- The Washington Times - Tuesday, January 31, 2006

Special correspondent John Zarocostas recently interviewed the governor of the Central Bank of Iraq, Sinan Mohammed Rida Al-Shabibi, in Geneva about Iraq’s troubled finances and the country’s economic outlook. Now 64, he earned a master’s degree in economics at Manchester University in England and a doctorate in economics from Bristol University there. Until 1980, he worked for Iraq’s Planning Ministry, and later, for more than 20 years, with the U.N. Conference on Trade and Development.

Question: What’s the situation in Iraq’s efforts to obtain forgiveness of the huge foreign debt (estimated at $120 billion to $130 billion) inherited from the former government of dictator Saddam Hussein?

Answer: Since the end of November 2004, we have had a Paris Club agreement stipulating that 80 percent of the debt be forgiven — and for this to be effective in three stages.

[Editor’s note: The Paris Club comprises 19 wealthy governments that are permanent members, with large claims on other governments throughout the world, plus other lenders that apply the rules in the Paris Club Agreed Minutes for canceling or restructuring claims on debtor countries.]

The first stage … implemented on Jan. 1, 2005, removed 30 percent of the debt.

The second stage, to cancel another 30 percent, effective upon the signing of the standby agreement with the International Monetary Fund (IMF), came at the end of December 2005. The final 20 percent will be forgiven on the successful application of the program [set by the donors].

We have this program, and we are going to include a lot of reforms in the fiscal and monetary areas — for example, for the central bank maintaining some level of reserves, economic stability in general, and stability of the exchange rate, and all these things.

And, of course, in the fiscal area, what is important is the reduction of subsidies — especially fuel subsidies — and the increase in prices. This was a … [requirement] to have the second agreement, and this happened and is decreasing the deficit in the budget.

The fact that you increase the price of gasoline makes a reduction of subsidies possible. We had [a gasoline-price increase] during the middle of December. They were good conditions in order to have another 30 percent of the debt forgiven, because, you know, the Paris Club is very important. It’s a template to be used for other creditors, and we are working very hard with non-Paris Club creditors, including the Arab creditors. …

We actually had a very important landmark in terms of reduction of the private debt, commercial debt. Already, we applied the Paris Club terms to that, and as part of it, we did debt buyback for the smaller amounts. Another part is debt-for-debt exchange.

We actually had the commercial debt reduced from 100 percent to 20 percent, and the 20 percent will be converted to bonds. Through that, for the first time, Iraq will enter the international market.

First, the Paris Club provided 80 percent debt reduction, and then we applied the Paris Club terms to the non-Paris Club and to private creditors. We negotiated these terms, so the club was very useful for that.

That’s why we were able to negotiate successfully with the other creditors — non-Paris club, socialist and Eastern European countries, and the private creditors.

So now, I would say we are on the right road in restructuring the debt and reducing it. Probably in three years’ time, Iraq will have a debt that is equivalent to gross domestic product (GDP), after its being five to six times the size of GDP.

Q: Have you managed to stabilize the Iraqi dinar?

A: Basically, vis-a-vis the dollar, we have maintained the dinar’s stability for about a year and a half — which is plus or minus 1 percent [shifts of the exchange value] or even less.

For example, the dollar is equal to 1,470 to 1,475 dinars — it has actually been like that for about a year. So, people are comfortable with the Iraqi currency because of this stability.

After all, as an independent central bank, we have price stability as our objective, and when we talk of price stability, this is to be taken in the wider sense.

When we talk about price stability — not only inflation — we talk about exchange rates; we talk about interest rates, all kinds of prices. So far, the performance and the record have been quite good.

Q: What is the situation with inflation?

A: Inflation is being reduced from the levels under Saddam. Actually, during Saddam, the exchange rate was fluctuating a lot, and this, of course, affected the price level.

Now, actually, the inflation rate is about 30 percent — still high, but no different from last year because we have a lot problems with security and with the delivery of goods affecting supply.

Therefore, the inflation is not due to monetary or financial variables, but to real variables like lack of supplies, and [commercial] security costs, which have increased very much. All these things have had an effect on the price level.

At the same time, the income of the people has increased, whether it’s salaries for government employees, for the people who are working in services. So I would say the purchasing power of the people has very much increased. I would say we are actually in a movement toward successful control of inflation.

Monetary policies, of course, are very effective in this, but still we have to implement more tools of monetary policy, because in Saddam’s era, there was no monetary policy. It was the printing of money that caused the high inflation.

Q: How high did inflation reach in the Saddam era?

A: Probably around 500 percent. But now, because the central bank is independent, it cannot print money at the will of the government. Therefore, it can implement whenever you have expenditure on the real side — the fiscal side — the monetary policy counters using all kinds of policies.

Q: Is the Iraqi currency the preferred medium of exchange, or is the dollar used extensively?

A: The dollar is used, but there is a lot of confidence in the Iraqi currency because of the stability, because of the new forms of the currency we printed. People use the dollar, but the dollar is more important when the currency is fluctuating and depreciating, but this is not happening in Iraq.

Iraq has a managed float against the dollar and, through the dollar, with other currencies. We intervene in the market and prevent or limit the fluctuation to very little.

Q: But you don’t have capital controls.

A: There are no capital controls — the market is free, financial flows, and the entry, and exit, is free. One of the achievements of the central bank is that it built a very good level of reserves — about $9 billion now — and we are using these reserves for currency-stability purposes.

Q: U.S. Deputy Treasury Secretary Robert Kimmitt recently predicted that Iraq’s economy would grow by 17 percent this year, a strong rise from last year’s 4 percent increase.

A: This does not surprise me. The IMF [standby arrangement estimation] is about 10 [percent] or 11 percent. But you see, in Iraq, the behavior of oil output makes an important difference. There are strong efforts to increase oil production, and the budget is built on that. So, I am not surprised.

Now we are producing only about 2 million barrels per day [mbd], but the capacity of Iraq is about 3.5 mbd. So once you have some kind of stable conditions of the outlets, and there is no sabotage, and some maintenance is done — if there is an upsurge in oil production, we might well reach such growth rates.

Q: Big potential foreign investors have played a wait-and-see game with Iraq. Do you think major funding will now flow in?

A: Well, foreign players in finance … are really very optimistic about the future of the Iraqi economy. They cannot, of course, go in because of security [concerns], but they are watching very carefully, holding a lot of conferences, and making a lot of contacts with Iraqi officials about these things. And they keep up their contacts with Iraqi authorities; for example, regarding training and technical assistance. They want to remain in the Iraqi arena, but don’t yet want a physical presence there.

A lot of banks are offering us training. We give a lot licenses to banks … . So despite what you see in the media and TV about Iraq, a lot of investors are keeping a close eye on the country and are very optimistic.

Q: But Iraq also has big war-reparations obligations as a result of United Nations compensation awards from the first Gulf War (1990-91) toward Kuwait and others.

A: This is a big drain on Iraq. What I’m saying is, this actually acts as a big drain on the Iraqi economy.

We succeeded on the debt issue. We are very grateful to the world, which supported all these things, and we expect the world will support us on the reparations issue. Because for us, this is a new Iraq. A lot of Iraqis think they were very badly treated. A lot of countries in the world were waging war against Saddam Hussein, and the Iraqi people were victims.

So the question here is — the Iraqis would like to substitute all these things with good relations, and reparations and debt issues should be converted into trade and investment relations. We welcome all the Gulf investment to come to Iraq. We welcome their contribution to development, which will result in mutual benefit.

Q: How do you see Iraq’s future in the region?

A: It will be central. Once you have stability in the region, Iraq will be a hub in terms of banking and finance.

We are determined to have a new Iraq, politically and economically. Politically democratic, economically liberal.

Q: Iraq has a well-educated population. Is there enthusiasm to move forward?

A: Yes, of course. We have very good talents. The only problem with the Iraqis is that they were not exposed to the world because of the war, [U.N.] sanctions and the policies of the [Saddam Hussein] regime.

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