U.S. Claims Economic Victory In Iraq, Experts Scoff

by Emad Mekay

(IPS) WASHINGTON -- The United States is having success in installing a market economy in Iraq, says a top Treasury Department official.

"Iraq is making tangible progress towards the establishment of an open, robust market economy," said John B. Taylor, undersecretary of international affairs at the Treasury Department, on Feb. 11.

But an economic expert who monitors the economy in the capital Baghdad gave a less rosy account, telling IPS that the Treasury's picture is exaggerated and that the majority of Iraqis have seen little benefit so far from the changes.

"Alongside the positive things that have taken place, there are other negative things," said Essam al-Khafaji, director of Iraqi Revenue Watch, an initiative of the Open Society Institute, which is headed by international financier George Soros.

Taylor, who was testifying before the Senate Banking, Housing and Urban Affairs Committee, painted a positive portrait of Iraq's U.S.-fuelled march towards market economic rules.

The official said "many significant, positive developments" had occurred since the Coalition Provisional Authority (CPA), the top power in the occupied country, and the U.S.-appointed Iraqi Governing Council launched the economic program. Its aim was to replace the quasi-socialist economy that operated under captured president Saddam Hussein.

Topping the list of accomplishments cited by Taylor was the imminent arrival of three foreign banks in Iraq, a wider playing field for local banks and the lifting of curbs on interest rates.

Taylor's presentation did not dwell on the persistent Iraqi guerrillas resistance, which has claimed the lives of hundreds of American and British troops. Just this week two suicide bombings killed more than 100 people, most of them Iraqis.

Discussing the economy, Al-Khafaji said that many recent changes to economic laws were imposed without consulting Iraqis and were carried out "in a very premature way".

"Many radically new sweeping changes, for example the law on foreign investment, Iraqis were not allowed to review it. They were not given the chance to even look at it before it was passed," he added.

Meanwhile, at a meeting of the G-7 finance ministers in Florida last weekend, the country's Central Bank Governor Sinan Shabibi and Finance Minister Kamel Gailani said that they are fully committed to a "private sector-led market economy."

The Iraqi officials outlined their priorities as working towards "openness and transparency of Iraq's institutions", and creating strong incentives for private-sector development.

They also said they were working toward close economic and financial integration with the international community.

On the ground, the CPA and the governing council are moving ahead. The U.S.-appointed council has selected three foreign banks to receive licenses to operate in Iraq, introduced a plan to liberalize interest rates by March 1 and will soon pass a new Central Bank law.

Taylor reported that interest rates on all domestic financial instruments -- loans, deposits and securities -- will be fully liberalized.

"This measure is an important step in the direction of creating a modern, efficient financial sector, because it will enable lenders and borrowers to make their own decisions rather than having them determined by fiat and top-down directives issued by the Central Bank," he added.

The CPA has taken other steps to give private banks in Iraq a start.

Under Saddam's regime, private banks controlled less than eight percent of total banking assets and used antiquated technology. But under a new banking law, they are permitted to offer new services to their clients.

According to the U.S. Treasury, already 10 banks are receiving international payments and remittances, and issuing letters of credit.

With 143 functioning branches of those banks, international payments and remittances are now estimated at more than five million dollars a day into Iraq, an influx of funds that Washington hopes will play a major role in funding investment and consumption.

The United States is also opening the doors wide to foreign banks. The CPA says its new law will permit up to six foreign banks to enter the Iraqi market over the next four years, a definite departure from the previous regime, which allowed only Arab banks to operate in Iraq.

Baghdad has to date received 15 applications from banks wanting a foreign bank license. On Jan. 31 Shabibi said that Hong Kong Shanghai Banking Corporation, the National Bank of Kuwait and U.K.-based Standard Chartered Bank will be given licenses by mid-March.

The Kuwait bank has already said it plans to buy 85 percent of one of Iraq's private banks.

Taylor announced plans to substantially overhaul the management, organization, personnel and other systems at the state-owned banks, including Iraq's two large state-owned commercial banks, Rafidain and Rasheed.

Washington has also opened the door to the new Trade Bank of Iraq, a credit bank designed to lubricate the imports and exports needed to support the country's economic re-orientation.

The Trade Bank, which opened in December, has issued over 200 letters of credit worth $190 million to most government ministries and several state-owned enterprises.

Al-Khafaji, whose program is among a very few that monitor the Iraqi economy, said these changes, while having some positive aspects, have also created layers of corruption and financial abuse.

"It's creating riches in a crony way, I have to say," he said. "We haven't unfortunately departed from the old pattern where people used their personal ties, etc., in order to enrich themselves. Old sharks from the old regime are taking advantage of what's going on".

For example, there was an uproar when the governing council chose to give a mobile phone licence to a company that includes the son of a close associate of Ahmed Chalabi, the governing council strongman.

Anger also erupted when the council decided that all major industries, except oil, would be open for 100 percent foreign ownership. Local businessmen complained it was a giveaway of the country's wealth to U.S. and other non-Iraqi companies.

But Washington says the reforms will help to create wealth that will eventually seep down to all Iraqis.

The Treasury says it has managed to persuade some foreign governments to transfer assets of the former Iraqi regime back to Iraq. To date, more than 10 countries have transferred about 650 million dollars in such assets to the Development Fund for Iraq, it adds.

Washington has also recorded partial success in reducing Iraq's international debt burden.

Current estimates put that debt at around $120 billion. Members of the Paris Club, which includes 19 of the world's wealthiest nations, are owed roughly $40 billion -- $21 billion in principal and the remainder in late interest.

Non-Paris Club governments, chiefly the Arab Gulf States, and private creditors, hold the rest.

Iraq has suffered under a dictatorship and, for the past 12 years, under international sanctions driven primarily by the United States and Britain, now the nation's two main occupying forces.

But al-Khafaji said that all of the economic changes are yet to leave a mark on unemployment rates and on basic services, the two most pressing issues for Iraqis now.

"The unemployed, who form some 50 percent of the total labor force, which is a huge, huge proportion, cannot see the changes. Those who are already workers see positive changes," he said.

"The number one problem remains basic services, which are not moving ahead in a way that's proportionate to the amount of resources committed to that. To be very fair, the outcome is very mixed to say the least."