Arab News
July 28, 2003

LONDON — US troops may be suffering ongoing casualties and the law and order situation is still perilous, but at least in the macro-economic management of Iraq there is rapid progress.

What is fueling this is oil. The Americans unilaterally also have set up the Trade Bank of Iraq (TBI) with an authorized capital of $100 million to help facilitate the country’s imports and exports, and to help facilitate the transition of state-owned enterprises to greater privatization. The US-led Coalition Provisional Authority (CPA), instead of the newly-established transitional Iraqi Governing Council (IGC), is calling the shots. It is not clear who are the shareholders of TBI.

The rationale is that Iraqi banks will be too busy re-establishing basic banking services such as consumer finance and retail banking, and “have limited capacity for specialized trade services” and they lack “sufficient expertise and international links” to issue such trade finance basics as letters of credit (LCs), guarantees, trade acceptances, bills of exchange and so on. Never mind the fact that prior to the Kuwaiti invasion and subsequent UN sanctions, Iraq’s Rafidian Bank was one of the largest banks in the Middle East in terms of capital and assets.

Instead, the US administrators are outsourcing the operations and management of TBI and have invited bids from seven international banking consortiums, inevitably dominated by the banking majors.

In the oil sector, after the initial “to the victors, the spoils”, in at least some of the earlier contracts in terms of privileged access and prices, Iraq’s State Oil Marketing Organization (SOMO) has taken over the running of the crucial oil sector. US and UK companies dominated the first two oil tenders. The third one has also attracted Tupras of Turkey and Petrobras of Brazil. However, BP and Shell have reportedly signed agreements to lift 10 million barrels of Iraqi crude each from the Basra oil fields.

The Iraqi Oil Ministry is keen to boost production to 1.5 million barrels per day (bpd) by the autumn rising to 2.8 million bpd by end Q1 2004. The CPA has projected oil revenues to total $3.45 billion over the next six months (at about $20 per barrel) — which is about 90 percent of all revenues. This set against projected expenditures of $6.1 billion.

Financing the shortfall and delivering on basic services indeed is the daunting task for both the CPA and IGC. This shortfall will have to be financed through grants and loans, and capital reserves — Iraqi government assets frozen worldwide following its invasion of Kuwait. As such, the IGC’s first post-war budget in this respect is going to make interesting reading.

The danger is that Iraq, already heavily indebted, may be further burdened by debts and interest which even for an oil-rich state could take years to pay back. Iraq’s Paris Club debt is $21.018 billion. Standard Chartered Bank estimates Iraq’s “total debt to be between $60 billion to $130 billion, implying a public debt to GDP ratio of 230 percent to 485 percent” — by far the largest ratio for any country on earth. Iraq’s vast oil reserves — an estimated 112.5 billion barrels of known reserves and a further 200 billion barrels of possible reserves — may be seemingly good collateral, but in the short-to-medium term will not be enough to meet the pernicious cycle of debt and interest servicing. Unless there are some debt write-offs, at least the interest, Iraq will be facing the future with a major noose round its neck.

The vultures of opportunism have long began to circle over the skies of Iraq, salivating over those huge reserves of “black gold”. They will argue that Iraq is not a failed state, and in the words of the CPA boss Paul Bremer, “a rich country that is temporarily poor.” As such Iraq can and must honor its obligations, no matter how long they are caught in this debt spiral.

The scramble to provide consumer services is already on, with companies in neighboring countries in pole position.

Bahrain’s telecoms company Batelco, for instance, last week launched the first private mobile phone system in Baghdad, which it said would empower Iraqis as well as aid workers and foreign investors to communicate freely and easily.

Other companies such as MTC-Vodafone of Kuwait is supplying similar services in the Basra governorate. Perhaps, Turk Telekom is poised to supply similar services to the Kurdish-controlled areas in northern Iraq including Mosul.

As Iraq’s retail sector starts to find its feet, other foreign suppliers are already poised for a comeback. France’s Peugeot, for instance, through its Iraqi franchise is already in place for an imminent launch complete with maintenance, servicing, and spare parts back-up in Baghdad.

The economic management and tender process, however, seems to be reinforcing the perception of the balkanization of Iraq into enclaves. One must assume that the contracts for these services were signed with the CPA as opposed to the IGC. This begs the question as to the real authority of the IGC, and its efficacy once the CPA is dissolved, especially if a democratically-elected government takes longer than expected to materialize. It also questions the priorities of Iraqi reconstruction.

All the agencies and the analysts, including the World Bank, agree that Iraq’s economic transition will be very difficult and that the security situation, job creation, and tempering expectations remain the main challenges. Iraq is no exception in the region — over 50 percent of its population is under 16 years old. This represents a huge potential for both economic growth, but also for political instability.

If economic policies fail to deliver the right kind of benefits to the ordinary Iraqis, then Iraqi reconstruction will be a drawn-out and painful experience perhaps for the next two decades.

This could lead to the further radicalization of the youth frustrated by the lack of jobs, opportunities, and mere hope. This could see a balkanized Iraq slide into further chaos and even civil war.

Iraq, according to the World Bank, saw its GDP plummet from $3,300 in 1980 to $1,200 just before the war. UN Secretary-General Kofi Annan’s special representative to Iraq, Sergio Viera de Mello, perhaps has touched the most sensitive of nerves. He recently warned that corruption, nepotism, economic and social discrimination, a weak judicial system, and lack of human rights and accountability, could rear their ugly heads in Iraq’s transition to a market economy.

Some cynics already argue that some of these practices have already materialized in the way the initial reconstruction and oil contracts were handed out to firms with strong business links to senior members of the Bush administration. Any continued lack of transparency, especially in the proposed privatization process of Iraqi utilities — and there are many of them because Saddam’s economy was effectively a centrally-controlled command economy — could lead to major problems in the future.

Iraq must not repeat the outrageously corrupt privatization process which marked the aftermath of the fall of the East European Communist states including the Soviet Union, where those with the right political connections and former aparatchiks became multi-millionaires overnight.

That would be the ultimate humiliation of the Iraqi people.