July 2, 2003
Entrenched in Iraq, McPherson is challenged to quickly install a free market economy in the war-torn nation
On the grounds of Saddam Hussein’s mosquito-infested Republican Palace in Baghdad, M. Peter McPherson sits in a white mobile home and plots the creation of a free-market economy in Iraq.
The MSU president’s room, the size of a minivan, is crammed with duffel bags, flack vests, helmets and a roommate: former New York Police Commissioner Bernard Kerik. They share a bathroom with two other U.S. administrators of postwar Iraq, who sleep in the other half of the trailer.
For McPherson, 62, U.S. head of Iraqi economic reconstruction, the challenge looms as large as the 260-room palace in whose shadow he resides. He and members of his team say they don’t know even the most-basic facts, such as Iraq’s total debt, the amount of the Central Bank of Iraq’s reserves or the locations of Iraq’s foreign bank accounts.
And they’ve yet to decide the fate of the Iraqi dinar, which still bears Saddam Hussein’s face and which has doubled in value against the U.S. dollar since the war.
“You always wish you could move faster and get more things done,” says McPherson, a former U.S. Treasury deputy secretary and Bank of America Corp. executive.
McPherson doesn’t have much time or much help. He agreed to take his post with the U.S. Coalition Provisional Authority only until September, when he plans to return to MSU.
Working with a team of no more than 20 financial specialists, McPherson hopes in that time to pay civil servants’ salaries, open Iraq to money transfers from individuals abroad, restart the country’s banks, begin debt relief negotiations and provide export financing for Iraqi businesses.
McPherson’s goal is to restore the economy of a country that still lacks even the most-basic services: In early June, electricity in the capital city was on only half the day in most neighborhoods. Gasoline shortages have caused lines at service stations that stretch as long as a mile.
In southern cities such as Basra, which bore the brunt of the war, water shortages and contamination have led to outbreaks of cholera and other diseases. Lawlessness reigns, with daylight carjackings, bandits on the main highway to Jordan and attacks on U.S. troops.
Economy in Shambles
Even before the U.S. began bombing on March 20, Iraq’s $59-billion economy was in shambles, shrunk by a third after a decade of United Nations sanctions and weighed down by as much as $130 billion of debt. Hussein’s socialist government rationed food and subsidized staples: Gasoline sold for 5 cents a gallon.
The war and subsequent looting have ravaged Iraq’s financial infrastructure, turning the central bank into a charred shell and closing bank branches throughout the country.
The U.S. wants to bring the economy back to life while relying mainly on the private sector. “A free economy and a free people go hand in hand,” says L. Paul Bremer III, U.S. administrator of Iraq and McPherson’s boss. President George W. Bush named Bremer, a career diplomat and terrorism expert, to replace retired U.S. Army General Jay Garner on May 6, as Iraqis and U.S. and UN officials complained that the rebuilding process was stalled.
David Mulford, international development chairman of Credit Suisse First Boston and a former colleague of McPherson’s at the U.S. Treasury, says McPherson hasn’t given himself enough time to accomplish tasks of such magnitude. “Reforms such as a credible banking system, a central bank and a new currency are a tall order and not something that can be achieved in six months,” Mulford says.
In early June – more than a month after the war ended – American administrators said they didn’t yet have policies for establishing a market economy in Iraq. “I’m not sure exactly where we want to start,” says Bremer, who’s continuing the practice of distributing food rations to Iraqi families every month.
Still, McPherson has achieved some of his early goals. “They are well on their way to creating a functioning payroll system,” says Ed Royce, a Republican representative from California who visited Iraq recently with a congressional delegation. “The police are back on the beat, schools have reopened, civil servants are working in the utility sectors.”
Another break for the economy came on May 22, when the UN Security Council, under pressure from the U.S., lifted sanctions against Iraq. That means imports will no longer be restricted and that Iraq, with the world’s second-largest proven oil reserves, after Saudi Arabia’s, can now sell crude on the open market for the first time since 1990.
In 2002, Iraq exported about 500 million barrels of oil under the UN’s oil-for-food program; by next year, production could be twice that amount, U.S. Vice President Dick Cheney has said.
Even if progress is slow, McPherson, a balding man with gray hair and a white mustache who wears a golf shirt and chinos, says he’s relishing the challenge. He says he likes surrounding himself with experts in dozens of specialties – such as oil, telecommunications and law enforcement – as he immerses himself in the financial side of nation building.
“It is fun,” McPherson says, laughing, during an interview in a Republican Palace sitting room with marble floors and walls. “It’s extremely interesting and complicated.”
McPherson and his colleagues also have to win over Iraqis, who are not finding anything to enjoy about the reconstruction. At state-owned Rafidain Bank, Iraq’s biggest bank, Dawood Sakran, acting manager of the international division, says he’s frustrated as he watches bank employees work by the light of a kerosene lamp to restore some order to looted offices. “The Americans should help,” says Sakran, 63.
May Abdul Hameed, head of the central bank’s maintenance and building department, agrees. She says the Americans didn’t stop the looting and the fire that destroyed the 10-story central bank headquarters after Baghdad fell. “They have to take some responsibility,” she says. “They don’t even feel sorry for this.”
McPherson says his most immediate task is getting money into people’s hands to raise standards of living and to promote trade and development. “It’s important to put some resources into this economy for purposes of recovery as well as for the human needs of individuals,” McPherson says.
He’s planning to do this by paying Iraqi civil servants’ salaries, by establishing remittance services for individuals living abroad so they can send money to Iraqis and by providing credit for businesses to fund imports such as oil-pumping equipment and electricity generators that will help them modernize Iraqi industry.
Paying monthly salaries has been a logistical nightmare in a city in which all of the banks were closed for almost two months after the war. One day in late May, David Nummy, who reports to McPherson as special adviser to the Iraqi Finance Ministry, huddles with a handful of colleagues to plan the next day’s shipment of cash from the central bank for salary disbursements.
Armored cars from the Finance Ministry will take the money to two branches each of Rafidain Bank and Rasheed Bank, Iraq’s second-largest bank, which is also state-owned.
On a whiteboard in the makeshift finance office McPherson runs on a mezzanine of the palace, the team lists times and locations and goes over the details with an army civil affairs officer whose soldiers will provide security for the white trucks that could otherwise make easy targets for robbers.
By early June, McPherson’s team had paid more than $115 million in government salaries and pensions, in both dinars and U.S dollars. The dinars were recovered from vaults at the central bank, and about $550 million was flown in by the Pentagon from the U.S., taken from the $1.7 billion in Iraqi accounts – at U.S. banks such as Bank of New York Co., Citigroup Inc., J.P. Morgan Chase & Co. and Bank of America – that have been frozen since Iraq invaded Kuwait in 1990.
McPherson says the pay distribution is partly intended to bring state workers back to their offices by giving government ministries a task to accomplish.
Nummy, who was the Treasury’s assistant secretary of management in the 1989-93 George H.W. Bush administration, says his office directed each ministry to compile pay data and employee lists and turn them over to a three-person audit committee at the Finance Ministry.
Before the war, the government used 60 Rafidain and Rasheed branches in Baghdad alone for cash payment of salaries. Most of those branches have been looted and remain shut. The city’s most- active financial institutions now are storefront exchange shops and curbside stalls that operated before the war and now exchange stacks of dinars for dollars.
The Treasury team was planning ways to pay Iraqis even before the war began. When Treasury Secretary John Snow announced on April 25 that McPherson had been appointed financial coordinator, the Treasury’s Iraqi team had already been in operation for more than a month.
Assembled in Kuwait on March 18, the team moved to Baghdad on April 17 – eight days after Baghdad fell – along with American, British, Australian and other specialists in various fields who’ve taken over ministries such as justice, oil and trade.
McPherson spent two weeks getting briefings from Treasury officials in Washington, where the Treasury has changed its second-floor market trading room – which was used for monitoring the trading of government securities and currencies – into headquarters for its Iraq Financial Task Force.
Staffed by a dozen officials from the Treasury, the U.S. Agency for International Development, the State Department, the Office of the Comptroller of the Currency and the Federal Reserve, the room – nicknamed the Iraq Shack – has a TV carrying CNN; clocks showing the times in Baghdad, Tokyo, New York and London; and filing cabinets with combination locks on them. A framed Saddam dinar sits on one desk.
McPherson arrived on May 9 at the Republican Palace compound, a city within a city, with hospitals, schools, houses and office buildings, that stretches more than 5 kilometers (3 miles) along the Tigris River in central Baghdad.
Despite the main palace’s opulent trappings – a ballroom the size of a small basketball arena and a meeting room with murals of Iraqi rockets and Jerusalem’s Dome of the Rock – the conditions were similar to those in Florida’s Everglades swamp: There was no running water until a few days after McPherson arrived, there was no air conditioning in the 100-degree heat and there were swarms of mosquitoes that sucked on his arms and ankles.
After 12 days, McPherson moved into one of the air- conditioned trailers that the U.S. installed between the main palace building and the river, which are called “the villas” by jealous staff members and military personnel, most of whom still sweat through nights in the palace under mosquito netting.
“One comes to appreciate the little things in life,” McPherson says. “You get to the trailer, and you think, Life is good.”
He and Kerik – who served under New York Mayor Rudolph Giuliani and who’s now in charge of rebuilding Iraq’s police force and prisons – have air conditioning. Kerik, 47, gave McPherson a New York Police Department baseball hat. “We’ve become friends,” McPherson says. “There’s a lot of good people trying to do things here.”
McPherson has helped out countries in crisis before. After graduating from MSU in 1963, he joined the Peace Corps in Peru, where he helped distribute food to the poor in rural areas. He earned an MBA from Western Michigan University in 1967 and a law degree from American University Law School in 1969.
Bankers from a range of international banks including ING Groep NV, Standard Chartered Plc, Wachovia Corp., Bank of America, Citigroup and J.P. Morgan Chase all have talked with the Treasury’s Iraq office in Washington to offer information about the region’s financial system, Treasury officials there say.
McPherson’s Baghdad office sits in a mezzanine one flight above the palace’s marble sitting room. A row of five filing cabinets, labeled “Property of U.S. Government,” are the only things blocking his team from the constant stream of officials walking to and from meetings.
The Treasury aides sit side by side at tables with rows of laptops powered by generators brought in by the Americans for when Baghdad city electricity fails. Temperatures in the office are often higher than 100 degrees.
The district around the central bank has some of the city’s heaviest security, with a half dozen Baghdad blocks ringed by barbed wire and U.S. Army tanks. Looters have already gotten to much of what’s there, including the gutted Central Bank of Iraq building, now a hulk of twisted steel and flooded vaults. Streets are strewn with ledgers and checkbooks.
At the headquarters of the Rafidain and Rasheed banks, workers shovel ash, papers and broken glass out through the front doors.
“I’ve never seen where the banking system is destroyed and looted like this,” says McPherson’s deputy, George Mullinax, who’s special adviser to the Iraqi central bank. Mullinax, 71, is normally Treasury’s regional bank adviser based in Budapest, responsible for Africa, Eastern Europe, the Middle East and Southeast Asia.
Outside the central bank, Iraqi workers hook up blue hoses to pumps in the basement, which in late May was flooded with 3 feet of water. The aim is to get to the bank’s vaults to salvage whatever cash or other valuables survived the looting and the last-minute $1 billion withdrawal by members of Hussein’s government.
Among the finds, in early June, was the Treasure of Nimrud, a trove of Assyrian gold objects dating to the eighth and ninth centuries B.C., which had been feared stolen during looting after the fall of Baghdad.
Mullinax – wearing jeans, desert boots and a white golf shirt – watches Iraqis pumping the vaults and helping move whatever they can salvage to the old central bank headquarters next door. “I’d cry, but they just tighten up their belts and keep working,” Mullinax says.
With the central bank’s office space reduced, Mullinax says only 50-60 percent of the central bank’s 1,530 workers will be able to return to work in the near term. “We have a plan, but the Iraqis are really implementing it,” he says.
Some Iraqis want the U.S. to do more than just plan. Abdul Hameed, the central bank building maintenance chief, says the work shouldn’t all be left to Iraqis. It’s her first day back on the job since the war, and the tasks in front of her range from pumping the basement to tearing down what remains of the bank’s former headquarters.
“In the newspapers, they say they are helping to rebuild, but I see nothing,” Abdul Hameed says. Tears well in her eyes as she talks about the destruction of the offices she’s worked in since 1980 and the humiliation of having to wait at the barbed- wire barricade to get to work. “This is not the way to free people,” she says. “OK, our people damaged this, but we need someone to give us a hand.”
The next day, Nummy and Garner, the outgoing U.S. administrator, are on the streets of Baghdad tracking the shipment of salary payments. As Garner gets out of his armed motorcade in front of the central bank, a crowd behind the barbed wire recognizes him.
“Mr. Garner, when are you going to help us? We have no electricity,” one yells. Garner gets back in his truck.
Now that civil servants are being paid, McPherson is concentrating on delivering money to other individuals. He’s opening the country to remittances from abroad so that Iraqis living outside the country can wire money to their relatives at home – possibly through private foreign exchange services – although, McPherson says, details are still being worked out.
Such payments, which typically are made by foreign exchange shops instead of banks, were forbidden under UN and U.S. sanctions.
First Data Corp.’s Western Union is in talks with U.S. Treasury officials to provide money transfers to Iraq through the country’s postal service, local banks or other businesses, says Wendy Carver-Herbert, a Western Union spokeswoman. Western Union is the world’s largest money transfer network with 159,000 locations.
“Remittances have the advantage of going to people who need the money and spend it,” McPherson says. He declines to estimate how much individuals might send. “I think there will be a lot of remittances to Iraqis for many years,” he says.
The full banking system won’t reopen until after remittances resume, McPherson says. He says he’d like to see foreign and private Iraqi banks compete with the government’s Rafidain and Rasheed, which have a near monopoly over the country’s 17 Iraqi- owned private banks. “A banking system is the linkage that ties an economy together,” he says.
Other issues, such as what to do with the Iraqi dinar, might be left for an eventual Iraqi government to decide, he says. In the meantime, McPherson is working with Treasury officials in Washington to arrange lines of credit for private and state-owned Iraqi companies with several banks from the U.S. and other countries. McPherson declined to disclose the banks’ names.
Before heading back to Michigan, McPherson also wants to determine how much money Iraq owes and then start negotiations with creditors on forgiving portions of the debt. Many papers were lost in the looting, he says.
The Center for Strategic and International Studies has estimated that Iraq’s debts to commercial banks, nations and development agencies range from $62 billion to $130 billion.
McPherson declines to say where in the range of estimates the actual debt lies. “It is overwhelming,” he says. “Even the smallest number is crushing.”
Although chasing Hussein’s hidden bank accounts and finding caches of gold has grabbed headlines, McPherson says, those amounts are small compared with what a tough debt reduction campaign can yield for Iraq.
“If more could be found, that would be wonderful,” he says of hidden accounts, which Treasury workers based in Washington are trying to track. “But I don’t think that will solve the problem.”
The debt talks will eventually be handled by a new Iraqi government, McPherson says. In the meantime, he says, his experience in negotiating on behalf of Bank of America in the 1980s will help him deal with Iraq’s creditors. “These negotiations, on the creditor side, I’ve been in on,” he says. “Now I’m on the debtor side.”
McPherson is obviously relishing the challenge of nation building. “Putting this together is just such fun,” he says before riding off to the palace and his mobile home. To Iraqis who live outside the palace gates, the task doesn’t look half as amusing.