Daily Star, Lebanon
June 11, 2003

Sinan M. Ridha al-Shabibi, consultant to the United Nations Conference on Trade and Development, recently made the following observations on Iraq’s debt in a presentation to the Middle East Institute in Washington:

Debt accumulation: One of the reasons why debt is an impediment to Iraq’s successful recovery is the likelihood that Iraq may accumulate debt beyond its capacity to repay. Any increase in output is likely to go to debt service ­ any increase in output and exports is an increase in debt service capacity. Contrariwise, any debt reduction is likely to increase output via investment and eventually further growth ­ a reduction in creditor tax, as it were.

Debt rescheduling: An effective strategy to deal with debt accumulation must be comprehensive, i.e., broader than mere debt rescheduling. True debt rescheduling may give some breathing space: Ultimately, growth will depend on the terms of that rescheduling. Debt reduction or swaps will have a more positive effect than other measures. Overall, what is needed is to make the debt sustainable, i.e., its payment should not affect growth opportunities and social conditions. Indeed, I think Iraq has a case for forgiveness. The latest G-8 summit (Deauville Communique) has recommended changing the rules of Paris club “to include in exceptional cases non-HIPC” countries. Iraq’s exceptional case derives from the sanctions and wars and poverty which it has suffered.

Bilateral debt relations: Iraq would do best to negotiate bilaterally with its Gulf Arab creditors, emphasizing the debt for investment potential. The Gulf Arab states are not members of the Paris club. A deal with those countries could well facilitate Iraq’s case in the Paris club due to the fact that this club requires some degree of comparable treatment from other creditors. New relations will have to be built with the Gulf states, which could include investment opportunities for the Gulf’s private sector.

Negotiation experience: Dealing with the Paris club and other multilateral fora has some advantages. This approach will expose Iraqi officials to the method of working of those institutions and increase their capacity to negotiate, experience which members of any new Iraqi government will need ­ nor should Iraq suffer further just because any inexperienced Iraqi official should forgo a favorable bilateral deal.

Capacity-building: The UN can play a role in capacity-building. There are many technical cooperation programs and projects that increase the negotiation skills, management capabilities, leadership, and other components of capacity-building. The aforementioned should be combined with measures to free up capital, e.g., release of assets and funds from escrow accounts.

Currency: If debt relief will provide some inflow of resources, the release of assets and funds from escrow accounts will provide for the additional resources needed to support the national currency and arrest inflationary pressures, thereby restoring macroeconomic stability. The recent increase of the value of the Iraqi dinar is related to the lifting of sanctions, the promise of debt relief, and other financial inflows ­ in addition to the fact that until recently, there was no money printing. The funding of the credit facility for foreign trade just announced will also require resources.