US embassy cable - 04ABUDHABI2372

UNCLAS SECTION 01 OF 02 ABU DHABI 002372 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR SECRETARY POWELL 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, OPDC, PREL, IZ, TC 
SUBJECT:  LETTER FROM THE IRAQI INTERIM GOVERNMENT TO SECRETARY 
POWELL 
 
REF:  NONE 
 
1. (SBU) ON JULY 13, POST RECEIVED THE FOLLOWING CORRESPONDENCE 
SIGNED BY THE IRAQI FINANCE MINISTER AND CENTRAL BANK GOVERNOR 
REGARDING TREATMENT OF IRAQ'S EXTERNAL DEBT. 
 
2. (SBU) BEGIN TEXT: 
 
12TH JULY 2004 
H.E. MR. COLIN POWELL 
SECRETARY OF STATE 
 
SIPDIS 
UNITED STATES 
 
DEAR SIR, 
 
WE WRITE TO YOU AS REPRESENTATIVES OF THE NEW, SOVEREIGN 
GOVERNMENT OF IRAQ RECOGNIZED BY UNITED NATIONS SECURITY COUNCIL 
RESOLUTION 1546.  AS OUTLINED BY PRIME MINISTER ALLAWI, THE GOALS 
OF THE GOVERNMENT ARE TO MOVE QUICKLY TO ESTABLISH SECURITY, 
PROMOTE PROSPERITY AND MOVE FORWARD WITH A POLITICAL TRANSITION 
LEADING TO NATIONAL ELECTIONS IN JANUARY 2005. 
 
TO ACHIEVE THESE GOALS, WE NEED TO CONCLUDE AN EMERGENCY POST 
CONFLICT ARRANGEMENT WITH THE IMF BY THE TIME OF THE OCTOBER 2-3 
IMF/WORLD BANK ANNUAL MEETINGS, AS WELL AS TO FINALIZE A DEBT 
REDUCTION AGREEMENT IN THE PARIS CLUB BY THE END OF THIS YEAR. 
WE COUNT ON YOUR HELP IN ACHIEVING THESE GOALS, WHICH ARE 
CRITICAL TO THE SUCCESS OF OUR EFFORTS TO PROMOTE SECURITY, 
PROSPERITY AND POLITICAL TRANSITION. 
 
WE WELCOME THE FACT THAT SOME CREDITORS HAVE COMMITTED TO 
"SUBSTANTIAL" DEBT REDUCTION AND OTHERS HAVE AGREED TO FORGIVE 
THE "VAST MAJORITY" OF THE DEBTS OWED BY IRAQ.  WE HAVE NOTED THE 
COMMITMENT OF THE HEADS OF GOVERNMENT OFG8 CREDITORS TO PROVIDE 
DEBT REDUCTION "SUFFICIENT TO ENSURE SUSTAINABILITY, TAKING INTO 
ACCOUNT THE RECENT IMF ANALYSIS" AND THAT THIS REDUCTION SHOULD 
TAKE PLACE IN 2004. 
 
WE BELIEVE, FOR REASONS OUTLINED BELOW, THAT THE IMF DEBT 
SUSTAINABILITY ANALYSIS MAKES IT INDISPUTABLY CLEAR THAT DEEP 
DEBT REDUCTION IS NECESSARY TO ENSURE SUSTAINABILITY.  INDEED, 
THE IMF'S BASELINE SCENARIO INDICATES THAT REDUCTION SHORT OF 95% 
WOULD RESULT IN SIGNIFICANT AND PERSISTING FINANCING GAPS. 
MOREOVER, STANDARD STRESS TESTS USED BY THE IMP PRODUCE EVEN 
LARGER FINANCING GAPS.  TO AVOID UNCERTAINTIES THAT WOULD IMPEDE 
IRAQ'S TRANSITIONS, DEBT REDUCTION SHOULD BE IMMEDIATE, COME IN 
ONE STAGE AND ENSURE THAT PAYMENTS ON ANY DEBT THAT REMAINS WILL 
BEGIN ONLY AFTER A SUITABLE GRACE PERIOD DURING WHICH IRAQ CAN 
FOCUS ALL ITS ENERGIES AND RESOURCES ON THE URGENT TASK OF 
ECONOMIC RECONSTRUCTION.  RECOGNIZING THAT MUCH OF IRAQ'S DEBT IS 
HELD BY NON-PARIS CLUB CREDITORS, WE WILL INSIST THAT THE EFFORTS 
OF PARIS CLUB CREDITORS ARE FULLY MATCHED BY OTHERS SO THAT 
COMPARABLE TREATMENT IS ASSURED. 
 
WE ARE NOT SURPRISED BY THE RESULTS OF THE RESULTS OF THE IMF'S 
DEBT SUSTAINABILITY ANALYSIS.  IRAQ'S DEBT BURDEN WAS PRODUCED BY 
MORE THAN TWO DECADES OF DISASTROUS DECISIONS AND ACTIONS BY THE 
SADDAM HUSSEIN REGIME -- COSTLY WARS, MISGUIDED POLICIES THAT LED 
TO INTERNATIONAL SANCTIONS AGAINST IRAQ AND ISOLATION OF IRAQ 
FROM THE INTERNATIONAL COMMUNITY, SEVERE ECONOMIC MISMANAGEMENT, 
AND THEFT OF IRAQ'S PRECIOUS RESOURCES THAT BENEFITED ONLY SMALL 
SEGMENT OF ITS POPULATION.  IN THE PAST TWO DECADES, LIVING 
STANDARDS FOR THE LARGE MAJORITY OF IRAQIS HAVE FALLEN 
DRAMATICALLY. 
 
IRAQ FACES ENORMOUS CHALLENGES IN REBUILDING ITS ECONOMY.  VITAL 
INFRASTRUCTURE MUST BE REBUILT, OFTEN FROM SCRATCH.  LIVING 
CONDITIONS AND SOCIAL INDICATORS MUST BE IMPROVED.  KEY ECONOMIC 
REFORMS WILL BE NEEDED.  IRAQ'S RECONSTRUCTION, INCLUDING THE OIL 
SECTOR, WILL REQUIRE A LONG PERIOD OF TIME, AND WILL OCCUR 
AGAINST A BACKDROP OF NEWLY ESTABLISHED GOVERNMENTS THAT ARE 
LIKELY TO FACE SUBSTANTIAL SECURITY AND POLITICAL CHALLENGES FOR 
THE FORESEEABLE FUTURE.  DESPITE IRAQ'S PETROLEUM RESOURCES, 
AFTER THREE WARS AND 13 YEARS OF INTERNATIONAL SANCTIONS, WE WILL 
REQUIRE SUBSTANTIAL NEW INVESTMENT, OVER MANY YEARS, TO RESTORE 
AND MAINTAIN THE COUNTRY'S DILAPIDATED OIL INFRASTRUCTURE, MUCH 
LESS TO EXPAND PRODUCTION CAPACITY. 
 
WE BELIEVE THAT IRAQ'S RECONSTRUCTION DEPENDS NOT ONLY ON 
SUBSTANTIAL DEBT REDUCTION BUT ALSO WILL NEED TO BE REINFORCED BY 
A POLICY PROGRAM BASED ON SOUND ECONOMIC PRINCIPLES: 
MACROECONOMIC POLICIES, INCLUDING FISCAL DISCIPLINE AND SOUND 
MONETARY POLICY BASED ON PRICE STABILITY THAT ENCOURAGE PRIVATE 
INVESTMENT, STRUCTURAL REFORMS THAT IMPROVE ECONOMIC EFFICIENCY, 
TRADE AND FINANCIAL POLICIES THAT ENCOURAGE PRIVATE INVESTMENT 
AND REINTEGRATE OUR ECONOMY WITH THE REST OF THE WORLD, OPENNESS 
AND TRANSPARENCY TO HELP BUILD CONFIDENCE AND REINFORCE POLICY 
DISCIPLINE, AND OVERALL POLICIES THAT ADDRESS THE POOREST 
SEGMENTS OF IRAQ'S POPULATIONS. 
 
IN CLOSING, WE SEEK THE SUPPORT OF YOUR GOVERNN1ENT FOR THE GOALS 
SET FORTH IN THIS LETTER.  AS THE PARIS CLUB PROCESS MOVES 
FORWARD AND OUR DISCUSSIONS WITH THE IMF PROCEED ON A RAPID 
BASIS, WE LOOK FORWARD TO BILATERAL DISCUSSIONS WITH YOU AS A 
MEANS FOR ACCELERATING FORMATIONS OF AN INTERNATIONAL CONSENSUS 
WITH RESPECT TO TREATMENT OF OUR EXTERNAL DEBT. 
WE LOOK FORWARD TO WORKING CLOSELY AND COOPERATIVELY WITH YOU IN 
OUR FUTURE DISCUSSIONS. 
 
SINCERELY, 
(SIGNED) 
ADIL ABDU MAHDI 
MINISTER OF FINANCE 
REPUBLIC OF IRAQ 
 
(SIGNED) 
SINAN AL-SHABIBI 
GOVERNOR, CENTRAL BANK OF IRAQ 
REPUBLIC OF IRAQ 
 
END TEXT. 
 
3. (U) MINIMIZE CONSIDERED 
 
ALBRIGHT