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Report to Congressional Committees: 

United States Government Accountability Office: GAO: 

September 2010: 

Iraqi-U.S. Cost-Sharing: 

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

GAO-10-304: 

GAO Highlights: 

Highlights of GAO-10-304, a report to congressional committees. 

Why GAO Did This Study: 

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. 

What GAO Found: 

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. 

What GAO Recommends: 

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. This includes assisting Iraq in completing IMF-required 
reviews of outstanding advances and central government accounts. State 
and Treasury agreed with the recommendation, although State, Treasury, 
and DOD had different perspectives on how much money would be 
available for cost-sharing. 

View [hyperlink, http://www.gao.gov/products/GAO-10-304] or key 
components. For more information, contact Joseph A. Christoff at (202) 
512-8979 or christoffj@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Iraq's Estimated Actual and Available Cumulative Budget Surplus 
through the End of 2009: 

Iraq's Financial Deposit Balances: 

Iraq Has Increased Its Spending on Security but Did Not Use All of Its 
Available Funds: 

Conclusions: 

Matter for Congressional Consideration: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Iraq's Oil Revenues: 

Appendix III: Amount and Categories of Iraq's Outstanding Advances 
through 2008: 

Appendix IV: Cost-Sharing Arrangements for U.S. Security Support 
Activities in Other Countries: 

Appendix V: Comments from the Department of State: 

Appendix VI: Comments from the Department of the Treasury: 

Appendix VII: Comments from the Department of Defense: 

Appendix VIII: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Iraq's Estimated Annual Surpluses and Cumulative Budget 
Surplus, through 2009: 

Table 2: Comparison of Financial Deposit Balances and Financial 
Deposits Available, through the end of 2009: 

Table 3: Iraq's Financial Deposits, through the end of 2007, 2008, and 
2009: 

Table 4: Estimated Iraqi Security Expenditures by Ministry, 2005-2009: 

Table 5: Estimated Amounts Budgeted and Spent by the Iraqi Ministries 
of Defense and Interior, 2005-2009: 

Table 6: Funds Set Aside for FMS Purchases by the Iraqi Ministries of 
Defense and Interior, 2006-2009: 

Table 7: FMS Purchases Using U.S. and Iraqi Funding: 

Table 8: Estimated Unused Funds by the Iraqi Ministries of Defense and 
Interior, 2005-2009: 

Table 9: Oil Export Revenues, 2005-2009: 

Table 10: Iraq's Outstanding Advances by Category, through 2008: 

Table 11: Selected Contributions That Six Selected Countries Provide 
to Share U.S. Security Support Costs: 

Figures: 

Figure 1: Estimate of Cumulative Outstanding Advances Recorded by the 
Iraqi Government, 2004-September 2009: 

Figure 2: Iraq's Annual Budgeted Deficits, Actual Cash Accounting 
Balance and Actual Balance Adjusted for Advances, 2005-2009: 

Figure 3: Average Price for Iraqi Crude Oil, January 2004-March 2010: 

Figure 4: Estimates of the World's Largest Oil Reserves by Country, as 
of December 2007: 

Figure 5: Selected U.S. Organizations That Manage U.S. Security 
Support in Other Countries: 

Abbreviations: 

CERP: Commander's Emergency Response Program: 

DOD: Department of Defense: 

DSCA: Defense Security Cooperation Agency: 

FMS: Foreign Military Sales: 

I-CERP: Iraq-Commander's Emergency Response Program: 

IMF: International Monetary Fund: 

MNF-I: Multinational Forces-Iraq: 

USAID: U.S. Agency for International Development: 

USF-I: U.S. Forces-Iraq: 

[End of section] 

United States Government Accountability Office: Washington, DC 20548: 

September 13, 2010: 

Congressional Committees: 

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.[Footnote 1] 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.[Footnote 
2] 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.[Footnote 3] 
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.[Footnote 4] 

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[Footnote 5] for 
2005 through 2007. We also analyzed similar data on Iraq's advances 
[Footnote 6] 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. 

Results in Brief: 

GAO analysis of Iraqi revenue and expenditure 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 reduces the amount of 
available surplus funds to $11.8 billion. In April 2010, a senior 
Ministry of Finance official indicated that these advances should be 
deducted from the $52 billion cumulative budget surplus because they 
are committed for future expenditures or have been paid out.[Footnote 
7] According to this official and Board of Supreme Audit reports on 
Iraq's financial statements,[Footnote 8] these advances include 
funding for letters of credit,[Footnote 9] advance payments on 
domestic contracts, and other advances. However, Iraq's Board of 
Supreme Audit has noted concerns about Iraq's accounting for these 
advances. In 2009, the board concluded that weaknesses in accounting 
for advances could result in the misappropriation of government funds, 
the means by which ministries exceed their annual budgets, and the 
inaccurate reporting of expenditures.[Footnote 10] The composition of 
some of these advances also is unclear. For example, 40 percent of 
total outstanding advances through 2008 are classified by the Ministry 
of Finance as "other temporary advances," which are not otherwise 
defined. Under the terms of a February 2010 IMF arrangement, Iraq 
agreed to develop new procedures for approving, monitoring, and 
controlling advances; set a time schedule for collecting recoverable 
amounts; and write off those that were not recoverable. This Iraqi 
report is to be completed by September 30, 2010. 

A second method of evaluating Iraq's available resources is to examine 
its financial deposit balances. Iraqi government data and an 
independent audit report show that, as of December 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.[Footnote 11] 
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 held in state-owned banks as unavailable 
for government spending, stating that these funds belong to state-
owned enterprises and trusts established for orphans and government 
pensions, among other things. Therefore, according to the Ministry of 
Finance, only $15.3 billion of the $32.2 billion in deposits reported 
by the Central Bank of Iraq was unencumbered and available to the 
government of Iraq for spending. The IMF is seeking clarification on 
the amount of Iraq's financial deposits that is available for 
government spending. Under the terms of a February 2010 arrangement 
with the IMF, the Iraqi Ministry of Finance is required to complete a 
review of all central government accounts, 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, it was 
still under way as of August 2010. 

Iraqi government data indicate that security spending under the 
Ministries of Defense and Interior increased from $2.0 billion in 2005 
to an estimated $8.6 billion in 2009. In addition, these ministries 
set aside about $5.5 billion over this period for the purchase of 
equipment, training, and services under the U.S. Foreign Military 
Sales (FMS) program. In certain instances, the United States has 
provided an incentive for these ministries to increase their security 
spending by leveraging U.S. funds to supplement Iraq's FMS purchases. 
The Iraqi government also funded the Iraq-Commander's Emergency 
Response Program and assumed responsibility for the salaries of almost 
90,000 Sons of Iraq.[Footnote 12] While security spending has 
increased, our analysis of data from the Iraqi government, DOD, and 
the Trade Bank of Iraq showed that the ministries did not spend or set 
aside between $2.5 billion and $5.2 billion of their 2005 through 2009 
budgeted funds--funds that could have been used to address security 
needs.[Footnote 13] State and DOD officials cited overly centralized 
decision making and weak procurement capacity as reasons for the 
ministries' inability to spend these funds. In April 2010, Ministry of 
Defense officials received Ministry of Finance approval to use $143 
million of their unspent 2009 funds for FMS purchases. Ministry of 
Interior officials planned to use more than $300 million of their 
unspent 2009 funds for similar purposes. 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 forces 
under Iraq's security ministries. 

GAO believes that Congress should consider Iraq's available financial 
resources when it reviews the administration's fiscal year 2011 budget 
request and other potential future budget requests for additional 
funds to train and equip Iraqi security forces. Iraq generated an 
estimated cumulative budget surplus of $52.1 billion through December 
2009. Adjusting for outstanding advances, at least $11.8 billion of 
this surplus was available for future spending. Iraqi data indicate 
that this surplus has enabled Iraq to accumulate at least $15.3 
billion in available financial deposit balances, another means by 
which to assess Iraq's fiscal position. Additional clarity is needed 
on Iraq's outstanding advances and financial deposits to determine 
whether Iraq may have additional resources that are available for 
future spending. To this end, GAO recommends that State and Treasury 
work with the Iraqi government to further identify available 
resources, including by assisting Iraq in completing IMF-required 
reviews of outstanding advances and deposits in central government 
accounts. 

We provided State, Treasury, DOD, and the IMF with a draft of this 
report. The three agencies' comments are contained in appendixes V, 
VI, and VII, respectively. All three agencies and the IMF provided 
technical comments, which we incorporated in the report as 
appropriate. State and Treasury concurred with our recommendation and 
agreed to work with their Iraqi counterparts to identify available 
financial resources. Treasury also 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. State, Treasury, and DOD stated that the Iraqi government's 
available funds are closer to the low end of GAO's range, and that 
Iraq needs to maintain a fiscal reserve. We believe that it is 
premature to determine that Iraq's available resources fall at the low 
end of the range until Iraq has completed IMF-required reviews of 
outstanding advances and central government accounts, particularly in 
light of the substantial shortcomings associated with Iraq's 
accounting for advances and financial deposits. These reviews will 
clarify the total resources available for government spending in 2010 
and beyond. We agree that it may be prudent for Iraq to maintain a 
fiscal reserve. As part of 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 maintained this level with the at 
least $15.3 billion 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 2010. 

DOD also commented that it believes the overall message of the 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. Moreover, when 
completed, IMF-required reviews of Iraq's outstanding advances and 
central government accounts will clarify the total funds that are 
available to the government for spending in 2010 and beyond. While we 
do not predict Iraq's fiscal position through 2011, we note that Iraq 
had predicted deficit spending in each of the past 5 years, but ended 
each of these years with a cash surplus. 

Background: 

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.[Footnote 14] 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.[Footnote 15] 

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[Footnote 16] 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.[Footnote 17] 
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[Footnote 18] activities 
worldwide. (See appendix 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.[Footnote 19] 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. 
[Footnote 20] The Secretary of Defense also provided an annual report 
to Congress through 2004--under legislative provisions dating back to 
the 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. 

Iraq's Estimated Actual and Available Cumulative Budget Surplus 
through the End of 2009: 

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. 

Iraq Generated an Estimated $52.1 Billion Cumulative Budget Surplus 
through 2009: 

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.[Footnote 
21] 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.[Footnote 22] 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 
appendix II for more information on Iraq's oil revenues.) 

Table 1: Iraq's Estimated Annual Surpluses and Cumulative Budget 
Surplus, through 2009: 

Total revenues: 
Estimated budget surplus, by year: Cumulative through 2004: [B]; 
Estimated budget surplus, by year: 2005: $27.0 billion; Estimated 
budget surplus, by year: 2006: $32.7 billion; Estimated budget 
surplus, by year: 2007[A]: $43.6 billion; Estimated budget surplus, by 
year: 2008: $67.2 billion; Estimated budget surplus, by year: 2009: 
$46.8 billion; Estimated budget surplus, by year: Cumulative through 
2009: $217.3 billion[C]. 

Total expenditures: 
Estimated budget surplus, by year: Cumulative through 2004: [B]; 
Estimated budget surplus, by year: 2005: $20.6 billion; Estimated 
budget surplus, by year: 2006: $25.0 billion; Estimated budget 
surplus, by year: 2007[A]: $31.2 billion; Estimated budget surplus, by 
year: 2008: $56.1 billion; Estimated budget surplus, by year: 2009: 
$44.5 billion; Estimated budget surplus, by year: Cumulative through 
2009: $177.4 billion[C]. 

Cash surpluses[C]: 
Estimated budget surplus, by year: Cumulative through 2004: $5.8 
billion[B]; Estimated budget surplus, by year: 2005: $6.4 billion; 
Estimated budget surplus, by year: 2006: $7.7 billion; Estimated 
budget surplus, by year: 2007[A]: $12.4 billion; Estimated budget 
surplus, by year: 2008: $11.1 billion; Estimated budget surplus, by 
year: 2009: $2.2 billion; Estimated budget surplus, by year: 
Cumulative through 2009: $52.1 billion[C]. 

Source: GAO analysis of Iraqi Ministry of Finance data on government 
revenues and expenditures. 

Note: Annual cash surpluses may not equal the difference between total 
revenues and total expenditures due to rounding. 

[A] The 2007 Board of Supreme Audit report provides inconsistent 
information on expenditures. The narrative section of the report lists 
total expenditures as 39.3 trillion dinar ($31.2 billion), whereas the 
report's financial statements list expenditures as 32.7 trillion dinar 
($26.0 billion). The 2007 report states that this difference is due to 
a new accounting guide implemented by the Ministry of Finance, which 
requires the Board of Supreme Audit to report operating and investment 
spending separately. We used the 39.3 trillion dinar figure as an 
estimate of 2007 expenditures because we believe it includes both 
operating and investment expenditures. See Republic of Iraq, Board of 
Supreme Audit, Financial Statement for the Republic of Iraq through 
12/31/07 (Apr. 14, 2010). 

[B] The cumulative cash surplus through 2004 is based on information 
from the 2005 Board of Supreme Audit report. The 2005 report does not 
contain data on cumulative revenues and expenditures before 2005. See 
Republic of Iraq, Board of Supreme Audit, Financial Statement for the 
Republic of Iraq through 12/31/05 (Mar. 30, 2009). 

[C] To calculate the net cumulative surplus, we estimated the net 
cumulative surplus through the end 2009 in Iraqi dinars and then used 
the 2009 budget exchange rate (1,180 Iraqi dinar per U.S. dollar) to 
express it in U.S. dollars. Thus, the cumulative cash surplus is 
different from the sum of all annual surpluses due to the appreciation 
of the Iraqi dinar. To calculate cumulative revenues and expenditures, 
we converted each year's revenues and expenditures from Iraqi dinars 
to U.S. dollars at that year's exchange rate and summed the resulting 
dollar-denominated, annual revenues and expenditures through 2009. As 
a result, the cumulative cash surplus does not equal the difference 
between cumulative revenues and cumulative expenditures due to the 
appreciation of the Iraqi dinar. 

[End of table] 

We estimated Iraq's budget surpluses through the end of 2009[Footnote 
23] on the basis of revenue and expenditure data obtained from the 
Ministry of Finance.[Footnote 24] 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. 

According to the Ministry of Finance, Outstanding Advances Reduce 
Iraq's Available Surplus: 

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 figure 1). 

Figure 1: Estimate of Cumulative Outstanding Advances Recorded by the 
Iraqi Government, 2004-September 2009: 

[Refer to PDF for image: vertical bar graph] 

Year end: 2004: $6.4 billion; 
Year end: 2005: $10.0 billion; 
Year end: 2006: $11.9 billion; 
Year end: 2007: $16.7 billion; 
Year end: 2008: $30.4 billion; 
Year end: 2009 (through September): $40.3 billion. 

Source: GAO analysis of data provided by the Iraqi Ministry of Finance. 

[End of figure] 

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. 

Questions Remain about the Accounting for and Composition of Advances: 

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 appendix 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. 

Iraq's Budgets Have Been Unreliable Indicators of Iraq's Year-end 
Fiscal Balances: 

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. 

Figure 2: Iraq's Annual Budgeted Deficits, Actual Cash Accounting 
Balance and Actual Balance Adjusted for Advances, 2005-2009: 

[Refer to PDF for image: vertical bar graph] 

Year: 2005; 
Budgeted deficits: -$3.5 billion; 
Actual cash accounting balance: $6.4 billion; Actual balance adjusted 
for advances: $2.8 billion. 

Year: 2006; 
Budgeted deficits: -$4.1 billion; 
Actual cash accounting balance: $7.7 billion; Actual balance adjusted 
for advances: $5.7 billion. 

Year: 2007; 
Budgeted deficits: -$8.1 billion; 
Actual cash accounting balance: $12.4 billion; Actual balance adjusted 
for advances: $10.0 billion. 

Year: 2008; 
Budgeted deficits: -$5.1 billion; 
Actual cash accounting balance: $11.1 billion; Actual balance adjusted 
for advances: -$1.8 billion. 

Year: 2009; 
Budgeted deficits: -$15.9 billion; 
Actual cash accounting balance: $2.2 billion; Actual balance adjusted 
for advances: -$7.1 billion. 

Source: GAO analysis of Iraqi Ministry of Finance data on government 
revenues, expenditures, and advances; and Iraqi budget law. 

[End of figure] 

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. 

Iraq's 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 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. 

Ministry of Finance Reclassified $16.9 Billion of $32.2 Billion in 
Deposits as Encumbered and Not Available to the Iraqi Government: 

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. 

Table 2: Comparison of Financial Deposit Balances and Financial 
Deposits Available, through the end of 2009: 

State-owned banks: Central ministry accounts[A]; Financial deposit 
balances reported by the Central Bank of Iraq: $12.2 billion; Amount 
reclassified by the Ministry of Finance: $7.6 billion; Available 
financial deposit balances: $4.5 billion[B]. 

State-owned banks: State-owned enterprises' accounts[C]; Financial 
deposit balances reported by the Central Bank of Iraq: $9.3 billion; 
Amount reclassified by the Ministry of Finance: $9.3 billion; 
Available financial deposit balances: $0.0. 

State-owned banks: Subtotal; 
Financial deposit balances reported by the Central Bank of Iraq: $21.4 
billion; Amount reclassified by the Ministry of Finance: $16.9 
billion; Available financial deposit balances: $4.5 billion. 

Central Bank of Iraq; 
Financial deposit balances reported by the Central Bank of Iraq: $0.8 
billion; Amount reclassified by the Ministry of Finance: $0.0; 
Available financial deposit balances: $0.8 billion. 

Federal Reserve Bank of New York--Development Fund for Iraq; Financial 
deposit balances reported by the Central Bank of Iraq: $10.0 billion; 
Amount reclassified by the Ministry of Finance: $0.0; Available 
financial deposit balances: $10.0 billion. 

Total; 
Financial deposit balances reported by the Central Bank of Iraq: $32.2 
billion; Amount reclassified by the Ministry of Finance: $16.9 
billion; Available financial deposit balances: $15.3 billion. 

Sources: Data from the Central Bank of Iraq, Iraqi Ministry of 
Finance, and KPMG audit report of the International Advisory and 
Monitoring Board; and interviews with officials from the Central Bank 
of Iraq and the Iraqi Ministry of Finance. 

Note: Sums may differ from totals due to rounding. This analysis does 
not include about $400 million in government "financial sector 
deposits" reported by the Central Bank of Iraq (about 2.0 percent of 
total deposits in commercial banks). The analysis also excludes about 
$100 million of government-sector deposits reported by the Central 
Bank of Iraq to be held in private, commercial banks (about 0.4 
percent of total deposits in commercial banks). Including these 
additional deposits would increase the deposit balances reported by 
the Central Bank of Iraq from $32.2 billion to $32.7 billion. 

[A] The direct translation from Arabic to English for this category is 
"Government sector deposits (Centrally funded)." 

[B] Data from the Ministry of Finance did not indicate whether these 
deposits are held exclusively in state-owned banks. However, data from 
the Central Bank of Iraq show that about 99.6 percent of government- 
sector deposits in Iraqi banks (excluding the Central Bank of Iraq) is 
held in state-owned banks and 0.4 percent is held in private, 
commercial banks. 

[C] The direct translation from Arabic to English for this category is 
"Government sector deposits (Self funded)." 

[End of table] 

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.[Footnote 27] 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.[Footnote 28] 

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[Footnote 29] 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.[Footnote 30] 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.[Footnote 31] 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.[Footnote 
32] 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. 
[Footnote 33] 

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. 

Iraq's Financial Deposits Decreased from $41.1 Billion in 2008 to 
$32.2 Billion in 2009: 

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). 

Table 3: Iraq's Financial Deposits, through the end of 2007, 2008, and 
2009: 

Bank and location: State-owned banks in Iraq[A]; Financial deposits, 
by year: 2007: $13.8 billion; Financial deposits, by year: 2008: $19.7 
billion; Financial deposits, by year: 2009: $21.4 billion. 

Bank and location: Central Bank of Iraq; Financial deposits, by year: 
2007: $5.7 billion; Financial deposits, by year: 2008: $11.1 billion; 
Financial deposits, by year: 2009: $0.8 billion. 

Subtotal[B]: 
Financial deposits, by year: 2007: $19.5 billion; Financial deposits, 
by year: 2008: $30.8 billion; Financial deposits, by year: 2009: $22.2 
billion. 

Federal Reserve Bank of New York - Development Fund for Iraq: 
Financial deposits, by year: 2007: $9.9 billion; Financial deposits, 
by year: 2008: $10.3 billion; Financial deposits, by year: 2009: $10.0 
billion. 

Total: 
Financial deposits, by year: 2007: $29.4 billion; Financial deposits, 
by year: 2008: $41.1 billion; Financial deposits, by year: 2009: $32.2 
billion. 

Sources: IMF's International Financial Statistics and Ernst and Young 
and KPMG audit reports of the International Advisory and Monitoring 
Board (2007 and 2008 data); and the Central Bank of Iraq and the 
International Advisory and Monitoring Board (2009 data). 

[A] In prior GAO reports, we used the terms "banking sector" and 
"commercial banks" to describe state-owned and private banks in Iraq. 
We now use the term "state-owned banks" because by the end of 2009, 
almost all of Iraq's deposits in commercial banks were held at Iraq's 
state-owned banks (about 83 percent at the two state-owned commercial 
banks and about 17 percent at the five specialized state-owned banks). 

[B] Iraq also has about $100 million in private banks (about 0.4 
percent of Iraq's financial deposits) and about $400 million in 
government "financial sector deposits" (about 2.0 percent of total 
deposits in commercial banks). 

[End of table] 

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. 

Iraq Has Increased Its Spending on Security but Did Not Use All of Its 
Available Funds: 

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.[Footnote 
34] 

Iraq's Security Ministries Have Increased Spending Since 2005: 

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,[Footnote 35] increased its spending by 45 
percent annually, on average. 

Table 4: Estimated Iraqi Security Expenditures by Ministry, 2005-2009: 

Ministry of Defense: 
Estimated Iraqi security expenditures, by year: 2005: $1.1 billion; 
2006: $1.3 billion; 
2007: $2.3 billion; 
2008: $3.4 billion; 
2009[A]: $3.7 billion; 
Average annual growth rate (2005-2009): 27.9%. 

Ministry of Interior: 
2005: $0.9 billion; 
2006: $1.6 billion; 
2007: $3.1 billion; 
2008: $4.2 billion; 
2009[A]: $5.0 billion; 
Average annual growth rate (2005-2009): 44.7%. 

Total: 
2005: $2.0 billion; 
2006: $2.9 billion; 
2007: $5.3 billion; 
2008: $7.6 billion; 
2009[A]: $8.6 billion; 
Average annual growth rate (2005-2009): 35.9%. 

Source: GAO analysis of data from Iraq's Board of Supreme Audit (2005- 
2007), the Iraqi Ministry of Finance (2008), and the Iraqi Ministries 
of Defense and Interior (2009). 

Note: Sums may differ from totals due to rounding. Although 
expenditures are expressed in U.S. dollars in this table, we 
calculated the average annual growth rate on the basis of expenditures 
in Iraqi dinars. Doing so eliminates any potential exchange rate 
effects on the growth rate in expenditures. 

[A] 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 (about 4 percent of its total budget) was 
expended. 

[End of table] 

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. 

Table 5: Estimated Amounts Budgeted and Spent by the Iraqi Ministries 
of Defense and Interior, 2005-2009: 

Ministry of Defense: Budgeted; 
Estimated amounts budgeted and spent, by year: 2005: $1.3 billion; 
2006: $3.4 billion; 
2007: $4.1 billion; 
2008: $5.3 billion; 
2009[A]: $3.9 billion. 

Ministry of Defense: Spent; 
Estimated amounts budgeted and spent, by year: 2005: $1.1 billion; 
2006: $1.3 billion; 
2007: $2.3 billion; 
2008: $3.4 billion; 
2009[A]: $3.7 billion. 

Ministry of Defense: Percentage spent; Estimated amounts budgeted and 
spent, by year: 2005: 83.2%; 
2006: 38.7%; 
2007: 55.3%; 
2008: 64.4%; 
2009[A]: 92.5%. 

Ministry of Interior: Budgeted; 
Estimated amounts budgeted and spent, by year: 2005: $1.1 billion; 
2006: $2.0 billion; 
2007: $3.2 billion; 
2008: $5.7 billion; 
2009[A]: $5.5 billion. 

Ministry of Interior: Spent; 
Estimated amounts budgeted and spent, by year: 2005: $0.9 billion; 
2006: $1.6 billion; 
2007: $3.1 billion; 
2008: $4.2 billion; 
2009[A]: $5.0 billion. 

Ministry of Interior: Percentage spent; Estimated amounts budgeted and 
spent, by year: 2005: 86.5%; 
2006: 79.8%; 
2007: 95.7%; 
2008: 73.1%; 
2009[A]: 91.0%. 

Source: GAO analysis of data from Iraq's Board of Supreme Audit (2005- 
2007), the Iraqi Ministry of Finance (2008), and the Iraqi Ministries 
of Defense and Interior (2009). 

Note: Budget execution rates may differ from averages due to rounding. 
Amounts spent do not reflect funds set aside for FMS purchases, 
letters of credit, or other advances. These set-asides are not 
included in expenditure totals until the purchased items have been 
delivered and recorded by the Ministry of Finance. Later in this 
section of the report, we factor in these set-asides as part of a 
separate analysis of unused funds by the security ministries. 

[A] 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 (about 4 percent of its total budget) was 
expended. 

[End of table] 

Iraq's Security Ministries Have Used the FMS Program to Purchase 
Equipment, Training, and Services: 

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);[Footnote 36] 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.[Footnote 37] 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.[Footnote 38] DOD then oversees 
contracting with suppliers, billing, and delivery of Iraq's purchases. 

Table 6: Funds Set Aside for FMS Purchases by the Iraqi Ministries of 
Defense and Interior, 2006-2009: 

Ministry of Defense: 
Funds set aside for FMS purchases, by year: 2006: $1.638 billion; 
2007: $1.1 billion; 
2008: $1.551 billion; 
2009: $0; 
Total: $4.290 billion. 

Ministry of Interior: 
Funds set aside for FMS purchases, by year: 2006: $169 million; 
2007: $0; 
2008: $671 million; 
2009: $404 million; 
Total: $1.244 billion. 

Total: 
Funds set aside for FMS purchases, by year: 2006: $1.807 billion; 
2007: $1.1 billion; 
2008: $2.223 billion; 
2009: $404 million; 
Total: $5.534 billion. 

Source: GAO analysis of data provided by the Defense Security 
Cooperation Agency. 

Note: Sums may differ from totals due to rounding. The years in this 
table indicate when funds were deposited in Iraq's FMS account, rather 
than the year during which these funds were budgeted to the Ministries 
of Defense and Interior. 

[End of table] 

From January 2006 through December 31, 2009, Iraq signed purchase 
agreements[Footnote 39] with the United States to buy an estimated 
$5.1 billion in equipment, training, and services through the FMS 
program.[Footnote 40] 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.[Footnote 41] Moreover, FMS purchases include training, 
sustainment, spare parts, and logistics support to help increase the 
likelihood that equipment will remain functional over time. 

Table 7: FMS Purchases Using U.S. and Iraqi Funding: 

FMS purchase: Armed scout helicopters; Implementation date[A]: Oct. 
2008 (Iraq) Jan./Aug. 2009 (U.S.); Iraqi ministry: Defense; 
Iraqi funding: $402.2 million; 
U.S. funding: $43.0 million; 
Total cost: $445.2 million. 

FMS purchase: Umm Qasr seawall; 
Implementation date[A]: Feb. 2008 (Iraq) Sept. 2008 (U.S.); Iraqi 
ministry: Defense; 
Iraqi funding: $45.0 million; 
U.S. funding: $7.7 million; 
Total cost: $52.7 million. 

FMS purchase: Mi-17 CT helicopters; 
Implementation date[A]: Dec. 2007 (Iraq) Dec. 2007 (U.S.); Iraqi 
ministry: Defense; 
Iraqi funding: $189.4 million; 
U.S. funding: $155.6 million; 
Total cost: $345.0 million. 

FMS purchase: 35m patrol boats; 
Implementation date[A]: June 2009 (Iraq) July 2009 (U.S.); Iraqi 
ministry: Defense; 
Iraqi funding: $95.8 million; 
U.S. funding: $154.0 million; 
Total cost: $249.8 million. 

FMS purchase: T-6A training aircraft; Implementation date[A]: June 
2009 (Iraq) July 2009 (U.S.); Iraqi ministry: Defense; 
Iraqi funding: $110.0 million; 
U.S. funding: $99.8 million; 
Total cost: $209.8 million. 

FMS purchase: General directorate of counterterrorism buildings; 
Implementation date[A]: June 2009 (Iraq)[B]; Iraqi ministry: Interior; 
Iraqi funding: $14.3 million; 
U.S. funding: $7.0 million; 
Total cost: $21.3 million. 

FMS purchase: Offshore support vessels; Implementation date[A]: Sept. 
2009 (Iraq) Mar. 2010 (U.S.); Iraqi ministry: Defense; 
Iraqi funding: $27.0 million; 
U.S. funding: $82.8 million; 
Total cost: $109.8 million. 

FMS purchase: Total; 
Iraqi funding: $883.7 million; 
U.S. funding: $549.9 million; 
Total cost: $1.434 billion. 

Source: GAO analysis of data provided by United States Forces-Iraq and 
U.S. Foreign Military Sales purchase agreements provided by United 
States Forces-Iraq and the Defense Finance and Accounting Service. 

[A] This category refers to the date that DSCA began implementation of 
the Iraqi-funded and U.S.-funded FMS cases that make up each cost-
sharing arrangement. The first date refers to the Iraqi-funded case, 
and the second date refers to the U.S.-funded case. 

[B] There is no implementation date for the U.S. portion of this cost- 
sharing arrangement because, according to USF-I, it funded its share 
through a direct contract, rather than through an FMS case. 

[End of table] 

Iraq Has Funded I-CERP and Assumed Responsibility for the Sons of Iraq 
and Other Security Contracts: 

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.[Footnote 42] 
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.[Footnote 43] 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.[Footnote 44] 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. 

Iraq's Security Ministries Have Not Fully Used Available Resources, 
and Funding for I-CERP Has Fallen Short of Expectations: 

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. 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. 

Table 8: Estimated Unused Funds by the Iraqi Ministries of Defense and 
Interior, 2005-2009: 

Total budgeted: 
Estimated unused funds: 
Ministry of Interior: $18.6 billion; Ministry of Defense: $19.8 
billion; 
Total: (2005-2009): $38.4 billion. 

Total expenditures: 
Estimated unused funds: 
Ministry of Interior: ($15.7 billion); Ministry of Defense: ($12.6 
billion); Total: (2005-2009): ($28.3 billion). 

Subtotal unspent funds: 
Estimated unused funds: 
Ministry of Interior: $2.9 billion; 
Ministry of Defense: $7.1 billion; 
Total: (2005-2009): $10.0 billion. 

Outstanding advances: 
Estimated unused funds: 
Ministry of Interior: ($1.1-1.6 billion); Ministry of Defense: ($3.7-
5.9 billion); Total: (2005-2009): ($4.9-7.5 billion). 

Unused funds: 
Estimated unused funds: 
Ministry of Interior: $1.3-$1.7 billion; Ministry of Defense: $1.2-
$3.4 billion; Total: (2005-2009): $2.5-$5.2 billion. 

Source: GAO analysis of data from Iraq's Board of Supreme Audit; the 
Iraqi Ministries of Finance, Defense, and Interior; Trade Bank of 
Iraq; and the Defense Security Cooperation Agency. 

Note: To calculate the unspent funds for 2005 through 2009, we found 
the cumulative unspent funds through 2009 in Iraqi dinars and then 
used the 2009 budget exchange rate to express it in U.S. dollars. 
Estimates of unused funds may not equal the difference between total 
unspent funds and outstanding advances, and sums may differ from 
totals due to rounding. 

[End of table] 

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. 

The Administration Is Requesting $2 Billion in Additional Funds for 
the Iraqi Military and Police Forces: 

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,[Footnote 45] and a $2 billion 
request as part of the administration's fiscal year 2011 budget 
proposal,[Footnote 46] 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[Footnote 47] 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 defense, and: 

* 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. 

Conclusions: 

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. 

Matter for Congressional Consideration: 

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. 

Recommendation for Executive Action: 

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. 

Agency Comments and Our Evaluation: 

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 
[hyperlink, 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. 

Signed by: 

Joseph A. Christoff: 
Director, International Affairs and Trade: 

List of Committees: 

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, Foreign Operations, and Related Programs: 
Committee on Appropriations: 
United States Senate: 

The Honorable Ike Skelton: 
Chairman: 
The Honorable Howard P. McKeon: 
Ranking Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable John M. Spratt, Jr. 
Chairman: 
The Honorable Paul Ryan: 
Ranking Member: 
Committee on the Budget: 
House of Representatives: 

The Honorable Howard L. Berman: 
Chairman: 
The Honorable Ileana Ros-Lehtinen: 
Ranking Member: 
Committee on Foreign Affairs: 
House of Representatives: 

The Honorable Edolphus Towns: 
Chairman: 
The Honorable Darrell Issa: 
Ranking Member: 
Committee on Oversight and Government Reform: House of Representatives: 

The Honorable John F. Tierney: 
Chairman: 
The Honorable Jeff Flake: 
Ranking Member: 
Subcommittee on National Security and Foreign Affairs: Committee on 
Oversight and Government Reform: House of Representatives: 

The Honorable Norman D. Dicks: 
Chairman: 
The Honorable C.W. Bill Young: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

The Honorable Nita M. Lowey: 
Chairwoman: 
The Honorable Kay Granger: 
Ranking Member: 
Subcommittee on State, Foreign Operations, and Related Programs: 
Committee on Appropriations: 
House of Representatives: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

In this report, we provide 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. This report builds on 
GAO's extensive body of work on Iraq, including our August 2008 report 
on Iraq's fiscal balances from 2005 through 2007 and our March 2009 
report in which we updated those figures through the end of 2008. 
[Footnote 48] 

Iraq's Estimated Actual and Available Cumulative Budget Surplus or 
Deficit: 

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 Supreme Audit on Iraq's 
financial accounts for 2005, 2006, and 2007.[Footnote 49] 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 
analyzed data from the U.S. Defense Security Cooperation Agency 
(DSCA)[Footnote 50] 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 International Monetary Fund (IMF) 
documents and interviewed officials from the Departments of State 
(State), Defense (DOD), and the Treasury (Treasury); the World Bank; 
and the IMF. 

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 accounts that it submitted to the Board of Supreme Audit 
for review. The data on total 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 December 2009 from the Ministry of 
Finance through Treasury. It is unclear whether these data include 
adjustments made by the Ministry of Finance during its end-of-year 
reconciliation process. We found that the 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 used the annual Iraqi dinar-dollar budget exchange rates 
to convert each year's dinar-denominated annual surplus into dollars. 
To compute the dinar-denominated cumulative cash surplus through the 
end of 2009, we added the cash surplus accumulated before 2005, as 
reported by Iraq's Board of 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. This dollar-
denominated cumulative cash surplus differs from the sum of annual 
dollar-denominated cash surpluses due to the appreciation of the Iraqi 
dinar. 

To estimate the amount of outstanding advances at the end of September 
2009, we first determined the amount of outstanding advances through 
the end of 2007 on the basis of data from the 2007 Board of Supreme 
Audit report. Using this amount as a starting balance, we added the 
net annual change in outstanding advances (total advances issued minus 
total advances closed, regardless of the year in which they were 
issued) on the basis of data from (1) the 2008 final accounts that 
were submitted by the Ministry of Finance to the Board of Supreme 
Audit and (2) Ministry of Finance data through September 2009. We 
interviewed officials from the 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. 

Iraq's Financial Deposit Balances: 

To assess the amount of the Iraqi government's financial deposit 
balances, we interviewed and obtained documentation from the Iraqi 
Minister of Finance, a senior Ministry of Finance official, the 
Governor of the Central Bank of Iraq, and staff from the two largest 
state-owned banks, Rafidain and Rasheed. The Iraqi government's 
financial deposits are held in Iraq's state-owned banks[Footnote 51] 
as well as in the Central Bank of Iraq and the U.S. Federal Reserve 
Bank in New York's Development Fund for Iraq. We also reviewed 
independent audit reports for the Central Bank of Iraq[Footnote 52] 
and Iraq's largest state-owned bank, Rafidain.[Footnote 53] 

The Central Bank of Iraq and the Ministry of Finance provided 
different sets of data on Iraq's financial deposits at state-owned 
banks in Iraq. The Central Bank of Iraq provided data on the account 
balances of government-sector accounts in Iraq's state-owned banks 
that were disaggregated by account ownership--that is, the central 
government; the self-funded government entities, also known as state-
owned enterprises; and the financial sector. The Central Bank of Iraq 
based its data on information about required reserves that commercial 
banks are required to maintain with the Central Bank as a fraction of 
all deposits held in commercial banks. In contrast, the Ministry of 
Finance provided data on the available account balances to the central 
government for implementing the operating and investment budgets as of 
the end of November 2009. The Ministry of Finance data show that only 
a small fraction of the amount 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 to independently verify the statements by 
the Central Bank of Iraq and the Ministry of Finance; thus, we report 
a range using both sets of data. 

The Ministry of Finance and the Central Bank of Iraq agree on the 
amount 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. 

Iraq's Estimated Spending on Security: 

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,[Footnote 54] 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 of 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 
[Footnote 55] 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 Ministries 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 
States 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 credit issued 
that remained outstanding as of December 31, 2009. Finally, we also 
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.[Footnote 56] 

Examples of Other Countries' Contributions to the Cost of U.S. 
Security Support: 

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 from State, including officials in the Bureaus of East Asian 
and Pacific 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 Defense Institute for Security 
Assistance Management. We traveled to 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. 

In selecting countries as illustrative examples of cost-sharing for 
U.S. security support from the number of U.S. cost-sharing 
arrangements we reviewed, we considered several factors, including 
geographic location, economic income classification,[Footnote 575] 
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 not 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. 

[End of section] 

Appendix II: Iraq's Oil Revenues: 

This appendix provides information on Iraq's oil revenues. Oil exports 
are 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). 

Table 9: Oil Export Revenues, 2005-2009: 

Oil export revenues: 
Oil export revenues, by year: 
2005: $23.0 billion; 
2006: $29.8 billion; 
2007: $37.8 billion; 
2008: $61.9 billion; 
2009: $39.0 billion. 

All other revenue: 
Oil export revenues, by year: 
2005: $4.0 billion; 
2006: $2.9 billion; 
2007: $5.8 billion; 
2008: $5.3 billion; 
2009: $8.0 billion. 

Total: 
Oil export revenues, by year: 
2005: $27.0 billion; 
2006: $32.7 billion; 
2007: $43.6 billion; 
2008: $67.2 billion; 
2009: $47.0 billion. 

Oil export revenue as a percentage of total: 
Oil export revenues, by year: 
2005: 85.3%; 
2006: 91.1%; 
2007: 86.7%; 
2008: 92.1%; 
2009: 83.0%. 

Source: GAO analysis of Central Bank of Iraq oil receipts, 
International Monetary Fund projections of non-oil export revenue, and 
Iraqi Ministry of Finance revenue data. 

[End of table] 

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. 

Figure 3: Average Price for Iraqi Crude Oil, January 2004-March 2010: 

[Refer to PDF for image: vertical bar graph] 

Average 2004-2009: $58.70 per barrel. 

Month-Year: January 2004; 
Price: $26.4. 

Month-Year: February 2004; 
Price: $26.35. 

Month-Year: March 2004; 
Price: $27.79. 

Month-Year: April 2004; 
Price: $29.32. 

Month-Year: May 2004; 
Price: $30.27. 

Month-Year: June 2004; 
Price: $32.2. 

Month-Year: July 2004; 
Price: $27.06. 

Month-Year: August 2004; 
Price: $33.99. 

Month-Year: September 2004; 
Price: $34.83. 

Month-Year: October 2004; 
Price: $38.47. 

Month-Year: November 2004; 
Price: $36.88. 

Month-Year: December 2004; 
Price: $29.81. 

Month-Year: January 2005; 
Price: $27.46. 

Month-Year: February 2005; 
Price: $27.04. 

Month-Year: March 2005; 
Price: $38.69. 

Month-Year: April 2005; 
Price: $41.92. 

Month-Year: May	2005; 
Price: $42.33. 

Month-Year: June 2005; 
Price: $42.2. 

Month-Year: July 2005; 
Price: $49.42. 

Month-Year: August 2005; 
Price: $53.35. 

Month-Year: September 2005; 
Price: $55.42. 

Month-Year: October 2005; 
Price: $54.61. 

Month-Year: November 2005; 
Price: $47.73. 

Month-Year: December 2005; 
Price: $45.76. 

Month-Year: January 2006; 
Price: $47.82. 

Month-Year: February 2006; 
Price: $52.22. 

Month-Year: March 2006; 
Price: $51.49. 

Month-Year: April 2006; 
Price: $54.4. 

Month-Year: May 2006; 
Price: $59.64. 

Month-Year: June 2006; 
Price: $60.99. 

Month-Year: July 2006; 
Price: $62.1. 

Month-Year: August 2006; 
Price: $61.46. 

Month-Year: September 2006; 
Price: $59.16. 

Month-Year: October 2006; 
Price: $52.48. 

Month-Year: November 2006; 
Price: $48.94. 

Month-Year: December 2006; 
Price: $51.87. 

Month-Year: January 2007; 
Price: $49.62. 

Month-Year: February 2007; 
Price: $48.24. 

Month-Year: March 2007; 
Price: $50.47. 

Month-Year: April 2007; 
Price: $55.28. 

Month-Year: May 2007; 
Price: $57.12. 

Month-Year: June 2007; 
Price: $60.94. 

Month-Year: July 2007; 
Price: $64.79. 

Month-Year: August 2007; 
Price: $66.64. 

Month-Year: September 2007; 
Price: $66.39. 

Month-Year: October 2007; 
Price: $72.19. 

Month-Year: November 2007; 
Price: $79.13. 

Month-Year: December 2007; 
Price: $84.15. 

Month-Year: January 2008; 
Price: $82.84. 

Month-Year: February 2008; 
Price: $87.56. 

Month-Year: March 2008; 
Price: $91.01. 

Month-Year: April 2008; 
Price: $95.13. 

Month-Year: May	2008; 
Price: $104.19. 

Month-Year: June 2008; 
Price: $116.26. 

Month-Year: July 2008; 
Price: $123.27. 

Month-Year: August 2008; 
Price: $112.88. 

Month-Year: September 2008; 
Price: $101.89. 

Month-Year: October 2008; 
Price: $84.27. 

Month-Year: November 2008; 
Price: $58.91. 

Month-Year: December 2008; 
Price: $42.74. 

Month-Year: January 2009; 
Price: $34.6. 

Month-Year: February 2009; 
Price: $37. 

Month-Year: March 2009; 
Price: $37.83. 

Month-Year: April 2009; 
Price: $44.23. 

Month-Year: May 2009; 
Price: $49.42. 

Month-Year: June 2009; 
Price: $57.15. 

Month-Year: July 2009; 
Price: $64.11. 

Month-Year: August 200; 
Price: $64.6. 

Month-Year: September 2009; 
Price: $68.14. 

Month-Year: October 2009; 
Price: $66.17. 

Month-Year: November 2009; 
Price: $73.3. 

Month-Year: December 2009; 
Price: $73.68. 

Month-Year: January 2010; 
Price: $73.64. 

Month-Year: February 2010; 
Price: $74.11. 

Month-Year: March 2010; 
Price: $75.19. 

Source: GAO analysis of Central Bank of Iraq data. 

[End of figure] 

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. 

Figure 2: Estimates of the World's Largest Oil Reserves by Country, as 
of December 2007: 

[Refer to PDF for image: horizontal bar graph] 

Country: Saudi Arabia; 
Oil reserves: 264.21 bbl. 

Country: Iran; 
Oil reserves: 138.4 bbl. 

Country: Iraq; 
Oil reserves: 115.0 bbl. 

Country: Kuwait; 
Oil reserves: 101.5 bbl. 

Country: United Arab Emirates; 
Oil reserves: 97.8 bbl. 

Country: Venezuela; 
Oil reserves: 87.04 bbl. 

Country: Russia; 
Oil reserves: 79.43 bbl. 

Country: Libya; 
Oil reserves: 41.46 bbl. 

Country: Kazakhstan; 
Oil reserves: 39.83 bbl. 

Country: Nigeria; 
Oil reserves: 36.22 bbl. 

Country: United States; 
Oil reserves: 30.46 bbl. 

Country: Canada; 
Oil reserves: 27.66 bbl. 

Source: Energy Information Administration data. 

[End of figure] 

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. 

[End of section] 

Appendix III: Amount and Categories of Iraq's Outstanding Advances 
through 2008: 

This appendix provides information on the amount and categories of 
Iraq's outstanding advances through the end of 2008. The amounts 
listed in table 10 represent the net annual change in outstanding 
advances (total advances issued minus total advances closed, 
regardless of the year in which they were issued) for 2005 through 
2008 and outstanding advances through the end of 2004 and 2008. As 
shown in table 10, the Board of Supreme Audit identifies 26 categories 
of advances, but the composition of advances is unclear. For example, 
40 percent of all outstanding advances through the end of 2008 are 
categorized as "other temporary advances," which are not fully 
defined. The "contractors advances" category, which was cited by a 
senior Ministry of Finance official as an example of an advance, 
accounted for 3 percent of all outstanding advances. This same 
official also stated that funds transferred for FMS purchases are 
treated as advances. However, the Board of Supreme audit does not 
include a category of advances that clearly identifies these transfers. 

Table 10: Iraq's Outstanding Advances by Category, through 2008: 

Type of advance: Temporary: Work and services implementation; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $1.441 billion; 
2005: $1.798 billion; 
2006: ($892.2v); 
2007: $718.1 million; 
2008: $2.274 billion; 
Cumulative through 2008[A]: Amount: $5.962 billion; 
Cumulative through 2008[A]: Percentage: of total: 20.0%. 

Type of advance: Temporary: Work/Business committees; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $26.4 million; 
2005: $18.4 million; 
2006: $28.8 million; 
2007: $13.5 million; 
2008: $101.0 million; 
Cumulative through 2008[A]: Amount: $207.3 million; 
Cumulative through 2008[A]: Percentage: of total: 1.0%. 

Type of advance: Temporary: Return travel (for recovering travel fees); 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $1.6 million; 
2005: $0.0; 
2006: $0.0; 
2007: ($1.9 million); 
2008: $0.0; 
Cumulative through 2008[A]: Amount: $0.0; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Temporary: Advertising; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.1 million; 
2005: $0.0; 
2006: $0.0; 
2007: $0.1 million; 
2008: $0.9 million; 
Cumulative through 2008[A]: Amount: $1.1 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Temporary: Other; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $3.579 billion; 
2005: $227.5 million; 
2006: $1.672 billion; 
2007: $1.018 billion; 
2008: $4.338 billion; 
Cumulative through 2008[A]: Amount: $12.255 billion; 
Cumulative through 2008[A]: Percentage: of total: 40.0%. 

Type of advance: Temporary: Subtotal; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $5.049 billion; 
2005: $2.044 billion; 
2006: $808.1 million; 
2007: $1.748 billion; 
2008: $6.714 billion; 
Cumulative through 2008[A]: Amount: $18.425 billion; 
Cumulative through 2008[A]: Percentage: of total: 61.0%. 

Type of advance: Employee: Travel; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.3 million; 
2005: $2.9 million; 
2006: ($0.6 million); 
2007: $0.2 million; 
2008: ($1.8 million); 
Cumulative through 2008[A]: Amount: $1.7 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Employee: Mission/Dispatching/Delegation; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $1.4 million; 
2005: $87.5 million; 
2006: $5.3 million; 
2007: $0.6 million; 
2008: $1.3 million; 
Cumulative through 2008[A]: Amount: $119.7 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Employee: Transfer; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.0; 
2005: $0.0; 
2006: $0.0; 
2007: $0.0; 
2008: $0.3 million; 
Cumulative through 2008[A]: Amount: $0.3 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Employee: Salaries; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $14.7 million; 
2005: $66.7 million; 
2006: ($0.9 million); 
2007: $27.1 million; 
2008: $468.6 million; 
Cumulative through 2008[A]: Amount: $597.6 million; 
Cumulative through 2008[A]: Percentage: of total: 2.0%. 

Type of advance: Employee: Hajj/Pilgrimage; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.0; 
2005: $0.0; 
2006: $0.0; 
2007: $0.1 million; 
2008: $0.0; 
Cumulative through 2008[A]: Amount: $0.1 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Employee: Subtotal; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $16.5; 
2005: $157.1 million; 
2006: $3.9 million; 
2007: $27.9 million; 
2008: $468.4 million; 
Cumulative through 2008[A]: Amount: $719.5 million; 
Cumulative through 2008[A]: Percentage: of total: 2.0%. 

Type of advance: Permanent/Sustainable: Cash disbursement (petty cash); 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $2.0; 
2005: $6.5 million; 
2006: $4.0 million; 
2007: ($2.2 million); 
2008: $23.8 million; 
Cumulative through 2008[A]: Amount: $37.0 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Permanent/Sustainable: Cash payments/treasuries; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.0; 
2005: $0.2 million; 
2006: $145.4 million; 
2007: $0.3 million; 
2008: $440.8 million; 
Cumulative through 2008[A]: Amount: $623.1 million; 
Cumulative through 2008[A]: Percentage: of total: 2.0%. 

Type of advance: Permanent/Sustainable: Fuel; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.2; 
2005: $0.0; 
2006: $0.1 million; 
2007: $0.3 million; 
2008: $0.1 million; 
Cumulative through 2008[A]: Amount: $0.7 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Permanent/Sustainable: Maintenance; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $1.3 million; 
2005: $0.1 million; 
2006: $0.0; 
2007: $0.1 million; 
2008: $0.2 million; 
Cumulative through 2008[A]: Amount: $2.0 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Permanent/Sustainable: Committee purposes 
(procurements); 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.0; 
2005: $0.0; 
2006: $0.0; 
2007: $0.0; 
2008: $6.2 million; 
Cumulative through 2008[A]: Amount: $6.2 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Permanent/Sustainable: Other; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $17.0; 
2005: $0.3 million; 
2006: $0.9 million; 
2007: ($2.5 million); 
2008: $0.0; 
Cumulative through 2008[A]: Amount: $20.2 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Permanent/Sustainable: Subtotal; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $20.4; 
2005: $7.2 million; 
2006: $150.4 million; 
2007: ($4.0 million); 
2008: $471.1 million; 
Cumulative through 2008[A]: Amount: $689.4 million; 
Cumulative through 2008[A]: Percentage: of total: 2.0%. 

Type of advance: Credit: Credit; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.0; 
2005: $0.0; 
2006: $179.6 million; 
2007: $0.0; 
2008: $0.0; 
Cumulative through 2008[A]: Amount: $224.5 million; 
Cumulative through 2008[A]: Percentage: of total: 1.0%. 

Type of advance: Credit: Letters of credit (document); 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $1.110 billion; 
2005: $1.134 billion; 
2006: $179.6 million; 
2007: $485.5 million; 
2008: $4.499 billion; 
Cumulative through 2008[A]: Amount: $8.696 billion; 
Cumulative through 2008[A]: Percentage: of total: 29.0%. 

Type of advance: Credit: Simple (small) letters of credit; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.0; 
2005: $0.0; 
2006: $705.4 million; 
2007: ($50.5 million); 
2008: $9.7 million; 
Cumulative through 2008[A]: Amount: ($45.0 million); 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Credit: Foreign transfers; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.0; 
2005: $211.6 million; 
2006: ($1.3 million); 
2007: $245.7 million; 
2008: $116.6 million; 
Cumulative through 2008[A]: Amount: $775.5 million; 
Cumulative through 2008[A]: Percentage: of total: 3.0%. 

Type of advance: Credit: Subtotal; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $1.110 billion; 
2005: $1.346 billion; 
2006: $109.1 million; 
2007: $680.7 million; 
2008: $4.626 billion; 
Cumulative through 2008[A]: Amount: $9.651 billion; 
Cumulative through 2008[A]: Percentage: of total: 32.0%. 

Type of advance: Contractors: Initial (advance) payment; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $153.7; 
2005: $41.5v; 
2006: $10.6 million; 
2007: ($8.9 million); 
2008: $461.2 million; 
Cumulative through 2008[A]: Amount: $709.2 million; 
Cumulative through 2008[A]: Percentage: of total: 2.0%. 

Type of advance: Contractors: Equipment and machinery; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $1.5; 
2005: $6.0 million; 
2006: ($0.1 million); 
2007: ($.3 million); 
2008: ($0.2 million); 
Cumulative through 2008[A]: Amount: $8.6 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Contractors: Contractors; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.3; 
2005: $0.3; 
2006: $0.0; 
2007: $4.3 million; 
2008: $73.5 million; 
Cumulative through 2008[A]: Amount: $78.3 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Contractors: Subtotal; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $155.5; 
2005: $47.5 million; 
2006: $10.5 million; 
2007: ($4.9 million); 
2008: $534.4 million; 
Cumulative through 2008[A]: Amount: $796.2 million; 
Cumulative through 2008[A]: Percentage: of total: 3.0%. 

Type of advance: Other: Claims; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.1; 
2005: $0.0; 
2006: $0.8 million; 
2007: ($0.4 million); 
2008: ($0.5 million); 
Cumulative through 2008[A]: Amount: $0.3 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Other: Projects financed by others; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.0; 
2005: 0.0; 
2006: $0.0; 
2007: $28.5 million; 
2008: $108.4 million; 
Cumulative through 2008[A]: Amount: $138.3 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Other: Temporary advances for external agreements; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.0; 
2005: 0.0; 
2006: $1.6 million; 
2007: ($0.3 million); 
2008: $0.0; 
Cumulative through 2008[A]: Amount: $1.7 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Other: Subtotal; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $0.1 million; 
2005: $0.0; 
2006: $2.4 million; 
2007: $27.9 million; 
2008: $108.0 million; 
Cumulative through 2008[A]: Amount: $140.4 million; 
Cumulative through 2008[A]: Percentage: of total: 0.0%. 

Type of advance: Total; 
Outstanding advances paid by the Iraqi government, by year: 
Cumulative through 2004: $6.351 billion; 
2005: $3.602 billion; 
2006: $1.968 billion; 
2007: $2.476 billion; 
2008: $12.921 billion; 
Cumulative through 2008[A]: Amount: $30.422 billion; 
Cumulative through 2008[A]: Percentage: of total: 100%. 

Sources: Iraq's Board of Supreme Audit reports (2005-2007); and Iraq's 
financial accounts submitted to the Board of Supreme Audit for review 
(2008). 

Note: The categories of advances are based on English translations of 
Arabic-language Board of Supreme Audit reports and Arabic-language 
Ministry of Finance accounts submitted to the Board of Supreme Audit. 
Consequently, the names of the categories varied slightly from year to 
year. 

[A] The amount of cumulative outstanding advances through 2008 does 
not equal the sum of the annual net change in outstanding advances due 
the appreciation of the Iraqi dinar. 

[End of table] 

[End of section] 

Appendix IV: Cost-Sharing Arrangements for U.S. Security Support 
Activities in Other Countries: 

This appendix describes cost-sharing arrangements for U.S. security 
support activities[Footnote 58] in selected partner nations. The 
United States provides a range of security support under State and DOD 
authorities to many 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. 

The United States Undertakes a Variety of Security Support Activities 
in Other Countries: 

The United States provides a variety of security support under State 
and DOD authorities to many countries.[Footnote 59] In more than 100 
countries, U.S. personnel provide security assistance under the 
direction and supervision of State's Chief of Mission.[Footnote 60] 
Security assistance activities include such programs as FMS, Foreign 
Military Financing, and International Military Education and Training. 
The Foreign Military Financing program consists of congressionally 
appropriated grants and loans to eligible governments and 
international organizations to purchase U.S. defense articles, 
services, and training through FMS or Direct Commercial Sales 
channels. The International Military Education and Training program 
consists of training for foreign military personnel in the United 
States, overseas U.S. facilities, and participating countries on a 
grant basis. 

In addition, organizations under DOD authority, such as U.S. Forces- 
Korea in South Korea and U.S. Forces-Japan, conduct a variety of 
security support activities, such as: 

* training foreign forces, including joint combined exchange training 
of U.S. special operations forces along with friendly foreign forces; 

* logistics support for foreign militaries, including agreements with 
eligible 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 selected 
incremental costs for certain training partners. 

The United States may have organizations under both State and DOD 
authorities within countries where the security relationship or other 
factors necessitate the type of activities traditionally undertaken by 
each. For example, in Saudi Arabia, two separate U.S. organizations 
operate under State--the U.S. Military Training Mission and the newly 
established Office of Program Management-Ministry of Interior. In 
addition, one organization operates under DOD authority--the Office of 
the Program Manager-Saudi Arabia National Guard. The three 
organizations provide training, advisory, and technical assistance to 
the government of Saudi Arabia. The type of security support the 
United States provides to Iraq and other countries depends on several 
factors, including host countries' security-related goals, prior 
experience in purchases of U.S. equipment or training, and ability to 
pay. 

Countries at Varying Income Levels Contribute to the Cost of U.S. 
Security Support Activities: 

Several countries, representing a variety of income levels,[Footnote 
61] provide cash 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 activities depend on the U.S. and host country security 
relationship as well as the country's 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 Korea, and 
Thailand represent a range of geographic locations, income levels, 
U.S. troop levels, and U.S. security support organizations (see figure 
5).[Footnote 62] 

Figure 5: Selected U.S. Organizations That Manage U.S. Security 
Support in Other Countries: 

[Refer to PDF for image: map] 

Country: Kuwait: High-income economy: 
State organization. 

Country: Saudi Arabia: High-income economy: 
2 State organizations; 
DOD organization. 

Country: Thailand: Lower-middle-income economy: 
State organization. 

Country: South Korea: High-income economy: 
State organization; 
DOD organization. 

Country: Japan: High-income economy: 
State organization; 
DOD organization. 

Country: The Philippines; Lower-middle-income economy: 
State organization. 

Sources: Departments of State and Defense documents and interviews; 
World Bank data; Map Resources (map). 

[End of figure] 

Despite varying income levels, security support needs, and cost-
sharing arrangements, all six countries provide cash and assistance-in-
kind to the United States for administrative costs, such as office 
facilities, supplies and equipment, or utilities. In addition, the 
high-income countries share labor or construction costs. Moreover, 
even the lower-middle-income countries provide personnel to support 
U.S. activities as well as grounds for U.S. military exercises. See 
table 11 for selected contributions by these six countries. 

Table 11: Selected Contributions That Six Selected Countries Provide 
to Share U.S. Security Support Costs: 

Middle East: 

Country: Kuwait; 
Economic income level: High; 
Selected cash or assistance-in-kind contributions: 
* Office facilities and equipment; 
* Salary, retirement, dependent, and other indirect personnel costs; 
* Housing; 
* Transportation; 
* Gas. 

Country: Saudi Arabia; 
Economic income level: High; 
Selected cash or assistance-in-kind contributions: 
* Rents; 
* Office facilities, equipment, and supplies; 
* Housing and furnishings; 
* Facility construction and renovation; 
* Relocation and transportation; 
* Dependent education; 
* Contractual services. 

Asia: 

Country: Japan; 
Economic income level: High; 
Selected cash or assistance-in-kind contributions: 
* Office facilities; 
* Salaries and benefits for 5 Japanese foreign service support 
personnel; 
* Labor (not to exceed 23,055 civilian support personnel); 
* Utilities, including fuel, electricity, sewage, and water; 
* Drivers and vehicles; 
* Facility construction and renovation. 

Country: South Korea; 
Economic income level: High; 
Selected cash or assistance-in-kind contributions: 
* Housing; 
* Labor; 
* Logistics; 
* Construction. 

Country: Thailand; 
Economic income level: Lower-middle; 
Selected cash or assistance-in-kind contributions: 
* Office facilities and compound; 
* Utilities; 
* Vehicles and drivers; 
* Military grounds for live-fire exercises and training; 
* Military airfield. 

Country: The Philippines; 
Economic income level: Lower-middle; 
Selected cash or assistance-in-kind contributions: 
* Office facilities within a military compound; 
* Salaries and benefits (no less than 15 civilian support personnel); 
* Operational costs, including utilities; 
* Drivers; 
* Military grounds for exercises and training. 

Sources: Departments of Defense and State documents and interviews; 
and World Bank data. 

Note: The World Bank classifies country economic income level 
according to 2008 gross national income per capita. The 
classifications are low income, $975 or less; lower-middle income, 
$976 to $3,855; upper-middle income, $3,856 to $11,905; and high 
income, $11,906 or more. 

[End of table] 

Kuwait: 

Under a 2009 agreement, Kuwait, a high-income economy, provides nearly 
$28 million and assistance-in-kind for administrative costs over 2 
years to support the U.S. Office of Military Cooperation. State's 
security assistance office administers Kuwait's FMS program, which 
totaled nearly $315 million in sales in fiscal year 2009. Kuwait also 
provided the United States with a cash transfer of approximately $94 
million in fiscal year 2009, which DOD reported was used for base 
operations and sustainment of U.S. Army and Air Force installations in 
support of the U.S.-Kuwait Defense Cooperation Agreement. Cooperation 
under this agreement includes joint military exercises, U.S. training 
of Kuwaiti forces, and U.S. access to Kuwaiti facilities.[Footnote 63] 

Saudi Arabia: 

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 billion in sales in fiscal year 2009, and 
provides training instruction and advisory services for Saudi Arabian 
Armed Forces personnel. The United States established the Office of 
Program Management-Ministry of Interior in 2009 to provide articles 
and services, including technical assistance, to develop the capacity 
of the Saudi Arabia Ministry of Interior's Facilities Security Force 
in the areas of critical infrastructure protection and public 
security.[Footnote 64] In addition, Saudi Arabia will provide the 
United States approximately $285 million from 2009 to 2013 to pay for 
security support activities managed by DOD's Office of the Program 
Manager-Saudi Arabia National Guard. The DOD office provides training 
and services to assist Saudi Arabia in modernizing its National Guard. 

Japan: 

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 to 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.[Footnote 65] For example, under a 
cost-sharing agreement, renewed in 2008, Japan provided the United 
States with approximately $1.4 billion for labor and utility costs in 
2009. 

South Korea: 

South Korea, a high-income economy, contributes cash and assistance-in-
kind to support two U.S. organizations--State's Joint U.S. Military 
Affairs Group, a security assistance 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.[Footnote 66] According to a State official familiar with the 
negotiation, this contribution represents about 40 percent of 
nonpersonnel stationing costs.[Footnote 67] 

Thailand: 

Thailand, a lower-middle income economy, contributes annual assistance-
in-kind and cash payments to support the Joint U.S. Military Advisory 
Group under a long-standing military assistance agreement with the 
United States. The security assistance organization's activities in 
fiscal year 2009 included managing Thailand's Foreign Military 
Financing grants, FMS cases, and 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 
and 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-fire training grounds--a substantial benefit to the 
United States. 

The Philippines: 

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. 

[End of section] 

Appendix V: Comments from the Department of State: 

Note: GAO comments supplementing those in the report text appear at 
the end of this appendix. 

United States Department of State
Chief Financial Officer: 
Washington, DC 20520: 

August 4, 2010: 

Ms. Jacquelyn Williams-Bridgers: 
Managing Director: 
International Affairs and Trade: 
Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548-0001: 

Dear Ms. Williams-Bridgers: 

We appreciate the opportunity to review your draft report.
"Iraqi-U.S. Cost-Sharing: Iraqi Data Show Continued Budget Surpluses, 
Offering the Potential for Greater Cost-Sharing," GAO Job Code 320638. 

The enclosed Department of State comments are provided for 
incorporation with this letter as an appendix to the final report. 

If you have any questions concerning this response, please contact 
Kyle Peterson, Desk Officer, Bureau of Near Eastern Affairs at
(202) 647-9837. 

Sincerely, 

Signed by: 

James L. Millette: 

cc: GAO — Judith McCloskey: 
NEA — Jeffrey D. Feltman: 
State/0IG — Tracy Burnett: 

[End of letter] 

Department Of State Comments On Gao Draft Report: 

Iraq-U.S. Cost-Sharing: Iraq Has a Cumulative Budget Surplus, Offering 
the Potential for Greater Cost-Sharing (GAO-10-304, GAO Code 320638): 

Thank you for the opportunity to review and comment on the July 2010 
draft of the GAO's report, Iraq-U.S. Cost Sharing: Iraq Has a 
Cumulative Budget Surplus, Offering the Potential for Greater Cost-
Sharing. We appreciate the close coordination between the GAO, the 
Administration, and Iraqi government officials during the development 
of this report. We agree with GAO's stated goal for this report, i.e., 
to "ensure that Iraq shares in its security costs." We also agree with 
the GAO's recommendation. In conjunction with the Treasury Department, 
we will continue to work closely with our 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. 

The Department of State believes that Iraq's Ministry of Finance has 
made progress in government spending, financial accounting, and 
reporting over the past few years, a particularly impressive 
accomplishment given that Iraq is recovering from years of civil 
strife. The Ministry itself was severely damaged by bombs twice in the 
past year, hampering its operational capabilities. Nevertheless, we 
agree with the GAO and others that there is room for improvement in 
the Iraqi government's financial accounting and reporting. The 
Embassy, in coordination with the International Monetary Fund (IMF) 
and World Bank, will continue to focus much of its capacity-
development efforts toward increasing budget execution and improving 
accounting standards for federal and provincial government entities in 
Iraq. Additionally, the Embassy will continue to provide assistance to 
both the Ministry of Finance and the Central Bank of Iraq as they work 
to restructure Iraq's state-owned banks, as called for under the Iraqi 
government's IMF program. 

The Department of State believes that the Iraqi government's available 
funds are closer to the low end of the draft report's range of 
available balances — almost $12 billion. [See comment 1] Given Iraq's 
dependence on oil revenues and the volatility of oil prices, 
maintaining a fiscal reserve would be sensible. Indeed, the most 
recent IMF staff report on Iraq notes that financing large, but 
declining, projected fiscal deficits over the next two years "could 
exhaust the government's remaining financial balances and result in 
the accumulation in arrears."[Footnote 1] [See comment 2] 

Iraq's recent financial decisions reflect its concern about its fiscal 
position. In 2009 and 2010, Iraq sought approximately $5 billion in 
loans from the International Monetary Fund (IMF) and the World Bank to 
finance projected budget deficits, and borrowed almost $5 billion for 
electrical infrastructure investment. And although Iraq sits on the 
third-largest proven conventional oil reserves in the world, the 
government faces a variety of constraints that could inhibit efforts 
to quickly increase oil output and revenue. 

The draft report correctly notes that the Government of Iraq (GOI) has 
continually allocated and spent increasing amounts on security over 
the past few years. As the draft report states, "both [security 
ministries] spent more than 90 percent of the funds made available to 
them in 2009."[Footnote 2] Furthermore, the Iraqi government budgeted 
a combined $11 billion for the Ministries of Defense and Interior in 
the 2010 budget, which translates to almost 14 percent of Gross 
Domestic Product (GDP). The Department of State believes this clearly 
indicates the seriousness with which the Iraqi government treats its 
responsibility to cover its own costs for internal and external 
security. 

As our relationship with Iraq evolves in the near term with the 
continued drawdown of U.S. forces from Iraq, our strategy hinges on 
assisting the Iraqis in developing security forces that are capable of 
defending Iraqi citizens against internal and external threats. 
Although the Iraqi government provides the bulk of its own security 
funding, U.S. government security assistance is necessary to help the 
Iraqi Security Forces meet the minimum essential capability 
requirements associated with our responsible drawdown of U.S. forces. 
The Department of State expects that security assistance of this 
magnitude will be short-term in nature; future requests for security 
assistance will be made only after a careful assessment of what we 
believe Iraq will need to maintain internal and external security. 

Iraq remains a key strategic partner for the United States in a 
critical region of the world. It is important that we use civilian and 
military assistance effectively to support a long-term, productive 
bilateral relationship with Iraq. At the same time, it is important 
for the Administration to pursue good stewardship of taxpayer 
resources. As Iraq's wealth grows, we will certainly expect the Iraqi 
government to cover an increasing share of the cost of Iraq's security 
and reconstruction. 

Footnotes: 

[1] International Monetary Fund, Iraq: Staff Report for Article IV 
Consultation and Request for Stand-By Arrangement (IMF Country Report 
No. 10/72), 12. 

[2] United States Government Accountability Office, Iraqi-U.S. Cost 
Sharing: Iraqi Data Show Continued Budget Surpluses, Offering the 
Potential for Greater Cost-Sharing (Draft, June 2010) 28. 

Following are GAO's comments on the Department of State's letter dated 
August 4, 2010. 

GAO Comments: 

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. 

[End of section] 

Appendix VI: Comments from the Department of the Treasury: 

Note: GAO comments supplementing those in the report text appear at 
the end of this appendix. 

Department Of The Treasury: 
Washington, D.C. 20220: 

August 4, 2010: 

Mr. Joseph A. Christoff: 
Director, International Affairs and Trade: 
Government Accountability Office: 

Dear Mr. Christoff: 

Thank you for the opportunity to review and comment on the July draft 
of the GAO's report, Iraq-U.S. Cost-Sharing: Iraqi Data Show Continued 
Budget Surpluses, Offering the Potential for Greater Cost-Sharing. 
Treasury has been closely engaged with the Iraqi government to improve 
its procurement capacity and budget execution. We appreciate the GAO's 
attention to the issue of strengthening Iraq's financial management, 
which is crucial for Iraq to achieve adequate capability for providing 
internal security before the withdrawal of U.S. forces by December 31, 
2011, as foreseen by the U.S.-Iraq Security Agreement. We also 
appreciate the close coordination between the GAO, the Administration, 
and Iraqi officials during the development of the report. 

We agree in principle with the GAO 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. Indeed, Iraq has 
significantly boosted its spending on security and reconstruction in 
the past few years. [See comment 1] However, we believe that the 
resources available to the Iraqi government are likely at the low end 
of GAO's range and that Iraq needs a fiscal cushion to deal with 
considerable variability in its fiscal revenues. [See comment 2] 

The GAO report appropriately subtracts outstanding advances to get an 
estimate of cumulative surpluses of almost $12 billion. This estimate 
is broadly consistent with IMF figures, based on preliminary analysis, 
that also suggest that the cumulative budget surplus over this period 
was relatively small. 

The GAO estimates that the Government of Iraq had between $15 billion 
and $32 billion in usable financial balances held at the Central Bank, 
the Development Fund for Iraq, and state owned banks as of December 
2009. Data shortcomings are significant, but the actual figure is 
likely at the low end of this range. 

* The low end of the range for available balances is consistent with 
estimates for Iraqi cumulative cash surpluses minus advances. 

* The upper end of the range includes significant deposits at state 
owned banks that the Finance Ministry indicates are unavailable for 
central government fiscal purposes as they are owned by other state 
entities, such as pension funds or state enterprises. The IMF is 
working with Iraqi officials to identify whether any significant sums 
could be recovered by the central government. 

In any event, the adequacy of Iraq's available fiscal balances should 
be assessed in the context of the uncertainties and variability of 
Iraq's fiscal position. Iraq would need some fiscal cushion as Iraq 
receives about 85 percent of its revenue from oil exports, and is 
therefore highly vulnerable to oil price fluctuations. IMF and Iraqi 
figures suggest that Iraq is likely to run a budget deficit this year 
based on current oil prices and exports. And, if oil prices fall from 
current levels or oil export volumes falter, the Government of Iraq 
may need to use most or all of its available fiscal balances to fund 
budget deficits in 2010 or 2011. (A $10/barrel drop in oil prices 
would increase Iraq's annual deficit by about $7 billion.) Iraq will 
benefit in the future from investments in the oil sector, but these 
benefits will not materialize for a number of years. Moreover, Iraq's 
still sizable external debt and unsettled political environment 
largely inhibits it from borrowing significant sums from the private 
sector before oil revenues begin to increase. [See comment 3] 

In light of its vulnerable fiscal position, Iraq has sought budget 
support from the international community. The IMF disbursed about $455 
million to Iraq earlier this year, as part of a program that could 
provide about $3.6 billion for fiscal support during 2010-2011. The 
World Bank also provided $250 million in budget support for Iraq this 
year. Further disbursements by the IMF and World Bank are conditional 
on improvements in Iraq's public financial management. 

We are committed to providing policymakers with an accurate 
representation of Iraq's fiscal situation and recognize that data 
limitations pose challenges. To this end, we support GAO's 
recommendations to work with the Iraqi government to further identify 
resources available to the Iraqi government, including by assisting 
Iraq to complete reviews of outstanding advances and central 
government accounts, as agreed in Iraq's IMF program. Treasury 
continues to engage with the Ministry of Finance and other Iraqi 
agencies to obtain more accurate estimates of available fiscal 
balances and government advances. Through our Attaché's office in 
Baghdad, Treasury is working with the Iraqis to enhance public 
financial management more broadly, including fiscal reporting and 
transparency. We will continue to give strong support to the work of 
the IMF and Iraq to strengthen financial management at the Finance 
Ministry and Central Bank. 

Signed by: 

Andy Baukol: 
Deputy Assistant Secretary, Middle East & Africa: 
U.S. Department of the Treasury: 

Following are GAO's comments on the Department of the Treasury's 
letter dated August 4, 2010. 

GAO Comments: 

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. 

[End of section] 

Appendix VII: Comments from the Department of Defense: 

Note: GAO comments supplementing those in the report text appear at 
the end of this appendix. 

Office Of The Assistant Secretary Of Defense: 
International Security Affairs: 
WASHINGTON, D.C. 20301-2400: 

August 10, 2010: 

Mr. Joseph A. Christoff: 
Director, International Affairs and Trade: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, D.C. 20548: 

Dear Mr. Christoff: 

Thank you for the opportunity to review and comment on the July 2010 
draft of the GAO's report, Iraq-U S. Cost Sharing: Iraq Has a 
Cumulative Budget Surplus Offering the Potential for Greater Cost-
Sharing. We appreciate the close coordination between the GAO, the 
Administration, and Iraqi officials during the development of the 
report. It has been a positive catalyst for engagement between the 
United States and Iraq. We agree with GAO's stated goal for this 
report: to "ensure that Iraq shares in its security costs." U.S. 
government agencies continue to work closely with their Iraqi 
counterparts to secure Iraqi cost-sharing across a variety of sectors. 
While there is much to agree with in the draft report, the report 
fails to put the data in context. This could leave the readers to draw 
inaccurate conclusions about Iraq's current fiscal strength. 

While GAO has recently changed its estimates of cumulative adjusted 
surplus over the past several months—from $41.1B down to $11.8B—the 
overall message of the report has not been similarly revised. We 
believe the overall GAO message—that Iraq currently has significant 
cash reserves that would allow them to pay more of their security 
costs now and in 2011—is inaccurate and not supported by the financial 
data. The current draft report also estimates between $15 billion and 
$32 billion on deposit. We believe the available deposits are closer 
to $15 billion, which is consistent with the estimate of cumulative 
surpluses. The report also fails to mention the prudent fiscal 
requirement for Iraq to maintain a cash reserve to finance its 
expected 2010 budget deficit. [See comments 1, 2, 3, 4] 

In addition, the draft report correctly notes that the Iraqi 
government has continually allocated and spent increasing amounts on 
security over the past few years. As the draft report states, "both 
[security ministries] spent more than 90 percent of the funds made 
available to them in 2009." However, this underestimates the total 
funds disbursed for security in 2009 since it does not include 
advances on domestic and foreign contracts made in 2009 by the 
security ministries. The Iraqi government budgeted a combined $11B for 
the Ministries of Defense and Interior in the 2010 budget, which 
translates to almost 14 percent of Gross Domestic Product (GDP). This 
clearly indicates the seriousness with which the Iraqi government 
takes its responsibility to provide internal and external security. 
[See comment 5] 

We also agree there is room for improvement in the Iraqi government's 
financial accounting and reporting. U.S. government agencies in Iraq, 
in coordination with the International Monetary Fund (IMF) and World 
Bank, have focused much of their capacity development efforts toward 
increasing budget execution and improving accounting standards for 
federal and provincial government entities in Iraq. Specifically, we 
agree that the growing amount of outstanding advances totaling $40 
billion at the end of 2009 presents a challenge to Iraq's public 
financial management. Iraq's Ministry of Finance has made progress in 
this area over the past few years, despite the fact that Ministry 
employees were killed and injured, and Ministry facilities were 
severely damaged several times in the last two years. Similarly, 
international agencies have encouraged Iraq to continue its review of 
central government accounts and reconcile treasury records with bank 
accounts. 

Iraq remains a key strategic partner for the United States in a 
critical region of the world. It is important that we use civilian and 
military assistance effectively to support a long-term, productive 
bilateral relationship with Iraq in a number of areas. With some 
significant changes, this report could play an important role in 
advocating continuing improvement in Iraq's public finance management 
processes, especially in the areas of advances and bank deposits. At 
the same time, it is important for the Administration to continue to 
pursue good stewardship of taxpayer resources. As Iraq's wealth grows, 
we will expect the Iraqi government to cover an increasing share of 
the costs for security and reconstruction. 

Sincerely, 

Signed by: 

Colin Kahl: 
Deputy Assistant Secretary of Defense for the Middle East: 

Additional Comments on the July 2010 Draft Report: 

1) We recommend changing the title to "Iraqi-U.S. Cost Sharing: From 
2005-2009, Iraq had a Cumulative Adjusted Budget Surplus of $11.8B." 
This title is supported by the data in the report and avoids the 
subjective and debatable assertion that GOI's—$12B surplus offers the 
potential for greater cost sharing. 

2) The draft report, from the title to the conclusions, fails to place 
Iraq's fiscal status as of December 2009 in the context of the need 
for a strategic cash reserve to finance budget deficits in 2010 and 
2011 and to act as a shock absorber for oil price fluctuations. This 
reserve is particularly important at the period of transition in Iraq. 
GOI has budgeted for a $20-25B deficit in 2010. However, past 
experience in 2008 and 2009 shows that actual deficits are about half 
of what is projected. Given that GOI has about $12-15B in available 
funds entering 2010, it may have the resources needed to cover the 
likely deficit for 2010. However, discussions with Iraqi officials 
indicate that GOI believes it is prudent to keep about $10-12 billion 
in government accounts (about 2-3 months worth of spending) for two 
main reasons: [See comment 6] first, over 90% of Iraq's revenues come 
from oil exports and export prices are highly volatile while export 
quantities are smaller than projected in the 2010 budget; second, Iraq 
cannot easily borrow internationally, has unsettled foreign debt 
obligations and Iraq's domestic T-bill market is at an nascent stage 
of its development.[See comment 7] Iraq's fiscal behavior is 
consistent with these constraints: the government does not act as if 
it has a large fiscal balance, and has drawn upon its SBA with IMF. 
Indeed, the most recent International Monetary Fund (IMF) staff report 
on Iraq notes that financing large, but declining projected fiscal 
deficits over the next two years "could exhaust the government's 
remaining financial balances and result in the accumulation in 
arrears." 

3) MoF reports only $4.5B of $21.4B in government deposits in state-
owned banks is available for future spending and the rest is 
encumbered in various ways. However, the GAO draft report tacitly 
asserts that the remaining $16.9B in government deposits in state-
owned banks is available for budget support. The CBI has disaggregated 
government accounts into central government accounts and accounts of 
the self-funded government entities. Out of the total amount of $16.9 
billion reclassified by MoF in 2009 as unavailable for central 
government spending, CBI has already recognized that $9.3 billion does 
not belong to the central government. The continued review of the 
remaining $7.6B should clarify how these funds are encumbered with 
respect to advances and long term government liabilities. [See comment 
8] 

4) The draft report should clearly state that, according to the 
Ministry of Finance, as of the end of 2009 $40B in cumulative 
outstanding advances and —$16.9B in government deposits is not 
available to the GOI for budget support. Whether some of this money 
would be available in the future is another matter and should be 
pursued by State and Treasury in coordination with the MoF and the 
IMF. [See comment 9] 

5) We recommend removing the text and table on pp. 19-20 referencing a 
decrease in deposits and questioning the status of $11B because GAO 
auditors could not corroborate MoF's data. This entire section seems 
to be based on tacit assertion and suspicion, rather than objective 
evidence. In addition, the adjusted deficit in 2009 seems to explain 
at least —$8B of the drawdown in deposits from 2008-2009, currently 
questioned by the draft report on pp. 19-20. [See comment 10] 

Response to the Revised Highlights Page and Tables 1 and 2 (provided 
to USF-I on 30 Jul 10): 

1) We agree with the proposed revision for Table 1: the cumulative 
cash surplus should be $52.1B. 

2) We agree with the proposed revision to Table 2: the cumulative 
adjusted surplus should be $11.8B, not $16.7 or $41.1B as the draft 
report asserts. Further, we believe the report should remove the 
references that disaggregate the $40.3B in advances into a 
corroborated $15B and an uncorroborated $25B. The entire 40.3B in 
advances should be treated as a whole since it was derived from the 
same sources: MoF and BSA reports. [See comment 11] 

Based on our analysis of the data and understanding of the situation 
on the ground, we offer the following narrative as an alternative 
optic: 

Iraq has ~$1513 in the bank entering 2010 which will finance a 
possible 2010 deficit of $8-10B and allow a small strategic reserve to 
hedge against oil price/production volatility. Iraq continues to 
shoulder an increasing share of its own security costs, budgeting $11B 
in 2010, almost 14% of its GDP. While Iraq's ability to spend and 
obligate funds for capital improvement is improving, Iraq must ensure 
almost $40B in outstanding advances results in greatly needed goods 
and services for the people of Iraq in a timely manner. Similarly, 
Iraq's Ministry of Finance and Central Bank of Iraq should take 
positive measures to improve oversight and transparency of government 
deposits in commercial banks. With a critical need for investment in 
infrastructure and services, Iraq faces challenging fiscal 
circumstances in 2011 and early 2012 as they partner with 
International Oil Companies to pursue increased oil revenue. 

Based on the draft highlights page we received on July 30, 2010, we 
understand the report could be significantly revised. We would like 
the opportunity to review the revision and provide final comments. We 
understand this is not GAO standard procedure, but we would greatly 
appreciate the opportunity. [See comment 12] 

Following are GAO's comments on the Department of Defense's letter 
dated August 10, 2010. 

GAO Comments: 

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 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. 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 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 resources 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 for government spending. 

4. We agree that it may be prudent for Iraq to maintain a fiscal 
reserve to 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. 
and Iraqi governments do not allow us to determine amounts disbursed 
for 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 
aside for 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 averaged 
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 end 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 substantiate Iraqi officials' statements that a $10 
billion to $12 billion reserve is now needed. The IMF does not require 
this reserve level, nor did any Iraqi official indicate to GAO that 
such a reserve level was needed. 

7. Iraq 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 fiscal 
balance, since it has drawn upon external financing provided through a 
Stand-by Arrangement with the IMF. However, as Treasury noted in its 
comments on this draft, the IMF has only disbursed about $455 million 
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 
categories in 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 
the banking system to reconcile them with Iraqi Treasury records and 
ensure that any idle balances received from the budget are returned to 
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 deducted 
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 that it 
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 to 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 Iraq is 
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 to 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. We removed the references in the draft report that disaggregated 
the $40.3 billion in advances into corroborated and uncorroborated 
amounts. However, we have modified the report to call attention to the 
accounting weaknesses associated with all outstanding advances. We 
note that Iraq's Board of Supreme Audit has identified weaknesses in 
Iraq's accounting for all transactions recorded as advances, including 
advances for letters of credit. As we have previously noted, Iraq has 
agreed to conduct a review of its outstanding advances and identify 
those that are recoverable as part of its arrangement with the IMF. 

12. We have provided DOD with ample opportunity to provide comments 
and other input on this report. We met with DOD in February 2010 to 
discuss an earlier draft of this report and agreed to travel to 
Baghdad, Iraq, in April 2010 to interview and collect additional data 
from the Ministries of Finance, Defense, and Interior; Central Bank of 
Iraq; and other officials. During and after this trip, we worked 
closely with DOD officials to gather and analyze relevant data. The 
level of coordination and cooperation between GAO and DOD, State, and 
Treasury was unprecedented and afforded the U.S. government the 
ability to obtain Iraqi financial data that previously had not been 
available to the U.S. government. We provided DOD with a second draft 
of this report for comment in July 2010 and met with the Deputy 
Assistant Secretary of Defense for the Middle East and Deputy 
Commanding General (Support) for United States Forces-Iraq later the 
same month to receive DOD's oral comments. We agreed to make several, 
additional modifications as a result of this meeting and provided DOD 
with a summary of these revisions. Throughout this process, GAO and 
DOD have stayed in close communication regarding this report. 

[End of section] 

Appendix VIII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Joseph A. Christoff, (202) 512-8979 or christoffj@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, the following staff 
contributed to the report: Judith McCloskey, Assistant Director; 
Kathryn Bolduc; Debbie J. Chung; Gergana Danailova-Trainor; Bruce 
Kutnick; Richard A. Lindsey; Mary Moutsos; Valérie L. Nowak; and 
Suneeti Shah Vakharia. R. Gifford Howland provided technical 
assistance. In addition, Pedro Almoguera and Martin De Alteriis 
provided technical assistance in economics and overall methodology, 
respectively. Robert Dacey and Evelyn Logue provided technical 
assistance in accounting principles and standards. 

Footnotes: 

[1] Iraqi security forces include the Iraqi army, navy, and air force 
under the Ministry of Defense and the Iraqi police, federal police, 
and border enforcement under the Ministry of Interior. 

[2] Duncan Hunter National Defense Authorization Act for Fiscal Year 
2009, Pub. L. No. 110-417 (Oct. 14, 2008). 

[3] Strategic Framework Agreement for a Relationship of Friendship and 
Cooperation between the United States of America and the Republic of 
Iraq (Nov. 17, 2008), effective January 1, 2009. 

[4] GAO, Stabilizing and Rebuilding Iraq: Iraq Revenues, Expenditures, 
and Surplus, [hyperlink, http://www.gao.gov/products/GAO-08-1031] 
(Washington, D.C.: Aug. 5, 2008); and Iraq: Key Issues for 
Congressional Oversight, GAO-09-294SP (Washington, D.C.: Mar. 24, 
2009). 

[5] The Board of Supreme Audit is the supreme audit institution of 
Iraq, as GAO is the supreme audit institution of the United States. 

[6] The Iraqi Ministry of Finance considers advances to be funds that 
are encumbered or have been paid out, but which have not been recorded 
as an expenditure. 

[7] No data that GAO received from the Ministry of Finance through 
Treasury prior to February 2010 included information on advances. 

[8] Hereafter referred to as Board of Supreme Audit reports. 

[9] The Trade Bank of Iraq issues letters of credit to confirm that 
funds have been set aside for Iraqi government purchases from foreign 
companies. 

[10] Republic of Iraq, Board of Supreme Audit, Financial Statement for 
the Republic of Iraq through 12/31/06 (Sept. 30, 2009). 

[11] These financial deposit balances exclude about $10 billion held 
at JP Morgan Chase and Citibank for fully funded letters of credit and 
about $3.2 billion held at the Federal Reserve Bank of New York for 
U.S. Foreign Military Sales purchases. 

[12] The Sons of Iraq are local, nongovernmental security contractors 
hired by U.S. and Coalition forces to help maintain security in their 
communities. 

[13] The range that we estimate reflects uncertainty regarding what 
portion of the funds set aside for FMS purchases and paid as letters 
of credit has been recorded as expenditures by the Ministry of Finance 
and is therefore included in expenditure totals. 

[14] [hyperlink, http://www.gao.gov/products/GAO-08-1031]. 

[15] This total includes some FMS purchases made with U.S. government 
funds. For example, some foreign governments, such as Egypt and 
Israel, made purchases with U.S. funding through the Foreign Military 
Financing program. In addition, DOD made FMS purchases for Iraq and 
Afghanistan with U.S. government funds. 

[16] Agreement Between the United States of America and the Republic 
of Iraq on the Withdrawal of United States Forces from Iraq and the 
Organization of Their Activities during Their Temporary Presence in 
Iraq (Nov. 17, 2008), effective January 1, 2009. 

[17] For more information on the U.S.-Iraq Security Agreement and the 
timetable for the drawdown of U.S. forces, see GAO-09-294SP and 
Securing and Stabilizing Iraq: U.S. Drawdown Plans Should Include 
Contingency Plans for Use If Key Assumptions about Security Conditions 
and Iraqi Capabilities Prove Wrong, [hyperlink, 
http://www.gao.gov/products/GAO-09-939C] (Washington, D.C.: Sept. 30, 
2009). 

[18] For the purposes of this report, we use the term security support 
to describe a range of activities, including security cooperation 
activities, which are intended to shape the operational environment in 
peacetime, and security force assistance, which is used to improve the 
capability and capacity of foreign security forces in security 
conditions ranging from stable peace to general war. 

[19] 10 U.S.C. § 2350j. 

[20] DOD Instruction 2110.31, 5.1 (Apr. 10, 1967). 

[21] Republic of Iraq, Board of Supreme Audit, Financial Statement for 
the Republic of Iraq through 12/31/05 (Mar. 30, 2009). 

[22] This estimate ($2.2 billion) is based on Ministry of Finance 
revenue and expenditure data through December 2009. It is not clear 
whether these data reflect final, end-of-year adjustments. 

[23] Iraq’s fiscal year is the calendar year. 

[24] With the possible exception of 2009 data, these expenditure data 
reflect final, end-of-year adjustments made when the Ministry of 
Finance reconciled its accounts with individual ministries. Similar 
analyses presented in past GAO reports used monthly expenditure data 
provided by the Ministry of Finance through Treasury, which did not 
include these final, end-of-year adjustments. This analysis also 
reflects final, adjusted revenue data provided by the Ministry of 
Finance. 

[25] Iraq has seven state-owned banks. The two largest, Rafidain and 
Rasheed, are commercial banks. The remaining five banks are 
specialized state-owned banks, including the Trade Bank of Iraq; the 
Agricultural Cooperative bank; and the Industrial, Real Estate, and 
Iraq banks. 

[26] The Development Fund for Iraq holds the proceeds of oil export 
sales from Iraq, as well as remaining balances from the United 
National Oil-For-Food Program and other frozen Iraqi funds. The 
International Advisory and Monitoring Board provides oversight for the 
Development Fund for Iraq and helps to ensure that its funds are used 
in a transparent manner for the benefit of the Iraqi people. 

[27] Ministry of Finance officials used the phrase “the people’s funds”
 to describe funds set aside for pensions and the care of orphans. In 
this report, we use the term “trust funds.” 

[28] In June 2010, the IMF reported in the International Financial 
Statistics—on the basis of data provided from the Central Bank of Iraq—
that Iraq had about $21.4 billion in financial deposits at the Central 
Bank of Iraq and other banks in Iraq. Together, these figures total 
about $800 million less than the Central Bank reported to us and about 
$16 billion more than the Ministry of Finance data indicated is 
available to the Iraqi government. According to the IMF, these data 
show a discrepancy between Central Bank of Iraq and Ministry of 
Finance reporting on government deposits in the banking sector, and 
IMF officials are following up with Iraqi authorities to clarify the 
nature and composition of these funds. 

[29] The meeting minutes referred to state-owned enterprises’ accounts 
as “self-financing accounts.” 

[30] The Governor of the Central Bank of Iraq stated that he is 
confident about the amount of these deposits because the banks are 
required to hold a certain share of their deposits in reserves. 

[31] This undated audit report covered Rafidain Bank’s 2006 financial 
statements. We obtained this report in April 2010. We have not been 
able to identify a more recent audit report for the bank. See Ernst 
and Young, Special Purpose Auditors’ Report to the Ministry of 
Finance, Government of Iraq (undated). 

[32] According to U.S. officials, a separate audit report found 
similar problems with the 2006 financial statements of Iraq’s second-
largest, state-owned bank. 

[33] Ernst and Young, Central Bank of Iraq Financial Statements, 
December 31, 2008: Independent Auditor’s Report to the Ministry of 
Finance, Government of Iraq (Feb. 9, 2010); and Central Bank of Iraq 
Financial Statements, December 31, 2009: Independent Auditor’s Report 
to the Ministry of Finance, Government of Iraq (June 20, 2010). 

[34] In addition to the approximately $23 billion that Congress has 
provided to train and equip the Iraqi security forces since 2003, 
Congress recently approved $1 billion in fiscal year 2010 supplemental 
funding to address these needs. This funding was approved on July 29, 
2010, and is available for use until September 30, 2011. See 
Supplemental Appropriations Act, 2010, Pub. L. No. 111-212 (July 29, 
2010). 

[35] The Ministry of Interior also is responsible for Iraq’s oil 
police and point-of-entry enforcement. 

[36] USF-I is currently responsible for U.S. programs to train, equip, 
and support Iraq’s military and police. The U.S. military command in 
Iraq was referred to as Multinational Forces-Iraq (MNF-I) from May 15, 
2004, through December 31, 2009. The command restructured and changed 
its name to United States Force-Iraq, effective January 1, 2010. 
Although many of our interviews took place when the command was still 
designated as MNF-I, we refer to it as USF-I throughout this report 
for clarity. 

[37] GAO, Stabilizing Iraq: Preliminary Observations on Budget and 
Management Challenges of Iraq’s Security Ministries, [hyperlink, 
http://www.gao.gov/products/GAO-07-637T] (Washington, D.C.: Mar. 22, 
2007). 

[38] DSCA requires that Iraq pay the full cost of its FMS purchases up 
front, a term of sale known as cash with acceptance, by transferring 
funds to an account at the Federal Reserve Bank of New York. 

[39] These purchase agreements between the United States and a foreign 
purchaser—in this case, Iraq—are called Letters of Offer and 
Acceptance. 

[40] From January 2006 through December 2009, Iraq transferred about 
$5.5 billion to an account at the Federal Reserve Bank of New York in 
anticipation of making FMS purchases. However, over the same period, 
Iraq had only signed agreements to purchase about $5.1 billion of 
equipment, training, and services. 

[41] Under certain circumstances, DOD will also procure equipment from 
foreign countries through the FMS program. For example, as noted in 
table 7, Iraq signed an agreement with the United States to purchase 
Russian-made Mi-17 CT helicopters. DSCA must approve an exception for 
such purchases from a foreign country. 

[42] Unlike FMS purchases, which are funded out of the budgets of the 
Ministries of Interior and Defense, according to USF-I, the original 
funding for I-CERP came from an unobligated balance in a subaccount of 
the Development Fund for Iraq. Consequently, Iraq’s contributions to I-
CERP are not reflected in the expenditures reported in table 4. 

[43] GAO has conducted a prior review of CERP in Iraq. See GAO, 
Military Operations: Actions Needed to Better Guide Project Selection 
for Commander’s Emergency Response Program and Improve Oversight in 
Iraq, [hyperlink, http://www.gao.gov/products/GAO-08-736R] 
(Washington, D.C.: June 23, 2008). 

[44] Through the end of 2009, the Iraqi government is paying the Sons 
of Iraq salaries out of funds budgeted to the Ministry of Interior. 
Eventually, the Iraqi government plans to transition 80 percent of the 
Sons of Iraq into employment with various Iraqi ministries and 20 
percent into the Iraqi security forces. When this transition occurs, 
the entities that absorb the Sons of Iraq will be responsible for 
paying their salaries. 

[45] See Supplemental Appropriation Act, 2010, Pub. L. No. 111-212 
(July 29, 2010). 

[46] The administration proposed that the $1 billion requested as part 
of a fiscal year 2010 supplemental budget remain available through 
September 2011, and that the $2 billion requested as part of a fiscal 
year 2011 budget remain available through September 2012. 

[47] According to USF-I, these transfers are authorized under section 
1234 of the National Defense Authorization Act for Fiscal Year 2010. 
Before exercising this authority, the Secretary of Defense, with the 
concurrence of the Secretary of State, must provide the appropriate 
congressional committees with notice of the proposed transfer and a 
report on the plan for the disposition of equipment and other DOD 
property in Iraq or Kuwait. See the National Defense Authorization Act 
for Fiscal Year 2010, Pub. L. No. 111-84 (Oct. 28, 2009). 

[48] GAO, Stabilizing and Rebuilding Iraq: Iraqi Revenues, 
Expenditures, and Surplus, [hyperlink, 
http://www.gao.gov/products/GAO-08-1031] (Washington, D.C.: Aug. 5, 
2008); and Iraq: Key Issues for Congressional Oversight, [hyperlink, 
http://www.gao.gov/products/GAO-09-294SP] (Washington, D.C.: Mar. 24, 
2009). 

[49] Republic of Iraq, Board of Supreme Audit, Financial Statement for 
the Republic of Iraq through 12/31/05 (Mar. 30, 2009); Financial 
Statement for the Republic of Iraq through 12/31/06 (Sept. 30, 2009); 
and Financial Statement for the Republic of Iraq through 12/31/07 
(Apr. 14, 2010). 

[50] DSCA is responsible for the administration of the U.S. Foreign 
Military Sales program. 

[51] 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). 

[52] Ernst and Young, Central Bank of Iraq Financial Statements, 
December 31, 2008: Independent Auditor's Report to the Ministry of 
Finance, Government of Iraq (Feb. 9, 2010); and Central Bank of Iraq 
Financial Statements, December 31, 2009: Independent Auditor's Report 
to the Ministry of Finance, Government of Iraq (June 20, 2010). 

[53] Ernst and Young, Special Purpose Auditors' Report to the Ministry 
of Finance, Government of Iraq (undated). 

[54] Iraq's Board of Supreme Audit presents operating and investment 
spending separately in its 2007 report but does not disaggregate 
investment expenditures by ministry. Our analysis in 2007 therefore is 
based on operating expenditures alone. Data we obtained from the two 
ministries indicate that their investment spending was very small in 
2007 and therefore would have a limited impact on the analysis. 

[55] A Letter of Offer and Acceptance serves as the official 
purchasing agreement for an FMS sale. 

[56] We did not receive data on individual ministries' cash balances 
as of the end of 2009, and we were unable to determine if any of the 
estimated unspent funds were rolled over from previous years with the 
permission of the Ministry of Finance or were returned to the public 
Iraqi Treasury. Moreover, our analysis of unspent funds did not 
provide information on the source of the unspent funds (i.e., from the 
ministries' operating or capital budgets). Thus, it is unclear whether 
any potentially rolled over unspent funds could be reallocated across 
the two main categories of expenditures. 

[57] We used the World Bank's economic income classification as a 
proxy for a host country's ability to pay. 

[58] For the purposes of this report, we use the term security support 
to describe a range of activities, including security cooperation 
activities, which are intended to shape the operational environment in 
peacetime, and security force assistance, which is used to improve the 
capability and capacity of foreign security forces in security 
conditions ranging from stable peace to general war. 

[59] Security assistance activities are generally codified in Title 22 
of the United States Code. These activities are often referred to as 
Title 22 activities. Security cooperation activities are generally 
codified in Title 10 of the United States Code. These activities are 
often referred to as Title 10 activities. 

[60] State's Chief of Mission is the principal officer appointed by 
the President to be in charge of a diplomatic mission of the United 
States or of a U.S. office abroad that is designated by the Secretary 
of State as diplomatic in nature. 

[61] The World Bank classifies countries as high-, upper-middle-, 
lower-middle-, or lower-income economies. Under this classification, 
Iraq is a lower-middle-income economy. 

[62] 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. 

[63] The exact nature of U.S. security support provided under the U.S.-
Kuwait Defense Cooperation Agreement is classified. 

[64] The areas of critical infrastructure protection and public 
security include border protection, civil defense capabilities, and 
coast guard and maritime capabilities. 

[65] This figure ($6.2 billion) includes Japan's support for costs 
related to the stationing of U.S. Forces-Japan, the Special Action 
Committee on Okinawa, and realignment of U.S. Forces-Japan. 

[66] The 2010 to 2013 contributions will be determined by increasing 
the contribution of the previous year by an agreed-upon inflation rate. 

[67] Nonpersonnel stationing costs are the cost of stationing U.S. 
forces in a host country, not including military personnel pay and 
allowances. 

[End of section] 

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