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C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002381 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 07/06/2016 
TAGS: ECON EFIN EINV EPET ETRD KBCT KCOR IZ
SUBJECT: SCENESETTER FOR SECRETARY OF COMMERCE VISIT TO IRAQ 
 
REF: A. BAGHDAD 2080 
 
     ¶B. BAGHDAD 2150 
     ¶C. BAGHDAD 1921 
     ¶D. BAGHDAD 2004 
 
Classified By: Charge d'Affaires David M. Satterfield for Reasons 1.4 ( 
b) and (d). 
 
¶1. (C) Summary.  Secretary of Commerce Gutierrez's visit to 
Iraq provides an opportunity to press the GOI for action on 
economic reform that would fundamentally change the 
investment climate (particularly in the hydrocarbon sector), 
open the country to international trade, and dismantle the 
remnants of the country's command economy.  We believe it 
would be helpful for you to have public and private messages 
to reinforce those goals.  The public message should 
emphasize that it is possible to do business and invest in 
Iraq, referencing recent legislative proposals, positive 
economic data, and success stories such as mobile 
communications.  The private message should be more pointed, 
utilizing your business experience to stress the need for 
Iraq to become competitive by attacking corruption, 
establishing a welcoming and stable investment regime, and 
stressing rule of law. 
 
¶2. (C) Summary continued.  The Secretary's visit comes at a 
time when Deputy Prime Minister Barham Saleh and Prime 
Minister Nuri al-Maliki are focusing on an economic 
revitalization plan and the launch of an International 
Compact to assist in reform and reconstruction.  PM Maliki 
tasked DPM Saleh to lead the GOI's efforts on economic 
matters.  A new Ministerial Economic Affairs Committee was 
established in June, under DPM Saleh's chairmanship, and is 
serving as the initial stop for key pieces of legislation and 
decision-making on economic matters.  We are working 
extensively with all of the economic ministries and hope that 
2006 will register an economic turnabout for Iraq.  End 
summary. 
 
---------------------------- 
OVERALL STATE OF THE ECONOMY 
---------------------------- 
 
¶3. (SBU) Iraq is starting to make concrete economic 
achievements.  The IMF decision on December 23 to approve a 
Stand-By Arrangement (SBA) for Iraq will permit a debt relief 
program that should forgive 80 percent of a $130 billion 
total debt by the end of 2007.  In addition to removing this 
crushing burden, the SBA also has prompted subsidy reductions 
for fuels.  Under the subsidy system, prices did not even 
cover the cost of production, corruption abounded, and 
resources were taken away from health, education, 
infrastructure development, and security.  As part of the 
SBA, Iraq has committed to fuel price increases so that, by 
the end of the 1st quarter of 2007, prices for refined 
products will approach or (in the case of premium gasoline) 
exceed prices of other Gulf states.  These price increases 
should remove much of the incentive for smuggling across the 
borders. 
 
¶4. (SBU) Many of Iraq's economic indicators are now in 
favorable territory.  We believe Iraq had a GDP growth in the 
3 percent range in 2005.  The IMF expected that to improve to 
better than 10 percent this year, but it is unclear to what 
extent ongoing security problems will undercut growth.  Iraq 
lacks the quantity and quality of macroeconomic numbers 
needed for accurate analysis of the economy, but we can see 
concrete evidence of increasing prosperity in new patterns of 
consumption and service use.  Importantly, the GOI appears to 
ready to move away from the dysfunctional centralized economy 
of the Saddam era. 
 
------------------- 
ARAB LEAGUE BOYCOTT 
------------------- 
 
¶5. (C) Embassy Baghdad engaged the government of former PM 
Jafari intensively but unsuccessfully to remove remnants of 
the Arab League Boycott (ALB).  Embassy already has raised 
this issue with PM Maliki, DPM Saleh, Foreign Minister Zebari 
(since the MFA houses the ALB Office), and the Minister of 
Trade.  When the Ambassador raised it with Maliki, the PM 
indicated that he was unaware of the issue (ref A).  We also 
discussed legal provisions of the ALB (Law No. 34 of 1956) 
with DPM Saleh during our discussions on the investment law. 
We pressed the DPM to include text in the draft investment 
law eliminating the ALB law.  However, Saleh emphasized that 
the GOI needs to come to an explicit decision separately on 
ALB and currently is dealing with the issue quietly on a 
case-by-case basis (ref B). 
 
¶6. (C) In our recent discussion with Minister of Trade 
 
BAGHDAD 00002381  002 OF 003 
 
 
al-Sudani, we emphasized that the ALB is costing Iraq 
millions of dollars in investment and thousands of jobs 
(septel).  Although the Minister of Trade said he was ready 
to assist and that the problem needs a creative solution, he 
did not provide specifics on what actions he would take. 
Foreign Minister Zebari also failed to raise concrete 
solutions when we raised it with him after the new GOI formed 
in May (ref C).  We plan to meet with the Minister of 
Industry over the next couple of days regarding the problems 
Pepsi is having in registering its trademark. 
 
-------------- 
INVESTMENT LAW 
-------------- 
 
¶7. (SBU) DPM Saleh is spearheading the GOI's efforts to pass 
a new investment law (ref B).  Embassy Baghdad provided 
suggestions to Saleh in the early drafting stages and was 
encouraged that many of these suggestions were incorporated 
in the revised text that went to the Economic Affairs 
Committee and Council of Ministers the third week of June. 
The law next will go to the Council of Representatives. 
Suggestions that DPM Saleh incorporated from our meetings 
include reducing the number of regulatory committees in the 
original draft and including provisions for international 
arbitration.  Among negative features, it would not permit 
foreign ownership of natural resources.  It also appears to 
prohibit investment projects unless expressly approved. 
Although a step forward, the draft law is not a sufficiently 
competitive investment regime, which we have told Saleh.  The 
GOI requires reinforcement that this new investment regime 
needs an expeditious and transparent process to attract 
foreign investors, who are looking to make long-term 
decisions. 
 
------------- 
WTO ACCESSION 
------------- 
 
¶8. (SBU) We met with Minister of Trade Abd al-Falah al-Sudani 
twice since he was appointed to press Iraq's progress towards 
WTO accession (ref D and septel).  Minister al-Sudani told us 
that the GOI is still in the process of reviewing candidates 
to be appointed as its WTO Ambassador.  Iraq also plans to 
submit the responses to its Foreign Trade Memorandum (FTM) 
"soon" but is working with other ministries to reach 
agreement on issues.  The Ministry of Trade is in need of a 
strong Director General (DG) in charge of its WTO Unit since 
the former DG left in July 2005.  Iraq needs to pick up the 
pace on WTO accession steps in order to have its first 
Working Party scheduled before the end of the year.  We have 
reinforced this point in our meetings with the Minister of 
Trade. 
 
------------------------ 
NATIONAL ENERGY STRATEGY 
------------------------ 
 
¶9. (SBU) Iraq needs a national energy strategy.  Fuel import 
liberalization legislation currently is pending approval by 
the Council of Representatives after recently having been 
approved by the Council of Ministers.  This is an important 
first step in opening the sector to private enterprise, 
undermining the black market, and improving fuel supply.  In 
addition, resolving significant center-regional issues by 
clarifying the division of authority over resource management 
and revenue distribution is necessary groundwork for 
effective hydrocarbon legislation.  A key element of a 
hydrocarbon law (or series of laws) would be a measure to 
attract the foreign direct investment (FDI) required for 
expansion in oil and gas production.  Although the structure 
and regulation of the hydrocarbon sector will be a critical 
aspect of national energy policy, the fact that oil export 
revenues account for upwards of 95 percent of the state 
budget while Iraq is at war should be taken carefully into 
account. 
 
---------------------------------- 
LOW QUOTIENT OF ECONOMIC EDUCATION 
---------------------------------- 
 
¶10. (SBU) Key decision-makers in the Council of 
Representatives are largely under-educated on economic 
issues.  This is the product of the isolation of Saddam's 
regime, its orientation towards socialist states of the 
former Soviet bloc, and the prevalence of a culture of 
dependency.  We have begun to educate key members and 
backbenchers of the Council of the Representatives on sound 
energy investment and development policies, subsidy reform, 
and the need for public integrity, openness, and transparency 
in the oil and gas sectors.  In addition, an expanded GOI 
public outreach campaign is needed to educate Iraqis on sound 
 
BAGHDAD 00002381  003 OF 003 
 
 
economic policies and the need for openness and transparency 
in oil production, reserves and government revenues, and the 
needs to fight corruption and to continue subsidy reductions. 
 Embassy is partnering with the Iraqis to create TV spots on 
economic reform issues and to build public affairs capacity 
within the various ministries, the Council of 
Representatives, and the Government Communications 
Directorate (the GOI's public affairs arm). 
 
------------------------------------------ 
CURRENT ECONOMIC DECISION-MAKING IN THE GOI 
------------------------------------------ 
 
¶11. (SBU) The GOI recently formed an Economic Affairs 
Committee, under the chair of DPM Barham Saleh.  It also 
includes the Ministers of Finance, Trade, Oil, Planning, and 
Development Cooperation, as well as the governor of the 
Central Bank, president of the Board of Supreme Audit, and an 
advisor to be appointed by the Prime Minister.  Many 
decisions on legislation and key economic issues are first 
being funneled to this committee before going to the full 
Council of Ministers and Council of Representatives. 
 
----- 
OTHER 
----- 
 
¶12. (SBU) As the first cabinet Secretary to visit Iraq from a 
USG economic agency, your trip is very significant.  In 
addition to raising policy issues that will help to increase 
foreign trade and investment opportunities, your visit has an 
important public outreach dimension to the Iraqi and American 
business sectors in Iraq.  Iraqi, American, and third-country 
traders and investors need to be encouraged to take advantage 
of the clear opportunities to do business, even in the 
current security environment.  In your public remarks, we 
hope you will encourage their business.  The new government 
has made a brave start, but its confidence has been shaken by 
the continuing security situation.  Directing the Iraqis' 
attention to neighboring examples such as Jordan or Turkey, 
where more open economic regimes have produced significantly 
higher levels of prosperity, would be useful. 
 
¶13.  (SBU) The GOI also should be complimented for its first 
steps to create a more liberal investment regime and to fight 
corruption.  The latter problem is endemic and is, along with 
the more general problem of weak governance, the most 
significant problem holding back foreign investment.  In your 
private comments, therefore, you should stress the need for 
rapid action on economic reform and anti-corruption measures. 
 There are legislative projects currently underway regarding 
fuel import liberalization, investment, and housing that all 
can be encouraged.  Your most fundamental argument should be 
that Iraq must create the conditions to attract investment. 
SATTERFIELD