Iraq's Odious Debts

Restructuring, not forgiveness

Financial Times editorial
April 15, 2003

In the euphoria of victory it is all too easy to say the wrong thing and equally easy to be misunderstood.

US officials appeared to fall into both traps last week when opining on Iraq’s debt. John Snow, the US Treasury secretary, raised expectations of debt cancellation when he told a television interviewer that “the people of Iraq shouldn’t be saddled with those debts incurred through the regime of the dictator who’s now gone”. However, his conclusion that “clearly some debt relief is in order” fell short of a call for forgiveness.

Not so Paul Wolfowitz, the deputy defence secretary. In remarks to a Senate committee, he urged Russia, Germany and France to “think about the very large debts that come from money that was lent to the dictator to buy weapons and to build palaces and to build instruments of repression”. He then suggested that the three nations – opponents of the war – “consider whether it might not be appropriate to forgive some or all of that debt”.

If Mr Snow’s remarks were muddling, those of Mr Wolfowitz were mischievous. Iraq’s debt problem is a serious issue. It should not get mixed up in political point-scoring.

Iraq’s external debt is anywhere between $62bn and $120bn (–à40bn and –à76bn) and so could be two to four times the country’s annual economic output. This is a heavy burden. But forgiveness, particularly if conditional on prior experience of despotism, would bring in its train great danger of moral hazard.

Iraq is, after all, a potentially wealthy country thanks to its oil reserves and its relatively well educated population. Its debt must therefore be considered in the context of a comprehensive strategy for restoring the Iraqi economy.

The first priority must be to meet the humanitarian needs of its people after a short, sharp war and decades of economic mismanagement and repression.

An audit of Iraq’s economic needs is urgently required. High priority must be given to getting Iraq and its oil back into the global trading system and to creating a sound domestic currency in place of the worthless dinar notes so comprehensively looted in recent days. Dealing with debt can follow.

Similar sequencing was successfully applied to the reconstruction of Germany after the second world war. The Marshall plan was announced in June 1947 and the creation of the D-Mark followed a year later, while the London agreement regulating Germany’s pre-and postwar debts was not signed until February 1953.

Fifty years on, the world moves faster. The weekend meetings of the Group of Seven leading industrial countries and the International Monetary Fund in Washington instructed the Paris Club of official creditor nations to be ready to deal with Iraq.

This is the right approach. Officially, forgiveness will not be on offer. Rescheduling on generous terms should be considered – but only if Baghdad has an effective, IMF-approved economic reconstruction programme.

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