VZCZCXRO1624
RR RUEHBC RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHGB #2301/01 2381429
ZNR UUUUU ZZH
R 261429Z AUG 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 4463
INFO RUCNRAQ/IRAQ COLLECTIVE
RHEHNSC/NSC WASHDC
UNCLAS SECTION 01 OF 03 BAGHDAD 002301
SENSITIVE
SIPDIS
AIDAC
STATE FOR NEA/I/ECON AND EEB/IFD/OMA
E.O.12958: N/A
TAGS: ECON EFIN EAID IZ
SUBJECT: SECURITY ISSUES, NOT RAMADAN, CORRELATES WITH
INFLATION IN IRAQ
1. (SBU) SUMMARY: In Iraq, as in other Middle Eastern countries,
economic activity increases during Ramadan as families buy more
traditional foodstuffs and gifts for Iftar dinners. Despite
this increased demand for goods (and reports of price-gouging),
our analysis of Iraq's Consumer Price Index (CPI) from 2003-2008
shows no systematic increase in inflation during the Ramadan
period. Instead, price inflation appears strongly correlated
with security concerns. END SUMMARY.
ANECDOTAL SIGNS THAT PRICES RISE DURING RAMADAN
--------------------------------------------- --
2. (U) Embassy Baghdad's local staff and many of our Iraqi
counterparts complain that prices of goods families typically
buy for Ramadan - meat, candy, tea, lentils, and small toys for
children - rise with the approach of the holy Islamic period.
Religious leaders have used their sermons to denounce the
attempt of some "unscrupulous" merchants to "exploit this
month in order to crush the poor by increasing prices." Press
editorials have accused Trade Ministry officials of "colluding
with the merchants to allow them to control prices." This
alleged seasonal inflation is a popular topic of conversation
in Iraq, but recent empirical evidence does not support the
accusations.
THE CPI DOES NOT SHOW SEASONAL INFLATION
----------------------------------------
3. (U) The GOI Central Office for Statistics and Information
Technology (COSIT) publishes the monthly Consumer Price Index
(CPI) for Iraq. Using this data (available at
http://cosit.gov.iq/english), ECON analyzed the annualized
average month-on-month core inflation during Ramadan and the
rest of the year for each of the past six years (2003-2008).
(NOTE: We specifically used just "core" inflation, which omits
globally volatile fuel, energy, transportation, and
communication prices to better isolate the local in-country
effects of Ramadan on prices, especially food prices. END
NOTE.) Our comparison shows that there appears to be no
systematic increase in inflation during the Ramadan period.
CORE INFLATION (AVERAGE ANNUALIZED % Month-On-Month)
Year NOT Ramadan Ramadan Difference
2003 10.4 4.6 -5.8
2004 2.8 4.0 1.2
2005 2.2 3.2 1.0
2006 2.3 1.4 -0.9
2007 1.0 1.5 0.5
2008 0.9 2.9 2.0
4. (U) The chart above shows that in two of the past six years
(2003 and 2006), prices actually decreased during Ramadan. In
2004, 2005, and 2007, we believe that the small percentage point
differences of 1.2, 1.0, 0.5 are statistically insignificant.
The difference of 2.0 percentage points in 2008 is likely
attributable to the significant increases in global food prices,
and should not be interpreted as indicative of seasonal Ramadan
inflation alone. (In September 2008, Iraq food prices increased
6.1 percent month-on-month and 14 percent year-on-year. Global
food prices, according to the United Nations, hit an all-time
high in June 2008 and did not recover to pre-crisis levels until
the beginning of 2009.)
PERHAPS THE CPI IS FLAWED
-------------------------
5. (U) Even if the historical CPI data do not reflect a seasonal
uptick in prices during Ramadan, why do more than 25 million
Iraqi consumers believe that they are paying more for their
Ramadan purchases? If consumers are indeed paying higher prices,
one possible explanation is that COSIT uses a flawed basket of
goods to calculate the inflation rate. COSIT's basket of goods
Qgoods to calculate the inflation rate. COSIT's basket of goods
is based on a 1993 household survey that may no longer reflect
the consumer behavior of the typical Iraqi household. For
instance, since 1993, Iraqis have started spending significant
portions of their income on televisions and mobile phones.
Also, many families have migrated from farms to the cities and
no longer grow food for their own consumption. COSIT conducted
a comprehensive Iraq Household Socio-Economic Survey in 2007
from which it intends to develop a new, updated CPI basket.
FOOD DISTRIBUTION MEANS FEWER GOODS BOUGHT
BAGHDAD 00002301 002 OF 003
------------------------------------------
6. (U) Another complication is that 70 percent of Iraqi families
receive monthly food baskets -- including flour, sugar, rice,
cooking oil, and soap -- through the GOI's Public Distribution
System (PDS). (In past years, the Ramadan basket also included
tea and lentils, key staples during this period.) The fact that
consumers receive many of these goods for free mitigates the
effect of traditional supply and demand and the (alleged)
price-gouging found elsewhere in the Middle East during Ramadan.
In an effort control budget expenditures and pressure from the
International Monetary Fund, the GOI may look to reduce the PDS
over the coming year. If so, we may see more (expected)
inflation during the Ramadan season.
SECURITY HAS STRONGEST EFFECT ON PRICES
---------------------------------------
7. (U) Our analysis indicates that security concerns in Iraq have
a very strong effect on overall prices. Hoarding of goods,
shortages due to transportation difficulties, citizens' fear
of attack as they walk in the streets, and anxiety over bombs
in market areas all affect consumer behavior in ways that
ultimately lead to higher prices. Because security concerns
may be impossible to quantify, a good proxy is mortality, measured
by the average number of Iraqi violent civilian deaths per day.
As it is a proxy, mortality can be seen as a strong correlating
variable in the analysis rather than a direct causative factor on
price inflation.
AVERAGE NUMBER OF IRAQI CIVILIAN DEATHS/DAY
Year NOT Ramadan Ramadan Difference
2003 32 16 -17
2004 21 48 27
2005 34 34 0
2006 69 88 19
2007 64 38 -25
2008 2 17 -5
8. (U) According to this data from the Iraq Body Count website
(http://www.iraqbodycount.org) on Iraqi civilian deaths, one
cannot immediately say that Iraq is either more or less "secure"
during Ramadan. [NOTE: While not GOI official information,
IraqBodyCount.org is widely used as the source of data for
civilian casualties due to its consistent reporting and
documentation. END
(NOTE.) In 2003, 2007, and 2008, average daily deaths
decreased during Ramadan, while in 2004 and 2006 they
increased substantially during the holiday period. But,
when one analyzes headline inflation over time alongside
our mortality proxy for insecurity, the results are surprisingly
strong. [NOTE: We use "headline" inflation here because it
includes the volatile sectors of fuel, energy, transportation,
and communication, which are particularly affected by acts of
terrorism. END NOTE.)
9. (U) Since mid-2004, the graphs for Iraqi civilian deaths and
monthly year-on-year percentage changes in headline inflation
over time track each other closely. [NOTE: The graphs of our
analysis are available on Embassy Baghdad's intranet homepage
at: http://baghdad.state.gov/ sites/ECON/Inflation%20Graphs/
Forms/AllItems.aspx END NOTE.] Of particular interest is the
period since July and August 2006, when violent deaths and
inflation peaked, respectively. We have calculated a .88
correlation (very strong) between the two since their decline
from that peak. If a one-month lag period is factored in
(assuming that one month's insecurity will not show up until
next month's price index), the correlation is even higher: .93.
Such a high correlation suggests that security concerns - as
measured by violent civilian deaths - in one month appears to
Qmeasured by violent civilian deaths - in one month appears to
drive up prices over the next month. Also, according to our
analysis, when civilian deaths decline, inflation generally
decreases shortly thereafter.
COMMENT
-------
10. (SBU) As the CPI model gets updated, the GOI cuts its
food distribution to all but the truly poor, and the security
situation improves over time, we may see empirical evidence of
price inflation during Ramadan as in other Middle Eastern
countries. Right now, however, security concerns (or
BAGHDAD 00002301 003 OF 003
insecurity proxied by violent civilian deaths) is a statistically
stronger factor than Ramadan as an indicator of price inflation
overall. Given the tragic August 19 bombings in Baghdad that
killed more than 100 people, we would expect inflation during
Ramadan 2009 to increase due to fear affecting consumer
behavior.
FORD