Identifier
Created
Classification
Origin
06BAGHDAD2381
2006-07-07 12:29:00
CONFIDENTIAL
Embassy Baghdad
Cable title:  

SCENESETTER FOR SECRETARY OF COMMERCE VISIT TO IRAQ

Tags:  ECON EFIN EINV EPET ETRD KBCT KCOR IZ 
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C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002381 

SIPDIS

SIPDIS

E.O. 12958: DECL: 07/06/2016
TAGS: ECON EFIN EINV EPET ETRD KBCT KCOR IZ
SUBJECT: SCENESETTER FOR SECRETARY OF COMMERCE VISIT TO IRAQ

REF: A. BAGHDAD 2080


B. BAGHDAD 2150

C. BAGHDAD 1921

D. BAGHDAD 2004

Classified By: Charge d'Affaires David M. Satterfield for Reasons 1.4 (
b) and (d).

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002381

SIPDIS

SIPDIS

E.O. 12958: DECL: 07/06/2016
TAGS: ECON EFIN EINV EPET ETRD KBCT KCOR IZ
SUBJECT: SCENESETTER FOR SECRETARY OF COMMERCE VISIT TO IRAQ

REF: A. BAGHDAD 2080


B. BAGHDAD 2150

C. BAGHDAD 1921

D. BAGHDAD 2004

Classified By: Charge d'Affaires David M. Satterfield for Reasons 1.4 (
b) and (d).


1. (C) Summary. Secretary of Commerce Gutierrez's visit to
Iraq provides an opportunity to press the GOI for action on
economic reform that would fundamentally change the
investment climate (particularly in the hydrocarbon sector),
open the country to international trade, and dismantle the
remnants of the country's command economy. We believe it
would be helpful for you to have public and private messages
to reinforce those goals. The public message should
emphasize that it is possible to do business and invest in
Iraq, referencing recent legislative proposals, positive
economic data, and success stories such as mobile
communications. The private message should be more pointed,
utilizing your business experience to stress the need for
Iraq to become competitive by attacking corruption,
establishing a welcoming and stable investment regime, and
stressing rule of law.


2. (C) Summary continued. The Secretary's visit comes at a
time when Deputy Prime Minister Barham Saleh and Prime
Minister Nuri al-Maliki are focusing on an economic
revitalization plan and the launch of an International
Compact to assist in reform and reconstruction. PM Maliki
tasked DPM Saleh to lead the GOI's efforts on economic
matters. A new Ministerial Economic Affairs Committee was
established in June, under DPM Saleh's chairmanship, and is
serving as the initial stop for key pieces of legislation and
decision-making on economic matters. We are working
extensively with all of the economic ministries and hope that
2006 will register an economic turnabout for Iraq. End
summary.

--------------
OVERALL STATE OF THE ECONOMY
--------------


3. (SBU) Iraq is starting to make concrete economic

achievements. The IMF decision on December 23 to approve a
Stand-By Arrangement (SBA) for Iraq will permit a debt relief
program that should forgive 80 percent of a $130 billion
total debt by the end of 2007. In addition to removing this
crushing burden, the SBA also has prompted subsidy reductions
for fuels. Under the subsidy system, prices did not even
cover the cost of production, corruption abounded, and
resources were taken away from health, education,
infrastructure development, and security. As part of the
SBA, Iraq has committed to fuel price increases so that, by
the end of the 1st quarter of 2007, prices for refined
products will approach or (in the case of premium gasoline)
exceed prices of other Gulf states. These price increases
should remove much of the incentive for smuggling across the
borders.


4. (SBU) Many of Iraq's economic indicators are now in
favorable territory. We believe Iraq had a GDP growth in the
3 percent range in 2005. The IMF expected that to improve to
better than 10 percent this year, but it is unclear to what
extent ongoing security problems will undercut growth. Iraq
lacks the quantity and quality of macroeconomic numbers
needed for accurate analysis of the economy, but we can see
concrete evidence of increasing prosperity in new patterns of
consumption and service use. Importantly, the GOI appears to
ready to move away from the dysfunctional centralized economy
of the Saddam era.

--------------
ARAB LEAGUE BOYCOTT
--------------


5. (C) Embassy Baghdad engaged the government of former PM
Jafari intensively but unsuccessfully to remove remnants of
the Arab League Boycott (ALB). Embassy already has raised
this issue with PM Maliki, DPM Saleh, Foreign Minister Zebari
(since the MFA houses the ALB Office),and the Minister of
Trade. When the Ambassador raised it with Maliki, the PM
indicated that he was unaware of the issue (ref A). We also
discussed legal provisions of the ALB (Law No. 34 of 1956)
with DPM Saleh during our discussions on the investment law.
We pressed the DPM to include text in the draft investment
law eliminating the ALB law. However, Saleh emphasized that
the GOI needs to come to an explicit decision separately on
ALB and currently is dealing with the issue quietly on a
case-by-case basis (ref B).


6. (C) In our recent discussion with Minister of Trade

BAGHDAD 00002381 002 OF 003


al-Sudani, we emphasized that the ALB is costing Iraq
millions of dollars in investment and thousands of jobs
(septel). Although the Minister of Trade said he was ready
to assist and that the problem needs a creative solution, he
did not provide specifics on what actions he would take.
Foreign Minister Zebari also failed to raise concrete
solutions when we raised it with him after the new GOI formed
in May (ref C). We plan to meet with the Minister of
Industry over the next couple of days regarding the problems
Pepsi is having in registering its trademark.

--------------
INVESTMENT LAW
--------------


7. (SBU) DPM Saleh is spearheading the GOI's efforts to pass
a new investment law (ref B). Embassy Baghdad provided
suggestions to Saleh in the early drafting stages and was
encouraged that many of these suggestions were incorporated
in the revised text that went to the Economic Affairs
Committee and Council of Ministers the third week of June.
The law next will go to the Council of Representatives.
Suggestions that DPM Saleh incorporated from our meetings
include reducing the number of regulatory committees in the
original draft and including provisions for international
arbitration. Among negative features, it would not permit
foreign ownership of natural resources. It also appears to
prohibit investment projects unless expressly approved.
Although a step forward, the draft law is not a sufficiently
competitive investment regime, which we have told Saleh. The
GOI requires reinforcement that this new investment regime
needs an expeditious and transparent process to attract
foreign investors, who are looking to make long-term
decisions.

--------------
WTO ACCESSION
--------------


8. (SBU) We met with Minister of Trade Abd al-Falah al-Sudani
twice since he was appointed to press Iraq's progress towards
WTO accession (ref D and septel). Minister al-Sudani told us
that the GOI is still in the process of reviewing candidates
to be appointed as its WTO Ambassador. Iraq also plans to
submit the responses to its Foreign Trade Memorandum (FTM)
"soon" but is working with other ministries to reach
agreement on issues. The Ministry of Trade is in need of a
strong Director General (DG) in charge of its WTO Unit since
the former DG left in July 2005. Iraq needs to pick up the
pace on WTO accession steps in order to have its first
Working Party scheduled before the end of the year. We have
reinforced this point in our meetings with the Minister of
Trade.

--------------
NATIONAL ENERGY STRATEGY
--------------


9. (SBU) Iraq needs a national energy strategy. Fuel import
liberalization legislation currently is pending approval by
the Council of Representatives after recently having been
approved by the Council of Ministers. This is an important
first step in opening the sector to private enterprise,
undermining the black market, and improving fuel supply. In
addition, resolving significant center-regional issues by
clarifying the division of authority over resource management
and revenue distribution is necessary groundwork for
effective hydrocarbon legislation. A key element of a
hydrocarbon law (or series of laws) would be a measure to
attract the foreign direct investment (FDI) required for
expansion in oil and gas production. Although the structure
and regulation of the hydrocarbon sector will be a critical
aspect of national energy policy, the fact that oil export
revenues account for upwards of 95 percent of the state
budget while Iraq is at war should be taken carefully into
account.

--------------
LOW QUOTIENT OF ECONOMIC EDUCATION
--------------


10. (SBU) Key decision-makers in the Council of
Representatives are largely under-educated on economic
issues. This is the product of the isolation of Saddam's
regime, its orientation towards socialist states of the
former Soviet bloc, and the prevalence of a culture of
dependency. We have begun to educate key members and
backbenchers of the Council of the Representatives on sound
energy investment and development policies, subsidy reform,
and the need for public integrity, openness, and transparency
in the oil and gas sectors. In addition, an expanded GOI
public outreach campaign is needed to educate Iraqis on sound

BAGHDAD 00002381 003 OF 003


economic policies and the need for openness and transparency
in oil production, reserves and government revenues, and the
needs to fight corruption and to continue subsidy reductions.
Embassy is partnering with the Iraqis to create TV spots on
economic reform issues and to build public affairs capacity
within the various ministries, the Council of
Representatives, and the Government Communications
Directorate (the GOI's public affairs arm).

--------------
CURRENT ECONOMIC DECISION-MAKING IN THE GOI
--------------


11. (SBU) The GOI recently formed an Economic Affairs
Committee, under the chair of DPM Barham Saleh. It also
includes the Ministers of Finance, Trade, Oil, Planning, and
Development Cooperation, as well as the governor of the
Central Bank, president of the Board of Supreme Audit, and an
advisor to be appointed by the Prime Minister. Many
decisions on legislation and key economic issues are first
being funneled to this committee before going to the full
Council of Ministers and Council of Representatives.

--------------
OTHER
--------------


12. (SBU) As the first cabinet Secretary to visit Iraq from a
USG economic agency, your trip is very significant. In
addition to raising policy issues that will help to increase
foreign trade and investment opportunities, your visit has an
important public outreach dimension to the Iraqi and American
business sectors in Iraq. Iraqi, American, and third-country
traders and investors need to be encouraged to take advantage
of the clear opportunities to do business, even in the
current security environment. In your public remarks, we
hope you will encourage their business. The new government
has made a brave start, but its confidence has been shaken by
the continuing security situation. Directing the Iraqis'
attention to neighboring examples such as Jordan or Turkey,
where more open economic regimes have produced significantly
higher levels of prosperity, would be useful.


13. (SBU) The GOI also should be complimented for its first
steps to create a more liberal investment regime and to fight
corruption. The latter problem is endemic and is, along with
the more general problem of weak governance, the most
significant problem holding back foreign investment. In your
private comments, therefore, you should stress the need for
rapid action on economic reform and anti-corruption measures.
There are legislative projects currently underway regarding
fuel import liberalization, investment, and housing that all
can be encouraged. Your most fundamental argument should be
that Iraq must create the conditions to attract investment.
SATTERFIELD