Iraq's Odious Debts

Iraq needs big debt writeoff — Fitch ratings agency

David Chance
Forbes.com
February 26, 2004
London: Iraq needs a big reduction in its $117-$122 billion debts, but it is unlikely to receive as generous a reduction as 90 percent given to the likes of Congo, credit rating agency Fitch said on Thursday.

Iraq is the world’s most heavily indebted country in terms of debt per head of population, but unlike many impoverished and highly indebted countries it sits on the world’s second-largest oil reserves, which could be used to make debt payments.

“More likely than a 90 percent write-off, in our view, is an extension of the debt moratorium beyond end-2004 and a smaller debt stock reduction to take account of Iraq’s increased oil export revenues in the medium term,” Fitch said in a report.

Without debt reduction Iraq’s debt service would be $7.2 billion a year, or 37 percent of 2004 gross domestic product, based on an interest rate of six percent, Fitch said.

Iraq debt forgiveness has been subject to a sustained lobbying effort by the U.S., which dispatched special envoy James Baker to states like France, Russia, China, Saudi Arabia and Japan to try to rally support for a debt reduction.

The U.S. does not want to see a future Iraqi state burdened with debt, although some creditors note that Iraq has a strong payment ability due to future oil revenues.

The next step on analysing Iraq’s ability to pay its debts will come in April, when Fitch said the International Monetary Fund is due to present a debt sustainability analysis.

Fitch’s own analysis shows the depth of Iraq’s predicament.

Fitch said it was likely, taking into account an existing balance of $8.4 billion at the Development Fund for Iraq plus 10-months of exports worth $13 billion minus imports of $10.3 billion, end-2004 net debt would be 560 percent of gross domestic product and 660 percent of current external receipts.

Despite the onerous debt burden, Fitch said Iraq is not likely to seek to invoke the doctrine of odious debts, which says that liabilities incurred against the interest of the people should not be recognised by successor states in seeking relief from debts incurred during the rule of Saddam Hussein.

Poor now, but more oil in years to come

Iraq may be a very poor nation now, with annual gross domestic product per capita of $715, an amount which places it on a level with Lesotho and Cameroon, both of which have credit ratings from Fitch.

But in years to come, revenue from oil is likely to rise sharply, with oil exports rising in value to $20.7 billion annually from an estimated $9.3 billion in 2003, based on exports reaching 2.4 million barrels per day at a price of $24 per barrel.

In addition to rising oil revenues, there is $26.5 billion in development aid and grants from the international community to flow into Iraq, plus $5.6-$9.3 billion from the IMF and World Bank.

On the negative side, there is still the issue of $84 billion of unresolved compensation claims relating to the 1990 invasion of Kuwait, and an as yet unknown claim for compensation from Iraq’s invasion of Iran, which could be as much as $100 billion.

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