Treasury’s challenge in Iraq

Continued lawlessness, delays in restoring basic utilities and the failure to promptly establish an Iraqi interim authority all have presented roadblocks to financial reconstruction. Still, U.S. Treasury undersecretary for international affairs John Taylor insists that some positive steps are being made.

“We have had people in Baghdad for quite a while,” Taylor tells Institutional Investor. “Their responsibility has been to assess the state of the central bank, the Finance ministry and the payment system and try to make all of those operational again.”

Taylor oversees the ten-person Iraq Financial Task Force, made up of officials from the Treasury, State Department, Federal Reserve and the Office of the Comptroller of the Currency. Based in Washington’s Treasury building, operating from a converted market-tracking room that has been dubbed the “Iraq Shack,” the team coordinates strategy with Peter McPherson, the Michigan State University president tapped in late April to oversee financial issues on the ground in Iraq. The Pentagon has given Taylor’s task force the lead on all non-oil-related financial and economic issues. Last month McPherson, who reports to Iraq’s new U.S. civilian administrator, Paul Bremer, joined a 15-member team of Treasury officials who have been detailed to the Pentagon’s Office of Reconstruction and Humanitarian Assistance in Baghdad. The group is headquartered in one of Saddam Hussein’s former presidential palaces, but the accommodations are far from palatial: army cots in a room with blown-out windows and no air-conditioning.

By the end of last month, using $1.7 billion in Iraqi assets frozen by the U.S. in 1991, the Treasury’s team in Baghdad had made emergency payments to 900,000 Iraqi civil servants. It also found more than $250 million in the vaults of the Iraqi central bank and recovered a further $900 million in stolen reserves; the bank should be up and running early this month. In addition, the Treasury is working with private financial institutions to set up a trade credit facility that will help Iraq reestablish commercial relations with the rest of the world. Taylor hopes that Iraq’s transition from a centrally planned economy will parallel those of Eastern European countries after the fall of communism. “In countries like Poland the transition was very quick,” says Taylor. “The lesson I would focus on most is the importance of the rule of law and property rights.”

Huge obstacles remain. Treasury officials are getting increasingly frustrated by the World Bank’s reluctance, based on security concerns, to send a team to Iraq to assess the extent of damage to the country’s economic and government institutions and infrastructure. Washington knows that Iraq’s oil revenue by itself won’t be enough to pay for the country’s reconstruction; the U.S. hopes to persuade noncoalition countries to forgive part of Iraq’s approximately $127 billion in debt and to contribute financially to Iraq’s reconstruction at an upcoming international donors’ conference. But without the World Bank’s expert determination of the resources needed to get Iraq back on its feet,

there’s no way to come up with a budget and no point in holding a donors’ conference.

Taylor has also been battling the perception that the U.S. is going to privatize the Iraqi economy -- and perhaps its oil -- for the benefit of U.S. corporations. The Treasury quickly disavowed a U.S. Agency for International Development contracting document implying as much, after it was leaked to the Wall Street Journal last month. That document, USAID and Treasury officials say, was only a standard contracting document that included all possibilities -- not a set plan. “That document was put away almost as soon as it came to light, because it left the impression that decisions on the future of Iraq were in the hands not of Iraqis or the coalition, but of U.S. private corporations,” says a senior Treasury official.