New York, Asharq Al-Awsat- Iraqi Central Bank Governor Dr Sinan Al-Shabibi talks to Asharq Al-Awsat regarding the numerous problems and difficulties facing the Iraqi economy today, including; the national budget, inflation and Iraq’s efforts in reducing the national debt.

The following is the full text of the interview:

(Asharq Al-Awsat) The Iraqi Government has allocated for this year a budget of 41 billion dollars. In addition to this budget, there are 21 billion dollars of currency reserves. After more than six months, it seems that the government expenditure is invisible, as the public services sector still suffers from huge paralysis, especially in the fields of electricity and water. How do you explain the large volume of the budget, and the lack of expenditure on public services?

(Al-Shabibi) This question has many aspects. Certainly the budget is ambitious, and when the government ratified this huge budget it intended to implement well the expenditure of this budget. Also I consider that the Finance Ministry is very careful in monitoring the implementation of the expenditure on the projects in coordination with the Planning Ministry. It seems clear that there are stumbling blocks facing the implementation because of the security situation, which contributes to the hindering of conveying the intermediary goods at the right time for the implementation of the public services projects. Sometimes there are other reasons stemming from the estimates of prices, which are always liable to change. It seems that many times the implementation does not take place in the way we were hoping for as a result of outside factors, which we call in the language of economics “outside shocks.” As a result of our discussions with the government, we consider that there is commitment to the implementation of a major part of the budget expenditure, despite the security conditions and the outside factors that stem from turning the Iraqi economy into an open economy.

(Asharq Al-Awsat) In the first report presented by the government to the meeting of the International Pledge to Iraq member-countries, which was held last Friday at the UN headquarters, there is talk about progress. However, the prevailing impression, which was confirmed in the report, is that there are major obstacles and challenges. Can you talk to us about the problems and the difficulties?

(Al-Shabibi) Certainly there are many problems and difficulties that the Iraqi economy faces. It is necessary to conduct an assessment and estimation of the many and various major needs of the Iraqi economy in all sectors. However, this is countered by the lack of conditions suitable for implementing the plans to improve the economy. For instance, we notice that there is some progress in the non-production sectors, which sometimes are not affected by the security conditions, such as the sector of school construction. These sectors are progressing well without any problems. However, the other sectors, which are production ones, sometimes face many stumbling blocks, security difficulties, and other circumstances that hinder the implementation of their plans. The government hopes and aspires to make the implementation ratio of this budget higher than that of the previous years, especially the investment budget.

(Asharq Al-Awsat) In your capacity as the governor of the Central Bank, what is your reading of the fiscal policy of the government while we witness a high degree of spread of financial and administrative corruption, in addition to the large thefts, in which senior government officials have been involved?

(Al-Shabibi) The problem of administrative and financial corruption is widespread in the developing countries, and even in the developed ones. Of course there are many violations that take place today in Iraq, and they differ from one administration to another; however, there is a serious tendency to deal with these loopholes and violations. We in the Central Bank monitor the government’s fiscal policy well and closely, because any fiscal expansion without production expansion could lead to imbalances. The important point is not spending the money, but the way it is spent on the production sector, because spending on its own leads to inflation; however, if spending is linked to production, it will not lead to inflation. What concerns us is to keep the economy of the country on a moderate inflation course. What we insist upon in our fiscal policy is not to have the imbalances that lead to inflation, which we consider to be a factor of social destruction. This is what Iraq faces during the current stage. Let me give you an example, if you were to advance by10 percent, but you had 20 percent inflation, this would mean that you have not achieved any progress. What we pursue is to coordinate and balance the fiscal policy in order to make sure that inflation will not increase as a result of expenditure. As inflation is the result of internal and external factors, in this case – which is not an easy process – you have to have the capability and determination to neutralize a collection of external and internal factors that lead to inflation. You have to make sure that the inflation rate does not exceed the growth rate, because inflation also affects the citizen’s purchasing power. We in the Central Bank are keen on linking expenditure to production, because theft is expenditure that does not produce.

(Asharq Al-Awsat) What attracts my attention in the Government report is that the governorates and ministries are given the power to sign contracts whose value range between 5 and 20 million dollars without consulting the higher authorities to check such contracts. Do not these powers seem to some extent premature when the state suffers from administrative and financial corruption?

(Al-Shabibi) Definitely these options and missions are difficult, especially in a country such as Iraq that suffers from an uneasy and complicated situation. The existence of administrative and financial corruption does not mean abandoning the development projects. What is important is to keep the productive spending. We consider it extremely vital to continue with the necessary expenditure, but to have supervision and transparency. Corruption should not be a hindrance against productive spending that leads to growth, and to reducing the rate of administrative and financial corruption. We admit that corruption is evil and it should be fought; however, at the same time we demand that the government preserves development, and that the expenditure should be transparent, because this transparency is bound to put an end to corruption.

(Asharq Al-Awsat) What is the rate of inflation now in Iraq?

(Al-Shabibi) The rate of inflation now in Iraq is around 41percent as a whole. We in the Central Bank are interested in the basic inflation, which is not linked to the temporary crises, such as the fuel crisis, the transportation crisis, and other temporary ones, because such crises change because of external circumstances. On the other hand, the basic inflation is linked to the prices of foodstuffs, furniture, and basic goods. The rate of the basic inflation now is about 19 percent, and we hope to bring it down to 8percent.

(Asharq Al-Awsat) What about the rate of exchange, and the value of the domestic currency, the Iraqi dinar? Has its value leaped forward?

(Al-Shabibi) In fact there is no leap forward in the value of the domestic currency. We are keen to monitor any changes in the value of the currency. In the Central Bank was are keen to make any changes bearable, and not to have strong fluctuations as it used to happen during the previous era when the value of the currency used to change from 1,500 dinars to the dollar to 3,000 dinars to the dollar within a few days. In fact we have been keen to have stability in the rate of exchange, and according to all the international financial institutions we have succeeded in achieving this. The domestic currency has not witnessed any major fluctuations in the exchange rate since 2003. We are committed to this policy, and now we have good reserves to prevent the occurrence of such fluctuations.

(Asharq Al-Awsat) The Iraqi Government has been trying, and is still trying to cancel the foreign debts that Iraq owes. What have you reached in this pursuit?

(Al-Shabibi) We have reached good agreements with a number of countries to cancel or reduce the debts. The fact, as you know, is that Iraqis one of the major indebted countries in the world. The volume of the Iraqi debts was some 120 billion dollars, in addition to the accrued interest, because Iraq could not pay back anything. We have dealt with this problem by going to the Paris Club, and we were granted a reduction of 80 percent of these debts. Now the criterion of canceling 80 percent is applied to the debts that Iraq owes; this is what has been agreed by the Paris Club member-governments. We hope that the same criterion will be applied to the other countries which are not members of the Paris Club. What we are doing now is negotiating with these countries in order to reduce the debts by 80 percent; the agreement with the Paris Club is the basis we follow in negotiating with the other countries. This applies even to the private companies; approximately 70 billion dollars have been cancelled from the debts owed by Iraq. The rest of these debts are debts to the Arab countries, specifically the Gulf countries. Saudi Arabia has agreed to reduce the debts owed to it be 80 percent. The other countries are showing amicable stances, and we hope to reach agreement with each of them through bilateral dialogue and negotiation. If we reach agreements with the other Arab countries, we will be able to cancel 100 billion dollars of the debts.

(Asharq Al-Awsat) What about the commercial contracts and the oil contracts signed by the previous regime with France and Russia? Are they still valid? How do you deal with them?

(Al-Shabibi) This is an issue that concerns the Finance and Oil Ministries. This issue is the responsibility of these two ministries, and I do not want to talk about it. However, I think that any contracts to be signed today by Iraq ought to have good conditions that suit the country; if the previous contacts satisfy these conditions, these contracts could be preserved.

(Asharq Al-Awsat) Prime Minister Nuri al-Maliki addressed a memorandum to the UN Security Council requesting a review of the mechanism and work of the UNCC with regard to the compensations for the damage of the second Gulf War, bearing in mind that the compensations paid so far are approximately 23 billion dollars. Have you raised this issue with the United States and the members of the UN Security Council in order to end the work of the UNCC, which is still working until now?

(Al-Shabibi) Naturally there are efforts by the government to put an end to the work of the UNCC. With regard to these compensations, we consider that the issues of their payment and the period during which they should be paid ought to be studied, and solutions ought to be reached for them. The fact is that Iraq now is in a difficult situation if it is to keep paying these compensations while it adheres to a number of commitments, and while it also wants to grow and progress like all the countries of the world. We hope to be able to resolve this issue through negotiations.

(Asharq Al-Awsat) The UNCC operated on the basis of allocating 5percent of the revenues of the oil, which Iraq is allowed to sell according to the Oil-for-Food Program, for the payment of compensations. Now, this program has ended, and the economic and trade sanctions imposed on Iraq have been cancelled; how is such percentage extracted now to pay the compensations?

(Al-Shabibi) Now, if this issue is raised, then it could be negotiated on different bases; for instance the funds allocated for compensations could be transferred to investment or commercial projects within the trade relations and the joint interests with the countries that still demand compensations. What we hope and what we pursue is that the Iraq we are establishing is different from the old Iraq; Iraq will not engage in wars, will not every now-and-then raise its weapons against another country to invade it or interfere in its internal affairs, and will find the internal wars it is now fighting enough for it. What we want is to change the entire previous legacy into better relations with the neighboring countries. This means that we want to turn the relations, which are based now on debts and compensations, into trade relations, investment relations, and good financial relations. Our concern now is to reach long-term and not short-term agreements, and to turn the debt relations into joint financial ones that are in the interest of all. Iraq, which is now in the stage of building and reconstruction, is a broken country. Iraq needs extensive long-term trade and financial relations, not only with the west, but also with the neighboring countries. Our priority now is to get rid of the international commitments, which were imposed upon Iraq during the era of the previous regime, with the minimum possible cost.

(Asharq Al-Awsat) The International Pledge to Iraq requires the government to adhere to a collection of political and economic commitments before presenting international aid to Iraq. However, it seems that the government is slow in implementing these commitments. What is the use of participating in these forums is the government cannot fulfill its commitments?

(Al-Shabibi) The International Pledge is a project to give international aid to Iraq in exchange for committing itself to follow specific policies, and on condition that nothing will be given without something being achieved on the ground. Our mission is to fulfill these commitments as soon as possible and with the minimum possible cost. There are commitments that are definitely in the interest of Iraq, such as developing the administration, developing the banking sector, and other commitments that are in our interest.

(Asharq Al-Awsat) Has there been any development in the banking sector during the past three years?

(Al-Shabibi) We can say that the banking sector now is proceeding well. The private sector constitutes the majority of the banking sector despite its few and small deposits. There are principal banks, such as the Al-Rashid Bank and the Al-Rafidayn Bank that need development and restructuring, despite the fact that they are leading banks. Now, we are working to develop and restructure them financially and administratively in order to make them open up to the world, to follow the competition laws, and to operate according to the market methods. This issue is definitely linked to the security and political situation. Please do not forget that many of the government banks, despite the fact that they are leading banks, are burdened with many commitments in which the previous regime involved them. These banks also need to get rid of these commitments in order to develop their operations and perform their duties in a good way. For instance, the Al-Rafidayn Bank suffers from crises because of its many debts; it is capable of entering the world markets, but first it has to get rid of its previous commitments and of the debts that stem from them. I believe that the financial and banking sector, with the help of the international institutions, is one of the sectors that indeed has achieved real development despite the circumstances in which Iraq lives.