US leaves Iraq running on empty
By Emad Mekay
WASHINGTON - A barrage of binding decrees passed during the United States occupation of Iraq, combined with a lack of resources, heavy debt and the continuing presence of a massive US force, provide clear evidence that the recent handover of authority to Iraqis does not equal real control over the economy.
Just before former US administrator L Paul Bremer left Iraq on June 28, he said that one of his biggest achievements was to transform Iraq into a market-based economy, citing lower tax rates and import duties, and more liberal foreign investment laws.
In May 2003, Bremer declared Iraq "open for business" and for the past 14 months the now defunct Coalition Provisional Authority (CPA) promoted major changes to the country's regulatory and legal frameworks, entered into long-term contracts and appointed oversight committees with multi-year terms. As a result, the country's economy looks set on a path that Iraqis will find hard - if not impossible - to alter.
A report by the Institute of Policy Studies estimated that Bremer had passed nearly 100 orders that, among other things, give US corporations "virtual free rein over the Iraqi economy while largely excluding Iraqis from a reconstruction effort which has failed to provide for their basic needs".
Iraqis have had little input into those changes imposed by the authority, the report said. Most of the benefits of the reconstruction contracts signed under the occupation also went to US companies that appear to have secured future maintenance and reconstruction contracts in massive, capital-intensive infrastructure projects.
Meanwhile, a recent report by the Open Society Institute's (OSI) program to monitor Iraq's reconstruction said that the US-controlled CPA was engaged in a last-minute spending spree, committing billions of dollars to "ill-conceived projects just before it dissolves", in an apparent attempt to pre-impose those deals on any future Iraqi government. The US-controlled Program Review Board, the body in charge of managing Iraq's finances, approved the expenditure of nearly US$2 billion in Iraqi funds for reconstruction projects in just a single meeting.
"With so much money available for cash give-aways, and so little planning on how the process will work, it will be all but impossible to avoid corruption and waste," said Svetlana Tsalik, director of the Iraq Revenue Watch at the OSI, which is chaired by leading US financier George Soros. She also said as a direct result of this last-minute spending, the new government is left with far less money to spend than the CPA, including the $20 billion collected for the Development Fund for Iraq (DFI), authorized by the United Nations Security Council last May to safeguard Iraq's oil revenues and other money, already earmarked by the CPA for government salaries and reconstruction costs.
The UN Security Council's latest resolution on Iraq, passed on June 8, requires the new government to satisfy all outstanding obligations against the DFI made before June 30, leaving the new interim Iraqi government with no choice but to honor the Program Review Board's questionable expenditures.
"All-in-all, the fund collected $20 billion and by the time the CPA leave, there will less than $3 billion," Tsalik said prior to the handover. "Two billion dollars were spent in one meeting recently by the coalition authority. So in one important sense, the government, even though it'll have formal control over its economy, it will have much less money to spend."
Although the new interim Iraqi government does have authority over its future oil revenues - estimated at $12 billion a year - its control is limited as a panel with members from the International Monetary Fund (IMF), the UN and the World Bank will still oversee the oil revenue fund. Iraqis will exert more control over the system, but there will still be checks on what they can do. Media reports state that most of the Iraqi oil ministry's foreign advisers, appointed by the US- led coalition, will be withdrawn. Only four advisers will remain, coordinating with remaining American troops and contractors.
Aside from oil money, the government can hope to raise revenue through collection of income and value-added taxes, as well as customs duties. Businesses and individuals will pay a flat 15% in annual income taxes.
In addition, Iraq has been left with a legacy of unaccountability. A damning new report by the British group Christian Aid, titled "Fueling Suspicion: The Coalition and Iraq's Oil Billions", charges that for the entire year the CPA oversaw Iraq's finances, it was impossible to determine with any accuracy precisely what it has done with the $20 billion of Iraq's own money, including its oil revenue and funds deposited in the DFI.
According to officials with Christian Aid, the CPA is in "flagrant breach of the UN Security Council resolution that gave the CPA control over the DFI on condition that its operations be independently audited". The auditor, KPMG, sharply criticized the CPA for the way it spent more than $11 billion in oil revenues and charged that the DFI's administration made it "open to fraudulent acts".
Meanwhile, Iraq Revenue Watch also says the occupation has left Iraqis burdened with the hundreds of US "experts and advisors" working in all of Iraq's 29 ministries as well as other government agencies. Those advisors, who mostly hail from US market institutions, wielded enormous influence over decisions taken before the nominal handover. They are expected to maintain their influence on future economic decisions.
"Under the coalition they were indeed very powerful and most of the decision-making within the ministries came from them," Tsalik said. "We know that these advisers will remain within the ministries but I think it's hard to say how much power they'll have. It may not be an official power but rather an unofficial one, stemming from the fact that the US will maintain some 140,000 soldiers in Iraq."
Iraqi control over the economy will also be diluted from another quarter after the handover. International financial institutions, which have often been used by Washington as a tool to channel its policies, will start working in the country soon - a move with implications that will further tighten the already snug noose around Iraq's financial freedom. The country's huge debts and its plans to take out more loans for reconstruction are likely to subjugate Iraq to further conditions by institutions such as the IMF and the World Bank, notorious for taking ownership from borrowing nations over their economies.
The World Bank said on Tuesday it recognized Iraq's new interim government as legitimate, a move that opens the door for new lending to the country. The World Bank's sister institution, the IMF, has previously signaled its willingness to resume lending in the second half of this year.
"Iraq will be very dependent on international aid," said Tsalik. "It also has a lot of debt and it remains to be seen whether that will be forgiven. So in such a needy country it may not have a lot of alternatives to saying 'yes' to the IMF and the World Bank."
Current estimates put Iraq's debt at around $120 billion. Members of the Paris Club, which includes 19 of the world's wealthiest nations, are owed roughly $40 billion - $21 billion in principal and the remainder in late interest. Non-Paris Club governments, chiefly the Arab Gulf States, and private creditors, hold the rest.
Juan Cole, an Iraq expert at the University of Michigan, sees limited sovereignty for the Iraqis from another perspective. He says the new US ambassador to Iraq, John Negroponte, will maintain control over some $18.3 billion in US aid to Iraq.
"The caretaker government is hedged around by American power," Cole wrote on his online blog Wednesday. "Negroponte will control $18 billion in US aid to Iraq. [US Defense Secretary Donald] Rumsfeld will go on controlling the US and coalition military. There isn't much space left for real Iraqi sovereignty in all that."
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