Approximately three months after Bush declared the ‘end of hostilities’ in Iraq, the country is on the brink of despair. With temperatures hovering at nearly 50 oven-dry degrees Celsius, much of Baghdad is still without reliable electricity, water or fuel. Fear of looting, carjacking and other previously unknown crimes is so intense that children are kept home from school. Few people have jobs to go to and many are living on the scraps of savings and US emergency payments.
Mail hasn’t been delivered in the city since March 20 and the telephone network barely works. The former regime’s paranoia ensured Iraq had no mobile phone network; those who have sufficient funds can shell out $700 for Thuraya satellite phones. Others drive through snarled traffic if they need to talk to someone.
‘None of us expected to deal with the impact of the looting,’ says David Nummy, a US Treasury Department official who has been advising the Iraqi Ministry of Finance. ‘Every single classic administrative mechanism necessary for a modern society was just wiped out.’
Iraq’s cash-only economy, too, is rubble. The dinar, with a big portrait of Saddam on the face, has been fluctuating wildly. The Central Bank has been looted of cash reserves. GDP is a fraction of what it was before the 1990 invasion of Kuwait and the former Baghdad Stock Exchange has been stripped to the bare walls, its offices and small trading floor now sheltering families with nowhere else to go.
Starting from zero
Occupation authorities say they have no reliable economic indicators to help them assess the situation. ‘But we don’t really need them to know how bad it is right now,’ says one, shaking his head.
Despite the gloom on the ground, no-one – Iraqi or foreign, financial expert or waylaid worker – believes the bust will last. They know this is a nation of hardworking, educated people blessed with abundant resources, from oil to wheat. But harvesting all that potential is going to take vision, patience and considerable foreign investment. It’s up to a team of US-led economic experts to put the structures in place that will create stability, growth and confidence.
One of the most important will be the reformed Baghdad Stock Exchange, which advisors say will meet, for the first time in Iraq’s history, international criteria for transparency and accountability. Like other stock exchanges in emerging economies, the BSE will not only give domestic issuers access to much needed capital, it will hopefully also raise Iraq’s profile among international investors as a place to put their money.
‘Mobilizing the capital is one of the critical issues facing Iraq generally,’ says Nummy, who has worked in Kosovo, Bosnia and Afghanistan. ‘Iraq is starting from a base of zero and they need every tool available to build a modern economy that includes modern banking, direct investment and appropriate legal structures.’
A new stock exchange – at least six months to a year away – is not the first priority in the rebuilding of Iraq. But when the best managed companies have exhausted the private funds, informal investment pools and bank loans that traditionally provide seed money here, the BSE should be ready, coalition advisors say.
They also say senior management of companies that list on the new exchange will likely be familiar with basic IR functions. Prior to the UN sanctions, much of Iraq’s business elite studied abroad and worked on Wall Street or in the City. Plus, listed companies will likely be partnered with large foreign companies which will help create a culture of accountability among Iraqi issuers.
It won’t be difficult to improve on the old exchange, which more closely resembled a fixed horse race than an open market. Open for only a few hours a day, three days a week, the BSE has since 1992 allowed just a handful of Iraqis the opportunity to gamble a few dinar on just over 100 companies, all of which relied on the former government for contracts or licenses.
The BSE was such a marginalized component of Iraq’s financial infrastructure that it didn’t even have computers. Investors would whisper their bids to 51 registered brokers who would record the trades in felt marker on a board posted at one end of the floor. Symbolic of the country’s dashed prosperity, traders used binoculars to search for gains.
Still, in 2002 the BSE was the single best performing stock exchange, according to Bloomberg, posting a 24 percent increase. Most of the gains were in the final quarter shortly after President Bush promised to go to war to find Iraq’s suspected chemical and biological weapons, and incidentally topple Saddam’s regime.
With 116 companies listed, the old exchange had a clubby feel. Shares could only climb or slide by 5 percent a day, with a week’s trades usually totaling less than $700,000. In the absence of a real economy, rumor alone moved the market.
Like many other Iraqi institutions, the BSE cannot be salvaged, so it will be reborn.
‘They are going to go from the 18th century to the 21st century rather quickly,’ says Thomas Wirges, a civilian reservist with the US army who is helping restore the BSE, the banking system and other financial institutions here. Computer networks, international telephone lines and a regulatory oversight system will be installed to give the exchange international legitimacy. Wirges, among the more optimistic advisors here, believes a commodities market can be up and running by the New Year, allowing investors to trade in oil, wheat and other Iraqi products that should be ready for export. Later, when circumstances permit, Iraq could also support a futures market, money market, stock market and even a secondary market for debt. But a lot has to happen first.
Laying the foundation
Besides the current infrastructure chaos, Iraq is in a legal vacuum that doesn’t stress transparency, accountability or any of the other basic protections today’s investors expect. In fact, in an effort to avoid pesky international scrutiny, foreign investors were banned from trading – a law that occupation lawyers are not reinstating.
In that sense, the long lag before relisting is something of a blessing, allowing new corporate management to sort out business plans and embrace the full disclosure the modern investing world requires.
The Coalition Provisional Authority, the civilian administration here, will soon begin drafting regulations, enforcement measures, filing requirements and other rules governing the rights of shareholders as well as appropriate backroom operations such as settlement and clearance. Before any firm can be listed on the new exchange, advisors say, it will be vetted.
For now, Iraqi companies are racing to take on the kinds of projects their country will require under reconstruction. Most of the major Pentagon and USAid contractors – including Kellogg Brown & Root and Bechtel Group – have publicly promised to subcontract to Iraqi businesses. Billions of dollars, dinar and euros have already been pledged toward Iraq’s rebuilding, the kind of investment that could give a well-run company an early leg up.
Iraq’s businessmen are a hard group to fathom these days. Many of them owed their lavish lifestyles to their place in the elite ranks of the Baath Party, a political machine with no rivals and few checks on power. Company officials were chauffeured in German sedans with tinted windows, lived in maze-like luxury behind high walls, and scheduled family vacations in countries that didn’t ask a lot of questions.
Many of the business elite are gone now, to France or Syria or Lebanon. Those that remain are keeping a very low profile. The civilian administrator, former US ambassador Paul Bremer, has recently dissolved and outlawed the Baath Party, and many are waiting to see what this means for high-ranking members of convenience.
US financial advisors say there is no reason the old publicly traded stocks cannot meet the new requirements and list again on the new and improved BSE. But meeting the new standards likely to be in place is going to be tough. To begin with, no-one has a handle on what happened to the assets of most listed companies during the three-week war and the months of looting.
Infrastructure was stripped clean or gutted for parts, factories and offices burned. ‘It would be irresponsible to allow Iraqi companies to trade without verifying their current assets, rather than what they had before the war,’ allows Nummy. But from these burning embers capitalism may yet flare.
Betsy Pisik, a long-time IR magazine contributor, has been in Baghdad writing for the Washington Times
