Operation Resurrection

America has one shot to get it right in Iraq, King Abdullah of Jordan recently said, and so far the situation looks grim. The post-war administration needs to get its head around the economy quickly

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By  Massoud Derhally Published  June 1, 2003

|~||~||~|“If the military campaign was a well-oiled machine, the post war reconstruction thus far has more closely resembled an episode of Keystone Kops,” is how Gary Sick, a former National Security Council advisor to Presidents Jimmy Carter and Ronald Reagan depicts post war Iraq. “The US performance thus far is too deficient to be casually explained away. If we are taking on an imperial role, by necessity or by design, we must do better than this,” adds Sick.

The situation on the ground in post-war Iraq doesn’t appear to be developing the way US and British occupation forces might have hoped. The country today has three currencies, no banking infrastructure and with the fall of the Saddam regime, chaos and uncertainty characterise what already was a fragmented and decaying financial system. Not exactly an ideal situation for commerce.

A week after the fall of Saddam’s statue in Firdous Square, the US airlifted dollars from the Federal Reserve Bank of New York to replace the Iraqi dinar. The Americans said the dollars came from Iraq’s frozen accounts in the US and that US $1.7 billion would go towards paying salaries and restoring a form of order to the country. With no Iraqi Central Bank, looting and hyperinflation have effectively allowed the American dollar to assume a central role in the vacuum left by the war. This has, of course, sparked talk about American intentions to dollarise the country.

As people try to make out what is to come amidst the painful rebirth of the country, what can be said with a degree of certainty is that the country needs a stable currency and a sound banking infrastructure.

Without both, Iraq will be unable to carry out neither reconstruction nor reform. To get a glimpse of the situation on the ground, consider the volatility of the Iraqi Dinar. After the first Gulf war one Iraqi Dinar, also known as the Saddam Dinar, would trade for $3.
At the height of the US invasion, the Dinar was reportedly trading as high as 16,000 to the US dollar, well above the official rate of 3,000 to the dollar. However, in the run up to the war, the Kurds in Northern Iraq were banking on the Swiss Dinar that was replaced by the ‘Saddam’ Dinar in 1991 and was trading at 10 Dinars to the dollar, according to news reports.

In other parts of the country, speculation was rife about what would become the benchmark currency. While you had Iraqis that didn’t quite believe regime change was entirely complete and still saw the Saddam Dinar as legal tender, you also had Iraqis in other parts of the country who were dollarising.

No doubt dollarisation was accelerated as American forces lured civil servants back to work on dollar salaries. By mid May, however, it appeared that the Dinar was starting to make a comeback, surging by as much as 30% in value against the US dollar.
In a way, Iraq today finds itself in an episode similar to when the country was under the Ottoman Empire, where various European currencies circulated along with the Turkish pound.

The situation makes it all the more evident that a central bank is essential to Iraq’s reconstruction and future. As long as the country continues without a central bank, there will be no banking infrastructure and the Iraqi dinar will not be able to hold its value.

More importantly, the absence of such an institution means that there is little if any guiding force on monetary and fiscal policy. All of these variables are intertwined and without a well-oiled system in place little can be done to alleviate pressure on a currency that has depreciated 84% or curb inflation that has reached 70%. There are those who feel that the successful revitalisation of the oil infrastructure is a prerequisite for sorting out the currency.
Neil Partrick, a senior economist at the Economist Intelligence Unit, says that currency reform is unlikely to happen, “until there is a process where reconstruction of the oil sector can begin and there can be legal agreement on who actually is managing the oil revenues.” Partrick says the US is looking very strongly at the prospect of launching a new currency.

He also believes it unlikely that the US is going to try and prop up one of the two existing Iraqi currencies.
“I don’t think it’s going to being a matter of adopting the Swiss Dinar, but rather creating a new Dinar,” he says. “That will require a process to be put in place where there are some indications that an Iraqi authority, which at the initial stages will be US led, will have access fairly quickly to foreign earnings from oil sales.”
But Basil Al Rahim, a seasoned Iraqi investment banker who previously used to head the international division of the Washington based Carlyle Group, sees things differently. “Until a new system is established, the belief is that the dollar will also be the official currency,” he says.

But in the long term, the draw-back of the dollar, says Al Rahim, is that you cannot “influence monetary policy in the country if you are using someone else’s currency, so monetary policy affects everything.” Al Rahim believes in order to put the country on the right track it will eventually need its own currency.
But he’s talking about ten to 20 years. “Long term eventually you’ll have a regional Arab dinar, which covers the whole area because our economies are so small to start with,” he says. Iraq could one day join such a union, but that will come with the removal of trade barriers and the need to comply with WTO regulations.

He believes such an eventuality would come after examining the lessons from the Euro and what a currency union means if you don’t have a co-ordinated fiscal policy. “It’s not so simple, even the Europeans haven’t worked it out fully,” he says.

The question then comes down to what, in the absence of a national currency and the predominance of the dollar, should be done to rebuild the financial infrastructure. Some believe Iraq’s oil is the answer to all of the country’s problems and then there are those that feel organic growth will require something extra that comes in the form of tangible economic steps where all parts of Iraqi industry are engaged.

One banker and economist with Iraqi connections says, “Oil will not redevelop the Iraqi economy, though it will remain the mainstay of growth.” The damage to the Iraqi economy, he continues, “has to be fixed at a grassroots level. In the purest economic sense, it is about the rebuilding of confidence in the currency as the unit of trade and value. [That is needed] in the interim, and whatever currency is chosen, it will have to be dollar based.”

Al Rahim agrees and is a bit more outspoken. He says people have overplayed the oil card. In simple terms he explains that before the war, Iraq was pumping 2.8 million barrels of oil a day and revenue at current prices was equivalent to $17 billion a year. When one thinks of the needs of the oil sector and other industries, in terms of modernisation and the required investment, oil revenues are just a drop in the bucket, he believes. “They are not going to be enough because this a country that needs a massive reconstruction programme,” he says.
Depending on whom you speak to, Iraq will need anywhere from $1 billion to $5 billion just to get back its pre-war production level, while to reach six million barrels a day, Iraq will need another $20 to $30 billion of investments in the oil sector.

“Everything is run down and the country needs everything from a major telecommunications infrastructure to factories that make baby diapers so oil revenue is not going to be near enough to support this,” says Al Rahim. “What oil revenue can do is act as a catalyst to revitalise the economy. But the real key to vitalising the economy is empowering the private sector,” he adds.

So how do you empower the private sector? With difficulty. The Baath party owned 80% of the productive assets of the economy and what needs to be done is to get the economy back into the hands of the private sector through a massive programme of privatisation, according to Al Rahim.

Consequently, you have to be careful how you run that privatisation, because if you don’t run it the right way, you could end up with the same problems encountered in Eastern Europe. “Every worker got a voucher, but at the end of the day when the dust settled every worker ended up with a bottle of vodka instead of real economic ownership of a particular asset,” is how Al Rahim describes events in Eastern Europe. In this situation, the majority of the assets in these formerly communist economies ended up in the hands of oligarchs.

Nor do quickly privatised assets command a proper value today. As a result, says Al Rahim, any meaningful bidders will not pay full price for those assets. “If you privatise too fast, three years down the road when you have real democracy in Iraq, people are going to come back to the government that did this privatisation and say, ‘You pilfered the wealth of the nation.’

Al Rahim pictures a privatisation programme that will push assets back down into the private sector but defer the valuation for three years. “The key is to empower the private sector as well as having a framework for attracting foreign direct investment,” he says.
Like many, Al Rahim, who helped establish the Washington based Iraq Foundation, a non-profit, non-governmental organisation working for democracy and human rights in Iraq, is frustrated at the slow pace of reconstruction. More than a month after the fall of Baghdad, many Iraqis have no electricity, water, food and worse, no access to medical care. “The Americans have put a lot of thought into the military campaign and really haven’t put meaningful thought into the economic programme going forward,” says Rahim.

“Its very good to say you want to build a democracy but a democracy, to operate in a proper and sustainable manner, needs to have a middle class to support it and Iraq has the makings of a middle class, but right now the middle class has been impoverished so an economic programme is key to supporting this grand vision of Iraq as a democratic example to the region,” Al Rahim stresses. Until people start filling their bellies and working again, you can forget democracy, Al Rahim says. “You will have a lot of people out of work, poor and frustrated and that’s what breeds dissent and radicalism. The two issues are tied.”

Yet it’s not all doom and gloom. The Iraqi economy had a gross domestic product (GDP) of $100 billion at the start of the 80s, whereas today the GDP is estimated to be around $26 billion, according Al Rahim. His point is that if other factors had not intervened, the GDP would now be around $300 billion. “That tells you there is a lot of latent capacity in the economy and if you get the economic programme right you are going to have a growth trajectory that is unseen in the history of modern economics,” says Al Rahim.
As an example of what may lie ahead in terms of potential and economic growth, Al Rahim explains that there are about 20,000 manufacturing industries in the private sector of Iraq today, most of which have come to a halt with the 12 years of sanctions.

“If these are reactivated and each one employs 10 people on average, that’s 200,000 people you absorb into the work force immediately,” says Al Rahim. “If you say on average each one of these companies has sales of just $1 million, that’s a $20 billion addition to GDP with the click of your fingers and that’s before you privatise anything.”
Listening to Iraqi exiles such as Al Rahim and Adnan Pachachi, one can’t help but wonder why America hasn’t taken their views on board. “[It’s] a shambles, in virtually every way,” says Edward Peck, a former US ambassador.

“Externally, the appearance, and that is the operative word, even if none of what follows is factual, is of a US that is inept, hostile, uncaring, totalitarian, brutal and imperial. The invasion was destructive, bloody, and unnecessary; the occupation a disaster. Iraq is prostate economically, dysfunctional politically and destroyed operationally.”

Former Ambassador Joe Wilson, who was the US envoy to Iraq on the eve of the first Gulf War and the last senior US official to have met personally with President Saddam Hussein, says, “The difficulties we face are directly related to the way in which we decided to wage the war. The minute the decision was made that only the invasion, conquest and occupation of Iraq would achieve the objectives of those who so fervently sought this war, the outcome of chaos and ultimately a surge of both nationalism and political Islam would occur.”
Basil Al Rahim, echoing Clinton’s words with Bush senior, has one thing to say to President George Bush. “Get the economy right and everything else falls in place.” ||**||

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