Iraqi-U.S. Cost-Sharing:

Iraq Has a Cumulative Budget Surplus, Offering the Potential for Further Cost-Sharing

GAO-10-304: Published: Sep 13, 2010. Publicly Released: Sep 13, 2010.

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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.

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.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matter for Congressional Consideration

    Matter: To ensure that Iraq continues to spend its own resources on security costs, Congress may wish to 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.

    Status: Closed - Implemented

    Comments: Because of GAO's work on Iraqi-U.S. cost-sharing and Iraq's fiscal position, Congress provided $500 million less than requested by the Administration in its FY11 budget request to support the Iraqi security forces. Before the report was issued, GAO briefed staff members from the Senate Armed Services Committee, House Armed Services Committee, and Senate Appropriations Committee's Defense Subcommittee on preliminary findings from our cost-sharing audit in March 2010. In May 2010, the Chairman of the Senate Armed Services Committee, in a markup hearing, reduced the Administration's FY11 $2 billion request to $1 billion, in part because of GAO's analysis. After the report was issued in September 2010, GAO briefed staff of the Senate Armed Services Committee, and Senators Begich, Lieberman, Reed, and Udall, to help them prepare for an upcoming Senate floor debate on the FY11 defense authorization bill. On January 7, 2011, the President signed the National Defense Authorization Act for Fiscal Year 2011, which authorized $1.5 billion for the Iraq Security Forces Fund, $500 million less than the Administration requested. In March 2011, professional staff to the Senate and House Armed Services committees confirmed that GAO's report and briefings played a key role in the debate over the appropriate FY11 funding level for the Iraq Security Forces Fund.

    Recommendations for Executive Action

    Recommendation: The Departments of State and the Treasury should 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. 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.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: With assistance from the U.S. government and IMF, Iraq completed the review of central government accounts in 2010. Since February 2012, the U.S. government and the IMF have also worked with the government of Iraq to complete a report on its stock of outstanding advances, as GAO recommended. This review identified $30 billion in advances from 2003 to 2011. However, according to Treasury officials, the Iraqi government has determined that none of these funds are recoverable because they were used to open letters of credit for the purchase of military equipment or spent by government ministries. As Congress reviews future budget requests for funding to train and equip Iraqi security forces, the completed review of advances--along with continued assessments of Iraq's other financial resources--will provide important information on resources available to the Iraqi government for future spending.

    Recommendation: The Departments of State and the Treasury should 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. 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.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: State and Treasury concurred with the recommendation. According to State and Treasury, Embassy officials and senior officials from both departments met with Central Bank of Iraq and Ministry of Finance officials to press them on efforts to identify available resources in September and October 2010. Subsequently, Iraqi Ministry of Finance officials shared the initial results of their review with U.S. officials at the Embassy, including Treasury advisors from the Office of Technical Assistance (OTA). The advisors then assisted their Ministry of Finance counterparts to clarify some of the accounts and helped to group the individual accounts into broader categories. According to the IMF, almost 90 percent of the government of Iraq's accounts has been reviewed and the ownership clarified; Treasury officials explained that the remaining 10 percent represent a large number of small accounts in regional bank branches. The IMF also reported that Iraqi officials are working on identifying which accounts can be returned to the central treasury. As a result of this effort, the government of Iraq has more complete knowledge of the funds available to it, and the United States has a better understanding of Iraq's capacity to pay for its own government programs and security.

    Recommendation: The Departments of State and the Treasury should 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. 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.

    Agency Affected: Department of State

    Status: Closed - Implemented

    Comments: With assistance from the U.S. government and IMF, Iraq completed the review of central government accounts in 2010. Since February 2012, the U.S. government and the IMF have also worked with the government of Iraq to complete a report on its stock of outstanding advances, as GAO recommended. This review identified $30 billion in advances from 2003 to 2011. However, according to Treasury officials, the Iraqi government has determined that none of these funds are recoverable because they were used to open letters of credit for the purchase of military equipment or spent by government ministries. As Congress reviews future budget requests for funding to train and equip Iraqi security forces, the completed review of advances--along with continued assessments of Iraq's other financial resources--will provide important information on resources available to the Iraqi government for future spending.

    Recommendation: The Departments of State and the Treasury should 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. 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.

    Agency Affected: Department of State

    Status: Closed - Implemented

    Comments: State and Treasury concurred with the recommendation. According to State and Treasury, Embassy officials and senior officials from both departments met with Central Bank of Iraq and Ministry of Finance officials to press them on efforts to identify available resources in September and October 2010. Subsequently, Iraqi Ministry of Finance officials shared the initial results of their review with U.S. officials at the Embassy, including Treasury advisors from the Office of Technical Assistance (OTA). The advisors then assisted their Ministry of Finance counterparts to clarify some of the accounts and helped to group the individual accounts into broader categories. According to the IMF, almost 90 percent of the government of Iraq's accounts has been reviewed and the ownership clarified; Treasury officials explained that the remaining 10 percent represent a large number of small accounts in regional bank branches. The IMF also reported that Iraqi officials are working on identifying which accounts can be returned to the central treasury. As a result of this effort, the government of Iraq has more complete knowledge of the funds available to it, and the United States has a better understanding of Iraq's capacity to pay for its own government programs and security.

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