What in your view were the main conclusions of the recent IMF Article IV consultation?
I think we don't disagree generally with the conclusions of the IMF. The conditions here are pretty poor in terms of the background and in terms of the indicators. I think by and large the report was quite understanding and quite sympathetic to the nature f these issues. I don't think there are any key issues on which we don't concur. We concur with most of them. Obviously regarding the timing is one issue which we are still trying to work out. But by and large we agree with the conclusions.
The review from my reading suggests in essence that Iraq's economic development cannot meaningfully occur unless and until the security situation picks up. Do you agree with this conclusion and if so what's your prognosis for Iraq's future?
Well as a general principle obviously I agree with it. You can't have a coherent economy policy with a background of daily violence. But this is not the situation in much of Iraq. Much of the country is not subject to daily terrorist activities. And these are the places where economic development can take place and is taking place.
One of the main issues highlighted by the IMF is the state of Iraq's budget, and in particular negative impact fuel subsidies. Do you plan to heed the advice to repeal these subsidies, and if so, when?
As a matter of principle we have already agreed do this. This question is: the state budget cannot sustain such huge amounts allocated to imports of petroleum products. The main issue is that the whole process was encapsulated in a very short period of time. This happened to coincide with major political adjustments taking place in the country. The fact that it's been delayed in its implementation by a few months doesn't mean in any shape or form we've abandoned the subsidies introduced or the deep structural reform of the whole subsidies program, not just for oil but for a whole range of areas, including utilities and so on. I think we don't agree and we don't disagree with the IMF on most of their prescriptions. I think the IMF has been quite sympathetic on that.
But given that the question is precisely on of timing, do you have a sense at this stage when might be the right time to move on the question of petroleum subsidies?
There are a number of ways to tackle this. The most easy is just to eliminate the subsidies. And ask the population to pick up the slack. This is by and large a process that we're willing to pursue but we're doing it over stages, each stage which would have a meaningful level of subsidies removed. The main issue now given the political background is what can we do to reduce some of the cost elements of the subsidies. And in fact we're doing that, we're imposing strict limits on the amount of cash that can be made available for the subsidies program, we're introducing petroleum rationing, by having cars move about on odd or even days, we're introducing changes in the law to allow for petroleum products to be imported by the private sector and in the 2006 budget we have introduced, and in fact it's been approved by the cabinet, changes regarding the entire subsidies program. All of these things together are very strong confirmation of the commitment of the government to meaningful reform. The question is, could we introduce these reforms given that we have a very, very difficult political adjustment to make over the next months.
First, this is a transitional government. Second, the constitutional referendum is coming up and then another government coming at the end of the year. So it's quite a tall order to expect that all of these things can be put together and implemented by a transitional government whose mandate is to some extent limited. There's no doubt there's the intention to go through with it and to set the stage for a very important radical shift in thinking.
Some are claiming that the recent constitutional agreement in principle is a milestone in Iraq while others are warning that the triumph will be short-lived, given a high likelihood of its defeat in October's referendum. Where do you think its significance lies and what is likely to happen if it fails to get passed, from an economic and political perspective?
Politically this is the work of a legally constituted national assembly which was elected by a popular mandate, so there's no question that we have met the various milestones in the transition process. So any talk that this was an incomplete grouping and so on, I would dismiss that out of hand. That the constitutional committee which invited people that did not participate in the discussion, this in itself is a strong indication for the desire for inclusiveness. And obviously we came up with a constitution that did not please everybody, but it definitely pleased 75% - 80% of the population. If you insist on looking at the glass as being 20% empty instead of 80% full, I mean this is not accurate. I think most newspapers are looking from the point of view of what makes good headlines, obviously they focus on support or rejection from the Arab Sunni community. But this is not tested. It will be tested in the referendum. And my conclusion is that it will be overwhelmingly passed in the Kurdish areas, that's 95% plus pass rate; it will be passed significantly in the Shia authorities, maybe up to around 75- 80% and it will be passed in some of the Arab Sunni areas, maybe two of them. And I don't think there will be great difficulty about finding a majority\. I'm quite sanguine about that outcome. We will have a constitution on October 15. But the fact that there will be armed resistance to it is something that we have to take into account. There will always be an element of society that has rejected the way forward, peaceful negotiations, and wants to bring back a system of government of old, associated with the dictatorship, tyranny and repression of the past. But I think the constitution will put Iraq on the right path.
There's a growing concern that the institutions to properly monitor and support a federal system of government are simply non-existent. In light of this how do you expect federalism to work from an economic let alone a political point of view?
I think this again is a red herring. People say that, well, the provisional and regional governments are not up to it. Well who said that the central government is up to it? We have a central government that is, to a very large extent, hollowed out. There are major reforms needed for it to function, even half notch. So it's whether we restructure the institutions of the central government or build new ones. I'll take my chances on building up provincial ones. Look at the way the Kurds, for example. All this talk about we don't have institutional capacity. But there is such a thing and I can assure youÉ
The IMF suggests the current government doesn't have adequate budgetary control to help it get a grip on what it's spending and where. That in itself would be an indication that institutions at their most basic level – from a central point of view – aren't really up to the task.
I don't really agree with that. This is one of the comments of the IMF that I don't agree with. We have budgetary control and its improved substantially in the last few months. There are strong central controls over the resources of the Ministry of Finance, and extremely good control monetary control by the central bank. It's true that in terms of information flow and in terms of standards of international best practices we are way behind but there is an element, a strong element of central control. We are on top of the numbers now, by and large, of what ministries are spending and what they're spending on. The state that we inherited was, as I said before, hollowed out, and it's taken some effort to bring matters under control, but at the macro level in terms of managing the economy, I think we're doing a reasonably good job given the circumstances. If you do down the micro level I think the are things that can be improved upon.
Is there anything else in the report that you disagreed with or is this point about institutional capacity the only thing with which you take issue?
The tone of the report as a whole I would accept. The emphasis, the IMF tends to overemphasize certain issues. There is I think a recognition on their part that we have a very very unusual set of circumstances. And so therefore there ahs to be far greater flexibility as it were. That kind of yardstick that would be used to guage performance and to gauge acceptability of this. Certainly I think they erred perhaps too much in terms of what can be expected from an economy that really has been in crisis since the 90's, or even earlier than that, since 1979. And so with this kind of background I don't think we have much to apologize for.
DEBT RELIEF
I want to move on briefly to the question of debt relief. Clearly without further progress Iraq's current debt level with remain unsustainable. I want to ask you about the non Paris club claims, which remains largely unrecognized. What's your strategy for dealing with these claims and how are you planning on proceeding.
There are four categories of debt, one of them is the Paris club debt. The other category is the commercial debt, and we have made them an offer six weeks ago. Partly to settle things to a certain amount in cash, and partly to agree debt for debt, for the banks. Of course this is all on the terms of the Paris club. In terms of reconciliation, I think our auditors E&Y are doing a very good job and the rate of reconciliation on the claims of the commercial creditors is proceeding quite rapidly. Over the course of the few weeks there will be reconciliation completed and there will be an offer on the table, I think we're doing reasonably good progress with the commercial creditors and I think we gave them an offer that is fair but perhaps in some ways not to resemble the expectations that people had but in terms of the Paris ClubÉ
When do you expect a deal on the commercial portion?
Well I mean the offer is on the table. We hope they can exercise a choice whether they want to accept the cash offer or not. They will be offered debt for debt either in the form of a syndicated loan, that will mimic the terms of the Paris club agreement. SO there is an offer there. I would hope that all those would understand that given the new circumstances, we are also committed to having terms not better than the Paris Club. I would hope that all those offered this is what we have to do and that they would take advantage of what we have to offer.
The non Paris club bilateral debt we are admittedly not making the same level of progress, but there are two or three countries that account for the bulk of the progress – India, Serbia, which has lost a large claim, China. One of the main non Paris club bilaterals, Romania, has signed off recently on funds on the same terms as the Paris club. So we hope that most of the non Paris club bilaterals of the former Soviet block and includes Romania will be resolved soon.
The third category is the Gulf creditors. There we're talking mainly about Kuwait and Saudi Arabia. Those need to be handled mainly through a mechanism that includes both an agreement on the content involved as well as through recognition that this is best resolved through a political process, a political dialogue between the countries.
So I think we're making reasonable progress on all levels. I don't see the debt negotiations as somehow stalling,
But clearly the issue with Gulf creditors is critical given its sheer magnitude and the political sensitivities of the discussion. You say this is best resolved through a political dialogue but can you give us a better sense of when where and how this political dialogues is taking place and what the prospects are for achieving a deal with Kuwait and Saudi Arabia.
Well the dialogue is already continuing apace it's not that we're in some irreconcilable situation. We're discussing this and we hope to meet with the parties over the course of the next few weeks, in particular our neighbours from Kuwait and Saudi Arabia. In terms of what we expect from them, certainly we expect at least acknowledgment that the Paris Club terms are the best terms that Iraq can offer. And we hope that we will be in a position to settle, given the circumstances in which the debt was incurred would warrant an acceleration of the write off. These are not Iraq's negotiating positions but we feel that we have certain constraints that we have to work with, one of them being the Paris Club, the other one being our own budgetary realities, the third thing being that these debts were incurred a long time ago under different circumstances and achieved by a regime that is no longer with us. The Iraqi public paid a really heavy, heavy price for the mismanagement of the economy, and paid a heavy price through the burden that was the result. So we will ask them to extend maximal support and to stand behind the Iraqis.
So you're hopeful of a speedy resolution of these particular debt claims?
I'm quite optimistic. I'm certainly optimistic about the negotiations with the lesser creditors, such as UAE and Qatar. We have had several discussions at a high level with the authorities. I think Kuwait is quite understanding of our position. Of course we also have seen the suffering that can be inflicted on them and that was in fact inflicted on them by the Saddam regime, so I'm sure they sympathize with us as well.
With Saudi Arabia, we're now preparing the ground for discussions with them and I'm sure we'll reach some kind of resolution with them in the next few months, hopefully before the end of the year.
DO you believe that the Arab world is doing enough to aid in the process of reconstruction and development?
Certainly not. I think the numbers speak for themselves. The Arab world is doing very very little. There is very little assistance of any kind forthcoming from the Arab world, particularly the richer parts of the Arab world. We've had huge amounts of aid committed to us by Western donors, especially the Untied States. And the scale of this aid really reaches Marshall plan levels on a per capita basis. The Arab world generally has been very very standoffish when it comes to the amount of assistance they're prepared to give Iraq. They make the right noises but in terms of actual monies and resources committed it's very very small, compared to non Arab countries even, like Iran even, which has committed $1 million, for an economy that has far lesser resources than some of the more wealthy Arab countries.
But why do you think that is?
I think there's this sense of uncertainty and a kind of ambivalence about what's happened in the country. They somehow associate the American invasion of Iraq and the overthrow of the regime with a new regime which may be a threat to them and there's also uncertainty generally as to the politics of Iraq. The fact of the matter is that we've had an open and transparent democratic change. Whether it was inspired by America's invasion of the country or otherwise it is not enough cause I think to make them hesitant to the reconstruction of a country and helping to improve the life of the people who have suffered enormously over the last twenty years.
Wouldn't you think that precisely this uncertainty, ambivalence and hesitation from the point of view of Arab countries not doing enough to aid in the reconstruction of Iraq might also cast doubt on their willingness, say, to reconcile some of the debt claims in a speedy and efficient manner?
I suppose it can influence their decision if they think in this kind of manner, that is, of they link the removal of debt claims to a more accommodating regime. What does that mean? Do they want to wait until the Baath party comes back to power or what? The reality of change in Iraq is there. They have to move beyond this and see that's it's in their manifest interest to help stabilize the country and to aid the reconstruction. They're also going to benefit [from it], after all. Most of the aid being offered is tied one way or the other. The fact that the greatest possible beneficiaries of an open Iraqi economy are going to be the larger Gulf countries. This to them is a market that they should be very very aware of and in many ways its similar to their own countries, thirty or forty years ago. They are nearby and the corporate sector should be rushing to come in once stability is established. The alternative to withholding support – waiting for better times to come or waiting for a different kind of government – I think is rather pointless because it isn't going to happen. Iraq is not going to go back to being a dictatorship.
Negotiations now for a standby agreement with the Fund. Clearly this is crucial, given the conditional nature of the Paris Club agreement and indeed for further debt relief.
When do you expect to achieve an agreement with the Fund?
Well we're hoping at least before the end of the year. We're aiming for sometime around October or November. Maybe we'll start serious discussions with them during or just before the IMF annual meeting. We understand that this is obviously of critical importance to us because the SBA underpins a great deal of other commitments including the continuation of the Paris Club agreement. We also believe that the IMF, once it sees that we are committed to a path of reform, to a path macroeconomic stability, that the country is being prudently managed, as it is, that the central bank is doing its job, as it is, and that the finance ministry is maintaining its authority and attempting to maintain fiscal control at least at the macro level, and that under these very trying circumstances we're trying to be as accommodating as possible, I think that even though it may not be your usual round of SBA, we should have met most if not all of the conditions. Therefore, taking into account the great importance of the SBA, the restructuring of the Iraqi economy by removing this large debt overhang, that the IMF would err on the side of helping us path through this hurdle, accepting that we are acting in good intentions is not merely words but rather anchored in specific actions and policies.
What do you think the sticking point still are for reaching an agreement with the IMF? What are the potential areas of disagreement?
I don't think there should be sticking points but if you ask me to play the game from the other side, there are three or four issues that the IMF has highlighted. One of them is that – technical and we've already done that – is to appoint an international auditor for the account of the central bank and we've done that, we've appointed Ernst & Young. The two or three other points relate to the progress being made in improving the reporting of our internal actual budget realizations to the IMF within a maximum three months period. WE are doing that, not with difficulty but with some problems because although we can manage to do that at a national level and most of the provincial levels, there are certain provinces whose internal accounting is such that it delays the process of giving the IMF the data that it wants within the three month deadline but we're managing to do that and we're improving our performance.
Dovetailing into that is the issue of introducing and implementing a new method for managing financial information, basically a computerization, an online version of financial management information. We're doing that and we've given a very large contract to an international consulting house to help us.
The last issue is the one that is the most problematic and that is to do with the petroleum price subsidies. We as a government inherited a situation where the previous government already accepted that as a requirement of the EPCA and already budgeted that as part of the 2005 revenues. However, given the election results and the fact that the government went into a kind of caretaker phase made it difficult for us to introduce that. We as a transition government inherited this situation but we made a very strong effort to recognize the need for petroleum price subsidies. I think the so called supplemental budget sometime around August. Because of the deteriorating political background I think that our inability to introduce these reforms into the supplemental budget this year has flagged this as an issue. The IMF is obviously concerned about approving an SPA while we are approving a programme of universal untargeted subsidies that are eating up our resources. They have a point, there is no doubt about that. So under normal circumstances you would say this would be a precondition, a sine qua non, but because of our abnormal condition, because we are moving, albeit not necessarily in a linear form, to the same goal, I think they will be able to see that this zigzag we are taking, not necessarily to cut out of the obligations we have, but rather they are necessary given the obligations we have. But rather this is necessary given the circumstances we have. But the end result will be the same. But if anything is going to be a sticking point, I think this will have to be it.
By all accounts, this is precisely the sticking point. But if an agreement were to be reached despite movement on oil subsidies, this would contravene basic IMF policy mandates. How realistic is that in your view?
I don't like to answer hypotheticals. It is true that this is not this is not your normal, run of the mill SBA. But we're talking about an abnormal situation and an abnormal circumstance. Iraq is not a normal country. It's not everyday that a country has its government overthrown. It's not everyday that you go through a major political reformation in less than an 18 month period. It's not everyday that you overthrow a government that has dragged the country into three wars and has been responsible for a million people killed, and has been under international sanctions for a decade. So, this is not the SPA that you would have for a South American or an African or a Middle Eastern country. Fine, you can make all you want of it, but if the IMF for one reason or another for country A, the walls don't necessarily fall down. But here we have a very very peculiar situation, a very abnormal scenario, where the whole linkage effect, as a result of this SPA - and part of its linkage in fact was generated by the original agreement that Iraq signed last year, under the EPCA – so if you ask me what will happen if the IMF rejects the SPA, something I don't want to consider – we have to cross that bridge when we get to it, but you have to be sure that we will do our best to make sure that agreement goes through.
But clearly it's a deeply political issue. In terms of Iraq being a special case, what you're suggesting is Iraq should be treated differently from an impoverished African country with no oil. Clearly a lot of other nations will be rallying against preferential treatment for Iraq, in light of equally profound needs in other parts of the world.
I don't accept this argument that it's a zero sum game, because Iraq is a special case. It's like a hospital – you go into a hospital and there are people sitting there in emergency waiting for treatment from the doctor. There are people who walk in, who come in a wheelchair, and there are people who are spilling blood at the rate of a gallon a minute and if you don't do something about them they are going to die. This is the truth and the fact of the matter is that if Iraq is going to be helped this way it doesn't mean that some poor African country does not getting more than Iraqis, although HIPC addresses this issue, and under HIPC they're getting better funds than the Iraqis. Iraq now has a per capita income of $750, which puts it at one of the lowest per capita incomes not only in the region but in the world. It's not that Iraq is an oil rich country – Congo is also mineral rich – it doesn't mean that these resources can be brought to the surface without a major restructuring of the economy. I don't think this is the logic. Iraq will be a strong advocate of those countries , the indebted countries, receiving HIPC treatment. Iraq will be a strong for those poor countries receiving a better deal from the creditor community and from the banking sector and from international financial institutions.
But you know why should we treat Iraq separately? Well, why should a doctor treat a person who's bleeding profusely before e treats someone who has a severe headache or severe stomach cramps? Because if he doesn't do it something fatal is going to happen.
What do you think Paul Wolfowtiz's key challenges are as president of the world bank and what do you think is expected of him now in this role? There was of controversy surrounding his appointment.
I worked in the World Bank in the 1970's and throughout that decade as a young professional there. I remember when I was there, during the era of Robert McNamara, who was previously US secretary of defense. He was also involved in an unpopular war. But he basically turned the World Bank around. He gave it new life and new direction and the 1970s was probably, by my reckoning from my experience while I was there, one of the World Bank's finer hours.
So coming from a background in the department of defense and being involved and engaged in the Iraq war does not really preclude Mr. Wolfowitz from doing a top rate job. I know he's a first class intellect and he has been involved in the administration and management of large organizations.
The World Bank is a peculiar place as we all know because it's a multilateral body. It's a very multicultural place but it has a staff that could be considered the elite in terms of intellectual abilities, at least as professionals. Managing this, directing this and setting the objectives right, Mr. Wolfowitz also following quite a strong act, that of Mr. Wolfensohn.
I don't think that Mr. Wolfowtiz would not in any way rise to the occasion because of some kind of perceived handicap that he might have. I think also being a man of great idealism, for those who know him, his idealism sits well with the idealism – the culture of idealism - of the World Bank. By and large I think he should and will continue the trend of am engaged presence in the developing world. I think he'll do a tremendous job.