A Free Iraq Economy Is Outlined

Iraq lurched toward the global free-market economy Sunday, announcing a program to establish an era of investment-friendly capitalism that would tell the world that the occupied country is building “a strong foundation for the future,” Finance Minister Kamel Keylani said.

The centerpiece of the initiative, which comes after approximately three decades of state-run socialism, is to open all sectors of Iraq’s economy -- except oil -- to foreign investors. They would be allowed to own 100% of those operations and would enjoy low taxes and virtually no government-imposed restrictions, Keylani said in one of several speeches Sunday to groups attending the 2003 meetings of the International Monetary Fund and World Bank governors.

The minister, who was appointed by the governing council created under the U.S.-led coalition occupying Iraq, said that oil, which accounts for nearly all of Iraq’s potential revenue, will remain in the hands of Iraqis. That includes both exploration and production, according to Keylani and other Iraqi officials, who were in Dubai to also solicit loans or donations for their rebuilding effort.

The new development plan came as violence against American soldiers continued. Two Americans died in a mortar attack on Abu Ghraib prison and a third was killed in a roadside bombing. That brought the death toll in Iraq of U.S. military personnel to at least 303; more than 1,275 service members have been wounded since the war began March 20.

Cautioning that Iraq’s economy and infrastructure had been destroyed by ousted President Saddam Hussein and his Baath Party regime, Keylani told the assembled financial and political leaders that it could take years to turn things around in Iraq, even though the changes will begin immediately.

“I ask for patience, patience not just from Iraqis but from the international community,” Keylani said. “Iraq has suffered for a long time, and all of us want progress. But we must build a strong foundation. We cannot build an economy overnight.

“An extraordinary opportunity stands before us,” Keylani continued. “Not just for Iraq, but for the world.”

The legal weight of the proposals and the willingness of foreign banks and insurance companies to back ventures in Iraq remained unclear, particularly with the ongoing violence against U.S. troops and their allies, said Iraqis and U.S. Treasury Secretary John W. Snow.

The plan was the result of months of work by the 25-member Iraqi Governing Council as well as the Coalition Provisional Authority, the U.S.-led occupation administration, Iraqi and U.S. officials said.

Snow, who was in Dubai attending the IMF and World Bank meetings, called the plan an important step to attract foreign aid and investment capital needed to rebuild Iraq. Such a dramatic series of financial measures is needed to kick-start Iraq’s nearly bankrupt economic engine and to send a message to the world that the Persian Gulf nation is once again open for business, Snow told reporters after meeting with Keylani.

“It’s a very promising set of policies,” Snow said. “It is important because Iraq needs to be seen as laying the foundation for its own prosperity.”

The plan provides an unusual number of financial incentives for foreign investors, Iraqi and U.S. officials acknowledged, including a guarantee of “national treatment,” or parity with Iraqi citizens in all business matters. Many developing nations place locals above foreign investors, often requiring the latter to have local partners.

The plan will also allow full and immediate repatriation of profits -- unlike in many countries that require the funds to be kept locally for a time -- according to an overview of the plan provided by the Coalition Provisional Authority. On Oct. 15, Iraq will introduce a new national currency.

The proposals will also significantly slash taxes and tariffs, limiting both individual and corporate income taxes to a maximum of 15%. And although they will impose a flat reconstruction surcharge of 5% on all imports, there will be a wide array of exemptions, including humanitarian goods such as food, clothing and medical supplies.

Six foreign banks will be allowed to purchase up to 100% of local banks; two to be chosen on their ability to provide significant loans will be given fast-track contracts to set up shop immediately. Foreign investors will be prohibited from owning real estate but allowed to lease property for 40 years.

A senior U.S. official involved in the plan said American advisors were involved in the drafting of the plan but that the vast majority of the work was done by the Iraqis. The official said the Iraqis rejected some U.S. proposals, including one to screen potential investors to make sure they were fiscally sound and well intentioned.

One of the reasons for the Iraqis’ rejection, the senior U.S. official said, was to avoid scaring away potential investors. Despite Iraq’s continuing security problems, many investors will respond to the plan because they will see it as an opportunity to get in on the ground floor of the rebuilding of Iraq, the senior U.S. official said.

“Some businesses can tolerate greater uncertainty than others,” the official said. “You can make money in Iraq. You don’t need everything to be perfect to make money.”

In addition, it is important to establish a set of banking, tax and investment laws so companies can begin planning for more peaceful times, the official said.

Some attending the conferences were supportive of the plan, while others were skeptical. One European finance official said it could cause resentment among Iraqis because of its generosity toward foreign investors, but he also added that such friction would evaporate if the foreign influx of cash sparks a return to the days when Iraq was bustling. “I will not accept that it’s an excellent agreement, but it’s a step forward,” the finance official said. “I don’t know what the alternatives are, to tell you the truth.”

The finance official also said the plan was needed since without it, there would be little to appeal to investors in Iraq, especially in the short term when the country lacks basic amenities and security safeguards.

Keylani defended the dramatic actions, particularly the low tax rates and other incentives for investors, saying: “Our objective is simple ... to promote Iraqi economic growth and raise the living standards of all Iraqis as soon as possible.”

Times staff writer Mark Fineman in Baghdad contributed to this report.