Editor: Mr. Silva, would you give our readers something of your background and experience?
Silva: I graduated from the United States Naval Academy in 1983 and served for six years in the fleet as a Radar Intercept Officer on board F-14 Tomcats. In 1989 I left the Navy to attend Columbia Law School. Upon graduation in 1992, I joined the Federal Reserve Bank of New York and have been there ever since.
Editor: Would you describe your role at the Federal Reserve Bank of New York?
Silva: I am a Vice President and team leader in the Financial Services Division of the Legal Group. My primary responsibility is to provide legal support for the New York Fed's account relationships with foreign central banks and governments. The New York Fed has account relationships with almost every central bank in the world and currently maintains over $1 trillion in foreign assets in custody. My secondary responsibility is to provide legal support for our Cash Services staff, especially an international cash depot system through which the New York Fed distributes U.S. currency worldwide. About $600 billion is in circulation, and two-thirds of that amount circulates outside the U.S.
Editor: Would you describe the mission of the CPA banking team?
Silva: The CPA banking team does not have a formal mission statement. If it did, it would probably be something like: "Advise and assist the Iraqi people in establishing a sound market-oriented banking system." In furtherance of that mission, banking team members have been working with the Central Bank of Iraq, the Ministry of Finance, the state-owned banks and the private banks, advising them on modern banking practices, currency distribution, balance sheet reconstruction, foreign exchange, monetary policy, payment systems, bank supervision, and so on.
Editor: How did you come to serve as an advisor to the Central Bank of Iraq?
Silva: The Foreign Affairs Group of the New York Fed started providing technical advice to the Coalition Provisional Authority from New York shortly after the invasion. During the summer of 2003, the CPA began to request on-site technical assistance. Concurrently, as part of my foreign central bank responsibilities, I had been working with the CPA to establish the UN-mandated Development Fund for Iraq on the books of the New York Fed, into which all of Iraq's oil proceeds and recovered property from outside of Iraq flow. It became apparent to me that the CPA was short on central banking expertise, and I indicated to my management that I would be willing to go to Iraq. The CPA had in fact requested New York Fed technical assistance and, after undergoing processing and training at the Pentagon and in Kuwait, I found myself in Baghdad in early October.
Editor: What was the security situation like when you arrived in Baghdad?
Silva: Immediately after the invasion, CPA advisors could travel around Baghdad without security escorts and frequently had dinner with their Iraqi counterparts in local restaurants. However, by the time I arrived, the security situation in Baghdad had deteriorated considerably. CPA advisors generally only moved around in armored vehicles with body guards and wearing body armor. During my time in Baghdad, hostile elements also began to mortar and rocket the "Green Zone," which is the so-called secure area where the CPA maintains its headquarters. The security situation definitely complicated our work.
Editor: Please describe the challenges you faced at the Central Bank of Iraq.
Silva: There were many challenges. In connection with the issuance of a new currency, for example, the CPA had to move some six trillion dinars to 325 distribution points throughout the country. The convoys that handled this movement were frequent targets of attack. Another significant challenge was keeping track of the new currency that had been issued and the old currency that had been turned in. In a country without computers or even reliable phone service, keeping track of such a large operation was very challenging, but we were successful.
In connection with the selection of foreign banks for Iraqi banking licenses, fortunately the only real challenge was picking among a number of very strong proposals. We wound up awarding the first three licenses to HSBC, Standard Charter Bank and the National Bank of Kuwait.
The development of a monetary policy was, and continues to be, a daunting task. Reliable economic data - even on things as basic as consumer prices - is in short supply. The CPA banking team is making a major effort to train the Iraqis on developing reliable data. Attempting to establish monetary policy in the absence of economic data is like flying blind. Another significant challenge is that there are no real monetary policy tools. There is no secondary market in Iraqi governmental securities, which is the primary mechanism for monetary policy implementation here in the U.S. At the moment, the closest thing Iraq has to a monetary policy tool is the daily auction of dollars for dinars that the Central Bank conducts. With respect to the latter, we do take comfort in the fact that the Iraqi dinar appears to be gradually appreciating in value.
Another challenge is the operation of the Development Fund for Iraq ("DFI") and overseeing its eventual transfer to Iraqi control. The DFI was mandated by a UN Security Council resolution, as I mentioned, for the purpose of receiving all of Iraq's frozen assets from around the world, as well as its future oil proceeds, for use in the development of the country. This fund is to be maintained by the Central Bank of Iraq, and the fund's main dollar account is here at the New York Fed. To date, more than $8 billion in Iraqi oil proceeds has come into that account. Under international law, the fund is currently managed by Ambassador Bremer, but his staff and the banking team are is in the process of training Central Bank of Iraq personnel to assume control in connection with the restoration of sovereignty to Iraq. This effort is greatly complicated by the absence of reliable methods of secure communication, like SWIFT.
The development of credit facilities in Iraq is another significant challenge for two reasons. First, there is little demand for credit in the country. People are not inclined to either make or obtain loans in a place that is essentially a war zone. In addition, historically lending in Iraq has been based solely on real estate collateral, typically for 30% or less of the value of that collateral. Lending based on a cash flow analysis is something new to the Iraqis, and the CPA banking team has been busy getting the Iraqis comfortable with it. The banking team believes it is important to broaden access to credit in Iraq in order to invigorate the Iraqi economy.
At the moment, the most promising aspect of the Iraqi banking system is the private banks, notwithstanding the fact they hold only 10% of the country's deposits. The private banks show considerably more entrepreneurial spirit than the two big state-owned banks, Rafidain and Rasheed, which hold 90% of deposits. The private banks took the lead in establishing correspondent accounts outside of the country and in issuing letters of credit to facilitate imports. They have also attracted foreign investors, including the sale of 50% of an Iraqi bank for several times book value, which indicates that at least some of the private banks have significant potential value. Many banking team members believe that, because of the inertia and lack of competitiveness that grip the state-owned banks, the private banks are likely to give the state-owned banks a real run for their money.
Editor: Would you summarize the accomplishments of the CPA banking team during your time in Iraq?
Silva: While I was in Iraq, the CPA banking team achieved a number of things. We participated in the issuance of the new dinar. We established a daily dollar/dinar auction at the Central Bank. We assisted with drafting and passing of the new Central Bank of Iraq governing statute. We reconstructed the central banks's balance sheet. We restarted the check clearing system. We handled the licensing of foreign banks in Iraq. We established a dialogue with the International Monetary Fund on behalf of Iraq, and we developed a strategy to deal with the country's external debt.
Editor: What remains to be done?
Silva: The most immediate need is to expand the check clearing system and establish an electronic payment system. At the moment almost all economic transactions in Iraq are accomplished with bags and bags of cash. In addition, there is a need to draft and pass an anti-money laundering law, to draft and issue regulations under the new statutes, and to train bank examiners. A longer term, but perhaps most important, need is to reconcile and resolve Iraq's $120 billion in external debt so that it can regain access to international capital markets.
Editor: What about the future? What is necessary to bring stability to the country?
Silva: In my opinion, in order to achieve stability, the U.S. has one thing that it absolutely has to do, and the Iraqis have one thing that they absolutely have to do. The critical task for the U.S. is to provide a secure environment. By that I mean we have to prevent foreign terrorists from entering Iraq in numbers large enough to destabilize society, prevent Saddam loyalists and Ba'athists from becoming sufficiently organized and well armed to terrorize the population on a large scale, and prevent religious and tribal militia from building up to the point where they are capable of organized, coordinated attacks as opposed to low intensity harassment of Coalition forces and opposing militia. The critical task for the Iraqis is to learn to compromise with each other over political power, religion, and resources. Neither task is going to be easy, but unless both are accomplished stability is not going to be achieved.
Editor: What about the handing over of sovereignty? Is there a chance that everything we have attempted to build in Iraq during the past year will be lost?
Silva: Absolutely. I was present when Ambassador Bremer announced the June 30 target date for returning sovereignty to the Iraqis. I had then and continue to have reservations as to whether that is a realistic date. However, if the U.S. restores and maintains security, and if the Iraqis learn to compromise with each other, Iraq has every possibility of joining Germany, Japan, and South Korea as countries that were once occupied by the U.S. and went on to successfully build a civil society, a strong and prosperous economy, and democratic institutions. Such an Iraq would be, in all probability, less democratic, more religious, and more chaotic than the U.S. might like, but it should still be more democratic, secular, and stable than other countries in the region and serve as a compelling example of a moderate, successful, and peaceful Arab society. That is worth staying the course for in Iraq.