DEPSEC KIMMITT DISCUSSES IRAQ COMPACT, TERROR

C O N F I D E N T I A L SECTION 01 OF 02 KUWAIT 004310

SIPDIS

NOFORN
SIPDIS

E.O. 12958: DECL: 11/02/2016
TAGS: EAID ECON EFIN EINV KTFN IZ KU
SUBJECT: DEPSEC KIMMITT DISCUSSES IRAQ COMPACT, TERROR
FINANCE, BANK OVERSIGHT WITH KUWAIT CENTRAL BANK GOVERNOR

REF: KUWAIT 4291

Classified By: Ambassador Richard LeBaron for reasons 1.4 (b) and (d).


1. (C) SUMMARY: On 1 November, Treasury Deputy Secretary
Kimmitt met with the Governor of the Central Bank of Kuwait,
Shaykh Salem Abdullah Al-Sabah, to report on the results of
the previous day's Iraq Compact Preparatory Group Meeting
(septel) and discuss the importance of a strong monitoring
and information sharing regime to combat money laundering and
terror finance. On Iraq, Kimmitt emphasized the importance
of debt relief and technical assistance and pointed to a
number of areas in which the GOI had demonstrated a real
commitment to economic reform. On bank and charity
oversight, he emphasized that banks, central banks, and
government agencies must cooperate to protect the
international banking system from being exploited for illegal
activities, especially terrorism and proliferation. The
Governor provided very little comment other than to say that
he agreed with the importance of reform and debt reduction in
Iraq and supported international cooperation to monitor banks
and charities. He added that, to his knowledge, Kuwait had
experienced no incidents of terror finance activity. END
SUMMARY

Iraq Compact Nearly Finalized
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2. (SBU) On 1 November, the day after the Kuwait-hosted
Preparatory Group Meeting of the International Compact with
Iraq (ICI),Treasury Deputy Secretary Kimmitt met with Shaykh
Salem Abdullah Al-Sabah, Governor of the Central Bank of
Kuwait, to report on the status of the ICI. Kimmitt said
that the progress made in the Preparatory Group meeting
should lead to finalization of the Compact by late November
or early December. He explained that the Compact was
designed to financially assist Iraq in the near term with the
expectation that the country should be economically
self-sufficient within 4-5 years. He added that the ICI was
focused on providing financial assistance, debt relief, and
technical assistance in return for reform commitments on the
part of the Government of Iraq.

GOI Commitment to Reforms is Critical
--------------


3. (SBU) Shaykh Salem responded that it was critical for
the GOI to institute reforms. Kimmitt emphasized that the
GOI had already demonstrated its commitment reform by meeting
the terms of the IMF Standby Agreement and taking important
steps to improve auditing, reduce subsidies, tackle
corruption, and increase transparency. He added that the GOI
had stabilized its currency, built up substantial foreign
reserves, and nearly restored oil production to pre-war
levels. Kimmitt noted that Iraq was still experiencing
problems with inflation and capital investment, and said the
U.S. Treasury Department was increasing the presence of its
technical assistance experts in Iraq to help the GOI enhance
its capacity for financial management. He noted that
regional organizations such as the Kuwait Fund for Arab
Economic Development and the Arab Fund for Economic and
Social Development were also contributing their expertise.

Debt Burden and Inflation Need to be Addressed
-------------- -


4. (C/NF) On debt relief, Kimmitt noted that the USG had
forgiven 100% of Iraqi Debt, and that in accordance with
Paris Club commitments, many of Iraq's other major creditors
were forgiving substantial amounts of Iraqi debt. The DepSec
explained that mere flexibility by creditors on Iraqi debt
servicing would be insufficient, as Iraq needed actual debt
forgiveness in order to increase investor confidence and
attract more private investment. The Governor acknowledged
that relieving Iraq's debt burden would be critical to the
development of its economy because sovereign debt is an
obstacle to foreign investment.


5. (C/NF) On inflation, Kimmitt said that monetary tools
alone would not be enough to solve the problem, though
appreciation of the Iraqi dinar was called for. Iraq needs
to exercise greater fiscal discipline, improve its banking
system, and curb the use of dollars in the economy. He
suggested that the Iraqi Central Bank could benefit from the
experience of Kuwait Central Bank in rebuilding the Kuwaiti
economy in the 1990s. Shaykh Salem did not respond to this.

Need to Strengthen Oversight of Banks and Charities
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6. (C/NF) Deputy Secretary Kimmitt also stressed the
importance of effective oversight of banks and charities to
combat money laundering and terror finance. He noted the
importance of information sharing and cooperation between
governments and banks to ensure that the international
banking system is not exploited for illegal activities. He
also emphasized the distinction between political sanctions
and legal-regulatory enforcement. He said in this latter
regard that Treasury takes actions against illegal
activities, not against countries. Furthermore, he said the
Treasury only instructs U.S.-based banks and is careful to
avoid extra-territorial action. For these measures to be
successful, Kimmitt said that multi-lateral cooperation was
critical between banks and governments. He added that
protecting the integrity of the international banking system
was in the common interest of all countries. Shaykh Salem
agreed with the importance of effective oversight, and said a
multi-agency national committee addressed this issue in
Kuwait. He said this group is hoping for parliamentary
approval of strengthened authority later this year. He also
mentioned Kuwait's participation in regional dialogues in
this area through organizations such as MENAFATF, but said
that he was unaware of any terror financing activity in
Kuwait.


7. (C/NF) In closing, Kimmitt summarized U.S. economic
issues, noting that many economists were still bullish about
the U.S. economy despite weaker than anticipated 3rd quarter
growth. He noted that the U.S. budget deficit had fallen to
below 2% of GDP thanks to strong revenue growth and greater
fiscal discipline. He added that greater demand growth in
Europe and Asia was needed to reduce the U.S. trade deficit
and that Secretary Paulson would be in China next month to
talk about valuation of the Chinese currency among other
topics in a Strategic Economic Dialogue. Regarding further
structural reform in the U.S., Kimmitt said the USG would be
proactive with regard to addressing long-term structural
economic challenges.
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For more reporting from Embassy Kuwait, visit:
http://www.state.sgov.gov/p/nea/kuwait/?cable s

Visit Kuwait's Classified Website:
http://www.state.sgov.gov/p/nea/kuwait/
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LeBaron