Administrator’s Weekly Report Economy — establish Baghdad Stock Exchange; Restructure National Debt — 20 شباط 2004

Administrator’s Weekly Report Economy February 14-20, 2004 HIGHLIGHTS -- The Financial Management Information System (FMIS) went online on February 16 at the Ministry of Finance. -- The Tax Strategy of 2004, which provides a maximum 15 percent income tax on corporations and individuals, was signed on February 20, 2004, and will go into effect April 1, 2004. I. BUILD FINANCIAL MARKET STRUCTURES Modernize the Central Bank; Commercial Banking System; Re-establish Baghdad Stock Exchange; Restructure National Debt The Ministry of Planning announced the results of the unemployment survey for the fourth quarter of 2003. The unemployment rate was 28 percent and the underemployment rate was 21.6 percent, for a total of 49.6 percent under/unemployed. The increase in the Consumer Price Index for 2003 was reported to be 33.6 percent. As of February 20, Iraq’s two large state-owned commercial banks, Rafidain and Rasheed, have extended dollar loans totaling $8.9 million, a 49 percent increase over the dollar loan amount extended as of November 30, 2003. These figures do not include the non-dollar loans issued by the two banks. The following chart details the small and medium enterprise loans granted by Rafidain and Rasheed Banks: State Banks Number of loans approved Value of loans approved Rafidain Bank 200 $ 6,779,000 Rasheed Bank 126 $ 2,135,000 At the New Iraqi dinar (NID) auction on February 19, the settlement price was 1,415 dinars per dollar, the same as it was the previous day. The value of dollars sold at the auction increased steadily over the week, from $50,000 on February 14, to nearly $13 million on February 19. The dinar per dollar price on the Baghdad streets was 1,420 dinars per dollar on February 19, compared with 1,415 from the previous day. During the past week, February 14-20, the NID held its value against the U.S. dollar. Source: CPA Senior Advisor to the Central Bank of Iraq (CBI) New Iraqi dinar monthly fluctuation: November 20 - December 19: NID appreciated 20.6 percent December 20 - January 19: NID appreciated 16.0 percent January 20 - February 19: NID depreciated 3.3 percent Source: CPA Senior Advisor to the Central Bank of Iraq The annualized weekly volatility of the new Iraqi dinar from February 15-19 was 3.1 percent. During the previous regime, Iraq’s private banks controlled less than eight percent of total banking assets and offered very limited services. Under the new Banking Law, 10 of Iraq’s 17 private banks are already making international payments and remittances, and issuing letters of credit. International payments and remittances into Iraq are now roughly estimated at more than $5 million per day. The Ministry of Finance, with the assistance of the Central Bank of Iraq, issued a Request for Proposals (RFP) for a private accounting firm or financial services firm to provide accounting and debt reconciliation services on Iraq’s external sovereign debt last month. Three of the eleven firms that responded by the February 12 deadline for the RFP have been chosen to give oral presentations in Baghdad next week, after which a recommendation will be given to the Finance Minister. The Iraq Stock Exchange is expected to open next month. The first 5-10 companies to be listed on the exchange will be identified at the beginning of March. II. DEVELOP TRANSPARENT BUDGETING AND ACCOUNTING ARRANGEMENTS Redrafting and Execution of 2004 Budget The Program Management Office intends to commit $10.3 billion (56 percent of the $18.4 billion supplemental) toward contracts by July 1, 2004. Three billion dollars are currently committed to Iraq relief and reconstruction efforts, 29 percent of the July 1 goal, and an 88 percent increase from the previous week. Currently, $836 million of funds are obligated with contractors (8 percent of the committed fund’s goal). The following two charts show the money committed by sector for construction and non-construction projects: Source: CPA Program Management Office Source: CPA Program Management Office A report by the U.S Treasury Department estimates that 1.7 million jobs could be created in Iraq in 2004, assuming that $8.4 billion (45 percent) of the supplemental funding is actually disbursed within the year (not just committed). The lower bound in the study assumes that $3.7 billion (20 percent) of the supplemental will be disbursed within the year, creating 700,000 jobs in this instance. As of February 19, the balance in the Development Fund for Iraq (DFI) was $8.4 billion, comprised of $7.6 billion in the original Federal Reserve Bank of New York (FRBNY) account, and $800 million on deposit in DFI-Baghdad. Of this, $4.7 billion is already committed to projects, and the remaining $3.7 billion is slated for projected shortfalls in the 2004 budget. Since establishment, the DFI investment program at FRBNY earned $12 million in interest. As of February 19, the total payments out of the DFI amounted to $4.0 billion. State Department and U.S. Agency for International Development (USAID) assistance to Iraq disbursed in FY 2003/2004 totals $2.6 billion as of January 27, 2004: USAID/ Asia and Near East (ANE): $1.9 billion USAID/ Office of Foreign Disaster Assistance (OFDA): $87 million USAID/ Food for Peace (FFP): $427 million USAID/ Office of Transition Initiatives (OTI): $104 million State Department/ Bureau of Population, Refugees, and Migration (PRM): $39 million III. DEVELOP FRAMEWORK FOR SOUND PUBLIC SECTOR FINANCES AND RESOURCE ALLOCATION Increase Capacity of Ministries of Finance and Planning to Manage Public Resources; Increase International Coordination to Manage Foreign Assistance The Financial Management Information System (FMIS) went online on February 16 at the Ministry of Finance. FMIS is an automated, networked accounting and budget execution system with online access and a real-time, updated centralized database for all spending organizations in Iraq. The CPA is implementing the first phase of the program in Baghdad and will then implement it in the other governorates by May. FMIS will enable the Ministry of Finance to establish strong fiscal controls and execute the budget. The U.S. Departments of Defense, State, Treasury, and the UK Treasury are all preparing proposals on the future of the DFI after the transition to Iraqi sovereignty. IV. COMMENCE REFORM OF TAX SYSTEM Reform tax rates The Tax Strategy of 2004 was signed on February 20, 2004, and will go into effect on April 1, 2004. The Order was approved by the Iraqi Governing Council (IGC), and incorporates comments from the Finance and Planning Committee of the IGC, the Director General of the Iraqi Tax Commission and his Iraqi advisors, the Iraqi interim Minister of Finance and his Iraqi senior advisors, the International Monetary Fund, and the World Bank. The tax strategy lowers the maximum rate of income tax for individuals to 15 percent -- significantly below the previous maximum rate of 45 percent. The corporate income tax rate changes to a flat 15 percent, compared to the previous maximum rate of 40 percent, and the 25 percent levy on company profits was removed. The proposed Order also equalizes tax rates for residents and non-residents. The new tax strategy also increases personal exemptions NID 2,500,000 for taxpayers; NID 2,000,000 for a taxpayer’s wife, if she is a housewife; and NID 200,000 for each child. The Order also increases exemptions for widows, divorcees and the elderly. Real estate rental taxes are reduced to a flat rate of 10 percent. In the new tax Order, public sector employees are no longer exempt from income taxes. However, in order to allow the Tax Commission time to develop the necessary infrastructure to accurately and transparently assess and collect tax on all employees, the exemption for public sector employees is increased for the year for 2004, effectively exempting most public sector employees from income taxation this year. Beginning January 1, 2005, public sector employees will have the same exemptions as private sector employees. V. DESIGN OIL TRUST FUND Proposal for Oil Trust Fund As of February 17, 2004, estimated crude oil export revenue is $1.7 billion since January 1, 2004 (crude oil export revenue for 2003 [June - December] was $5.1 billion). VI. LAY FOUNDATIONS FOR AN OPEN ECONOMY Provide IG Staff Capability; Trade Bank; WTO Observer Status; Draft Intellectual Property law to GC by April 15, 2004; Develop Framework for Collateralizing Movable and Immovable Property As of February 20, the Trade Bank of Iraq issued 130 letters of credit (L/C’s) worth $370 million for nearly every Ministry and several state-owned enterprises. The Trade bank of Iraq recently approved 10 new applications for L/C’s for electricity sub-stations in northern Iraq valued at $60 million and one large L/C valued at $283 million for a turn key electrical plant for the Ministry of Electricity. In addition, the U.S. Export-Import Bank backed its first L/C valued at $6.9 million for an export out of Wisconsin for 361 generators for the Ministry of Communications. VII. PURSUE NATIONAL STRATEGY FOR HUMAN RESOURCES DEVELOPMENT Begin to employ workers in Public Works programs around the country The National Employment Program and the additional employment program in the northern regions, initiatives that seek to create 155,000 new public works jobs, created 108,433 jobs- nearly 70 percent of the goal. This remains unchanged. Coalition Joint Task Force 7 (CJTF-7) Civil Affairs units estimate that the CPA has created approximately 434,896 jobs for Iraqi citizens (51 percent of the CPA target of 850,000): Security/National Defense employs 210,495 National Employment Program employs 108,433 CJTF-7 employs 50,473 Civilian contractors working under CPA contracts employ 64,115 Governorate Teams employ 1,380 VIII. INITIATE PUBLIC SECTOR MANAGEMENT REFORM Civil Service Salary Review All 26 Iraqi Ministries are working to have as many Inspectors General offices as possible operating by February 28. As of February 19, the first three appointment letters for Inspectors General have been sent out, and a further 11 Ministries have submitted nominations for their respective Inspectors General. PAGE PAGE 2 FOUO Prepared by the Information Management Unit FOUO Prepared by the Information Management Unit