Cablegate: Jcred - Progress Report

Published: Mon 3 Oct 2005 12:50 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
2972 (D) BAGHDAD 3672
This cable is sensitive but unclassified. For government
use only. Not for internet distribution.
1. (SBU) Summary. Significant progress has been made
with Iraq in many economic policy areas since the July 10-
11 Joint Commission on Reconstruction and Economic
Development (JCRED) in Amman, Jordan. The Iraqis have
moved toward the approval of their 2006 budget and
beginning negotiations on an IMF Stand-By Arrangement.
They are, however, behind on WTO accession,
privatization, and moving to suspend implementation of
the Arab League Boycott. The Iraqis have taken modest
steps to strengthen their private sector, often in
response to broad efforts by USG entities seeking to move
the economy away from its statist orientation. End
2. (SBU) 2006 Budget: The Minister of Finance submitted
his preliminary estimates for the 2006 Budget to the IMF
as a follow-up to Iraq's Article IV consultations. The
Council of Ministers has endorsed this 2006 budget, which
will tackle politically difficult fuel and food subsidies
by reducing budget allocations for these subsidies by 25
percent annually over 4 years. The TNA is expected to
approve this budget in October. At the same time, the
Government of Iraq (GOI) is working with the World Bank,
USAID and donors to introduce social benefit and safety
net measures, such as means-testing, so that the
genuinely poor people will not be disadvantaged by
reduced fuel and food subsidies. The Iraqis also are
looking closely at ways they can increase oil exports and
reduce refined fuel imports in order to increase revenues
available to general budget use.
3. (SBU) IMF Stand-By Arrangement: During the World
Bank/IMF Meetings in Washington on September 23 and 24,
Iraq Finance Minister Allawi had productive discussions
with IMF officials regarding Iraq's effort to secure a
Stand-By Arrangement (SBA) with the IMF. The IMF
announced on September 23 that it is working with Iraqi
authorities to move toward a SBA as a follow-on to their
Emergency Post-Conflict Agreement (EPCA). The IMF has
approved starting negotiations with the Iraqis with the
aim of completing the SBA by the end of the calendar
year. The current Iraqi Government is expected to
endorse a reform policy framework that will obligate the
next government to implement in order to retain the
benefit of the Paris Club debt reduction agreement.
4. (SBU) Debt Relief: Completion of an IMF Stand-By
Arrangement will keep Iraq on track toward meeting its
overall Paris Club debt reduction agreement. Of Paris
Club creditors, only the U.S. and Canada have signed
bilateral agreements. Since the July JCRED, the
Government of Romania signaled its willingness to re-
negotiate Iraq's debt in conformity with Paris Club
principles, and on August 18, Romania's Ministry of
Finance signed such a debt re-negotiation agreement with
Iraq regarding $2.5 billion debt (ref A).
5. (SBU) Banking Sector Reform: The Embassy (USAID and
IRMO) are two months ahead of schedule in preparing the
balance sheets of Iraqi state-owned banks as well as
their executive summary assessment. Reform options for
the banking sector will be presented to the Ministry of
Finance by mid-November. USAID and Treasury are
gathering financial information requested by the Minister
of Finance to support the development of a state-bank
reform program. We have begun to provide direction for
the work of the Minister of Finance via a new Joint Task
Force on Budget and Finance, led by the Treasury Attache
Taecker and the Minister of Finance Allawi. The first
meeting on September 13 focused on expenditures in the
2006 budget. Treasury's interagency meeting with Iraqi
officials on September 22 on the margins of the World
Bank/IMF Meeting also helped to set the agenda and
activities for the next task force meeting in Baghdad.
6. (SBU) Currently, donor coordination is occurring on
multiple fronts. The monthly Baghdad Coordination Group
meeting between the Minister of Planning and Development
Cooperation and Baghdad-based donor officials provides an
effective forum for discussion and strategic level
coordination. Second, sectoral working groups have been
established for education and health, and soon will be
established for electricity and rule of law. These
working groups will be led by the Ministries of
Education, Health, Electricity, and the Chairman of the
Supreme Court. Third, the Iraq Strategic Review Board
(ISRB) meets on a more regular basis to ensure that donor-
funded projects are consistent with national priorities
as articulated in the National Development Strategy
(NDS). National priorities include those projects that
are labor intensive and in essential services (i.e.,
water, electricity, road, bridges). The ISRB also seeks
to ensure equitable regional distribution of donor
7. (SBU) Draft Oil Law: The GOI has been taking steps to
reform its energy policy by drafting a law to liberalize
the import and distribution of refined fuel products (ref
B). If adopted and implemented, the law would end the
State Oil Marketing Company's monopoly on fuel imports by
enabling foreign companies to import and sell certain
refined fuel products. It is also our understanding that
the Ministry of Oil intends by this law to liberalize the
price at which imported fuel can be sold in Iraq, but the
draft language on this point is ambiguous. The Minister
of Justice is currently examining the draft law.
8. (SBU) Infrastructure Security: Multinational Security
Transition Command-Iraq (MNSTC-I) has completed the
training of the first four Strategic Infrastructure
Battalions (SIBs). Training is underway for the next
group and is expected to be complete in December. The
primary duty of these units is protecting critical linear
infrastructure such as oil pipelines and electricity
lines. The GOI agreed in September to assume the cost
(just over $80 million) of maintaining these units.
9. (SBU) SOE Privatization Plan: On August, 29, 2005,
the Council of Ministers signed a Privatization Decree,
which calls for the formation of a ministerial committee
that will oversee the research, identification, and
feasibility of privatizing state-owned enterprises
(SOEs). The committee, led by the Minister of Planning
and Development, will include the Ministers of Finance,
Industry & Minerals, the Treasurer of the Central Bank of
Iraq, the President of the Board of Supreme Audit, and a
representative from the Prime Minister's Office. The
committee will present its recommendations to the General
Secretary of the Council of Ministers by the end of
October 2005. USAID facilitated the development of the
committee and continues to provide technical support on
privatization, including developing an SOE database and
SOE profiles at the Ministry of Minerals and Industry, as
well as advising the Iraqis on how to address social
safety net issues impacting redundant employees.
10. (SBU) Investment Promotion Agency: The Iraqi
Investment Promotion Agency (IIPA), the establishment of
which was announced at the JCRED, seeks to help Iraqi and
foreign investors open businesses in Iraq. With the
support of USAID, the IIPA is still in the process of
becoming operational. Three ministries (Planning,
Industry & Minerals, and Trade) are all involved in the
staffing process. USAID has tentatively scheduled visits
for the new staff of the IIPA to economic development
agencies in Georgia and North Carolina in late October or
early November.
11. Investor Roadmap and Competitiveness Study: Also in
the area of investment, USAID has put together an
"Investor Roadmap" to be completed before the end of
October. This document details the step-by-step process
for foreign companies on how to invest in Iraq (i.e.
register, taxes, etc). There is also a "Competitiveness
Study" due out about the same time that highlights the
industry sectors in Iraq that have a competitive
advantage vis-a-vis competitors. Once these are
completed, they will be housed at the IIPA as resources
available to potential investors.
12. (SBU) WTO Accession: The Ministry of Trade
submitted Iraq's Foreign Trade Memorandum (FTM) on behalf
of the GOI at the end of August 2005. USAID's Izdihar
Project, which assisted with the development of the FTM,
has developed a set of approximately 600 questions that
it estimates Iraq will receive from the members of its
WTO Working Party and is working with government
officials to prepare them for WTO accession requirements.
However, the GOI must take additional steps in upcoming
months to maintain the momentum for its WTO accession.
These steps include selecting a WTO Chairman for their
Working Party, appointing a WTO ambassador, and
assembling a delegation to attend the WTO Ministerial in
Hong Kong in December 2005. Despite Post's pressure, the
Iraqis have made little progress on these tasks. For
example, the Minister of Trade has not appointed a new
Director General to replace Ahmed al-Mukhtar, who
previously headed Iraq's WTO efforts and was recently
dismissed. The Deputy Director General, Abdul Salam, is
currently running the office, but lacks the power to push
WTO issues with Iraqi Trade Minister Karim.
13. (SBU) Iraqi Trade Information Center: USAID's
Izdihar Project also has been working with the Government
of Iraq to develop an Iraqi Trade Information Center that
will be part of the Ministry of Trade and located at the
Baghdad International Fair Grounds in Al-Mansour. It is
modeled after the U.S. Department of Commerce's Trade
Information Center and will serve as a one-stop-shop for
private firms seeking information about trade and
investment opportunities. The new center is scheduled to
open by the end of November.
14. (SBU) Arab League Boycott: Post has engaged the
relevant officials in the GOI, including at the highest
level, numerous times over the past five months to press
for non-implementation of the Arab League Boycott (ALB)
(ref C). While enforcement of the Arab League Boycott is
not/not mandatory for Arab League members, Law No. 34 of
1956 implements the ALB in Iraq. CPA Orders have
suspended or removed ALB requirements in trademark and
company registration processes. The Minister of Trade
has indicated that he sent written instructions to the
Council of Ministers regarding non-enforcement of the
ALB. Nevertheless, ALB enforcement by the GOI appears to
continue in other areas of the economy, e.g. refusing
docking privileges for ships that have used Israeli
ports. Post will continue to push the GOI on non-
enforcement of the ALB, but the next JCRED provides an
additional venue to press the GOI on this issue.
15. (SBU) Generalized System of Preferences (GSP) and
Iraqi Dates: Iraq must take advantage of the GSP
exception for certain categories of dates granted by the
Administration on June 30, 2005. Iraq was a major
producer and exporter of dates, which before the 1990's
ranked a distant second to oil and related products in
its share of Iraq's total exports (ref D). Post is now
taking the next steps by finding interested Iraqi date
16. (SBU) Post delivered a letter to Vice President Mahdi
on September 19 encouraging him to forward the three
JCRED bilateral agreements (Trade and Investment
Framework Agreement, Investment Incentive Agreement, and
Economic and Technical Cooperation) from the Presidency
Council to the TNA, with the recommendation that the TNA
ratify them. Post is arranging a meeting with the TNA
Speaker to stress the importance of these agreements.
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