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Weapons of Mass Destruction (WMD)

Washington File

30 April 2003

Snow Discusses Iraq's Financial Reconstruction

(Calls restoring key economic institutions a priority) (4360)
A U.S. Treasury Department task force is working to address financial
and economic aspects of Iraq's reconstruction, including restoring
operations of the Finance Ministry, the Central Bank, commercial banks
and the stock market, Treasury Secretary John Snow says.
"We start from the premise that our role is to help the Iraqi people
rather than to impose changes upon them," Snow said April 30 in
prepared testimony before a panel of the House of Representatives.
He told the Foreign Operations Appropriations Subcommittee that
Treasury will work with Iraqis on "essential" reform of those elements
of the existing system that are "corrupt, ineffective or inconsistent
with a market-oriented economy."
Other priorities include helping Iraq develop a federal budget, a
system to supervise and regulate financial institutions, overhaul the
tax system and guard against money laundering and terrorist financing,
Snow said. He emphasized that a market-based economy in Iraq will
require a system of commercial law that covers issues ranging from
protection of real estate to intellectual property rights.
Treasury is working with the State Department, U.S. Agency for
International Development (USAID) and the emerging leadership in Iraq
to rebuild the economy, he said.
U.S. officials also expect the World Bank and International Monetary
Fund [IMF] to play an "important role in supporting" reconstruction of
post-war Iraq, Snow said.
"The World Bank is already forming a team of experts to conduct a
needs assessment in Iraq, which will help focus attention on
assistance priorities and lay the groundwork for economic recovery and
growth," he said.
Snow added that the IMF has already provided general advice to Iraq on
currency and monetary policy, and has signaled that it is prepared to
carry out a needs assessment at the "appropriate time."
Snow's testimony outlined the Treasury Department's request of $1,960
million for international programs during the 2004 fiscal year, which
runs from October 1, 2003 to September 30, 2004. The requested total
includes $1,400 million for annual U.S. payments to multilateral
development banks (MDBs), $196 million for repaying U.S. arrears to
these banks, $395 million to help ease the debt burden of the world's
poorest countries, and $14 million for technical assistance programs.
Treasury's international programs "are crucial instruments in
promoting the [Bush] administration's international economic agenda,"
he said.
Snow highlighted President Bush's proposed Millennium Challenge
Account (MCA), which aims to channel additional U.S. aid money to
governments that invest in their people, govern justly, and encourage
economic freedom. The MCA "is one of the most innovative ways of
delivering development assistance that has ever been proposed," he
said.
The Treasury chief also stressed the Bush administration's interest in
helping countries in Africa and the Caribbean fight the HIV/AIDS
epidemic through expanded aid programs "with an emphasis on
accountability for results."
Following is the text of Snow's testimony as prepared for delivery:
(Note: In the text "billion" means 1,000 million.)
(begin text)
U.S. Department of the Treasury
Office of Public Affairs
Wednesday, April 30, 2003
TREASURY SECRETARY JOHN W. SNOW
TESTIMONY BEFORE THE HOUSE APPROPRIATIONS SUBCOMMITTEE ON FOREIGN
OPERATIONS, EXPORT FINANCING AND RELATED PROGRAMS
Chairman Kolbe, Ranking Member Lowey, Members of the Subcommittee,
thank you for the opportunity to testify today on President Bush's FY
2004 budget request for Treasury's international programs.
President Bush is deeply committed to promoting economic growth and
stability, especially in those parts of the world where poverty is
most acute. Economic growth has been strong in some developing
countries. And in those countries, living standards have risen and
poverty has been reduced. However, it is hard to be satisfied with the
overall progress in development results. Many developing countries
have not yet experienced strong sustainable economic growth. As a
result, billions of people still live in extreme poverty.
I'm here today to discuss Treasury's international appropriations
requests. While here I also wanted to take the opportunity to
highlight two of the president's other initiatives to help the poorest
people escape poverty. President Bush's proposal to establish the
Millennium Challenge Account is one of the most innovative ways of
delivering development assistance that has ever been proposed. The MCA
takes the goal of providing incentives for nations to govern justly,
invest in their people, and encourage economic freedom and turns it
into an operational action plan. More recently, the President also
announced the Emergency Plan for AIDS Relief, an effort that goes well
beyond existing efforts to help countries in Africa and the Caribbean
wage and win the war against HIV/AIDS, with an emphasis on
accountability for results. As the President has said, "Persistent
poverty and oppression can lead to hopelessness and despair. And when
governments fail to meet the most basic needs of their people, these
failed states can become havens for terror."
These initiatives and others that I will highlight today recognize the
enormity of the challenge and the critical U.S. stake in the outcome.
With this in mind it is essential that our foreign assistance dollars
be used effectively.
The more effective our economic development efforts, the greater the
chance for democratic values to take root, the greater the likelihood
that stable governments and social institutions will develop, and the
greater the volume of mutually beneficial trade with Americans.
Over the past few years, the international community has worked at
creating a set of development goals. These goals include such
ambitious targets as halving by the year 2015 the proportion of people
whose income is less than one dollar a day. Last year, President Bush
added another ambitious goal -- "we ought to double the size of the
world's poorest economies within a decade." Such goals will require
developing countries to take vital policy steps to increase economic
growth rates. They will also require a serious commitment by the donor
community and the multilateral development institutions. If these
ambitious goals are met, we can add another target that we should all
want to achieve, and that is for the development institutions --
bilateral and multilateral -- to start working themselves out of
business. While it may seem like a strange measure of success -- think
about it -- such an achievement would mean that countries are relying
on investment, private capital, and entrepreneurship instead of
pledges, concessions, and debt relief. It would mean that the people
of developing countries will have governments that deliver basic
services and provide for the rule of law; it will mean that they will
have a chance to better their lives and see their children educated;
and it will mean that they will know freedom and human dignity.
Ambitious -- yes, but I'm here today to tell you about a number of
reform initiatives that President Bush has made to start us in that
direction. He set out a new economic growth agenda for the
multilateral development banks that focuses these institutions on
raising productivity growth and measurable results by channeling more
funds to countries that follow pro-growth policies, and by structuring
our contributions to create incentives for specific outcomes. He
called on the development banks to increase the use of grants, rather
than loans, to the poorest countries, and the banks are already
responding to this call. Grants help the poorest countries avoid
crippling their growth with a burden of debt they can never repay and
create incentives for greater development effectiveness.
Treasury's international programs -- oversight of the multilateral
development banks, technical assistance, and debt relief -- are
crucial instruments in promoting the Administration's international
economic agenda. They also help pursue specific U.S. foreign policy
objectives, such as supporting economic assistance to key countries in
the war on terrorism and combating money laundering and terrorist
financing. Similarly, Treasury's international debt programs help
support good policies in reforming countries, while technical
assistance programs help reforming countries put in place the sound
budget and financial systems needed for growth.
This year's request totals $1.96 billion. It includes $1.4 billion in
funding for our annual commitments to the Multilateral Development
Banks [MDBs], $196 million toward clearing a portion of our arrears to
these institutions, $395 million towards debt reduction programs, and
$14 million for international technical assistance programs. It
includes, following on last year's request, funding increases for
several of the key institutions linked to progress on our reform
efforts. I am committed to ensuring that U.S. taxpayer resources are
put to good use. Treasury will continue to press its pro-growth agenda
in the MDBs, holding these institutions accountable for achieving
significant and sustainable improvements in the daily lives of people.
This agenda is being incorporated in many of the MDBs, but our work
must continue until our objective is fully achieved.
Iraq and Afghanistan 
Before reviewing the details of our FY04 request, let me say a few
words about activities related to the urgent reconstruction efforts in
Iraq and Afghanistan. First, we have formed a task force at the
Treasury Department to help address key financial and economic aspects
of Iraq's reconstruction. This task force includes broad
representation from U.S. Government Agencies, including
representatives of the Federal Reserve, OCC [Office of the Comptroller
of the Currency], USAID [U.S. Agency for International Development],
and the State Department. In conjunction with State, DoD [Department
of Defense], and others, Treasury will be working closely with Peter
McPherson, who will be General Garner's top assistant on financial
matters on the ground in Iraq. Treasury's Office of Technical
Assistance already has deployed 14 advisors to the Office of
Reconstruction and Humanitarian Assistance (ORHA) in Kuwait, and
additional personnel may be deployed as necessary to help staff ORHA,
which is expanding in conjunction with its move to Baghdad.
Working in concert with USAID, State, and the emerging leadership of a
free Iraq, Treasury will assist in the formulation and execution of
financial and economic policies in post-war Iraq. We start from the
premise that our role is to help the Iraqi people rather than to
impose changes upon them. It will be a priority to restore essential
operations of the Finance Ministry, the Central Bank, commercial banks
and the stock market. Where elements of the existing system are
corrupt, ineffective, or inconsistent with a market-oriented economy,
Treasury will work with the Iraqi people to begin essential reform and
restructuring efforts. A crucial near-term challenge will be paying
civil servants, teachers, and pensioners in a fair, orderly and prompt
manner -- and transitioning to a wage/pension payment process under
Interim Iraqi Authority control. Near-term goals include assisting the
Iraqi people in the development of a fair and transparent federal
budget, creation of a responsible system of regulation and supervision
for financial institutions, reform of the tax and customs regimes,
design of a strategy for the management of domestic and external debt,
and implementation of financial fraud, anti-money laundering and
anti-terrorist financing measures.
Development of a system of commercial law, founded on a base of
private property rights, is an essential element of developing a
market-based economy in Iraq. For this reason, we believe there are
several areas in which the Iraqi people will need to focus, ranging
from dealing with real estate and personal property to intellectual
property rights. These will also include establishing the legal
framework for corporations, the banking system, and capital markets.
Given the reach of commercial law, more than just Treasury will be
involved in assisting this effort; it will also include the
Departments of State, Justice, Commerce, and USAID. However, each of
us recognizes the importance of creating a free market economy in the
country, and development of a sound framework of commercial law is key
to this goal.
We also expect the international financial institutions to play an
important role in supporting Iraq's reconstruction. The World Bank is
already forming a team of experts to conduct a needs assessment in
Iraq, which will help focus attention on assistance priorities and lay
the groundwork for economic recovery and growth. Just yesterday, the
Executive Directors of the World Bank met and gave full authority to
Bank management to determine when the time is appropriate to send a
mission to Iraq for a field-based needs assessment. The IMF has
provided general advice on the currency and monetary policy, and has
also signaled that it is prepared to undertake a needs assessment at
the appropriate time.
Shortly after the creation of the Interim Authority in Afghanistan in
December 2001, Treasury's Office of Technical Assistance [OTA] sent an
advisor to Kabul to conduct early assessments of budgetary, financial
and economic conditions. OTA Budget Advisor Larry Seale has since been
in Kabul for over a year working closely with Finance Minister Ashraf
Ghani in establishing modern budget mechanisms in the country.
Treasury consulted with the World Bank, the Asian Development Bank and
the UN Development Program during their development of the Needs
Assessment for Afghanistan, which was presented at the Tokyo donors'
conference in January 2002. Treasury provided advice and assistance on
the creation of a new, unified currency, which completely replaced the
old afghani in January of this year. Under Secretary Taylor has also
played a key role in marshaling international financial support for
the Afghan government's day to day expenses through the World
Bank-administered Afghanistan Reconstruction Trust Fund
The MDBs are providing critical support for economic reform in
Afghanistan. The World Bank and the Asian Development Bank [AsDB],
together with UN agencies and international donors, are working
closely with the Afghan government to respond to the country's urgent
reconstruction needs. Last year, the World Bank extended grants
totaling $100 million to support public administration,
infrastructure, education, and public works and provided a $108
million concessional loan in March this year to rebuild Kabul airport
and a section of the "ring" road. Last year, the AsDB moved quickly to
offer grants assistance on roads, energy, and capacity building and to
date has provided about $40 million in grant assistance. Additionally,
Afghanistan has received an AsDF post-conflict concessional loan of
$150 million that is supporting urgent road building and another $150
million in concessional resources are expected to be approved for
post-conflict reconstruction next month.
The MDB Growth Agenda
Productivity growth is the key to raising living standards. Therefore,
the U.S. has urged the MDBs to focus on projects that raise
productivity growth. This means placing a greater emphasis on health,
education and private sector development to help individuals to
realize their full potential. It also means removing obstacles to
productivity growth by aggressively promoting good policies. One
important mechanism for effecting this change is the adoption of
policy-based allocation systems by all of the MDB windows that provide
concessional finance for the poorest countries. These systems provide
more resources to countries that establish policies conducive to
productivity growth, and fewer resources for those who do not.
Raising productivity growth requires efforts to promote private sector
development, including expanding small businesses' access to credit.
The U.S. has proposed that the International Finance Corporation (IFC)
-- the private-sector arm of the World Bank Group -- work with the
International Development Association (IDA) to promote lending by
financial sector institutions to small and medium-sized enterprises
(SME) in Africa. This is intended to build on a number of successful
SME programs already in place, including those at the European Bank
for Reconstruction and Development (EBRD) for Russia and Eastern
Europe. The IFC and IDA are now developing this program for African
SMEs.
Focusing on measurable results requires fundamental changes in
operating style, beginning with the creation of new measurement and
accountability systems. To drive this change, the U.S. has set up a
structure of results-based contributions in IDA, the flagship of
development institutions. The U.S. has proposed to provide an
additional $300 million in contributions if IDA produces a results
measurement system, expands essential diagnostics and achieves
progress toward concrete health, education and private sector goals. A
similar results-based mechanism was established for the Global
Environment Facility (GEF), with the final $70 million of our
contribution tied to the GEF achieving specified, quantifiable program
goals.
The U.S. has also put a high priority on MDBs' increasing the use of
grants, instead of loans, to fund priority development activities in
the poorest and least creditworthy countries. Grants help poor
countries make productive investments without saddling them with ever
larger debt burdens. Recipients view grants as more valuable than
loans, permitting higher performance hurdles and thus enhancing
development effectiveness and results. Due to strong U.S. urging, both
the World Bank's concessional window -- IDA -- and the African
Development Fund (AfDF) have agreed to sharply increase the amount of
grant resources available to the poorest countries, so that 18-21
percent of total assistance over the next three years will be provided
in grant form. The poorest countries are eligible for 100% grant
financing for HIV/AIDS. Donors likewise committed to increase grants
in the International Fund for Agricultural Development (IFAD) to 10
percent of total assistance. This year we will seek to expand the use
of grants further including at the Asian Development Fund (ADF)
through new replenishment discussions which start in the fall. In the
context of these significant reforms, the U.S. has responded to
critical regional needs with additional funding for the institutions.
The FY 2004 Request
There are four basic components of our FY 2004 request: (1) annual
funding for the MDBs, (2) MDB arrears clearance, (3) debt reduction
programs and (4) Treasury's bilateral technical assistance program:
1. Annual Funding for the MDBs ($1,359.0 million)
The Administration's request for the MDBs includes $1,359 million to
fund fully our current annual U.S. commitments. The request includes
the second payment of our proposed contributions to the recent
replenishments for the International Development Association ($950
million), the African Development Fund ($118 million) and the Global
Environment Facility ($107.5 million). It also includes the first
payment ($15 million) of our proposed contribution to the new
replenishment of the International Fund for Agricultural Development
(IFAD). Replenishment negotiations for these four institutions
concluded last year.
The $950 million request for the International Development Association
(IDA) includes $100 million for this year's portion of the
results-based Incentive Contribution. I am pleased to inform you that
we made the determination shortly before this spring's meeting of the
Development Committee on April 13 that IDA had met the Spring 2003
goals, and earned the results-based Incentive Contribution. IDA is
clearly making strong progress toward ensuring that development
resources are invested effectively. IDA has another set of even more
challenging development outcome and diagnostic goals to meet in spring
2004 to earn the second installment of the results-based Incentive
Contribution of $200 million for FY05. Our total commitment to IDA,
including our baseline pledge and both installments of the
results-based Incentive Contribution, is $2,850 million, or 18 percent
above the U.S. commitment to the last IDA replenishment in 1999. This
is the 13th replenishment and covers a three year period ending in
June 2005.
The request also includes funding for an 18-percent increase in U.S.
contributions for the African Development Fund (AfDF), which will
total of $354 million over three years. For the Global Environment
Facility (GEF), the U.S. agreed to contribute a total of $500 million
over four years, a 16 percent increase over the last replenishment.
2. Arrears ($196 million)
The $196 million request for arrears is part of an effort to pay down
U.S. arrears to the institutions, which total $497 million as of the
end of FY 2003. It is critical that the U.S. meet its international
commitments, thus helping to ensure U.S. leadership and credibility on
global issues of vital importance to the United States. In FY2003, we
requested $177.7 million for the first year of a three year arrears
clearance plan. Congress reduced arrears by only $36.4 million. We
must do better.
3. Debt Reduction Programs ($395 million)
The $395 million request for debt reduction programs includes $375
million for the Heavily Indebted Poor Countries (HIPC) debt relief
initiative. At the 2002 G-8 Economic Summit, President Bush committed
to fund a share of the additional financing requirements for the HIPC
Trust Fund that have emerged. As a first installment on that
commitment, we have requested $75 million for the Trust Fund. The HIPC
Trust Fund helps regional development banks and other multilateral
institutions meet the costs of providing debt reduction to heavily
indebted poor countries committed to economic, social, and governance
reforms. Our request also includes $300 million for the cost of 100
percent U.S. bilateral debt reduction for the Democratic Republic of
the Congo, which is expected to qualify for debt relief under the HIPC
initiative this year. As a demonstration of the Administration's
commitment to better manage the world's most valuable natural assets,
we are also requesting $20 million for debt relief under the Tropical
Forest Conservation Act (TFCA), which provides debt relief to
developing countries that commit to use the savings to protect
biodiversity and tropical forests around the world.
4. Technical Assistance ($14 million)
Our request also includes $14 million for Treasury technical
assistance programs, which form an important part of our effort to
support countries facing economic transition or financial security
issues, and whose governments are committed to fundamental reforms.
Treasury's technical assistance programs were created in the early
1990s to assist countries in the Former Soviet Union and Central and
Eastern Europe. Beginning in FY 1999, a direct Congressional
appropriation allowed expansion of the geographic reach of these
bi-lateral assistance programs. The FY 2004 request will allow us to
continue current programs in Africa, Asia, Central and South America
and to expand the assistance effort into other countries committed to
sound economic reform policies. Over half of the traditional programs
will be in Sub-Saharan Africa, as has been the case for the past three
years. We expect to spend $5 million of the appropriated funds on
anti-terrorist financing programs, in coordination with other U.S.
agencies engaged in this area. The interagency group will continue to
focus on a program for about 20 countries that the Administration has
identified as having financial systems vulnerable to misuse by
terrorist organizations.
Authorization Requests
As part of this year's budget, the Administration is seeking
authorization for additional commitments to the HIPC Trust Fund. The
HIPC authorization request supports the U.S. contribution for its
share of additional HIPC financing agreed to by the President and
other G-7 leaders. We appreciate recent passage by the House of
Representatives of legislation (HR 254) to help implement the
President's proposals to reform the North American Development Bank
(NADBank) and Border Environment Cooperation Commission (BECC), and
are working with the Senate to achieve enactment of this legislation
as soon as possible. The full package of reforms would make NADBank
financing more affordable, expand the institutions' geographic scope
in Mexico, create a single board of directors for the two
institutions, and conduct a business process review.
In addition, Treasury has resubmitted requests for Congressional
authorization for U.S. contributions to the current replenishments of
the International Development Association (IDA), the African
Development Fund (AfDF), and the Asian Development Fund (AsDF). Each
of these funds provides critical development assistance to the poorest
and most vulnerable peoples of the world. In early 2001, President
Bush requested the authorization for the latest replenishment of the
Asian Development Fund (ADF-8). In early 2002, he further requested
the authorization for the latest replenishments of the World Bank's
International Development Association (IDA-13) and the African
Development Fund (AfDF-9). Most recently, the FY 2003 Consolidated
Appropriations Resolution appropriated related funds but did not
include authorization legislation for U.S. participation in these
replenishments. This situation is undermining United States
reform-minded leadership in these institutions. If it continues, it
also will threaten to slow the provision of critical assistance to the
poorest countries and peoples in Africa, Asia and Latin America.
Without the U.S. contribution, to IDA-13, IDA may not have enough
resources to make its normal lending and grant targets for its 2004
fiscal year, which begins on July 1, 2003.
As Treasury Secretary, I believe that it is critical that the Congress
pass authorization legislation for these institutions as soon as
possible. I look forward to working with you and other members of
Congress in achieving this end.
Legislative Mandates and Reports
Finally, I would like to raise the issue of legislative mandates.
Currently, the Administration must execute -- to the extent consistent
with the President's constitutional authorities -- an extremely large
number of specific legislative mandates relating to U.S. participation
in the international financial institutions, including requirements
for directed voting, policy advocacy, certifications, notifications,
and reports, that have built-up over time. The U.S. government's
policy development and implementation in these institutions would be
improved by consolidation of these mandates. Some mandates go back 50
years. Some provisions overlap, or are inconsistent. There are 37
directed vote mandates and over 100 policy mandates, plus numerous
reports, certifications and modifications. These actually impede the
ability of the Treasury to keep Congress fully informed on the vital
issues because the numerous vestigial reporting requirements require
substantial amounts of time from staff and senior officials, diverting
resources from the key issues of current Congressional interest that
warrant serious concern and review. I would like to work with you to
rationalize and focus our mandated reports and requirements, so that
Treasury can work as effectively as possible in pursuit of U.S.
foreign policy goals.
Conclusion
Treasury will continue to work with MDB management and our fellow
shareholders to ensure that the strong reform agenda that we have put
in place is fully implemented. I ask for your support as we strengthen
these institutions in an effort to increase global economic growth,
reduce poverty in the world's poorest countries and support key U.S.
foreign policy interests.
Thank you very much. I would be happy to respond to your questions and
suggestions.
(end text)
(Distributed by the Office of International Information Programs, U.S.
Department of State. Web site: http://usinfo.state.gov)



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