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Weapons of Mass Destruction (WMD)

26 March 2004

U.S. Must Help Iraq Obtain Wealth Quickly, Ex-Im Bank Head Says

Iraqis could use future oil revenues to get capital, Merrill says

The United States must help Iraq realize wealth quickly -- in addition to giving Iraqis more responsibility -- in order to make Iraq more secure, politically stable and economically viable, the chairman of the Export-Import Bank of the United States (Ex-Im Bank) says.

In March 24 remarks to a business organization in Washington, Phillip Merrill said that the funds appropriated so far by the Congress, even when counted together with the money generated by current production of Iraqi oil, will not cover the costs of reconstruction and revitalization of the country's economy, estimated at close to $100 billion over several years.

He said that unless Iraq finds a way of using its "tremendous" oil reserves to obtain the necessary capital, or access to it, more quickly, the U.S. taxpayer will likely have to pick up the tab.

"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," Merrill said.

He said that an Iraqi authority could securitize the proceeds from future oil production to raise more money upfront. News reports says the Ex-Im Bank is supporting a plan under which such an authority would issue bonds or other securities and pledge a portion of Iraq's future oil and gas revenue as collateral to obtain capital.

Merrill said that, in any case, Iraq will need approximately $20-$30 billion in long-term investment to increase its oil production significantly. He emphasized that a request for such investment must come from the Iraqis themselves.

"In the end, it is their oil, and they can use it as they wish," Merrill said.

As the precondition for international investment, Iraq will have to deal "promptly" with its foreign debt estimated at $130 billion -- an amount that excludes reparation obligations from its previous wars, Merrill said.

He said that international investors will require "some form of sovereignty, physical security, and precedence over existing debt, to provide sufficient comfort that contracts will be honored over time" if they are to come to the country.

Merrill also commented on Ex-Im Bank dealings with Vietnam, China, Russia and African countries.

Following is the text of Merrill's remarks as prepared for delivery:

(begin text)

Export-Import Bank of the United States


The Honorable Philip Merrill

President and Chairman
Export-Import Bank of the United States
Washington International Business Council

Washington, DC, March 24, 2004


I would like to thank Greg Dole (Boeing's director for commercial trade) for his kind introduction.

It's a pleasure to be here to address the Washington International Business Council and the many ambassadors and other distinguished diplomats who are members of the Executive Council on Diplomacy.

In the next few minutes, I would like to say a few words about trade and the global economy and Ex-Im Bank, the institution that President Bush has entrusted me to lead. I would also like to touch on the situation in Iraq.

During the last year, I have traveled extensively on behalf of Ex-Im Bank and the Bush Administration's trade team -- to Asia, Russia, and Europe, in particular.

In fact, I was in Rome on Monday, where I signed a co-financing agreement with Ex-Im Bank's Italian counterpart. I was also attending meetings of the G-7 [Group of Seven major industrialized countries] export credit agencies in Paris.


Many commentators focus on the risks of globalization. Certainly, a slowdown in one part of the global economy -- because of a terrorist attack in the United States or Europe, a default in Latin America, sluggish growth in Japan, or an epidemic like SARS last year -- can reverberate throughout the world economy.

But it is also clear that the opening up of world trade has helped bring about the greatest aggregate wealth creation in history by spurring productive enterprise. Global trade is now $16 trillion, a number that's doubled just since 1990, according to the World Bank.

Twenty years ago, the prevailing wisdom from most investment managers was to diversify one's investments -- as one part of the world was likely to do well when another part was in a slump. Now, the U.S. can only do well if other countries do well, and other countries can only do well if we do well. What this means is that our fortunes are all inextricably linked.

U.S. trade alone has soared from about $80 billion to $2.6 trillion in the last 35 years. That represents an increase from about 8 percent of GDP [gross domestic product] to about 20 percent. In the United States, 1 in 10 jobs is now dependent on exports. Indeed, there are 240,000 American exporting companies. They have helped create jobs and wealth on an unparalleled scale, to the tune of $100 trillion of net worth in the United States over the last four decades.

Let me drive that point home: 35 years ago, U.S. exports were $42 billion. Now, they are approaching $1.1 trillion. That's equal to China's GDP and roughly three times the size of Russia's GDP.

Today, China has a $125 billion trade surplus with the United States. Wal-Mart is their distribution agent, with $12 billion in sales to that one company alone. But China's overall trade is in balance. Despite problems in some sectors, trade -- and the direct investment that flows from it -- have made all who participate in it wealthier.


Export credit agencies have consistently played a critical role in filling financing gaps to keep trade flowing to emerging markets.

This is because commercial banks simply do not have a large appetite for placing emerging market risk on their books. This has been particularly true in recent years, as net commercial bank lending to emerging markets has fallen significantly.

Private financing, of course, could reverse course again with a change in risk perception. But it's hard to see private finance fully supplanting the role of export credit agencies in providing significant trade finance to higher-risk emerging markets in the foreseeable future. In a very important sense, Ex-Im Bank provides dual benefits. We help developing countries and their companies get the U.S. goods and services they need to grow. And we help U.S. exporters make sales into these markets. Our mission is to create and maintain U.S. jobs.

We're a $100 billion bank, with roughly $60 billion in exposure as I speak. That leaves $40 billion in my pocket to lend to anyone who wants to buy from U.S. companies.

We provide guarantees, insurance and direct project finance products in areas where private capital alone cannot afford to take either the political or commercial risk that we underwrite.

We are legally mandated to find that a "reasonable assurance of repayment" exists for every transaction we authorize. Yet, we like to see ourselves as catalysts that pave the way in opening up and cultivating what euphemists call more difficult markets.

Ex-Im Bank is active in about 90 countries, and open for business in about 60 more. We support every kind of export -- from capital goods associated with large infrastructure projects, jet aircraft, medical equipment, and engineering and other services, right through to exports of a multitude of small businesses. Last year, we financed $67,000 of used clothing to Ghana.

Ex-Im Bank's project finance program is particularly useful for major infrastructure development needs such as transportation, oil and gas and other energy facilities, and major telecommunications systems. And our municipal exports initiative makes it possible for creditworthy cities and other local governments to procure needed goods and services.

Our annual conference next month will be a great place to learn more about how Ex-Im Bank can serve U.S. exporters and foreign buyers. It will be April 29 and 30 here in Washington, and some 1,500 international bankers and exporters will overflow the Omni-Shoreham, as they do every year.


Looking around this room, I see distinguished representatives of many nations. Ex-Im Bank has been active in the vast majority of them.

Just last month, I traveled to Vietnam, where Ex-Im Bank recently provided long-term loan guarantees to help Vietnam Airlines purchase its first four commercial aircraft from Boeing and the United States.

With 51 million out of 83 million people doing stooped labor in rice paddies, the Prime Minister of Vietnam -- with whom I met for two hours -- is very conscious of the need for foreign direct investment to produce the 30 power plants his country needs in the next 10 years.

This means moving toward a market economy. Such a recognition from a still-communist government I found intriguing and remarkable.

I also visited several cities in India, an economy on the rise, where Ex-Im Bank financing has helped Indian companies buy everything from refinery equipment and commercial jets to U.S.-made software.

Last fall, President Putin and I signed the latest in a number of financing agreements that we have concluded with banks in Russia, where Ex-Im Bank has long been active.

I'm pleased that we're open to support deals with Russia's private sector -- something, by the way, that we cannot yet do in China, even though we have $5 billion in exposure in China and the Chinese are very market-oriented.

It is still difficult to enforce private contracts under Chinese law. Thus, unlike Russia, our business there still requires sovereign guarantees.

Last October, Ex-Im Bank held a sold-out conference in Slovenia to connect private- and public-sector buyers in Southeast and Central Europe with U.S. exporters.

After that conference, our executive vice president, Jim Lambright, and I went to Kazakhstan, where we signed an agreement to provide Ex-Im Bank financing for a major project to modernize the country's rail system.

Ex-Im Bank has also made a major effort to increase U.S. trade with sub-Saharan Africa. Last year, we supported a record $700 million in U.S. exports to the region, about 15 percent of our nation's total exports there.

In fact, we have supported several significant infrastructure projects in Africa and the Middle East. We provided critical financing for the Chad-Cameroon oil pipeline and to help Nigeria expand its liquid natural gas production. And just a few weeks ago, Ex-Im Bank financing was approved to help Jordan develop a nationwide radio-dispatch and cellular telecommunications network.

Indeed, Ex-Im Bank has a long history of engagement in the Middle East. We helped Israel's initial provisional administration in the late 1940s with loans based on the idea that the future government would be supported by the United States and was therefore a good risk. At about the same time, we helped finance the highway in Saudi Arabia from Jidda to Mecca.

In short, we're doing business in an awful lot of places.


Today, we are engaged in another historic effort in the Middle East. We are working with our coalition partners to devise effective structures to help the Iraqi people address their country's immediate reconstruction needs and Iraq's medium- and longer-term needs of rebuilding a sustainable, diversified economy.

There are three pillars to the successful reconstruction of Iraq: physical security, political stability and economic growth.

A consensus U.S. estimate is that Iraq will need close to $100 billion in economic support over several years.

One answer to this requirement is the U.S. taxpayer. This year's appropriation for Iraq's reconstruction is $18.6 billion.

Another approach is to use the proceeds from Iraqi oil in rebuilding their country. With tremendous oil reserves, Iraq should be able to afford a lot, but time is a big problem.

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 to raise more money upfront.

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, as we plan to do on July 1.

This will require resolving the Iraqi debt problem. A country with a pre-war GDP of $26 billion 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. At the moment, there is a major effort to resolve this issue through the Paris Club by the end of this calendar year.

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 armed forces there, the political and military costs are incalculable.

Currently, Ex-Im Bank can support reconstruction activities in Iraq in three ways by providing:

1. short-term support to the Trade Bank of Iraq, which was established last July as an independent Iraqi government entity to help facilitate reconstruction;
2. any kind of financing, if backed by a creditworthy source of repayment in a third country; and
3. working capital guarantees to U.S. subcontractors operating there now.

While the Trade Bank will help, Iraq will need approximately $20 to $30 billion in long-term investment to get from the current 1-2 million barrels per day to 5-6 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-plus per year for its own development, depending on oil prices and ramping up time.

In short, investors are telling us that three key requirements are some form of sovereignty, physical security, and precedence over existing debt, to provide sufficient comfort that contracts will be honored over time.


If there is one message I want to leave you with, it is that Ex-Im Bank is committed to creating win-win opportunities for U.S. businesses and foreign buyers, and for workers in both the United States and abroad. If you have any questions, I would be happy to try to answer them. 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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