Why This Area Is Important

Since 2003, the United States has reported obligating about $708 billion for U.S. military operations in Iraq and has provided about $25.5 billion for training, equipment, supplies, facility construction, and other services for Iraqi security forces.[1] In its fiscal year 2012 budget request, the administration requested more than $2.4 billion in U.S. funding to support the training and equipping of forces under Iraq’s security ministries. 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.[2] In December 2011, the United States withdrew all U.S. forces from Iraq. 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.[3] Iraq’s large oil reserves offer the Iraqi 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. As GAO previously reported, Iraq reported substantial budget surpluses.

What GAO Found

GAO analysis of Iraqi revenue and expenditure data through the end of 2009 showed that Iraq generated an estimated cumulative budget surplus of $52.1 billion. 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. For 2010, Iraqi Ministry of Finance and Central Bank of Iraq data show that the Iraqi government generated a $600 million cash deficit (rather than the $19. 6 billion deficit budgeted) due to higher-than-predicted revenue and less-than-planned expenditures. In addition, during the first 6 months of 2011, the government of Iraq collected $7.9 billion more in oil revenue than it originally budgeted. GAO does not have more recent data on outstanding advances that would allow for an update to the amount of available surplus. The International Monetary Fund, however, has determined that the Ministry of Finance should review the outstanding advances as a benchmark the government of Iraq needs to achieve under its current stand-by arrangement.

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—nongovernmental security contractors hired by U.S. and Coalition forces to help maintain security in their local communities. While security spending has increased, GAO’s analysis of data for the Iraqi government, the Department of Defense (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.[1] Department of State (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.

In its fiscal year 2012 budget request, the administration requested more than $2.4 billion in U.S. funding to support the training and equipping of forces under Iraq’s security ministries. Specifically,

• State requested $1 billion for Foreign Military Financing to purchase training and equipment for Iraqi security forces. According to State, this request for Iraq is a replacement for DOD’s Iraq Security Forces Funding and is in addition to the $25.5 billion that has already been provided since 2003. In the 2012 Consolidated Appropriations Act, Congress appropriated $1.102 billion for Foreign Military Financing for Overseas Contingency Operations/Global War on Terrorism.[2] The Conference Agreement accompanying the act explains that the amount is for the extraordinary costs of contingency operations, including in Iraq, Pakistan, the Philippines, and Yemen.
• State also requested $886 million to fund its new Police Development Program in Iraq, of which 15.5 percent ($137 million) will be used to deploy approximately 190 police advisors and 82 percent ($723 million) will be used for security and support costs. These funds are in addition to the $757 million that was available in fiscal years 2010 and 2011, for the Police Development Program’s start-up and initial operating costs. Congress appropriated $983,605,000 for International Narcotics Control and Law Enforcement for Overseas Contingency Operations/Global War on Terrorism. The conference Agreement accompanying the act explained that the amount is for the extraordinary costs of contingency operations, including in Iraq, Pakistan, Afghanistan, Yemen, Somalia, and for African counterterrorism partnerships.
• DOD requested $524 million to establish its Office of Security Cooperation-Iraq, which will be responsible for administering Iraq’s FMS and Foreign Military Financing program, among other responsibilities. Congress authorized that from the funds made available to DOD for Operation and Maintenance, Air Force, up to $524 million could be used to fund the operations and activities of the Office of Security Cooperation-Iraq and security assistance teams, including life support, transportation and personal security, and facilities renovation and construction.

Actions Needed

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. In light of these resources, Iraq has the potential to further contribute toward its security needs, even as it addresses other competing priorities. GAO recommended in September 2010 that Congress should

• consider Iraq’s available financial resources when it reviews future budget requests for additional funds to train and equip Iraqi security forces.

Additional clarity is needed on Iraq’s outstanding advances to determine the financial resources Iraq has available for future spending. To this end, GAO recommended in September 2010 that the Secretaries of State and the Treasury should

• work with the Iraqi government to identify these resources by assisting Iraq in completing International Monetary Fund-required review of outstanding advances.

How GAO Conducted Its Work

The information contained in this analysis is based on findings from the products listed in the related GAO products section. GAO 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. GAO analyzed data on Iraq’s reported revenues and expenditures from the Minister of Finance for 2005 through 2010 and from Iraq’s financial statements prepared by Iraq’s Board of Supreme Audit for 2005 through 2007. GAO also analyzed similar data on Iraq’s advances through September 2009. GAO also interviewed U.S. and other officials in Washington, D.C., and Baghdad, Iraq, including officials from DOD, State, and the Department of the Treasury; the World Bank; the International Monetary Fund; and the Federal Reserve Bank of New York. GAO conducted a site visit in Baghdad, Iraq, in April 2010, to interview Iraqi officials and to obtain additional information on Iraq’s fiscal position. To report on the President’s fiscal year 2012 budget request, GAO reviewed the President’s fiscal year budget request for international affairs, and past and current transition and interagency planning documents for the transition to a civilian-led U.S. presence in Iraq. GAO also interviewed officials from the Departments of State and Defense in Washington, D.C., and the U.S. Embassy Baghdad.

Agency Comments & GAO Contact

GAO provided a draft of its September 2010 report to State, Treasury, DOD and the International Monetary Fund for review and comment. State, Treasury, DOD, and the International Monetary Fund provided technical comments, which were incorporated as appropriate. State and Treasury agreed with GAO’s 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. 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. GAO believes that it is premature to determine that Iraq’s available resources fall at the low end of the range until Iraq has completed International Monetary Fund-required review of outstanding advances, particularly in light of the substantial shortcomings associated with Iraq’s accounting for advances. This review will clarify the total resources available for government spending. GAO agrees that it may be prudent for Iraq to maintain a fiscal reserve.

DOD also commented that it believes the overall message of the draft report—that the Iraqi government had significant cash reserves that would have allowed it to pay more of its security costs—is inaccurate. GAO disagreed. In its report, GAO noted that Iraq ended 2009 with at least $15.3 billion in financial deposits. Moreover, when completed, International Monetary Fund-required review of Iraq’s outstanding advances will clarify the total funds that are available to the government for spending.

For additional information about this area, contact Charles Michael Johnson, Jr. at (202) 512-7331 or johnsoncm@gao.gov.

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