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The costs of the 1991 Gulf War and military campaign will be borne by the Iraqi people:
Iraqi Debt in Excess of $400 billion
September 19, 2003
HEADLINE: IRAQI MINISTER ON ECONOMIC SITUATION: "WE ARE WALKING THROUGH A MINEFIELD"
Dr Mahdi al-Hafiz, the new Iraqi minister of planning and international cooperation, has discussed the huge obstacles facing the reconstruction of the Iraqi economy, including foreign debts of around 130bn dollars, a reconstruction bill of an estimated 100bn dollars and requests for compensation from those affected by the war of over 300bn dollars. He discussed the implications of ending the oil-for-food programme in two months time, and the dangers of a rapid privatization of the economy. Al-Hafiz was the Iraqi representative at the United Nations in New York between 1978 and 1980, he worked for the United Nations Economic and Social Commission on Western Asia as a regional advisor and was also head of the Cairo-based Arab Economic Research Association. The following is the text of an interview with Mahdi al-Hafiz, by Ibrahim Khayyat, in Baghdad; date not given entitled: "Iraqi Planning Minister Mahdi al-Hafiz estimates reconstruction cost at 100bn dollars and asks for exempting Iraq from its debts, says: It would be unfair to continue to pay compensation for occupation of Kuwait"; published by London-based newspaper Al-Hayat on 15 September; subheadings added editorially:
(Khayyat) You have been appointed as minister of planning and international cooperation in the new Iraqi government. What is your understanding of planning?
(Al-Hafiz) The country needs a clear policy to develop the different sectors and get rid of the legacy of the past. This legacy is embodied in the manifestations of backwardness on the level of national production and in the infrastructure and the damage done to it as a result of the war, the previous policies and the international blockade. There are many elements that require adopting a comprehensive view of developing the country in accordance with a clear plan without belittling the private sector and through depending on it as one of the key mechanisms for comprehensive development.
Debts and negative growth
We have a problem with the (economic) growth rate, which is negative (now), after it exceeded 11 per cent in the late 1970s. However, due to the policies of the former regime, the wars it waged and the international blockade, the growth rates of production and the national economy in general have deteriorated. Now, the growth rate is around minus 6 per cent, which is very frightening. We also have the problem of backwardness of some economic sectors, like agriculture, which is now unable to meet the needs of the population and the local market.
In addition, we have the problem of foreign debts, which total around 130bn dollars, according to the estimates of some international institutions. Of course, these debts are computed on the basis of the original debt, in addition to the interest that has accumulated for years. This problem should be tackled as a priority. Security Council Resolution 1483 had referred this issue to the Paris Club to settle it in a positive way, which means resolving it either by reducing some of these debts through exemption or finding a new formula for payment over successive periods of time. However, in our view, the problem should be solved radically because the country has suffered a great deal over the past two decades, and there are new burdens because of the need for revenues for reconstruction and repairing the infrastructure, especially the oil sector and oil industry.
Reconstruction and compensation
The cost of reconstruction is estimated at 100bn dollars, according to some international institutions. We think that the Iraqi people should be treated favourably after all these misfortunes that have befallen it and that it should be exempted of these debts. We are confident that our efforts to cooperate with many institutions and friends in the world will produce a positive result.
Of course, we have another problem, which is the problem of compensation. The Security Council resolution allocated 50 per cent of oil revenues to cover compensation for the claims of victims of the [FIRST] second Gulf war. The truth is that the former regime and not the Iraqi people, is responsible for what happened. So far, Iraq has paid around 19bn dollars in compensation. According to the records of the (UN) Compensation Commission, the value of required compensation exceeds 300bn dollars. Also, claims worth 50bn dollars have been approved by the Compensation Commission, and Iraq is supposed to pay them. This is very unfair, and it should be stopped. We do not want to do injustice to anyone or to deny anybody his right, but justice should be equal (for everybody), and the Iraqi people should be saved from this catastrophe: that is, burdens of previous policies.
(Khayyat) How do view the international aid which you could obtain at international forums and that may take the form of cancelling or reducing compensation? President George Bush spoke about inviting donor nations to help Iraq, and a conference will be held soon. What will your position be?
(Al-Hafiz) We attach great importance to international aid. This takes different forms, most notably seeking to benefit from international institutions to finance projects and programmes aimed at carrying out reconstruction, repairing the infrastructure and developing human resources to solve the problem of unemployment and poverty, which have become disastrous phenomena. The rate of unemployment in Iraq exceeds 50 per cent. This is a very abnormal situation, which must be tackled and given priority, because the problem of poverty is the source of social disasters. We need international aid. Through our international relations, we seek to obtain the necessary international aid to tackle all these issues.
Another important area is encouraging foreign investment, which has priorities with regard to the fields and percentages of investment. We are careful to provide all means and guarantees in order to attract foreign investment. I have no doubt that the most important guarantee or encouraging factor is maintaining security and stability in the country. This is a central mission for the government. Regrettably, security is still faltering because of the activity of forces that do not want this country to rise and stabilize. For this reason, we are facing a great challenge, which is the need to create the necessary climate for foreign investment. If this climate is created - and I am optimistic about that - there will be great opportunities for foreign capital in Iraq, because reconstruction projects are very big and cover vital sectors. For some months now, preliminary missions of large (foreign) companies and corporations have been arriving in Iraq to examine many projects. We should have a clear plan for foreign investment. We are in the process of studying this plan. I hope that this (investment) law will be enacted quickly to allow this important source (foreign investment) to play an effective role under the new circumstances.
(Khayyat) The draft (investment) law includes an interesting paragraph, which stipulates that foreign investment will not be treated less favourably than Iraqi capital. But it does not stipulate that foreign investment will not be treated better (than Iraqi capital). Are you going to include this provision (in the investment law) so as not to strengthen foreign investment at the expense of domestic investment?
(Al-Hafiz) The examination of this law has not yet been completed. Discussions will be held soon, and there are different points of view. However, the law will definitely take into consideration, and pay special attention to, national capital so that foreign competition will not be at the expense of developing the national sector or national capital. This is my personal opinion. We are also careful to strike a balance between developing national capital and providing it with good opportunities on the one hand and benefiting from and encouraging foreign investment in important, vital sectors in the economy on the other.
(Khayyat) What is the expected foreign capital flow to Iraq? Are there studies that show that the market can absorb various financial products, which help in financing the reconstruction process?
(Al-Hafiz) We are now in the process of preparing for the Madrid conference, which will be held next month. This conference will examine the aspects of investment in Iraq and the aid to be provided by countries and international institutions. In our estimation, the figure given for reconstruction is 100 bn dollars. Of course, this is an estimated cost, which we can consider as a ceiling for the projects and programmes that we seek to execute. However, this will primarily depend on the projects that will attract foreign capital and on the expected cost. Based on my personal experience in this regard, when I used to supervise conferences for investment encouragement at the UNIDO (UN Industrial Development Organization), this issue was subject to change due to the desire and interests of foreign financiers. At those conferences, you find that the financier is interested in a certain project or programme at the beginning of negotiation, but he can change his opinion at the last minute. Therefore, we should be flexible in presenting projects and programmes, and we should try to focus on vital sectors pertaining to people's lives.
(Khayyat) In the Arab world, there is a complaint that foreign direct investment or capital wants to control pan-Arab and national resources. On the other hand, some (foreign) investors argue that the Arab market is not as tempting as other markets. Will the Iraqi market be tempting, especially in the short term; that is, over the next three years, irrespective of laws and legislation, while taking the problem of security into account?
(Al-Hafiz) There are two kinds of foreign investment. First, direct investment. Second, investment in non-productive fields, like investment in stock markets and in buying and selling currency, and financial speculation. This kind of investment will not benefit Iraq. We call for direct investment in productive, vital sectors that are useful for people's lives, because our problems and the fields of investment are determined first by restoring the oil sector. The oil industry needs rehabilitation, development and discovery of new fields and this requires huge amounts of money. The infrastructure was also destroyed and it needs to be rehabilitated and restored and this is direct investment.
There is also investment in several industrial and agricultural sectors and in developing human resources. These fields are vital for people's lives. The most important thing for us is that we want foreign investment to achieve three key goals. First, creating new job opportunities to solve the problem of unemployment and end poverty. Second, the transfer of technology to modernize the economy and economic structures. Third, we think that the attempt to restore balance to the national economy should be taken into consideration in order to remove imbalances and diversify revenues. We seek to achieve these key goals. We think that if this plan is adopted, it will produce good results.
(Khayyat) Handing over the services sectors, like electrical power generation and others, to foreign investors entails a risk. Isn't this process of privatizing and handing over these sectors to foreign companies going to place additional social burdens on citizens, who are exhausted in the first place, and cause a problem by increasing the cost of living?
(Al-Hafiz) Of course, there is a problem that should be tackled by a clear policy. I think privatization should be studied in light of the needs of the national economy. I cannot accept privatization as an ideological slogan, because this will be disastrous for the country, since it should be based on requirements for developing the economy and on people's needs. If we find that there are justifications for privatizing an agricultural project, we should adopt an economic standard and the criterion of cost and return. Otherwise, privatization will become an ideological action or measure, which means that we are advocating a market economy instead of depending on the role of the state. This issue leads to negative results, including harmful social consequences and their impact on people's lives and increasing unemployment. This happened in several countries because of not taking steps that prevent such social consequences. For example, there is the issue of cancelling subsidies on some commodities. This is also a social problem, since we live in a country where the state had been playing a key role. Take, for example, the oil-for-food programme, which was a key element in the lives of millions of people, in fact, a kind of subsidy. This programme will expire in November 2003, and a problem will arise unless we take precautions to prevent it right now.
The issue ( privatization) should be addressed in light of the circumstances of the national economy and the needs of development, and not because of the call for adopting market mechanisms. There should be a balance between benefiting from market mechanisms and maintaining and developing the social gains of people and averting any consequences which could stir up social unrest and lead to a kind of poverty and unemployment.
Transparency and free competition
(Khayyat) The Americans say publicly that the road to the Iraqi market passes through Washington. This means that US or British companies alone have a monopoly, because of the limited ability of other foreign investors and companies, including Arab companies, to participate in tenders and in the development process, as the case is in cellular phone tenders, for example. These tenders were prepared in a way that does not allow any Arab company to participate in them. This attitude could harm the development process by politicizing or ideologizing it. So are you going to clash with the Americans and British at some point?
(Al-Hafiz) First of all, the Americans and British have their own view and policies. In fact, they represent their own interests. However, we (Iraqi ministers), who assumed responsibility recently, view this issue from the perspective of the interests of the Iraqi people and the national economy. We are keen on placing all matters related to international tenders in an atmosphere of transparency and free competition and within strict controls. We cannot place obstacles to national or Arab capital. This is the central issue in dealing with outside capital. Without adopting these controls, there is no doubt that there will be a kind of favouritism and discrimination.
When such things are presented to the Iraqi side and the Planning Ministry, especially since we will be witnessing international tenders, we will be careful to handle them in an atmosphere of transparency and free competition. We will not allow any favouritism towards any foreign side.
(Khayyat) You want international aid. Money is always attached to political conditions and not to goodwill. Since you are at the receiving end, you are not in a strong negotiating position. Take, for example, the cellular phone project, it has been implemented the way the Americans want and according to their conditions has become a reality. The same thing may be repeated with other projects.
(Al-Hafiz) The cellular phone law has been forwarded to the Governing Council. A study of this law will be conducted soon. No decision has been taken yet on this law. Certainly, there are many views, such as the view you have put forward. But there is serious concern that this issue should be carried out based on controls that give a serious chance to national capital and Arab capital. Therefore, it is premature to pass judgment on this issue. But I would not hide from you the fact that the Iraqi arena is now open and it is influenced by many Western and Arab sides. There are missions and teams sent by huge international firms and there is an intense conflict. We are going through a critical period. We are trying as much as possible to lay down a rule for this competition in a way that serves the interest of the national economy.
(Khayyat) There is a national feeling in the Iraqi establishment that is trying to restore a great part of its sovereignty, but there are also pressures by foreign capital, perhaps with the participation of some officials in the US and British civil administrations. How can you impose your view? We hear about a lot of cases of bribes received by some US officials in some military units and some cases of favouritism. Can a law against bribery be issued, for example, which will be a part of efforts to impose transparency in Iraq? Are you going to launch an initiative to protect investment?
(Al-Hafiz) We are at the first stage of work. The country is still occupied. There is an authority that represents the occupation countries. There is also a national authority which does not have complete powers. But it has great chances to go forward and wrest many powers in the future. This is the big challenge ahead of us. Our option is to take this road, armed with the support of the political forces, the masses of the people and Arab public opinion.
The things you have mentioned may happen. Indeed, they may have happened. I cannot confirm or deny this, but I do not dismiss it. We are required in the next stage to try to immunize the Iraqi authority against any attempts at foreign influence, whether through financial corruption or political pressure, and even military pressure. This is because real independence cannot be achieved unless there is immunity for the national economy. We are fully eager to provide the controls that lead to this. We do not exaggerate this and we are not pessimists, but we believe that facing this challenge should be through restoring national independence and restoring political decision-making in full. I believe that the experience of the recent months has proven that the Iraqi side has managed to achieve a great deal, and it is proceeding towards its goal steadily.
(Khayyat) Can a law against bribery and financial corruption be a part of development plans?
(Al-Hafiz) No doubt this is a very important issue. We will not tolerate this issue. One of the most serious diseases that afflict the national economy of any country is the spread of bribery and financial corruption. This phenomenon exists in many developing countries and even in countries that are advanced economically. Therefore, we believe that one of the basic guarantees for protecting the national economy is to issue a law to fight bribery and all forms of financial corruption. This is a fundamental issue, which we are careful to implement.
(Khayyat) Have you already adopted this idea?
(Al-Hafiz) We have adopted it and we are keen on implementing it. But no one should imagine that we are going to perform miracles. Therefore, I have to say that we have numerous challenges and obstacles. We hope that we will make achievements over several stages, because our circumstances are difficult and the balance of power is tilted. Also, the country is still under occupation. However, we are confident that the nation is going forward.
(Khayyat) The planning process needs sufficient human resources. Do you have these resources?
(Al-Hafiz) Human resources are a very important part of Iraq's wealth.
(Khayyat) At the ministry and in planning?
(Al-Hafiz) I think that the correct plan is to make use of all the energies and resources that exist, whether inside or outside the planning agencies. One of the things that I take care of personally is to conduct a survey of these resources and to employ them in different forms, and not necessarily as part of the official employment of the ministry. For example, they could provide advice. We may also benefit from the expertise as part of training courses, seminars and preparing studies. These are essential things. This country could benefit from its sons, without discrimination based on religious or nationalist considerations or bigotry. The Planning Ministry will be at the service of all Iraqis. On my first day at the ministry, I announced this to all the employees. I said: This ministry is for all Iraqis. It must be a field of competition among them in order to make use of all their energies and resources in a constructive manner.
(Khayyat) If we speak about planning growth, there is population growth and economic growth. Therefore, you must count the population. Are you planning to conduct a census?
(Al-Hafiz) This is one of the basic missions we will undertake within the coming months. We are going to hold parliamentary elections. We think that holding these elections after drafting a constitution will be the second basic mission in the political march in the country, which will lead to the formation of an elected government that would lead to the restoration of national sovereignty in full. The census will take place in the coming period. We have started to think about this issue, not only because developing the country and achieving economic growth require this, but because we must prepare voter records and this is a very important issue politically. In addition, the requirements of comprehensive sustainable development dictate that we should have a successful picture in front of us of everything related to the situation of the population: the democratic picture of the country, which would form the basis of any economic options we adopt in the field of development.
End of oil-for-food
(Khayyat) You said that the oil-for-food programme would stop in two months. Does this mean that the ration card and the government subsidy will stop as well?
(Al-Hafiz) The ration card that is associated with the programme will stop, but there is a study to find an alternative to this. This study would meet the purpose, which is not to expose people to hardships. It must be completed within a short time.
(Khayyat) What is the expected time period for such a study?
(Al-Hafiz) This must be prior to the end of the programme, which ends in November, as I have said. The truth is that some money will be returned to Iraq, which will be around 2bn dollars, as Sevan, director of the programme, said in his last interview. At the same time, however, we must draw up a plan for this and this plan must be turned into legislation so that the citizens will not face any new hardships.
(Khayyat) Do you plan to expedite the census so as to serve an alternative plan to the oil-for-food programme?
(Al-Hafiz) The purpose of the census, politically, is to prepare for the parliamentary elections by preparing voter lists. This is a very pressing political issue. The second purpose is to re-evaluate the particular features of the needs of the national economy, at the level of the governorates or at the level of the country as a whole. Therefore, any vision of the development of the country cannot be realized unless we have a complete picture of the demographic situation in the country.
(Khayyat) Where does tourism fit in all of this? Tourism does not require a lot of capital to employ in generating jobs.
(Al-Hafiz) Tourism is linked to security and stability. So as not to have any illusions, unless the country is stable and immune against the dangers of terrorism and violence, it is difficult to have optimistic prospects for tourism. Certainly, there is religious tourism, which is an important source of income. But this issue needs controls as well. We feel that this issue should be addressed in the near future. We should seek to maintain security and restore stability in a serious and comprehensive manner. These are two basic conditions for foreign investment in tourism to develop the economy and enable people to enjoy a normal life under the general climate, which the Iraqis look forward to.
Security and foreign capital
(Khayyat) The civil administrator Paul Bremer told Al-Hayat-LBC (Lebanese TV) that even if Saddam Husayn were to be apprehended, this would not stop the violence. It may reduce it. If the rate of violence does not drop, this means a climate that is not appropriate for foreign investment. Perhaps, you have one, two or three years before foreign capital feels a desire to come to Iraq. In this case, what will your position be?
(Al-Hafiz) No doubt, this is a great challenge. I do not think that matters will require all this time. I think that security and stability will be achieved when the Iraqis have the ability to return national authority. This is not an illusory issue because many signs have started to emerge. For example, there is now a draft resolution at the Security Council, which stipulates providing a timetable for ending the authority of the coalition and handing over authority to the Iraqis. The dispute is whether the Governing Council should set this timetable. For the United States to accept such an option is in itself a big step forward because pressure comes from other countries. It comes from France, Germany, China, Russia and also from the Iraqi side. The Iraqi political forces are unanimous on the need to regain authority in full, as soon as possible. Therefore, I believe that the door will be opened soon for the possibility of regaining authority as soon as possible and handing over powers to the Iraqis. This is the first point. Second, the United Nations will have a big role in the ongoing political process in Iraq through the deployment of multinational international forces under UN supervision or perhaps there will be a bargain that allows US supervision. This has not been determined yet. It is being negotiated at the Security Council. This resolution is expected to be issued within a week or 10 days. This is why I believe that the key to resolving the problem of security and stability in Iraq lies in restoring Iraqi national sovereignty and enabling the Iraqis to address the issue of security through an effective role for the national police and the civil defence agencies. This issue was recently discussed and there is agreement about it. I have a great hope and confidence that we will be able to advance on this road.
(Khayyat) Do you practically believe that there is a possibility of achieving your hopes? I do not want to say that pessimism is required, but is it possible under these circumstances and the minefields you are passing through; to finish your job? You plan and then ask (for support), but support does not come in advance. And you cannot plan based on fixed resources that exist in advance. This is sometimes exhausting, especially in light of changing circumstances. Does this mean that you can achieve something practical?
(Al-Hafiz) This is a correct and accurate description. We are walking through a minefield, but our walk represents a real national option based on our study of the situation of the country and the characteristics of the regional and international situation. We feel that this option is the safest situation because we represent the opinion of the majority of people, who aspire to restore stability and security to restore national independence and end the occupation and to enable the country to rise once again. This is the safest option, considering the other options.
We cannot follow certain methods, as some people are trying to do. Car bombs, sabotaging oil pipelines, striking the United Nations and political assassinations will not lead to any result. These acts harm the interests of the country. Our option is based on a conviction and the political forces are agreed on it. No one disavows this option, except a few people. We believe that the future provides a lot of guarantees. As I have told you, the international situation is changing in our favour. The same goes for the Arab situation. Also, the domestic situation is progressing in favour of giving more powers to the Iraqis. We are optimistic that this road will lead to results. Therefore, the issue of resources and foreign capital is dependent on the success of the political process. Inasmuch as this process succeeds, we will be able to say that the investment climate in Iraq will be appropriate.
(Khayyat) What about the international agreements with the rest of the countries or with the outside world and with the WTO (World Trade Organization) and others? What will the fate of the banking sector be? Is there a plan to develop it?
(Al-Hafiz) Of course, Iraq is not a member of the WTO, but there are agreements with other countries which are being studied so as to comply with them based on mutual interests and standards. When drawing up a plan for the future, no doubt these things will be studied and we will come up with a clear plan which will turn into official policy. Reforming the banking sector will also be on our agenda in the near future. There is a trend to encourage the banking sector and again study the problems from which it suffers. There is also the problem of security. Regarding the banks, there is also the problem of the new currency and how to deal with it. There is the problem of guarantees for depositors because a lot of depositors still do not have confidence in the existing banks. At the same time, restructuring the banks is very important because what had existed in Iraq was not really a banking sector that enjoys a sound position. I will give you an example of what used to be the case. One of the former assistants of the Central Bank recalls that issuing currency or reprinting currency, which prevailed at that time, was not done based on the needs of monetary circulation, but based on the technical and printing capacity of the machine. This is a disaster. This means that this used to take place based on the personal whims of this or that ruler. You know how things were on the level of the political authority, since currency used to be printed in light of the capacity of the machine, and not the need for monetary circulation.
(Khayyat) How much money was returned to Iraq or is currently frozen and will be returned to Iraq?
(Al-Hafiz) There are initial estimates. The total of what is expected to be in Iraq's possession is around 18bn dollars. These funds are either money frozen abroad in the United States and European countries, or some funds that are deposited at some banks that are associated with some trade transactions and agreements, such as Lebanon and Jordan. At the same time, around 2bn dollars is in the oil-for-food programme. There are some amounts in some Gulf states that are associated with economic or trade agreements that have not been implemented. All this makes our initial estimates around 18bn dollars.
(Khayyat) An FBI team is investigating the funds of the former regime. Also, some of the detainees who are held at the (Baghdad) Airport from the regime officials have confessed to where some of their money is stored. Does the sum of 18bn dollars include these funds that will be retrieved? What is the total of these funds, which the Americans will contribute to retrieving?
(Al-Hafiz) I have no information about any investigations. I heard about this from newspapers. But the 18bn dollars have nothing to do with these sources. Perhaps there are other sums that are being dug up discovering the accounts of some aides or secret accounts of the former authority. I do not rule out the discovery of things which might sound imaginary, because the way in which the money of people and state funds were manipulated under the former regime has no match in any other country.
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