C. Peter McColough Series on International Economics: A Conversation with Baqir Jabr al-Zubeidi

Wednesday, October 8, 2008

JEFFREY R. SHAFER:  If I may have your attention, please, as you're finishing up your lunch.  I'm Jeff Shafer from Citi, and it's my privilege today to preside over this council meeting where our guest is minister of Finance of the Republic of Iraq, Baqir Jabr al-Zubeidi.

And before I begin and introduce the minister, I would like to inform you that today's meeting is part of the C. Peter McCullough series on international economics.  And that the next meeting in the series is going to be on October 15th, 2008 where our guests will be Martin Wolf of the Financial Times, who I think is probably the most thoughtful person you could hear think about these troubled times we live in.  It should be a very good event.

Also, I'd like to ask you to turn off -- not just put on vibrate but turn off -- cell phones, BlackBerrys, other wireless devices to avoid interference with the sound system as well as annoying your fellow audience members.

Also, this meeting will be on the record.  Some meetings at the council are, and some aren't, but this meeting is on the record.

With that, I would like to introduce Minister Jabr by reflecting on the fact that given the importance that progress and constructing a strong society in Iraq has for we in America today.  And my conviction -- and I think a lot of our conviction -- is that the way you do that is get an economy that works and an environment in which people can seek opportunities by having jobs and making a living.

The minister is in a position that, I think, is important to us.  It comes just behind Secretary Paulson, to whom we look to create the conditions so that we have jobs here.  So then our hopes are for the minister's success in managing an economy that is still in the process of being pieced back together again.

Minister Jabr has held his current portfolio for two and a half years.  Before that, he served as Interior minister in the previous government.  He graduated as a civil engineer and started a career in business.  But in 1982, he went into exile and became active in the opposition to Saddam Hussein and then returned after 2003.

The minister today is accompanied by Tasser el-Kulak (ph), who is the chief of staff in the minister's office but who was placed there by the U.S. Treasury.  So he will be interpreting for the minister and join him up here.

Without any further adieu, let me turn the platform over to you, Minister Jabr.  (Applause.)

MINISTER BAQIR JABR AL-ZUBEIDI:  In the beginning, let me express my thanks to the Council on Foreign Relations for making this effort and inviting all these friends to meet with me.

I give my thanks also to Mr. Shafer for introducing me.  And I wish you well.

I believe that advancement in Iraq depends on three actions.  First is the improvement of the security situation, improvement in the political process, improvement in the security situation and a sound economic system.

Since I was minister of Construction in Iraq, I strongly believe that the advancement of the security system depends on economic improvement, not on kinetic operation only.

And speaking on sound and robust economic system is also important, talking about sound and robust banking system.  Also providing job opportunities, fighting unemployment, also providing services to the citizens and improving the living conditions.

On the front of providing services to the citizens, we have worked intensely with the other ministries and with the coalition forces on making the budget execution the focal our attention.  In 2006, the size of the investment budget was only $6 billion, where in 2008 the investment budget reached 20 billion U.S. dollars.

The biggest challenge that we faced was the capability or the capacity of the provinces in terms of executing its own investment budget.  And we are still suffering of this issue.  However, we could talk about a little advancement in terms of budget execution.  In 2006, the percentage of budget execution was between 28 to 36.  In 2007, we witnesses improvement in terms of the performance of ministries.  We reached a level of 73 percent of budget execution in 2007.  And we expect the level of budget execution in 2008 to reach in the 80 percent.

I need to emphasize on one point here.  When I say "budget execution percentage" I mean the level of commitment by the spending units, not the actual spending on the part of the spending unit.

On the other front, there is delay in terms of providing services to the citizens.  And this is definitely an influential factor on the security situation.  The reasons behind the delay in budget executions are many, and I can tackle these reasons during the discussion with you.

We have inherited a near-completed destroyed infrastructure from the previous regime.  To give you an idea about how bad the infrastructure was, from the '70s to the time of the fall of the regime, the percentage of the budget execution or the size of the project (and ?) the sewage, only in that area, and the sewage reach only 6 percent.

When I talk about building the infrastructure, I refer to a study done by the Ministry of Housing and Construction, which says that to rebuild the Iraqi infrastructure system, we need roughly 400 billion U.S. dollars.  The size of destruction is humongous.

Now we could refer to talking about the (debt ?) on Iraq.  We have also inherited from the previous regime a sizable debt, reached 140 billion U.S. dollars.  We have conducted intensive steps and procedures.  We have signed an agreement with the IMF.  Iraq committed to perform certain measures so we could finalize our deal with the Paris Club.  The journey of dealing with debt has begun, and I can tell you that most of the debt was settled according to Paris Club terms with the exception of the debt we owe to the Gulf region and some other small debt.

I think one of the main problem in Iraq today is that we fail to invite the private sector at the right time.  We failed to invite the private sector to come into Iraq and invest in Iraq -- the foreign private sector.

I could speak on two school of thoughts since the fall of the regime.  One believes that the private sector is capable of rebuilding Iraq on all sectors.  The other school of thought believes, like the previous school of thought, that the social system, the centralized system is the solution for what Iraq is facing.  I am from the school that believes the private sector, the foreign investment is capable of resolving all of the economic issues that are facing Iraq.

In terms of improvement, many sectors were delayed, specifically the oil sector, the electricity sector and the construction sector were delayed in terms of (improvements ?).  For example, when I talk about the construction sector, I talk about the need for housing.  I talk about the need to build 2.5 million housing units today.  And maybe within five years, that number would reach 5 million units.

The Ministry of Housing and Construction is building housing units.  And since I was the minister of Housing and Construction, until today the ministry only builds a few thousand housing units only.

In terms of electricity, Iraq needs about 15,000 megawatts.  What we have today is only 5,000 megawatts.  Our own minister who assumed the responsibility of minister of Electricity has depended only on the public sector to solve the issue of the shortage of electricity.  They have not relied on the private sector to solve this problem.

Also, in terms of oil, as you know, Iraq is considered one of the largest holder of oil reserves in the world.  Also, the Ministry of Oil has not sought the help of the foreign companies to solve the issue in the oil sector.  As a minister of Finance, I can tell you that I'm afraid that the Iraq capability to produce oil will decline if we don't go and seek the help of the international oil companies.

In terms of investment, the government was successful in passing the investment law in 2006.  This law is considered good in relation to the investment law in the neighboring countries.  And I don't claim that this law is the best and the ultimate, but it's a good step forward to invite the foreign investors into Iraq.

We at the Ministry of Finance have reached an agreement with the World Bank. And we signed the (mega ?) agreement that protects the foreign investors from any political turmoil or instability.

Before I conclude and I go to the question-and-answer session, I have to say one thing, that the delays in budget execution and the delays that contributed to the delay of the entry to the country by foreign investment are many.  The first element that delays providing the services to the citizens is the security factor. And -- (inaudible) -- security factor prevent foreign companies from entering Iraq. However, I believe if the foreign investors have found alternative ways, he can enter Iraq through joint-venture agreements with the local Iraqi businessmen or the pan-Arab businessmen in the region or other means that we can discuss during the discussion.

The second factor that contributes to the delay of the foreign investor entry to Iraq is the set of laws that we inherited from the previous regime that are complex and ambiguous.  But I can tell you that we are now overhauling these laws and improving them.

The main factor of all these delays is the fact that Iraq still depends on the public sector in terms of improving the economic situation.  Therefore, I invite the American private sector to get in touch with the Iraqi private sector and also the government.  And I say this especially after the security situation has improved up to 80 percent.

I can tell you that the government has signed an agreement with General Electric that reached up to $5 billion.  And this is encouraging and hope that it will be followed by other similar steps.

And the other step that is not less important than the previous step is when I signed agreement with Boeing in Baghdad to buy a number of planes, the contract value reached to 5 billion U.S. dollars.

Yes, there are problems in entering Iraq, but these are not final barriers to entering Iraq.  For example, when GE said its engineer cannot provide the service and the work in Iraq, we found another alternative solution that our engineers would do that job for GE.

We are hoping that the American private sector, private investors will seriously think about going into Iraq, finding alternative solutions to protect its investment in Iraq and finally come to Iraq to help the construction in Iraq.

I thank you very much for (your listening ?).


SHAFER:  Well, Mr. Minister, I think that that was a very informative talk that you gave.  You covered pretty thoroughly the first thing that I though I would ask you about, which is, how do you deal with the unique problem for a finance minister of spending all the money you have instead of keeping spending money down to the money you have?

But I thought I would ask you one more question along those lines.  And that is, if the security situation is improving and that's helping, if there's one more thing that one could make happen that would accelerate the pace at which in fact money's able to be effectively spent, what would that be?

AL-ZUBEIDI:  The second step is for the foreign investor to take a serious step and check with the ministries and check on all the opportunities.  We post all the business opportunities on the Internet.  The foreign investor can go and check all these opportunities, all these contracts (online ?).

SHAFER:  I thought I might also ask you, you did emphasize a good bit your interest in attracting foreign investment and the need to have foreign investment in the oil sector in order to keep production from beginning to falter again.  I know that it is maybe politically the most difficult thing to do in Iraq and, at the same time, the most important in this respect to get this oil bill that would resolve the question of how the oil resource is going to be managed finally enacted.  Could you give us an update of sort of the current status of that and what we should look forward to happening going forward?

AL-ZUBEIDI:  I think that the hydrocarbon law was not delayed because of a technical issue, it was merely a political issue.  The technical and the political were mixed together that resulted in the freezing of the hydrocarbon law. As a member of the Energy Committee, I have worked on the hydrocarbon law.  We have solved almost 95 percent of all the issues.  But then the process was stopped because of political reasons.

One of the reason is what I have indicated during my remarks is that there are two school of thoughts.  One believes in the role of the foreign investment, the private sector, and the other school that believes in the cultural system. Therefore, we saw the accusations started and conferences were conducted across the world and in the neighboring countries.  And the accusations, you know, have risen without any justification.  They have accused the government of selling out Iraq to the interests of the foreign companies.  And all these were baseless accusations.

The second relates to the difference in opinion between the Kurdistan government and the central government.  I am hoping that we have already solved the first factor.  We explained to the Iraqi public that Iraq was not sold.  And it's absolutely an investment opportunity that the country needs to develop the oil sector.  And I'm hoping that we will succeed in tackling the other factor.

But I can tell you this that after the stoppage of the discussion on the hydrocarbon law, the oil ministry has started contacting the foreign oil companies, and the licensing has started in the last month.

SHAFER:  Okay.  So things are beginning to move even without the law being in place.

TASSER EL-KULAK (PH) (Minister al-Zubeidi's interpreter):  Yes.  Because we have already that law.  You know, we have the old law.  We can work through that old one.

SHAFER:  I thought I'd ask you as well -- you've emphasized a lot about the need to construct an infrastructure for the economy.  And for at least a number of us in this room, one of the most important elements of the economic infrastructure is the banking system.  And I know you're really having to rebuild that from scratch, that there are many parts of the country that haven't had banking offices, there hasn't been communication between them.  Almost the only way to move money in the country, at least until recently, was to take currency from one place to another.  What progress is being made?  What can the Iraqi people see happening over the next year or so to get in place the basic infrastructure to support small business in Iraq?

AL-ZUBEIDI:  Definitely we have inherited a destroyed banking sector. Since 1982, the Iran-Iraq war, then the Kuwait invasion, then the other war, there has been no development on that front.  I can say that we have inherited a very primitive banking system.  People who depend so much on moving cash, there is no computers in most bank branches.  Although it is good to remember banks in Iraq have started working since 1945.

Some of the steps that we have taken since the last year and a half, we have brought into the country a comprehensive banking core system.  We started this initiative with the (Rafidain ?) Bank, and we will soon move on to the Rashid Bank. We have indeed started using the (smart card ?) for all the recipients of the (food basket ?), the national -- (inaudible) -- in a way that is very simple, not complex, without the need even to use a secret number, only by using the (phone ?) -- only the card and the (phone ?).

Now we will move to make all the ministries pay their salaries through these systems.  We will start with the Ministry of Finance where all employees at the Ministry of Finance will receive their salaries electronically.  First, they have to open a bank account, then they can go to the bank account and get their salaries monthly.

The (real estate ?) bank has just begun giving citizens small loans to build housing units, although it is still small step, but it is good one.

We have a weak private banking system.  We have started supporting this sector by referring all the government letter of credit that are below $2 million in value as a way of supporting this sector.  And we are hoping to increase this threshold to 4 million (dollars).  The problem is that the capital for those private sector banks is so small we cannot give a bank with a $20 million capital an LC for 200 million (dollars).

This is an invitation to the American banking sectors to go and do joint ventures with the Iraqi private banking sector, just like a child that you cherish and that you care for until he grows up becomes independent.

SHAFER:  Well, thank you.  You are clearly making progress.  And as I can hear, it is a priority, and we hope to see that evolve and continue.

Let's turn now, Mr. Minister, if we can to the audience and see what questions they have for you.

I'd like to invite you to raise your hand and ask for the microphone.  Wait until we bring you the microphone.  And then I would ask you to please stand, state your name and affiliation.  And please only ask one question and make it as concise a question as possible.

Why don't we start here in the middle.

QUESTIONER:  Thank you.  My name is Kenneth Bialk (ph).  Thank you for a very interesting and encouraging presentation.  I think you know that all of us in the United States are very pleased with the progress toward government and democracy that Iraq is showing.  In your comments, you identified some obstacles to progress. And you've said that they were being overcome rapidly.  And in your supplemental comment, you talked about or referenced the hydrocarbon law, an inability to reach agreement with the government of Kurdistan.  And many of us who are generalists and follow the press read that one of the main obstacles to the coming together of your government in political and economic terms is the allocation of resources among the three sectors -- the Kurdish, Shi'a and Sunni -- and the lack of agreement amongst them in the division of resources and the allocation of revenues.  And I wonder if progress toward that issue is included with the 98 percent or whatever percentage you gave in the elements of progress toward resolving all open issues?  Thank you.

AL-ZUBEIDI:  Thank you for the question.  It is very, very important question.  And the irony or the interesting thing here is that I am in charge of putting together the law of revenue sharing.  I was charged, I was tasked by the government to put a draft for the revenue sharing law.

This issue is a very sensitive and very dangerous issue.  The constitution says in one of its stipulations that the revenue or the release of those should be distributed equally among all segments of the Iraqi society.  Therefore, the Ministry of Finance, when it prepared the budgets, applied this law to the letter. And this draft law says that all revenues from selling oil should come to the DFI fund and then should be distributed on all Iraqi provinces through the budget process equally and based on the concentration of population in each province.

Even though this revenue sharing law was not passed, right now we distribute the resources based on the distribution of population in all the provinces.

SHAFER:  Here, Mr. Laurenti.

QUESTIONER:  Jeff Laurenti at the Century Foundation.  Minister Zubeidi, the old Ba'ath-Arab socialist regime had littered the budget with lots of subsidies for consumer commodities, basic commodities like food and fuel.  And despite the Bremer occupation's effort to create a free market island in Iraq, there was a good deal of pushback from Iraqis and the smart card program that you outlined.  It was suggested there is still a major share of your budget that goes to consumer subsidies for basic necessities.  What is that share now?  And how has it changed? And what are the long-term plans, what's the political support for continuing it? And do you have the administrative capacity, with the flight of so much administrative talent to the safety of Damascus and Oman, to actually get those subsidies, get the kind of education programs throughout the country?  Or are there areas where you just don't pump that money out?

AL-ZUBEIDI:  We have engaged with the prime minister about a month ago. And we see this discussion about this issue, and the prime minister is seriously considering eliminating all the subsidies to the food basket.

All the polling that we conducted, the official polling or those done by private sector and others, indicates that 90 percent of the Iraqi population would like to keep the subsidies for the food basket program.  This cost the budget in 2007 and 2008 roughly about 5 billion U.S. dollars.

We are concentrating on some alternative solution, one of which is to make the citizen choose between receiving the subsidies food basket items and between receiving cash for this.  There are many ideas.  We have formed a committee that studies all these solutions.  But I can tell you right now that it is still very early to say that this subsidy will be eliminated soon because large segment of the Iraqi society still depend on receiving the food basket allocation.

We have increased the civil sector salaries by 75 percent.  After we increased the salary by 75 percent, we have studied (a standard ?) of our employees, the Ministry of Finance employees.  We found that 80 percent of those sampled still refuse the idea of eliminating the subsidy -- (inaudible) -- even though they receive cash instead.  What shall we do?  (Laughter.)  We will create another problem for security.  (Laughs.)

SHAFER:  The question put another thought in my head.  It would be interesting to know how it looks to you.  We hear that with the improvement in security that some of these people who have gone abroad, the talent, is beginning to come back.  Is that happening?  Does that mean that you have a stronger pool of people to draw from in building your ministry and the other ministries and the capacity to do the things you want to do?

AL-ZUBEIDI:  Yes, yes, this is true.  For example, in the medical field, many have come back, especially a few who I know that with the increase in salary now the salaries for those who work in the medical field is becoming almost adequate to the neighboring countries.

SHAFER:  Let's see.  Let me go back to the center right here.  Yeah.

QUESTIONER:  Thank you, Mr. Minister.  My name is Roland Paul (sp).  Of course, all right-thinking Americans hope your government will succeed and support it.  So I hope you're not offended by this question.  But what steps have you been taking or have been taken to eliminate corruption in the programs you are responsible for or are familiar with?  And how successful have you been?

AL-ZUBEIDI:  Thank you very much for this question.  Indeed, my ministry and the government of Iraq at large is suffering from this corruption epidemic since the fall of the regime.  Let me relate a little story to you.  I have visited an Iraqi psychiatrist, someone who's a specialist in psychiatry.  And I asked him the question, what has impacted the Iraqi personality from a rich-in-history pride, a personality that feels the pride of belonging to Iraq into a personality that accepts bribery and corruption this easily?  He told me that since 1982, the successive wars that Iraq was forced to engage in and the salaries that the Iraqi civilians receive during the sanction that in most cases that was no more than $1 per month is the main factor for this corruption or this change in personality.

I can tell you that we have not succeeded in eliminating corruption today. However, we have changed many laws.  We have established the Commission on Public Integrity.  We have the -- (inaudible).  We have other committees that is doing the follow up.  And we are very hopeful that in the near future we will be able to curb down the corruption to a great degree.

SHAFER:  Mr. Minister, we do have a strong tradition at the Council on Foreign Relations of ending on time, so I must apologize to the members of the audience that did not have a chance to ask their questions.  But I think you have been very informative for all of us who follow what is going on and try to understand what is going on in Iraq.  And as I think you've heard from many people, we all share very strong hopes for your continued success.

So I hope you'll join with me in expressing your appreciation to Minister al-Zubeidi.










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