FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you for inviting me here today to speak about the economic and financial aspects of Iraqi reconstruction.  Progress in these areas is critical to achieving the broader goal of building a stable, prosperous, and democratic Iraq.  As you can imagine, this is a daunting task.

It is a task, however, that is incredibly important.  After living under decades of misrule by Saddam Hussein, the Iraqi people at last have an opportunity to forge a better future for themselves and for their children.  We are committed to assisting in this effort.  Our work is guided by a set of principles that are fundamental to creating the foundation for sustained economic growth.  These principles include open markets, the rule of law, established property rights, transparent and accountable governance, and a sound currency.

It is with these principles in mind that we are confronting the many challenges on the economic front that we have faced since the end of the war.  Government ministries were largely destroyed by fighting and looting; the Iraqi dinar had depreciated severely and we feared a monetary crisis and hyperinflation; basic economic statistics were non-existent; and the lack of a secure environment restricted commerce and the work that our staff could do in Iraq.  We continue to deal with lawlessness, limited communication capabilities, and the loss of technical expertise in government ministries. 

I would like to stress, however, that the reconstruction task is not solely, or even primarily, to rebuild from the consequences of several weeks of war, but from several decades of misrule.  The Iraqi economy has deteriorated under years of sanctions, conflict, and economic mismanagement.  Income per capita plummeted, impoverishing the Iraqi people, and other measures of wellbeing also declined.  The infant mortality rate, for instance, increased from 50 per 1,000 live births in 1990 to 121 per 1,000 live births in 2000.

Although the reconstruction task is significant, Iraq has several advantages that will facilitate efforts to improve the prospects for the Iraqi people.  The country has a long tradition of entrepreneurship and diverse commercial activity; already, the streets of Baghdad are bustling with commerce.  In addition, Iraq has abundant human potential and natural resources.  In combination with a market economy based on rule of law, established property rights, and economic freedom, these advantages can lead the way to a brighter, more prosperous future for all Iraqis.

In helping Iraqis achieve such a future, it will be important to draw on lessons learned from previous post-conflict experiences.  One such lesson is that rebuilding societies and economies requires time, patience, and a sustained commitment.  Reconstruction is not amenable to easy solutions or quick exits.  The nature of our engagement will necessarily evolve over time as Iraqis choose their own government and reconstruction tasks are completed, but we are committed to ensuring that the people of Iraq have brighter prospects for their future.

While we are still confronted with serious problems, our initial efforts in Iraq have already resulted in some success.  Credit is due in part to a group of extremely dedicated technical experts that Treasury has sent who, in spite of all of the difficulties, are working hard to assist Iraqis in revitalizing the country’s economy.  They have been involved in all facets of our initial efforts.  I would like to focus now on some of the principal steps we have taken so far, as well as on our priorities for future action.

One of the foremost priorities at the end of the war was to make emergency and salary payments to government workers and pensioners.  This has been an enormous undertaking.  The first step was to obtain the financial resources required to make payments.  On March 20, President Bush vested $1.7 billion of Iraqi regime assets that had been frozen in the United States over a decade ago and placed them in an account at the New York Fed to be used to support reconstruction.  So far, nearly half of these assets have been delivered to Iraq to finance payments.  A mechanism for emergency payments was quickly established on the ground so that payments could begin for dock workers, power plant workers, and others.  Despite tremendous logistical challenges, the system of payments has been a success, placing money in the hands of consumers and helping to spur commerce. 

A second priority is to promote the establishment of a stable, unified national currency, which is a prerequisite for establishing a vibrant economy.  The pre-existing currency situation in Iraq makes this a difficult task.  Several currencies circulate widely, including the Iraqi, or “Saddam,” dinar in central and southern Iraq; the Old Iraqi, or “Swiss,” dinar in the northern part of the country; and the U.S. dollar.  One of our main concerns following the end of the war was that there would be a large devaluation of the Saddam dinar and hyperinflation.  In addition, there were concerns about losing control of currency printing facilities, and fears that the currency would cease to serve as an accepted means of exchange.

We took early action to address these concerns.  We secured currency stocks and printing facilities, and the military made public announcements that existing currencies would continue to be accepted as means of payment.  Although little price data is available to make assessments about inflation, the information we have received on exchange rates indicates that the value of the Saddam dinar against the dollar, while very volatile, has strengthened of late.  We stand ready to assist in the implementation of whichever long-term currency reform the people of Iraq choose through a representative Iraqi government.

A third area on which we have placed a great deal of attention is the development of an integrated and transparent Iraqi government budget.  Before the war, the Iraqi budget was a state secret.  The lack of transparency and accountability made it difficult to determine how resources were allocated.  Enhanced transparency will be essential in future budget operations, particularly in the area of oil revenues, if enhanced standards of governance are to be achieved and the Iraqi people are to hold their elected officials accountable. 

Strengthening and modernizing the banking sector is also central to achieving economic progress in Iraq.  We are still in the early stages of assessing the banking system, but we do know that Iraqi banks were dominated by the state and oriented more toward the fulfillment of political objectives than the provision of economic services or financial intermediation.  Our objective is to ensure that the banking sector begins to function in a commercially viable way and that it reflects regional as well as international best practices.  For example, we endorse the objective of Iraqis having access to financial products and services that are based on Islamic principles.  We are also working with Iraqis to help them create a sound supervisory and regulatory regime in the banking sector.  After closing their doors during the war, financial institutions are now beginning to revive.  The Central Bank has reopened, as have many of the branches of the largest banks in Iraq. 

In addition, we are evaluating options to establish a “trade credit authority” that will begin laying the groundwork for commercial activity independent of central authority.  Such a financing mechanism will help stimulate the Iraqi economy by facilitating foreign trade. 

An issue that has received much attention and will clearly have to be addressed is Iraq’s capacity to address the potentially enormous burden of its existing financial obligations.  In the near-term, we have taken two important steps to address this situation.  First, we secured agreement from G-7 creditors not to expect Iraq to service its debt for at least the next eighteen months.  Second, we have been working to determine how much debt Iraq owes.  In the medium-term, once we have a better estimate of the true level of Iraq’s debt and its underlying payment capacity, we can move forward to develop a comprehensive strategy to deal with Iraq’s official debt.

Donor contributions will also play an important role in the reconstruction of Iraq.  Active participation by the international financial institutions is important to mobilizing this support.  Indeed, I am pleased to report that these institutions are already intensifying their engagement in the process of reconstruction and recovery in Iraq.  The U.S. also welcomes the commitment of the UN and the international community for a donor reconstruction conference for Iraq in October.

We have been guided in all of our actions by the goal of creating a stable and prosperous Iraq and releasing the shackles that have constrained the potential of the Iraqi people.  The challenges are still formidable, but we remain committed to achieving an environment in which all Iraqis will have the opportunity to forge a better future for themselves and their children.