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Weapons of Mass Destruction (WMD)


13 November 2003

Ex-Im Bank Proposes to Underwrite U.S. Exports to Iraq

$500 million facility would help Iraq take charge of its own development

The Export-Import Bank of the United States is proposing a $500 million trade facility with the new Trade Bank of Iraq, which would allow the Iraqis to start taking charge of their economic development, using their own resources to finance the process, according to Philip Merrill, the president and chairman of the bank.

This trade facility would ensure that U.S. companies will be able to receive payment for exports aimed at supporting Iraqi reconstruction efforts.

Merrill stated in a November 12 speech in Washington that "there are three pillars to the successful reconstruction of Iraq: physical security, political stability, and economic growth."

Merrill observed, however, "In order to have physical security and political stability, we must do something to enable Iraqis to realize their wealth more quickly."

He noted that Iraq could potentially generate $20 to $30 billion per year in oil exports to finance its development program but observed that this would require $20 to $30 billion in investment up-front.

Merrill pledged that if Iraq requests help in acquiring such investment, "Ex-Im Bank can help spur private financial flows to Iraq with our trade financing, but more private capital will be needed, and that will require improvement in the security situation, legal framework, and banking system."

Following is the transcript of Merrill's speech:

(begin text)

Speech by the Honorable Philip Merrill
President and Chairman Export-Import Bank of the United States
Washington, DC, November 12, 2003

Thank you, John Bachmann (vice chairman of board) for your kind introduction.

The two pressing issues of the day are the U.S. economy and the situation in Iraq. I'd like to say a few words about each in the context of Ex-Im Bank, the agency that I'm privileged to lead.

The events of the last two years have conclusively shown that the United States has the most powerful and most operationally versatile military in world history. We are able to project devastating force around the globe in record time - and we reap many significant strategic and political benefits as a result. Yet, it is worth noting that the military power of the United States pales in comparison to our economic power.

With an $11 trillion GDP and a sense that the U.S. economy may be rallying again, the United States is driving the world economy to a degree that it has not since the 1960s. It is hard to exaggerate the size and growth of the U.S. economy when viewed from other countries.

As a point of comparison, our Cold War adversary, Russia, has a $350 billion economy - which is 3.3 percent of ours, or about the size of Holland's. China's economy is about three times that of Holland. Brazil, for example, with 60 percent of our population, has a GDP of around $500 billion - 5 percent of ours. Fifteen or 20 years from now, our GDP will go from $10 to $20 trillion or more, and one can only hope that Brazil will be striving toward $1 trillion.

I think that for the United States the best is yet to come! The U.S. has shown an amazing capacity for productivity growth and economic reinvention. Within the normal business cycle - including savings, surplus, and deficit projections -- I believe that the United States will continue to have explosive growth in the 21st century - just as it has over the last two centuries.

In 1962, the U.S. GDP, in today's dollars, was $586 billion. In just 40 years, we have created more than $100 trillion in new net worth. This is a level of wealth creation without historic parallel. The Spanish control of Latin America, the Dutch trade with the East Indies, and the British Raj in India all look like marginal investments in comparison.

The central fact of the 21st century is the enormous size of the U.S. economy compared with everyone else. Contrast this with the dominant political fact of the 20th century -- the growth of huge military forces in the hands of totalitarian states that were willing to use them. This is a kind of tectonic shift that has been recognized more by other countries than by Americans. Of course, we realize we are rich and powerful, but we don't completely realize by how much. It is not surprising, therefore, that taken as a whole, the world sees us as a Gulliver to be tied down with Lilliputian strings through various multilateral institutions and treaties, as well as other legal instruments.

One country that does understand the importance of economic growth is China. Compared, for example, with Russia they have been quite successful. Russia, despite a very well-educated population with many technological skills, produces nothing that is competitive in world markets except for energy and other natural resources, such as gold and timber. China has a $100 billion trade surplus with the United States and has Wal-Mart as its distribution agent -- with $12 billion in annual sales to that one company alone.

It is a fact that company after company, particularly in the information technology (IT) field, is exporting jobs to China and also to India. They are investing in education, especially in math and science. Despite our enormous strengths, the one thing that gives me pause is our failure to adequately invest in education and prepare our young people for technically demanding jobs.

While American higher education is second to none, with tens of thousands of foreign students flocking to our graduate schools each year, state university budgets are being cut by Democrats and Republicans alike. This is a mistake. And, as every concerned parent knows, America lacks effective math and science education at the secondary level.

At Ex-Im Bank, we have $100 billion in lending authority. If I could trade that $100 billion with the National Science Foundation to support better math and science education, in the long-term interest of our country, I just might consider it.

In an $11 trillion economy, investing in good education is the smartest long-range investment we can make - and it is likely to produce the highest returns.

Since, of course, we cannot give our authorization to the National Science Foundation, we can do the next best thing: make that available to U.S. businesses seeking to export. We have roughly $60 billion in outstanding exposure, which means we have $40 billion of unlent capital not quite burning a hole in our pocket.

I don't need to tell you how important exports have become to the U.S. economy. One way or another, one U.S. job in 10 is export-dependent. At $1 trillion a year, exports have risen 1000 percent in just over a quarter century. And with 19 out of every 20 of the world's people living outside the United States, that's where our growing markets lie. While the private sector has the tools and the experience to export to mature markets such as Western Europe, government support can be crucial in expanding and opening markets in riskier developing economies. That, of course, is where Ex-Im Bank comes in.

As most of you know Ex-Im Bank is in the business of providing financing - through insurance, guarantees, and loans -- for exports that would not otherwise take place.

We have three basic criteria:

1) maintain and create American jobs; 2) complement, but not compete with, private-sector financing; and 3) have a reasonable assurance of repayment.

In fact, the Bank has a 2 percent default rate -- even though we operate only in areas where private capital alone cannot afford to take either the political or commercial risk that we underwrite. Nevertheless, the Bank makes money or breaks even, and costs the taxpayer virtually nothing. Our measurement of success is jobs . . . jobs . . . jobs.

Clearly, a new and risky market where Ex-Im Bank is trying to take the lead on behalf of U.S. exporters is Iraq. There are three pillars to the successful reconstruction of Iraq: physical security, political stability, and economic growth. What are Iraq's needs, and how can they be paid for? A consensus U.S. estimate is that Iraq will need close to $100 billion over several years. So where will the money come from?

One answer is the U.S. taxpayer. Congress has approved the President's request for $18.6 billion for Iraq's reconstruction. Another approach is to use the proceeds from Iraqi oil --100 percent for Iraq's own benefit -- in reconstructing their country. Iraq has great needs but also tremendous oil reserves. It should be able to afford a lot. So what is the problem? The problem is time.

In order to have physical security and political stability, we must do something to enable Iraqis to realize their wealth more quickly. And, of course, we must also turn more responsibility over to Iraqis. This will require resolving the Iraqi debt problem. A country with a pre-war GDP of $26 billion, about the same as the annual sales of Lowe's Home Improvement Centers or 10 percent of Wal-Mart's, cannot service $130 billion in debt, plus billions in reparation obligations from previous wars.

If there is going to be any long-term investment, this debt will have to be dealt with promptly. Investors will need comfort that they have a prior position to the old debt.

It is cheaper, as well as smarter, to make Iraq relatively rich than it is for the United States to continue on a path that, in time, if not already, is sure to make us be seen as an "occupying" power. At $1 billion a week just to maintain our forces there, the political and military costs are incalculable.

Keep in mind that Iran and Syria both have a vested interest in taking advantage of Iraqi popular frustration to turn Iraq into Lebanon through guerrilla-type terrorist means. And they are experts at it. Recent bombings are indicative of how many soft targets are available to dedicated terrorists of any stripe.

Because the U.S. contribution is designed to have immediate impact, Ex-Im Bank is working on several initiatives to help Iraq utilize its own resources. We are opening a $500 million trade facility with the new Trade Bank of Iraq.

Under the program, Ex-Im Bank will insure letters of credit issued through the Trade Bank for up to one year for U.S. exports that contribute to Iraqi reconstruction. These Iraqi imports will be funded through the Development Fund for Iraq by current Iraqi oil export revenues. This is to be a multilateral institution. Many of our sister export credit agencies around the world will also participate. Japan and Italy have been particularly helpful, and have offered $500 million and $250 million, respectively, to support exports into Iraq from their countries.

We hope that multilateral support for the Trade Bank from other export credit agencies will help spur trade into Iraq and aid the reconstruction effort, but we cannot expect Iraqi oil revenue to fully fund this task. While Iraq's oil reserves are great - current production is unlikely to generate the money needed today to ensure Iraq's success. Pay-as-you-go is not likely to cut it. One solution might be an Iraqi authority that could securitize future oil revenues in order to raise more money up front. Iraq will need approximately $20 to $30 billion in long-term investment to get from the current 1 million barrels per day to 5 million barrels per day of sustained oil production. The request for that investment must come from the Iraqis. In the end, it is their oil, and they can use it as they wish.

However, if that investment doesn't take place, the American taxpayer will end up paying most of Iraq's development bill. If it does take place, Iraq can generate for itself $20 to $30 billion or more per year for its own development, depending on oil prices and ramping up time.

Investors will require that the Coalition Provisional Authority reach some understanding with the Iraqi people on the ultimate benefits of foreign direct investment. It is not a simple problem to overcome the inherent resistance to Western investment in Iraq and throughout the Middle East. Ex-Im Bank can help spur private financial flows to Iraq with our trade financing, but more private capital will be needed, and that will require improvement in the security situation, legal framework, and banking system.

What prospective investors are telling us is that a key requirement is some form of sovereignty that provides sufficient comfort that contracts will be honored over time.

I want to emphasize that the Iraqi people need to realize some economic value today in order to establish the physical security, political stability, and economic development that their country needs - and to which the United States is fully committed.

Whether we are addressing Iraqi reconstruction, improving American education and competitiveness, or expanding U.S. exports, the United States can achieve the goals it sets for itself.

The challenge is - as it has always been - how to draw on our wealth and our innovative spirit to advance and support our national interests. I have no doubt that we can do this.

Thank you.

(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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