Administrator’s Weekly Report Economy

Administrator’s Weekly Report Economy 10 – 16 January 2004 The first report of the New Year HIGHLIGHTS -- The Iraqi Currency Exchange was completed on 15 January as planned, meeting 106 percent of its original goal -- The National Employment Program has now created approximately 76,000 jobs I. BUILD FINANCIAL MARKET STRUCTURES Modernize the Central Bank; Commercial Banking System; Re-establish Baghdad Stock Exchange; Restructure National Debt Ten of the 17 private Iraqi banks have now been approved to provide payments remittances and letters of credit. The private banks, despite their relatively small size, are the only banks in Iraq that can conduct international transactions. Banks in the Arbil governorate are paying interest on deposits and are preparing to make loans for the first time in years. The Central Bank branch in Arbil is also beginning to take steps—such as bolstering communication and producing regular reports––to reconnect with the Central Bank (CBI) in Baghdad after its separation during the Kurdish autonomy period in the early 1990s. The Trade Bank of Iraq has issued over $100 million in letters of credit to international suppliers in order for Ministries to import essential goods and equipment. There are over $120 million more in letters of credit pending issuance. The Iraqi Currency Exchange was completed on 15 January as planned. 100 percent of the scheduled 6.36 trillion new Iraqi dinars (NID) have been delivered to Iraq. 1.44 trillion NID are at Iraqi banks, with the remaining 0.3 trillion NID are at hubs scheduled to be delivered to the banks next week. There are 4.62 trillion NID currently in circulation, 106 percent of the original demand estimate of 4.36 trillion needed for the Iraqi economy. Higher than expected demand for the new currency pushed Central Bank reserves below the 2 trillion NID goal. Reports indicate that the new dinar is popular with both consumers and businesses. The old Saddam dinar and Swiss dinar are now worthless and are being verified and destroyed by the Central Bank of Iraq (approximately 4,000 / 13,000 tons have already been destroyed). The separate exchange for the registered owners of the 25 Swiss dinar notes begins January 17 and runs through April 17. The equivalent of about 85 billion new dinars are expected to be exchanged. The value of the Iraqi dinar continues to strengthen against the dollar. At the Iraqi dinar auction on January 15, 2004, the settlement price was 1350 new Iraqi dinars (NID) per US dollar compared with 1405NID the day prior. On January 15, 2004, the dollar price of the dinar on Baghdad streets fell again to 1220NID per dollar, from 1290NID yesterday. Source: CPA Ministry of Banking In its first month in circulation (15 October – 14 November), the NID appreciated 1.3 percent. In its second month in circulation (15 November – 14 December), the NID appreciated 7.8 percent. In the last month (15 December – 14 January), the NID appreciated 27.7 percent. Within this period, during the week of 3 – 9 January 2004, the Iraqi Dinar appreciated 7.8 percent and during the last week, 10 – 15 January 2004, it gained another 12.9 percent against the US dollar. The Central Bank of Iraqi (CBI) is concerned about the volatility on the local foreign exchange (FX) market and will implement actions to reduce the excessive volatility of the local currency. On January 15, the CBI bought all offered dollars well above the parallel street market price, and stated that it is ready to continue intervening in the FX market buying dollars if necessary. The CBI is still examining the causes of this appreciation, and noted that there are reports of strong speculative demand for dinars coming from neighboring countries. A limited Consumer Price Survey of nine food items and four fuel items undertaken by CPA and CJTF-7 is in its third week. The survey draws from 19 cities throughout Iraq and aims to determine price trends within the country. See attachments. Coalition Joint Task Force 7 (CJTF-7) Civil Affairs units estimate that the CPA has directly created approximately 391,654 jobs for Iraqi citizens. By sector: Security/National Defense is employing 207,394; The National Employment Program is employing 76,139; CJTF-7 is employing 55,121 Iraqis; Civilian contractors working under CPA contracts are employing 53,000 people. II. DEVELOP TRANSPARENT BUDGETING AND ACCOUNTING ARRANGEMENTS Redraft and Execution of 2004 Budget Since July 21, 2003, $4.7 billion has been transferred from the U.S. to Development Fund for Iraq (DFI) accounts in Baghdad ($3.02 billion from the DFI and $1.7 billion in vested assets). As of January 6th, the balance in the DFI is $8.39 billion, comprised of $7.01 billion in the original Federal Reserve Bank of New York (FRBNY) account, and $1.37 billion on deposit in DFI-Baghdad. Since the establishment of the DFI investment program at FRBNY by the Treasury Iraq Financial Task Force, the DFI has earned $5 million in interest. Treasury’s Office of Foreign Assets Control (OFAC) has initiated the first vesting initiative under the Presidential Order in August vesting the U.S. assets held by former Iraqi officials. $15 million held in a frozen AT&T telecommunications account was deposited to the DFI account that has been established at FRBNY. Total State Department and U.S. Agency for International Development (USAID) sssistance to Iraq disbursed in FY 2003/2004 totals $2,284 million as of January 13, 2004. 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 Develop an Inter-Governmental Policy Framework by Jul 04 in time for the 2005 Budget Develop Public Procurement Framework with Regulatory Oversight Coordination with Ministry Senior Advisors is taking place for the implementation of the Financial Management Information System (FMIS). Beginning in March 2004, FMIS will be used by the Ministry of Finance and will then eventually spread into the other ministries. FMIS is an accounting and budget execution system with on-line access and a real-time updated centralized database for all spending organizations in Iraq, which includes all Treasury offices and Ministries. The core system will be up and running by March and phase two and three will roll out in all 18 governorates and 28 national ministries in May. IV. PROMOTE PRIVATE BUSINESS AND SMALL AND MEDIUM ENTERPRISES (SMEs) Business facilitation measures and technical assistance to business; Facilitate lending to private businesses; Administer micro credit activities; Create business centers; Direct job creation; Develop foreign investment The CPA approved a new $2.25 million micro-lending program for the governorates of Al-Anbar, Salah Ad Din, and Diyala, funded from DFI. The program features a collaborative match with local banks, so the total amount of lending capability could be $4.2 million. Lending will start in February. Community Habitat Finance (CHF), a non-governmental organization (NGO), has dispersed $1 million out of the approximately $8 million they have been granted for micro-lending in the southern regions of the country. Most lending has been in the South Central areas, but CHF programs based in Baghdad and Basra are being launched now. Agricultural Cooperative Development International and Volunteers in Overseas Cooperation (ACDI/VOCA), another NGO, has now arrived in country and has begun setting up operations, although it has not yet started lending the $6.44 million scheduled for the central and northern regions of Iraq. Additional micro-lending funds may be allocated from the supplemental but with the expected 2004 arrival of a $170 million IFC micro- and small-business lending facility, Iraq’s immediate micro-lending requirements may have been fully met. As noted above, the IFC has approved a $170 million micro- and small-business lending facility and a $30 million technical assistance facility. The technical facility is aimed at developing bank capability. Operation of both parts of the IFC program is expected to begin in 2004. The Ministry of Trade Fair Company signed an agreement with the Iraqi-American Chamber of Commerce and Industry (IACCI) to put on the “Destination Baghdad Expo,” a large scale trade exposition open to all sorts of businesses scheduled for April 5-8 at the international fairgrounds. V. COMMENCE REFORM OF TAX SYSTEM Reform tax rates The 2004 Tax Strategy, which provides for a flat tax of 15 percent on companies and a maximum tax rate of 15 percent on individuals, has been submitted to the Administrator for review and signature. The Order was drafted in close coordination with the Iraqi Ministry of Finance and the Tax Commission, and the draft Order was cleared by the IMF and the World Bank. VI. REMOVE SUBSIDIES/DEVELOP SOCIAL SAFETY NET Develop energy subsidy reform plan; Implement Food Basket monetization trials The Public Distribution System (PDS) provides a food basket to each of Iraq’s 26.3 million citizens, but must be phased out as a matter of economic necessity. CPA and the Ministry of Trade have been analyzing proposals to monetize the PDS, but CPA will not pursue initiatives to do so prior to the July 1 transition to Iraqi sovereignty. VII. IMPLEMENT POLICY TOWARDS STATE-OWNED ENTERPRISES (SOEs) Return SOEs to pre-war operation levels, where appropriate; Find sources for financing their short term working capital and investment requirements; Hard Budget 111 bidders are competing in a review process to lease 35 plants belonging to 18 Ministry of Industry and Mineral SOEs. Of the 111 bidders, 20 are foreign and 91 are Iraqi (many have opted to form partnerships with international firms, a very positive step toward free enterprise). Ten private Iraqi accounting firms and one international firm (KPMG) are preparing financial reports for some SOEs in order to help the stronger firms apply for liquidity loans, and assist the ministry in determining the viability of the remaining firms. VIII. DESIGN OIL TRUST FUND Finalize development of an Oil Trust Plan As of January 10, 2004, crude oil export revenue is estimated at $5.3 billion since Iraqi exports resumed in June 2003. IX. LAY FOUNDATIONS FOR AN OPEN ECONOMY Continued technical assistance with coordination among IFIs and bilateral donors Trade Bank; Trade Liberalization Policy (to include Customs Law) to GC by DEC 03; Draft Intellectual Property law to GC by April 15, 2004; Develop Framework for Collateralizing Movable and Immovable Property; The “Phase One” revision of the Company Law has been submitted to the Governing Council for its review. The Phase One revision facilitates increased capital infusion, reduces state control over company formation, removes restrictions on ownership, and removes certain state controls on business decisions. Implementation of the five percent Reconstruction Levy on imported goods has been delayed until March 1, 2004 in order to ensure that the Iraqis have sufficient enforcement capacity to enforce the Levy. X. PURSUE NATIONAL STRATEGY FOR HUMAN RESOURCES DEVELOPMENT Begin work to employ 100,000 workers in Public Works programs around the country Eleven Ministry of Labor and Social Affairs (MOLSA) employment centers are operational throughout Iraq (Baghdad, Irbil, Mosul, Kirkuk, Baqubah, Khanaqin, Karbala, Najaf, Diwaniyya, Samawa, and Nasariyya), although none are fully operational because of inadequate staffing and equipment. Seventeen more employment centers are going to open later this year. Three Technical and Vocational Training Centers are open in Baghdad, Irbil, and Mosul, although none are running at full capacity. Fourteen more centers are scheduled to open this year. Approximately 76,000 jobs have been created under the National Employment Program, an initiative that seeks to create 100,000 new public work jobs. Program progress by governorate Governorate Target Employment Achieved Employment Percent Delivered Salah ad Din 7200 1547 21 percent Al Anbar 7200 5729 79 percent Wasit 7200 6875 95 percent Babil 7200 6687 93 percent Karbala’ 7200 3664 50 percent An Najaf 7200 6160 85 percent Al Qadisiyah 7200 5603 78 percent Al Muthanna’ 7200 7700 100 percent Dhi Qar 7200 4291 60 percent Maysan 7200 4565 63 percent Al Basrah 7200 6291 87 percent Ninawa’ 3300 2985 97 percent At Tamim 2640 2444 92 percent Diyala’ 2640 1123 43 percent Baghdad 3300 3268 100 percent Arbil 3300 2707 82 percent Dahuk 3300 3000 90 percent Sulaymaniyah 3300 1500 45 percent TOTAL 100980 76139 76 percent Source: USAID Daily Report to CPA PAGE PAGE 5 UNCLASSIFIED Prepared by the Information Management Unit UNCLASSIFIED Prepared by the Information Management Unit