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Weapons of Mass Destruction (WMD)

Washington File

26 June 2003

Text: Iraqi Reconstruction Efforts Target "Decades of Misrule"

(Treasury's Quarles addresses Cato Institute June 25) (1760)
The reconstruction of Iraq will not only help the country recover from
the recent conflict with coalition forces, but will also rebuild from
"several decades of misrule," according to Randal Quarles, Assistant
Secretary of the Treasury for International Affairs.
Quarles, speaking June 25 at the Cato Institute in Washington, warned
that the reconstruction process is "not amenable to easy solutions or
quick exits," but cited several successes and potentials that made him
optimistic that a stable and prosperous Iraq will be created.
He said the system of emergency and salary payments to government
workers, pensioners, and others out of the $1.7 billion in frozen
regime assets has been successful, "despite tremendous logistical
challenges."
Quarles also said it appeared that the value of the former Iraqi
currency known as the "Saddam dinar" had strengthened against the
dollar.
On reforming the banking sector, Quarles said Bush administration
officials "endorse the objective of Iraqis having access to financial
products and services that are based on Islamic principles," and said
the United States is evaluating options to establish a "trade credit
authority" that would help to stimulate the economy by facilitating
foreign trade.
"The nature of our engagement will necessarily evolve over time as
Iraqis choose their own government and reconstruction tasks are
completed, but we are committed to ensuring that the people of Iraq
have brighter prospects for their future," said Quarles.
Following is the text of Quarles' remarks at the Cato Institute on
June 25:
(begin text)
DEPARTMENT OF THE TREASURY 
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS 
June 26, 2003
JS-504
Iraqi Economic Reconstruction 
Randal Quarles, Assistant Secretary of the Treasury for International
Affairs
Cato Institute Washington, DC 
June 25, 2003
Thank you for inviting me here today to speak about the economic and
financial aspects of Iraqi reconstruction. Progress in these areas is
critical to achieving the broader goal of building a stable,
prosperous, and democratic Iraq. As you can imagine, this is a
daunting task.
It is a task, however, that is incredibly important. After living
under decades of misrule by Saddam Hussein, the Iraqi people at last
have an opportunity to forge a better future for themselves and for
their children. We are committed to assisting in this effort. Our work
is guided by a set of principles that are fundamental to creating the
foundation for sustained economic growth. These principles include
open markets, the rule of law, established property rights,
transparent and accountable governance, and a sound currency.
It is with these principles in mind that we are confronting the many
challenges on the economic front that we have faced since the end of
the war. Government ministries were largely destroyed by fighting and
looting; the Iraqi dinar had depreciated severely and we feared a
monetary crisis and hyperinflation; basic economic statistics were
non-existent; and the lack of a secure environment restricted commerce
and the work that our staff could do in Iraq. We continue to deal with
lawlessness, limited communication capabilities, and the loss of
technical expertise in government ministries.
I would like to stress, however, that the reconstruction task is not
solely, or even primarily, to rebuild from the consequences of several
weeks of war, but from several decades of misrule. The Iraqi economy
has deteriorated under years of sanctions, conflict, and economic
mismanagement. Income per capita plummeted, impoverishing the Iraqi
people, and other measures of well-being also declined. The infant
mortality rate, for instance, increased from 50 per 1,000 live births
in 1990 to 121 per 1,000 live births in 2000.
Although the reconstruction task is significant, Iraq has several
advantages that will facilitate efforts to improve the prospects for
the Iraqi people. The country has a long tradition of entrepreneurship
and diverse commercial activity; already, the streets of Baghdad are
bustling with commerce. In addition, Iraq has abundant human potential
and natural resources. In combination with a market economy based on
rule of law, established property rights, and economic freedom, these
advantages can lead the way to a brighter, more prosperous future for
all Iraqis.
In helping Iraqis achieve such a future, it will be important to draw
on lessons learned from previous post-conflict experiences. One such
lesson is that rebuilding societies and economies requires time,
patience, and a sustained commitment. Reconstruction is not amenable
to easy solutions or quick exits. The nature of our engagement will
necessarily evolve over time as Iraqis choose their own government and
reconstruction tasks are completed, but we are committed to ensuring
that the people of Iraq have brighter prospects for their future.
While we are still confronted with serious problems, our initial
efforts in Iraq have already resulted in some success. Credit is due
in part to a group of extremely dedicated technical experts that
Treasury has sent who, in spite of all of the difficulties, are
working hard to assist Iraqis in revitalizing the country's economy.
They have been involved in all facets of our initial efforts. I would
like to focus now on some of the principal steps we have taken so far,
as well as on our priorities for future action.
One of the foremost priorities at the end of the war was to make
emergency and salary payments to government workers and pensioners.
This has been an enormous undertaking. The first step was to obtain
the financial resources required to make payments. On March 20,
President Bush vested $1.7 billion of Iraqi regime assets that had
been frozen in the United States over a decade ago and placed them in
an account at the New York Fed to be used to support reconstruction.
So far, nearly half of these assets have been delivered to Iraq to
finance payments. A mechanism for emergency payments was quickly
established on the ground so that payments could begin for dock
workers, power plant workers, and others. Despite tremendous
logistical challenges, the system of payments has been a success,
placing money in the hands of consumers and helping to spur commerce.
A second priority is to promote the establishment of a stable, unified
national currency, which is a prerequisite for establishing a vibrant
economy. The pre-existing currency situation in Iraq makes this a
difficult task. Several currencies circulate widely, including the
Iraqi, or "Saddam," dinar in central and southern Iraq; the Old Iraqi,
or "Swiss," dinar in the northern part of the country; and the U.S.
dollar. One of our main concerns following the end of the war was that
there would be a large devaluation of the Saddam dinar and
hyperinflation. In addition, there were concerns about losing control
of currency printing facilities, and fears that the currency would
cease to serve as an accepted means of exchange.
We took early action to address these concerns. We secured currency
stocks and printing facilities, and the military made public
announcements that existing currencies would continue to be accepted
as means of payment. Although little price data is available to make
assessments about inflation, the information we have received on
exchange rates indicates that the value of the Saddam dinar against
the dollar, while very volatile, has strengthened of late. We stand
ready to assist in the implementation of whichever long-term currency
reform the people of Iraq choose through a representative Iraqi
government.
A third area on which we have placed a great deal of attention is the
development of an integrated and transparent Iraqi government budget.
Before the war, the Iraqi budget was a state secret. The lack of
transparency and accountability made it difficult to determine how
resources were allocated. Enhanced transparency will be essential in
future budget operations, particularly in the area of oil revenues, if
enhanced standards of governance are to be achieved and the Iraqi
people are to hold their elected officials accountable.
Strengthening and modernizing the banking sector is also central to
achieving economic progress in Iraq. We are still in the early stages
of assessing the banking system, but we do know that Iraqi banks were
dominated by the state and oriented more toward the fulfillment of
political objectives than the provision of economic services or
financial intermediation. Our objective is to ensure that the banking
sector begins to function in a commercially viable way and that it
reflects regional as well as international best practices. For
example, we endorse the objective of Iraqis having access to financial
products and services that are based on Islamic principles. We are
also working with Iraqis to help them create a sound supervisory and
regulatory regime in the banking sector. After closing their doors
during the war, financial institutions are now beginning to revive.
The Central Bank has reopened, as have many of the branches of the
largest banks in Iraq.
In addition, we are evaluating options to establish a "trade credit
authority" that will begin laying the groundwork for commercial
activity independent of central authority. Such a financing mechanism
will help stimulate the Iraqi economy by facilitating foreign trade.
An issue that has received much attention and will clearly have to be
addressed is Iraq's capacity to address the potentially enormous
burden of its existing financial obligations. In the near-term, we
have taken two important steps to address this situation. First, we
secured agreement from G-7 creditors not to expect Iraq to service its
debt for at least the next eighteen months. Second, we have been
working to determine how much debt Iraq owes. In the medium-term, once
we have a better estimate of the true level of Iraq's debt and its
underlying payment capacity, we can move forward to develop a
comprehensive strategy to deal with Iraq's official debt.
Donor contributions will also play an important role in the
reconstruction of Iraq. Active participation by the international
financial institutions is important to mobilizing this support.
Indeed, I am pleased to report that these institutions are already
intensifying their engagement in the process of reconstruction and
recovery in Iraq. The U.S. also welcomes the commitment of the UN and
the international community for a donor reconstruction conference for
Iraq in October.
We have been guided in all of our actions by the goal of creating a
stable and prosperous Iraq and releasing the shackles that have
constrained the potential of the Iraqi people. The challenges are
still formidable, but we remain committed to achieving an environment
in which all Iraqis will have the opportunity to forge a better future
for themselves and their children.
(end text)
(Distributed by the Bureau of International Information Programs, U.S.
Department of State. Web site: http://usinfo.state.gov)



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