Iraq's Odious Debts

Iraq debt casts a shadow over rebuilding plans

David Chance
Forbes.com
October 22, 2003

London: (Reuters) – A major donor meeting for Iraq this week will see billions of dollars pledged to begin reconstruction but the sums will be dwarfed by massive debts that a future Iraqi government will have to tackle.

Even a big debt write-off, which has been mooted, could still leave Iraq poor for many decades to come.

Financial analysts estimate Iraq’s debt at $108-$123 billion but that could rise to as much as $166 billion if compensation claims for Saddam Hussein’s invasion of Kuwait are included – and more if Iran seeks compensation for its earlier invasion by Iraq.

The first step on cutting the debt burden is to deal with $45-$55 billion from Gulf Arab states, which Iraq insists was given as grants to help it in the war against Iran in the 1980s, but which the Gulf states say were loans.

So far, there has been little progress, according to an official from the Coalition Provisional Authority.

Some analysts and academics say Saudi Arabia, for example, did not bother booking the loans, while others have suggested Kuwait refused to write off the loans, but has not insisted on repayment. This could not be confirmed with creditor states.

“We would expect the terms of settlement at least to reflect the dubious status of the loans, their use for military purposes, and political considerations,” said UBS analyst Alex Garrard.

Iraq owes another huge sum, $21 billion plus the same again in unpaid interest, to the Paris Club, which groups sovereign creditors in working out debt reduction for poor nations and has been charged with getting a deal done by the end of next year.

That may be an optimistic target, officials say.

For a Paris Club deal, there needs to be an active International Monetary Fund programme, which requires a sovereign government in Iraq, currently the subject of dispute between the United States and states like France and Germany.

Among the Paris Club creditors the main anti-war states are owed the some of the biggest sums – France with $2.994 billion in principal, in large part for fighter aircraft and Exocet missiles, Germany with $2.404 billion, and Russia with $3.450 billion for MiG fighters and helicopters.

Despite political point-scoring by the U.S., where legislators have tied half its $20 billion reconstruction commitment to a 90 percent debt Paris Club reduction so as not to reward anti-war creditors, Washington itself is owed $2.2 billion and its ally Japan is owed $4.1 billion.

The legislators who pushed that amendment on the Bush administration may be disappointed and end up creating a larger future liability for Iraq as negotiations are likely to be dogged by wartime divisions.

In addition to these divisions, there are issues about Iraq’s ability to finance itself. The Netherlands, for example, has declined to support the donor conference because it believes Iraq can finance itself from its huge oil reserves.

“I would not expect the debt issue to be resolved soon, or the negotiations to be easy,” said a senior development official from one G7 nation.

Debt reduction unlikely to be 90 percent

But the 90 percent reduction stipulated by U.S. legislators in their spending for Iraq reconstruction, is not likely to be the outcome, analysts said.

The Paris Club would not want to set a precedent way beyond what it has granted to some of the poorest countries in the world who do not have Iraq’s massive oil reserves.

“Given conservative assumptions, we believe debt relief of 75-80 percent from Paris and non-Paris Club country creditors would suffice,” said Garrard at UBS.

Assuming a 20-year repayment programme, a 75 percent write-off would result in debts being reduced to $66.2 billion, according to Garrard’s research.

That would commit Iraq to a debt to exports ratio of 210-227 percent and a debt service ratio of 13.6-16 percent of exports over the next five years, which compares favourably with Serbia, Poland and Egypt, all of which have won substantial debt relief in recent years.

Where does this leave Iraq?

While the UBS financial analysis shows Iraq could achieve a sustainable level of debts, there are serious doubts as to whether the country can reclaim its status of the 1970s as one of the richest developing nations.

The Institute of International Finance, a body which represents 330 of the world’s largest private sector banks, said in a recent report that Iraq was already facing a financing gap on current spending of $5 billion in 2004.

“Even under the best circumstances, with socio-political stability, comprehensive debt relief, massive international support, and favourable oil prices, we estimate Iraq’s per capita gross domestic product would not surpass $3,500 in the next 10-15 years,” the influential banking body said.

In the late 1970s, Iraq’s GDP per capita was $7,000 a year.

It is currently less than $1,000.

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