outstanding advances—is separate from the question of whether Ira capable of additional cost-sharing. When completed, these reviews will clarify the total resources available for cost-sharing.  10.  We modified the section referencing a decrease in deposits from 2008 2009 by explicitly citing the independent Ernst and Young audit reports  that have identified problems verifying deposit balances at the Central  Bank of Iraq and Iraq’s largest state-owned bank—Rafidain bank.  Furthermore, we note in our report that the amount of outstanding  advances increased by about $10 billion from the end of 2008 through  September 2009, which may offer an explanation for why we did not  observe an increase in the deposits of state-owned banks that  corresponds to the decrease in deposits at the Central Bank of Iraq over  this period. However, we also note in this report that the data on  financial deposits do not illustrate a clear relationship between Iraq’s  fiscal balance, adjusted for advances, and financial deposits. For  example, Ministry of Finance data show that in 2008 Iraq generated a  $1.8 billion deficit, after adjusting for advances. However, over the same  period, Iraq’s financial deposits increased by $11.7 billion, from $29.4  billion to $41.1 billion. Accordingly, there is no clear relationship  between Iraq’s adjusted fiscal balance and financial deposits, as DOD  asserts.
11.
section_title: Appendix VIII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments