Iraq's Odious Debts

Saddam’s odious debt

Justin Alexander, Jubilee Iraq
Swans Commentary: Special Issue on Iraq
February 2, 2004

Few politicians would disagree in public that the fall of Saddam should mean freedom and democracy for the Iraqi people. However the freedom they are being offered is a freedom to pay vast sums to the countries that financed Saddam and the democracy will be one in which the key economic policies will be decided by foreign creditors rather than by officials chosen by the Iraqi electorate. This is because Saddam accumulated around $130 billion of unpaid debt, on top of tens of billions of war reparation, and the countries and companies he owes are seeking to extract as much money as they can and use the debt as a lever to control Iraq’s economy.

Iraqis, however, argue that most of the debt is illegitimate. It financed Saddam’s brutal regime and in particular his invasion of Iran. The Iraqi people suffer immensely. Hajim Al Hassani of the Iraqi Islamic Party told Jubilee Iraq that “Iraq is not responsible for any debts which supported the regime’s war machine.”1 This is a sentiment repeated throughout Iraqi society. It has also found widespread support internationally, ranging from Richard Perle on the Right to Archbishop Desmond Tutu on the Left. On top of the clear moral and humanitarian arguments for not charging these debts to the Iraqi people, a legal case has developed based on the doctrine of odious debt. This legal doctrine was formalised in the 1920s by Alexander Sack, in reaction to Soviet Russia’s repudiation of Tsarist debts. Sack argued that successor governments could not repudiate the debts of former regimes, even undemocratic ones, except in special cases in which the debts were “contracted and utilised, for purposes which, to the lenders’ knowledge, are contrary to the needs and the interests of the nation.”2 They are not legitimate state debts, but rather the personal debts of the despotic regime. Some early precedents for this include Mexico (1883), Cuba (1898), Poland (1919) and Costa Rica (1923).3 An examination of the origins of the Iraqi debt demonstrates that most of it is indeed the personal debt of Saddam and his regime.

When Saddam invaded Iran in September 1980, Iraq had $36 billion of cash and no long term debt. Military spending constituted up to three quarters of Iraq’s GDP, sustaining the war for eight years and claiming a million lives.4 Between 1981-85 oil revenues were just $48.4 billion, while military spending was two and half times higher at $120 billion.5 This huge imbalance between revenue and expenditure was possible precisely because many countries provided loans and export credit. At the end of the war the US Export-Import Bank, which had restricted its own lending because of concerns about Saddam’s misuse of funds, estimated that Iraq owed $27 billion to Western countries and $50 billion to the Gulf States.

One example of a project financed by foreign export credit is Falluja 2, a chlorine plant which the CIA identified as a key component in Iraq’s chemical warfare arsenal. The plant was secretly built by a British company, Udhe Ltd, in 1985 with financing from the Export Credit Guarantee Department. British taxpayers paid £300,000 in compensation to the company after final checks on the plant, completed in May 1990, were interrupted by the outbreak of the Gulf War.6

Debt crisis sparks another war

As Iraq emerged from the war and attempted to rebuild, it faced a serious financial crisis due to a low oil price and annual debt services obligations of around $3 billion. By mid-1990, Iraq had an inflation rate of 40% and only enough cash reserves for three months of imports.

On July 17, 1990, Saddam accused Kuwait and the United Arab Emirates of conspiring with the United States to cheat on oil production quotas and keep the price low. As the situation escalated, Egyptian President Husni Mubarak and Saudi King Fahd arranged a meeting between Kuwaiti and Iraqi officials, in Jeddah on July 31, to find a peaceful solution. The Iraqi representative, Izzat Ibrahim Ad-Duri, walked out, complaining of Kuwaiti reluctance to drop Kuwait debt claims.7

According to King Hussein of Jordan, the Al-Saud (Saudi Arabia) and al-Sabah (Kuwait) families agreed, in a closed door meeting before the conference, to forgive their claims and give $10 billion to help repay Saddam’s debts. But on July 30, 1990, Kuwait’s foreign minister, Sheikh Sabeh Ahmed al-Jaber al-Sabah, the Emir’s brother, ridiculed the Iraqi army to Jordanian diplomats and said, “If they don’t like it, let them occupy our territory . . . we are going to bring in the Americans.”8 At Jeddah the next day, he announced to Ad-Duri that Kuwait was only offering $500 million (instead of $10 billion). Two days later Iraq invaded.

The subsequent events: the occupation of Kuwait, the Gulf War and 13 years of sanctions not only devastated Iraq but also increased the already critical foreign debt overhang. Firstly no debt was serviced during the sanctions period, resulting in a buildup of interest and arrears, doubling the debt to $130 billion or more (the precise figures are still unclear). On top of this loan debt, Iraq was landed with an immense reparations bill. The exact amount of this bill is not yet decided because the UN Compensation Commission (UNCC), which began work in 1991, has not yet completed its assessment of claims. About three quarters of the $351 billion claims have been settled at $48 billion, of which $18.5 billion has been paid. UN Security Council resolution 1483 (May 22, 2003) stated that 5% of Iraqi oil revenues should be diverted to reparation payments.

Scale of the debts today

The creditor countries, although now demanding repayment, have taken some time to come up with figures for claims. This may be partly because of the secrecy of some of the loans, and partly because, after thirteen years of sanctions during which the debt was not serviced, they had written off any expectations of repayment. The Paris Club, which is a cartel of major creditors including all the G8 countries, published tables of its claims on July 10, 2003, three months after the fall of Baghdad. However, it was not able to give the total claims with interest and arrears, but only the principal value of the debt claims ($21 billion). The IMF was expected to report in mid-July on non-Paris Club debt, but six months later it has not yet been able to complete this.

Jubilee Iraq has collated all the figures in the public domain and estimates that the total debt claims are within the range $95-154 billion. This excludes reparations awards, which will probably settle at around $40 billion when the UNCC completes its assessments.

The largest claimants are Saudi Arabia, UAE and Kuwait. Their claims, however, are on very uncertain ground, because no documents have yet emerged proving that they were structured as loans, rather than grants as Iraqis contend. Next in line are Japan, Russia, France and America with claims ranging from $5-8 billion. Countries such as Germany, China, Italy, Bulgaria, Britain, Jordan, Turkey and India have claims between $1-4 billion, while a host of countries have smaller claims.

If one compares the total of debt and reparations to Iraq’s export earnings ($12 billion expected in 2004) then it becomes clear that Iraq is the world’s most heavily indebted country by a wide margin. Moreover, it is a country with urgent relief and reconstruction needs (estimates range from $100-600 billion). Although the loan debt is not yet being serviced, ongoing reparation payments are currently diverting critical funds from humanitarian relief. On April 8, 2003, the very day Kofi Annan received a mandate to use the Oil-for-Food fund to meet emergency needs, and as the UN launched a flash appeal to fund relief, $870 million was paid from Oil-for-Food to Kuwait, Britain and others. In 2004 Iraq is likely to pay more in reparations than the $685 million it will receive in grants pledged at the Madrid donor conference.9 In 2005 debt service payments are likely to begin, starting at perhaps $2.25 billion in interest alone, and increasing to $5 billion when principal repayments begin, according to estimates from financial analysts.10

The Paris Club

Past experience suggests that trusting in the altruism of creditors is unlikely to provide a solution to Iraq’s debt crisis. The Paris Club has still only delivered a third of the $100 billion debt relief which, responding to the Jubilee 2000 campaign, they promised to 41 poor countries in 1999. Even this was conditional on those counties submitting to extensive and damaging IMF economic liberalisation programs.

James Baker III was appointed the special envoy on Iraqi debt by Mr. Bush on December 5, 2003. The appointment is ironic since, as Secretary of State in the late 1980s, Baker persuaded the US Department of Agriculture to increase its lending program to Iraq. Baker has made whirlwind tours of Europe and the Far East, which have been the catalyst for a closing of ranks by the Paris Club, whose member countries were split over the war. The Club will reach a consensus position in the first half of 2004, which the transitional Iraqi government will be expected to sign up to after its scheduled takeover from the Coalition Provisional Authority on July 1. This will be flawed in three critical ways. 1) It will retain a significant part of the debt, probably at least 40%, far more than Iraq can afford to service. 2) It will whitewash over the odious origins of most of the debt. 3) As a condition for the Club’s “generosity” Iraq will be required to follow an IMF economic program. This will take away Iraq’s freedom to make its own decisions on key issues such as privatisation even before the Iraqi people have the opportunity to elect their own government.

The alternative: an arbitration tribunal

In October 2003, Jubilee Iraq conducted an extensive consultation with Iraqis, including four ministers in the interim government, most of the major political parties, and a number of civil society groups and religious leaders. The clear result was that Iraqis feel very strongly about this issue and reject the Paris Club’s suzerainty. Sheikh Mauyad of the Abu Hanifa Mosque, a leading Sunni cleric, put it this way: “In the Paris Club process, the enemy is the judge, this cannot be fair.” Even the British business magazine The Economist agrees: “There is an overwhelming case, both in terms of economic expediency and justice, for writing off most of Iraq’s debts . . . The Paris Club will no doubt belatedly negotiate some sort of rescheduling . . . on the basis of what lenders judge to be Iraq’s ability to pay – which will no doubt be on the high side – not on the rightness of its having to do so.”11

Since “the Iraqi people had no say, even regarding the civilian debts,”12 and they maintain that “Saddam never spent money for the benefit of the Iraqi people, but just for himself and his followers,”13 Iraqis are calling for a fair process of arbitration to assess the legitimacy of debt claims. This would be a public legal process involving Iraqis, creditors, and neutral jurists to judge each claim on its merits. It would result in a more significant debt reduction than the Paris Club is likely to offer because, since Marek Belka, the former Polish Finance Minister who organised the Madrid donor conference, has estimated that “about 90% of Iraq’s potential, virtual debt is war-related.” It would also avoid the imposition of an IMF program, a condition of the Paris Club, which Dr. Saleh Yasir of the Iraqi Communist Party warns would “neglect the social consequences of economic policies . . . [and could] cause a social explosion which might destroy the transition to democracy.”14

Support for this approach has come from unexpected sources. The billionaire George Soros has said that it would “send a signal to the financial markets that it’s dangerous to deal with oppressive regimes.” The then Chairman of CSFB investment bank, David Mulford, proposed an international commission that would “disallow debt used for state security or military aggression. Only loans for verifiable economic purposes should be collectable.”15

Any creditors that wish to claim repayment from the Iraqi people for loans made to Saddam would submit an argument to the tribunal demonstrating that the loans were beneficial. The tribunal would debate and rule in public on each claim and agree repayment terms for any legitimate debt. This process would dramatically reduce Iraq’s debt, set a clear precedent for other countries which have inherited debt from dictators and discourage creditors from financing the Saddams of the future.

Notes

1. “Paying for the Executioners Bullets: Iraqi views on debt and reparations,” Jubilee Iraq (2003).

2. “Effects of State and Government Succession on Commercial Bank Loans to Foreign Sovereign Borrowers,” A.N. Sack, (1927).

3. See, http://www.jubileeiraq.org for more details.

4. “Prospects for Iraq’s Economy,” Sinan al Shabibi, in The Future of Iraq Middle East Institute (1997).

5. “Dealing with Iraq’s Foreign Indebtedness,” Wajeeh Elali, Thunderbird International Business Review, Vol. 42(1) 65-83 (2000).

6. “The strange case of Falluja 2,” The Guardian (March 6, 2003).

7. “Conduct of the Persian Gulf War,” Report to US Congress (1992).

8. “Interview with King Hussein,” The Village Voice (March 5, 1991).

9. “Funds for Iraq Falling Short of Pledges,” The New York Times (December 7, 2003).

10. “2003: The Year in Iraqi debt,” Richard Segal, Exotix (2003).

11. “Those odious debts,” The Economist (October 16, 2003).

12. Waleed Al-Hilli, Al Da’wa Party, quoted in Jubilee Iraq (2003).

13. Perweez Mohammed, Patriotic Union of Kurdistan, quoted in Jubilee Iraq (2003).

14. Quoted in Jubilee Iraq (2003).

15. “Iraqi debt, like war, divides the west,” The Financial Times (June 22, 2003).

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