KIMMITT/ZELIKOW MEETING IN ABU DHABI WITH ARAB

C O N F I D E N T I A L SECTION 01 OF 03 ABU DHABI 003100

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**CORRECTED COPY**

DEPT FOR C - ZELIKOW, NEA/ARP, EB/IFD/ODF
TREASURY FOR DEPUTY SECRETARY KIMMITT
CENTCOM FOR J-5 RADM MOELLER

E.O. 12958: DECL: 07/31/2016
TAGS: EAID ECON EFIN IZ AE
SUBJECT: KIMMITT/ZELIKOW MEETING IN ABU DHABI WITH ARAB
MONETARY FUND DIRECTOR GENERAL

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Classified By: Ambassador Michele J. Sison for reasons 1.4 b and d.


1. (C) Summary: An interagency delegation led by Treasury
Deputy Secretary Robert Kimmitt and Counselor of the
Department of State Philip Zelikow briefed Arab Monetary Fund
(AMF) Director General, Chairman of the Board Jassim
Al-Mannai on the International Compact for Iraq on July 23 in
Abu Dhabi. Al-Mannai said that the Arab Monetary Fund was
already working closely with the Iraqis and would be pleased
to support and participate in the Iraqi Compact, either at
the preparatory stage or later. He said that the AMF and the
Iraqis were discussing how to resolve Iraq's outstanding debt
to the AMF (around $505 million counting capitalized
interest) in order for Iraq to be able to access AMF funding
again. Al-Mannai supported the concept of the International
Compact for Iraq, but expressed concern that the current
security environment would make it difficult for the Iraqis
to implement an ambitious reconstruction effort. AMF Advisor
Dr. Hazem El-Beblawi suggested that the GoI needed to deliver
visible and tangible results for the Iraqi people in the
short-term in order to affect Iraqi public perceptions
positively. Al-Mannai welcomed cooperation with the USG and
any visits by U.S. Treasury officials going to Iraq. End
Summary.

Iraqi-AMF Relations
--------------


2. (C) Al-Mannai said that the AMF had close relations with
the Iraqi government, especially with the Minister of Finance
and the Central Bank Governor. The AMF has been providing
Iraq with technical assistance and training, including
through courses targeted toward Iraq. The AMF (in
conjunction with the IMF) has trained around 300 Iraqi
officials at its institute in the UAE. Iraq has been an
important member of the AMF since its founding.


3. (C) In the 1980s, the Iraqis borrowed heavily from the AMF
then stopped paying. Over the last two years, Al-Mannai said
there have been active AMF-Iraqi MinFinance/Central Bank
discussions about dealing with the debt and Al-Mannai
described the discussions as encouraging. Under AMF
regulations, once a country is in arrears, it can no longer
borrow from the fund, although it is still eligible for
training and technical assistance. (Note: As of June 2006,
Iraq owed the AMF approximately $505 million in principal and
capitalized interest, making it the largest debtor to the
AMF. End Note.)


4. (C) Al-Mannai said that he thought both sides would be
able to solve Iraq's arrears problem allowing the country to
again access fund facilities. He explained that the AMF had
more flexibility in dealing with arrears than the IMF. It
could restructure the debt and allow Iraq to "tap" the fund
before it completely resolved its arrears. Al-Mannai added
that the AMF was considering exempting Iraq from some portion
of accumulated interest, noting that Iraq as a major AMF
shareholder could benefit more from AMF funds than could
other countries. (Note: A country is eligible to borrow four
times its paid up capital. End note.) In response to
Kimmitt's question, Al-Mannai said that the AMF could
announce its debt restructuring in advance of the GCC, noting
that he did not think the GCC could hold back a facility
owned by 22 Arab countries.


5. (C) Al-Mannai also said that the AMF had discussed the
possibility that Iraq could benefit from trade finance
facilities and the AMF subsidiary, the Arab Trade Financing
Program, had signed an agreement with Iraqi banks allowing
them a line of credit to the trade financing facility.

Iraq Compact
--------------


6. (C) Kimmitt briefed Al-Mannai on the International Compact
for Iraq, stressing that the Iraqis would need to agree to
specific economic reforms in return for international
support. Kimmitt also asked for AMF assistance and advice
in helping the Iraqis shift from their current state-owned
centrally-planned economy to a more market-oriented economy.
Al-Mannai noted that this would require a cultural shift in

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Iraq, adding that the AMF had experience in this area, since
it had worked in countries such as Egypt and Yemen as they
started to transform their economies. Kimmitt explained
about the structure of the compact preparatory group and
noted the importance of having regional multilateral
financial institutions supportive of Iraqi reform. Al-Mannai
confirmed that the AMF would support Iraqi reform and would
welcome participating, whether at the preparatory group level
or "later on."


7. (C) Al-Mannai said that the AMF has sent a joint AMF-IMF
mission to Iraq, but had returned after the UN headquarters
was bombed. Since that time, he added that the AMF, due to
security concerns, was not in a position to return to Iraq.
In the meantime, however, the AMF and the Iraqis were
engaging in active discussions on debt restructuring.


8. (C) Al-Mannai said he thought that the international
community would be able to raise the funds required to
support Iraqi reconstruction. He expressed concern that, in
the current security environment, the GoI and the
international community might not be able to implement an
ambitious reconstruction program, even with the best possible
commitment. Kimmitt agreed that security was a concern, but
noted that the international community (including the UN) was
steadily building up its presence. He added that capacity
problems at Iraqi ministries were one of the big constraints
on reconstruction. The GoI had instituted a highly
bureaucratic system to manage projects in an effort to cut
down on rampant corruption. He stressed that the Compact was
not project finance oriented, but would focus on key elements
of the Iraqi political economy, such as the energy sector and
distributing oil and gas revenues. Al-Mannai agreed that it
would be important for people to see tangible improvements in
their living situation and that it would be inadvisable to
wait for the security situation to improve.

"Give them Something Tangible"
--------------


9. (C) Al-Mannai introduced AMF advisor Hazem El-Beblawi, who
had met with Iraqi PM Maliki during his July 3-4 visit to the
UAE. El-Beblawi confirmed that Maliki was very interested in
returning to all of the Arab financial institutions and was
aware of the AMF's role in Iraq. El-Beblawi suggested that,
rather than a long-term compact, it would be important for
the Iraqi government to have an immediate economic success
story. This would give the government credibility with the
average Iraqi. He suggested that, for example, the GoI take
one "unsettled area," declare that it would provide essential
services and then deliver. A long term "big fix" program
would not involve the Iraqi people.


10. (C) Kimmitt and Zelikow both acknowledged El-Beblawi's
point about the need for near-term gains, but argued that an
overarching strategic vision was also key to Iraqi recovery.
Kimmitt solicited the AMF's expertise on areas such as
reforming payment systems and on transitions to markets.
Al-Mannai noted that the AMF was engaged in an initiative
with the IMF and the Bank for International Settlements (BIS)
on payments systems and had been working in Egypt, Yemen, and
Syria on this project. He was happy to contribute AMF
expertise to Iraq. Zelikow welcomed the AMF's contributions
and asked for the AMF's advice on a few issues where the
Iraqis could feel that their government and the international
community "did something." Al-Mannai suggested that the GoI
needed to start with the basic needs of the population (i.e.,
electricity and water). If these services improved, the
population would realize that something had changed.


11. (C) El-Beblawi noted that there, in Iraq, perception was
key. The GoI needed to give the people the idea that they
had achieved something. He pointed to Singapore, which had
transformed itself from one of the dirtiest cities in the
world to one of the cleanest. The GoI also needed to give
its people tangible and visible improvements while working on
its master plan. Their position should be "test us and we
will deliver."

AMF-USG Cooperation
--------------

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12. (SBU) Kimmitt said that the Treasury Department had
received funding to increase its presence in Iraq and that
six technical specialists would be going to Iraq. He asked
whether they could consult with the AMF either on the way to
Iraq or on trips out of Iraq. Al-Mannai welcomed any visit.
He stressed that the AMF was happy to play a role. The AMF
had played a role in the BMENA initiative and looked forward
to participating in this initiative as well.

Organization of the AMF
--------------

13. (SBU) Al-Mannai described the AMF as an organization
similar to the IMF, with 22 members from the Arabian Gulf to
North Africa. The AMF does not provide project financing,
but provides technical assistance and financing for economic
sector reform. It has a balance sheet of $5 billion and
paid-up capital of $3 billion. According to Al-Mannai,
technical assistance is becoming a bigger part of the AMF's
operations as Arab countries' need for financing diminishes
with higher oil prices. The AMF is focusing on trade
liberalization and facilitation of WTO accession. In
addition, the AMF serves as the secretariat for Arab Central
Banks coordinating efforts on banking supervision, payment
systems, and stopping terrorist finance. He stressed that
the AMF always appreciated the training and assistance
provided by the U.S. Federal Reserve.

Participants
--------------


14. (SBU) AMF Meeting Participants

Arab Monetary Fund

--Dr. Jassim Al-Mannai, Director General, Chairman of the
Board
--Dr. Hazem El-Beblawi, AMF Advisor
--Mr. Ghassan Bechara, Director, Finance and Computer
Department
--Dr. Mustapha Kara, Director, Economic and Technical
Department

Arab Trade Financing Program

--Mr. Sherif Abdel Khalek, Director, Trade Development


15. (SBU) U.S. Delegation

--Robert Kimmitt, Deputy Secretary of Treasury
--Dr. Phillip Zelikow, Counselor of the State Department
--Ambassador Michele J. Sison
--RADM Robert Moeller, CENTCOM
--Evangelia Bouzis, NSC Director for Iraq
--J. Alexander Monsarrat, Department of State
--Vickie Alvo, Department of the Treasury
--Oliver John (notetaker)


16. (U) This cable has been cleared by DepSec Kimmitt and
Counselor Zelikow.
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