Administrator’s Weekly Report
Economy
January 31 - February 6 2004
INFO MEMO
December 289, 2003
TO: The ADMINISTRATOR CPA Exec Sec
CPA Governance
CPA South Central
82d Abn Div Cdr
82d Abd Div G-5
304th CA Bde Cdr
CJTF-7 Polad (for LTG Sanchez as promised).
FROM: Keith Mines, Al Anbar Governance CoordinatorBill Wood, IMU
SUBJECT: HIGHLIGHTS
-- As of February 4, the balance in the Development Fund for Iraq (DFI) was $8.6 billion.
-- Coalition Joint Task Force 7 (CJTF-7) Civil Affairs units estimate that the CPA has created approximately 436,562 jobs for Iraqi citizens.
I. BUILD FINANCIAL MARKET STRUCTURES
Modernize the Central Bank; Commercial Banking System; Re-establish Baghdad Stock Exchange; Restructure National Debt
On January 31, the Central Bank of Iraq (CBI) announced that on March 1, it would fully liberalize interest rates on deposits, loans, credits, securities, and all other domestic financial instruments. The CBI currently sets these rates. This represents a major step in the development of Iraq’s financial system. The decision to liberalize interest rates will facilitate the modernization and development of Iraq's financial system based on market principles.
· Central Bank Governor Shabibi and Finance Minister Gailani were in Boca Raton, Florida, February 6-7, for the Group of Seven ministerial meetings. They discussed the progress to date on reforming Iraq’s financial system and budget priorities, and outlined future steps.
· The Iraqi Governing Council is expected to approve the new Central Bank law by mid-February.
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· The CBI closed the auction market for the new Iraqi dinar (NID) from February 1 until February 7 for Eid al Adha celebrations. At the NID auction on January 31, the settlement price was 1360 dinars per dollar, appreciating from 1370 dinars per dollar on January 29. On January 31, the NID street market price was also 1360 dinars per dollar, appreciating from 1360 dinars per dollar on January 29.
§
Source: CPA Senior Advisor to the Central Bank of Iraq (CBI)
Source: CPA Senior Advisor to the Central Bank of Iraq
· The CBI announced on January 31, three banks that will proceed to the final step in the selection of foreign bank licensees. The banks are Hong Kong Shanghai Banking Corp., National Bank of Kuwait, and Standard Chartered Bank. The CBI chose these banks from 15 applicants representing a range of international and regional banks. Other banks remain under consideration. The CBI anticipates granting licenses to all three banks in mid-March 2004. The banks shall then be required to begin actual banking operations in Iraq no later than December 31, 2004.
· Paris Club creditors agreed during their January meeting to participate in another data call that will seek more detail on creditors’ claims on Iraq. They will aim to complete the data call by the time of the next Paris Club meeting during the first week of March. In addition, the International Monetary Fund continues to work on obtaining better data from non-Paris Club creditors.
II. DEVELOP TRANSPARENT BUDGETING AND ACCOUNTING ARRANGEMENTS
Redraft and Execution of 2004 Budget
· CPA is working with the Minister of Finance on revisions to the 2004 budget and the rollover of unspent budget money from fiscal year 2003. The Minister of Finance allowed this rollover exception because of the extraordinary circumstances of the previous year. One of the major revisions to the 2004 budget is a 40 percent increase in money for salaries in order to cover the cost of implementing the new salary scale (the total increase amounts to $710 million, or 1.07 trillion NID).
· As of February 4, the balance in the DFI was $8.6 billion, comprised of $7.9 billion in the original Federal Reserve Bank of New York (FRBNY) account, and $600 million on deposit in DFI-Baghdad. Since establishment, the DFI investment program at FRBNY earned $11 million in interest. As of February 4, the total payments out of the DFI amount to $3.1 billion.
State Department and U.S. Agency for International Development (USAID) assistance to Iraq disbursed in FY 2003/2004 totals $2.3 billion as of January 27, 2004:
USAID/ Asia and Near East (ANE): $1.7 billion
USAID/ Office of Foreign Disaster Assistance (OFDA): $87 million
USAID/ Food for Peace (FFP): $426 million
USAID/ Office of Transition Initiatives (OTI): $72 million
State Department/ Bureau of Population, Refugees,
and Migration (PRM): $39 million
III. DEVELOP FRAMEWORK FOR SOUND PUBLIC SECTOR FINANCES AND RESOURCE ALLOCATION
Increase Capacity of Ministries of Finance and Planning to Manage Public Resources; Increase International Coordination to Manage Foreign Assistance
§ On January 29, the World Bank Board of Executive Directors authorized the Bank to act as an administrator for the Iraq World Bank Reconstruction Trust Fund, which will finance a program of emergency projects and technical assistance. The trust fund donor committee will hold its first meeting in late February in Abu Dhabi, UAE. The donor countries that participated in the Madrid conference are expected to follow up on their commitments at that time.
IV. PRIVATE SECTOR INITIATIVES
Streamline existing commercial code/regulations; Facilitate lending to private businesses; Technical Assistance for Small and Medium Enterprises (SMEs); Iraqi Participation in Reconstruction Subcontracts; Business Development
The International Finance Corporation (IFC) invited six banks to Amman, Jordan on February 8-9 to discuss the $170 million SME lending facility to determine their level of interest in participating.
The CPA Office of General Counsel is meeting with the Iraqi Governing Council (IGC) Finance Committee to obtain their approval for the Tax Strategy and Trade Liberalization laws, and to discuss their concerns regarding the Company Law. The CPA Office of General Counsel is also finalizing comments from the interagency group and the Coalition regarding the interim securities law, which will facilitate the establishment of the Iraqi stock exchange.
U.S. Treasury, Commerce, and State Department staffs are participating in an “Iraqi commercial law legal cell” that is drafting and implementing laws and regulations for secured transactions, leasing, and possibly insurance. A strong legal and regulatory framework in these areas will facilitate the delivery of credit and promote a business friendly environment.
V. COMMENCE REFORM OF TAX SYSTEM
Reform tax rates
CPA currently is developing the information technology system to support the enforcement of the 5 percent reconstruction levy that will take effect on March 1, 2004.
VI. REMOVE SUBSIDIES/DEVELOP SOCIAL SAFETY NET
Develop energy subsidy reform plan; Strengthen food security controls on PDS system until monetization is implemented
CPA submitted energy subsidy reform information to the Minister of Oil for his review and is awaiting recommendations from his task force.
VII. IMPLEMENT POLICY TOWARDS STATE-OWNED ENTERPRISES (SOEs)
Return SOEs to pre-war operating levels, where appropriate; Find sources for financing their short term working capital and investment requirements; Hard Budget Constraints; Develop restructuring plan for SOEs
· The lack of Iraqi political will is limiting significant restructuring of SOEs.
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VII. DESIGN OIL TRUST FUND
Proposal for Oil Trust Fund
As of January 31, 2004, estimated crude oil export revenue is $1.3 billion since January 1, 2004 (crude oil export revenue for 2003 [June - December] was $5.1 billion).
· CPA provided information to the Minister of Oil on potential oil trust structures for Iraq, and is awaiting his response.
VIII. LAY FOUNDATIONS FOR AN OPEN ECONOMY
Provide IG Staff Capability; Trade Bank; WTO Observer Status; Draft Intellectual Property law to GC by April 15, 2004; Develop Framework for Collateralizing Movable and Immovable Property
· As of February 6, the Operating Consortium of Banks, led by JPMorgan, issued 205 letters of credit (L/C’s) worth $205 million for nearly every Ministry and several SOEs.
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IX. PURSUE NATIONAL STRATEGY FOR HUMAN RESOURCES DEVELOPMENT
Begin work to employ 100,000 workers in Public Works programs around the country
· The National Employment Program and the additional employment program in the northern regions, initiatives that seek to create 155,000 new public works jobs, created 108,433 jobs as of February 6, 2004, nearly 70 percent of the goal.
Coalition Joint Task Force 7 (CJTF-7) Civil Affairs units estimate that the CPA has created approximately 436,562 jobs for Iraqi citizens (51 percent of the CPA target of 850,000):
Security/National Defense employs 214,831
National Employment Program employs 108,433
CJTF-7 employs 50,473
Civilian contractors working under CPA contracts employs 61,445
Governorate Teams employ 1380
Welcome Home - Information Management Unit Why are the Attacks Down in Al Anbar Province – Several Theories
1. Over the past month attacks against Coalition Forces in Al Anbar province have gone from over 20 per day to next to none. There are a number of theories for why this is. It is entirely possible that it is merely a blip on the screen or a statistical aberration and we will return to larger numbers of attacks, but it has held for nearly five weeks now and both military commanders and Anbar’s citizens are starting to openly talk about it and offer their theories for why it is happening. Among the reasons given:
Ø Rounding up the Bums: MG Swannack and all military commanders (as well as GC) believe that the many high yield raids of the past weeks have made a difference both in getting off the streets some of the leaders and financiers of the resistance and especially some of the technical experts that attackers rely on to carry out their attacks. This has had the spin off effect of causing others to go underground out of fear that they might be next. Most raids also leave in their wake a number of innocents who were either rounded up and detained or had their houses busted up. These can conceivably lead to bitterness over the occupation and spawn new attacks. But there appears to be sufficient care in how the attacks are carried out, adequate information in the community about the mild reality of detention, and sufficient civil affairs clean up afterwards that this has not been a major factor.
Ø Crossed the Line: Violence in Iraq is a form of political discourse as well as being culturally acceptable for settling disputes and scores. Thus for a people which is nearly universal in its opposition to being occupied, attacking the occupier is a natural reaction and is widely accepted, even by those who are friendly to us. “It is nothing personal,” one businessman told me, “I like you and believe you could be bringing us a better future, but I still sympathize with those who attack the coalition because it is not right for Iraq to be occupied by foreign military forces.” Thus a low level of violence has been widely accepted in Al Anbar and those carrying out the attacks have even been the recipients of admiration and praise. But with the spate of attacks in mid to late November, culminating with the shootdown of the Chinook, there may have been a sense that the insurgents had crossed a line. This was reinforced strongly by General Abizaid when he came here on the heels of that incident and told some 70 Sheikhs and community leaders that he planned to unleash hell if they kept it up. It was further reinforced by the dropping of several JADMs which may have served to get the attention of the province. It is possible that Anbar’s leaders realized they had crossed a line and reeled the attacks in.
Ø Operational Pause: A boring theory is that the terrorists are in an operational pause, needing to regroup after the recent spate of roundups. There are very few persons we have met who subscribe to this.
Ø Occupation Ending: A number of individuals have expressed satisfaction at the announcement of the new political calendar, although they don’t appear to fully understand it. What has caught their attention is the simple expression that in June a sovereign Iraqi government will be in place. What they have gotten wrong is the idea that the military will be leaving Iraq in June, which one individual said he was sure was a major factor in the diminishing attacks. Oh well, this is one time it might be best that folks don’t fully understand things. By June, when there is a transition of the force rather than a pullout, we will have a new set of challenges anyway, but if this bought us some months of peace it will be worth the confusion.
Ø Project Money Flowing: Some individuals have expressed satisfaction that project money is flowing in greater quantities and believe this has made a difference in the public perception toward the occupation. While the amounts of money are still modest, especially in Fallujah, there are a number of visible projects ongoing that have employed some people and given the appearance that help is on the way.
Ø Engagement: We’ll take some credit here. We have been engaging widely with all the various groups of losers in the new Iraq – intelligence officers, ex-Ba’athists, ex-Army. While many are tiring of the refrain that if you stay with us things will get better, for some they actually have improved and that may have given hope to entire groups. The Veteran’s Affairs office, for example, has created some very positive interaction with the ex-military, and it has helped some of the senior leaders to go on to employment. The simple fact that we are engaging with these people sends a positive signal, even though many others are still waiting for something that will help them.
2. We are still in the knock on wood mode here, as there is no telling what the future holds. The bizarre reaction to the Saddam capture and the increasing lawlessness in many cities in the west certainly gives us pause. There is also the sense among many Sunnis that we are clearly a temporary presence and other Iraqis are the real enemy so in the long term it might be better to begin to gear up and position themselves for the fight to come. This would not in the end make the reduction in attacks a good news story. In short there is plenty of fight left in the Sunnis here and plenty of weapons to carry on that fight. But the sharp and now continuing drop in attacks does give the coalition a much needed respite whose continuation will be critical to successfully carrying out the very challenging political calendar before us. Reinforcing this trend with resources and added attention will be crucial to ultimate success.