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Cablegate: Dialogue On Economic Cooperation Ends with Follow-Up

VZCZCXYZ6721
RR RUEHWEB

DE RUEHGB #0643/01 0650741
ZNR UUUUU ZZH
R 050741Z MAR 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 6049
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS BAGHDAD 000643

SIPDIS

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON ETRD EAID EFIN EINV EAGR ENRG IZ
SUBJECT: Dialogue on Economic Cooperation Ends With Follow-Up
Commitment

1. (SBU) SUMMARY: The Government of Iraq (GOI) hosted the U.S.
Government (USG) at the Al Rasheed Hotel in Baghdad February 27-28,
2008 for the U.S.-Iraq Dialogue on Economic Cooperation (DEC).
Senior officials from both governments discussed the nature of the
bilateral economic relationship, its future direction, and what the
GOI can do to accelerate economic growth and improve the lives of
its citizens. Over the course of eight working group sessions that
covered a broad spectrum of Iraq's economic sectors, the GOI and USG
both noted the importance of including the private sector in all
manner of economic reforms. As a result of these sessions, the GOI
and USG agreed to number of key 'next steps' for pursuing economic
growth in Iraq, which will be tracked jointly by the High Economic
Committee Secretariat within the Iraqi Council of Ministers and the
U.S. Embassy in Baghdad. They also agreed to continue this
important dialogue by holding another DEC in spring 2009. END
SUMMARY.

--------------------
Dialogue Reconvenes
--------------------
2. (SBU) The Government of Iraq (GOI) hosted the U.S. Government
(USG) at the Al Rasheed Hotel in Baghdad February 27-28, 2008 for
the U.S.-Iraq Dialogue on Economic Cooperation (DEC). The DEC
allowed senior officials from both governments to discuss the nature
of the bilateral relationship, its future direction, and what the
GOI can do to accelerate economic growth and improve the lives of
its citizens. Over the course of various working group sessions
that covered a broad spectrum of Iraq's economic sectors, the GOI
and USG both noted the importance of including the private sector in
all manner of economic reforms.

3. (SBU) As a result of these sessions, the GOI and USG agreed to
number of key 'next steps' for pursuing economic growth in Iraq,
including:

-- Developing an action plan on state-owned bank restructuring;
-- Ratifying the U.S.-Iraq Trade and Investment Framework Agreement
(TIFA) in the Iraqi Council of Representatives (CoR) and convening
the first TIFA Council meeting in 2008;
-- Helping Iraq take better advantage of the benefits of the U.S.
Generalized System of Preferences;
-- Extending the USDA's heretofore successful Iraq Agricultural
Extension Revitalization (IAER) program;
-- Working together to create a comprehensive national energy
strategy and improve investment in oil and gas;
-- Pursuing GOI membership in the Extractive Industries
Transparency Initiative (EITI);
-- Implementing social safety net (SSN) measures to protect
vulnerable Iraqi citizens;
-- Reforming the Iraqi public distribution system (PDS); and
-- Increasing USG technical assistance to improve budget execution
and build ministerial capacity.

4. (SBU) To continue constructive bilateral dialogue, both sides
agreed to mandate the High Economic Committee Secretariat within the
Iraqi Council of Ministers and the U.S. Embassy in Baghdad to follow
up coordination and implement recommendation and decisions of this
meeting. They also agreed to hold another DEC in spring 2009, the
location of which will be determined.

5. (SBU) The DEC is the sixth in a series of bilateral economic
meetings since 2003 that have focused on Iraq's economic reform
agenda and priorities. Iraqi Deputy Prime Minister Dr. Barham Salih
co-chaired the meeting with U.S. Under Secretary of State for
Economics, Energy, and Agriculture Reuben Jeffery III and Treasury
Under Secretary for International Affairs David McCormick. The
Iraqi delegation included the Ministers of Finance, Planning, Oil,
Electricity, Industry & Minerals, Trade, Construction & Housing, and
Agriculture, as well as Iraqi Presidency and Council of Ministers
senior officials. The USG delegation included top officials and
specialists from the State Department, Treasury Department, U.S.
Agency for International Development (USAID), Department of
Agriculture (USDA), Department of Commerce, Department of Energy,
Office of the U.S. Trade Representative, Iraq Transition Assistance
Office (ITAO), and Multi-National Forces-Iraq.

6. (SBU) The senior-level representation at the meeting highlighted
Iraqi leaders' ongoing commitment to establishing a robust,
market-oriented economy, as described in the International Compact
with Iraq, and the U.S. government's continued role in supporting
these efforts. The significance of the meeting being held in
Baghdad was noted by many of the participants.

---------------
Opening Plenary
---------------
7. (SBU) Deputy Prime Minister Dr. Barham Salih and Finance Minister
Bayan Jabr elaborated on some of the economic gains Iraq was able to
achieve over the past year, including spending significantly more of
their own money on capital investment and reconstruction,
considerable reduction of both official and privately-held debt,

drastic reduction in the rate of inflation, and adjusting fuel
prices to reign in fuel smuggling. Both underscored the importance
of taking advantage of security gains and the need for continued
reforms, including banking sector reform, anti-corruption measures,
and tax reform.

8. (SBU) U.S. Ambassador to Iraq Ryan Crocker, U/S of State Jeffery,
and Treasury U/S McCormick all noted the significant economic
progress Iraq has made, particularly under the International Compact
with Iraq. Each expressed interest in deepening the bilateral
economic relationship between the U.S. and Iraq to promote further
economic reform in the coming years. USAID Acting Deputy
Administrator Kunder also offered USAID's continued support.

9. (SBU) Charles Ries, Embassy Baghdad's Coordinator for Economic
Transition in Iraq, gave a brief presentation outlining U.S.
assistance efforts in Iraq since 2003 and the changing nature of the
bilateral economic relationship.

---------------------------------------
Banking Sector Reform Working Group
---------------------------------------
10. (SBU) Treasury U/S McCormick and Finance Minister Jabr led their
respective delegations during this very substantive working group.
The GOI noted that Iraq needs to keep pace with the global banking
sector, and that it has begun that process by committing to
restructure Iraq's two largest state-owned banks, Rafidain and
Rasheed. DPM Salih, who joined the session in mid stream, demanded
that an action plan on bank restructuring be presented to the
Council of Ministers by end March 2008. DPM Salih also specifically
asked for USG assistance in developing this action plan, a point on
which both U/S McCormick and CETI Ries agreed to follow up. Minister
Jabr also suggested that both banks, particularly the lagging
Rasheed, need to make progress in developing core banking systems.

11. (SBU) On Letters of Credit (L/Cs), Hussein al-Uzri, President of
the Trade Bank of Iraq, noted the recent decision that all L/Cs
below $2 million will be processed through private sector banks,
which will expand private banks' share of L/Cs to around 12% of the
total volume of L/Cs, or around $500 million. Minister Jabr
emphasized the need for the TBI to begin distributing more L/Cs to
the private sector.

----------------------------------
Trade and Investment Working Group
----------------------------------
12. (SBU) One of the key issues discussed in this working group was
the TIFA. The TIFA has yet to be ratified by the Iraqi CoR, but is
one of many items on the CoR's agenda when it returns. Dr. Abdul
Hadi al-Hamiri special advisor to the Ministry of Trade, said he
would like to lay the groundwork now for the TIFA Council stipulated
in the agreement and be able to announce its formation after the
agreement is ratified by Iraq. Both sides agreed to begin planning
for a Council meeting in the near future, pending the ratification
by the Iraqi CoR.

13. (SBU) The other major issues discussed were economic zones and
Iraq's accession to the World Trade Organization (WTO). On economic
zones, the Finance Ministry representative indicated that looting
and infrastructure damage during the last six years have closed
Iraq's economic zones, and called for huge amounts of funding for
reconstruction in these areas to convince outside investors to
return. DPM Salih also requested U.S. legislation for
industrialized zones. In response, AUSTR Meredith Broadbent
recommended, alternatively, that it would be beneficial to conduct
an educational campaign on the Generalized System of Preferences
throughout Iraq, a proposal which interested the Ministry of Trade.
On the WTO accession process, Dr. Al-Hamiri noted that Iraq
confirmed with the WTO Secretariat to hold its second WTO Working
Party meeting for April 2.

-------------------------
Agriculture Working Group
-------------------------
14. (SBU) The Iraqi Ministry of Agriculture (MoA), USAID, and USDA
all presented their respective current activities for developing the
agricultural sector in Iraq, and their plans for future development
and collaboration. Deputy Minister of Agriculture Dr. Subhi
Al-Jumaily indicated that the MoA is guided by two strategic
documents: the Prime Minister's Agricultural Development Initiative
and a 3-year strategic plan that the MoA is developing. MoA
emphasized the importance of the Coalition consulting with MoA
before new agriculture projects are announced.

15. (SBU) USDA made known that their successful IAER program would
be extended for an additional two years, through 2010. The MoA was
also particularly interested in more information about USAID's INMA
program, about which USAID agreed to brief the MoA by the end of
March. Additionally, USAID suggested that, due to current USG
budget shortages that are likely to continue, a GOI-USG dialogue on
cost-sharing of agricultural programs should start now.


--------------------
Energy Working Group
--------------------
16. (SBU) This discussion focused on two aspects of the energy
situation: the management of proceeds of oil and gas sales, and the
development of oil and gas resources. On the former, Dr. Azez,
special advisor to the Ministry of Finance, indicated that the
Iraqi-led Council of Financial Experts (COFE), which has been
identified as the replacement to the International Advisory and
Monitoring Board for Iraq (IAMB), has the full confidence of the GOI
as it works with the IAMB in preparation for taking over auditing
the Development Fund for Iraq (DFI) in January 2009.

(SBU) Regarding oil and gas resource development, the GOI delegation
stressed the importance of international investment and new
technology to improve these sectors, and indicated that a 10-year
plan exists to improve production. The U.S. delegation stated that
international private companies are interested in investing in Iraq,
but that the right legal and regulatory framework has to be in
place. The Technical Service Agreements (TSAs) that the Ministry of
Oil (MoO) is currently pursuing are a good start, but are not the
solution; a framework law is needed. The U.S. delegation also
pressed the importance of developing a collaborative, comprehensive
National Energy Strategy, but no such strategy is planned. The GOI
requested help in developing such a strategy.

------------------------------
Economic Revival Working Group
------------------------------
17. (SBU) Deputy Minister of Industry and Minerals Dr. Sami Al-Araji
advocated for Iraq moving to a market economy, but cautioned
participants that it could not be "at any price." He said that the
Ministry of Industry and Minerals (MIM) was focusing its efforts on
Small and Medium-sized Enterprise (SME) promotion, in particular how
to hone SMEs to produce the "inputs" needed for Iraq's
reconstruction and development like steel, cement, and fertilizer.
The Ministry of Industry and Minerals and the Ministry of Labor and
Social Affairs highlighted various GOI programs - particularly
favorable lending and SOE revitalization - to help boost private
sector development.

18. (SBU) The U.S. delegation agreed that SMEs will create the most
jobs, which is also the case in the United States. USAID Deputy
Assistant Administrator James Bever noted, however, that private
banks will need to take a greater lending role and that there is a
need for Iraq to develop that capacity for contract enforcement.
Susan Hamrock-Mann from the U.S. Commerce Department cited the
February 9 U.S.-Iraq Business Dialogue as a good way to leverage
ways to attract US investment, but said that "capital is
conscientious" and will look to find the most efficient commercial
and legal environment.

-----------------------------
Anti-Corruption Working Group
-----------------------------
19. (SBU) The WG on Anti-Corruption was led by Dr. Faik Abdul Rasool
and Econ Counselor Todd Schwartz on the US side. MoO Director
General Nihad Ahmad Moosa presented an official letter, which had
been sent earlier on behalf of the Government of Iraq to the
Extractive Industries Transparency Initiative (EITI). The letter
formally announced the GoI's intent to become an EITI member. DG
Nihad issued a request for a subject matter expert to assist the GoI
in gaining EITI membership. USAID Director described his agency's
transparency initiatives. (Note: The Iraqi side had only two
representatives for this WG. End note)

-------------------------------------
Iraqi Living Conditions Working Group
-------------------------------------
20. (SBU) Representatives from the Ministries of Labor and Social
Affairs (MOLSA), Trade, and Housing and Reconstruction presented on
several programs and issues, including the SSN, the PDS, and housing
initiatives respectively. On PDS reform, the Ministry of Trade
announced a three-year plan, beginning in 2008, to overhaul the PDS.
On housing initiatives, the Ministry of Housing and Construction
noted that there is currently the need for roughly 1.6 million
housing units. The Ministry plans to combat this by building new
units, rehabilitating old units, and augmenting the state-owned Real
Estate Bank to encourage investment.

21. (SBU) Dr. Ahmad Ridha, Chairman of the National Investment
Commission (NIC), contended that diversifying the economy beyond oil
and passing critical legislation relating to investments, including
the monetary law, are key steps towards making the Iraq economy the
largest in the Middle East. He stated that the NIC would be fully
engaged in creating the proper legal and regulatory framework for
attracting investment. He also asked the Americans to encourage
investment in Iraq and assist Iraq with purchasing modern
technologies.

----------------------------------
Ministerial Capacity Working Group
----------------------------------
22. (SBU) This working group addressed the challenges and
opportunities associated with GOI budget execution and reported on
capacity building projects. The GOI highlighted its improved budget
execution in 2007, but Dr. Aziz from the MoF said Iraq's cash-based
accounting system hampered the GOI's ability to record accurate
figures for budget execution. Looking ahead to 2008, Dr. Faik, a
special advisor to the Ministry of Planning, said the GOI expected
continued improvements, pointing out that that the GOI had increased
governors' and ministers' contract-signing authorities. The
American delegation sympathized with the GOI's accounting challenges
and expressed the USG's desire to continue working with the GOI to
improve budget execution performance. The GOI and USG delegations
also agreed on the importance of re-starting the Iraq Financial
Management Information System, especially in the provinces.

23. (SBU) On ministerial capacity building, the GOI delegation
indicated that their own capacity development initiatives are in the
early stages, and facing some growing pains. Minister of Planning
Ali Baban said that USG-sponsored capacity-building programs would
benefit from more cultural sensitivity and an understanding that
many GOI officials and ministries have existing administrative
strengths. USAID's Chris Crawley recognized these points and stated
USAID planned to hire more Arabic speakers from other Gulf countries
to lead capacity-building initiatives.

---------------
Closing Plenary
---------------
24. (SBU) DPM Salih led the closing session. Noting the
improvements in security, DPM Salih stated that these positive
changes would not be successful in the long term without economic
reforms and improved living standards. Iraqis are proud of the
achievements they have made despite the on-going difficulties, he
said. Going forward, programs must translate into real dividends on
the ground for the Iraqi people. The Deputy Prime Minister also
specifically said that a new energy policy, agreed upon by the Iraqi
government, would be adopted.

25. (SBU) While noting that the country faces difficult challenges,
including political problems, the DPM stated there was consensus
among the political leadership to tackle these challenges. The GOI,
he said, was committed to dealing with economic reforms in
cooperation with the international community to achieve progress at
the national and regional levels. Both DPM Salih and Finance
Minister Bayan Jabr expressed their appreciation for such excellent
U.S. participation.

26. (SBU) Treasury U/S McCormick and U/S of State Reuben Jeffery
highlighted the positive outcomes of the productive two-day meeting,
and underscored that the way forward on Iraq's economy would be one
of partnership with, and support from, the United States.

27. (SBU) Ambassador Ries extended thanks on behalf of Ambassador
Crocker for all the participants who had made the meeting a
success.

CROCKER

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