Iraq's Odious Debts

Iraq seeks debt solution before economy picks up

Roula Khalaf and James Drummond
Financial Times
May 21, 2004

Iraqi officials are seeking to speed up the resolution of the country’s massive debt problem in the hope of receiving more generous terms before the battered economy picks up. Adnan Pachachi, a prominent member of Iraq’s Governing Council and a leading contender for the presidency in the next caretaker government, told the FT yesterday a rescheduling of the estimated $120bn (€100bn, £67bn) debt through the Paris Club of creditors should not wait for an elected government.

“If the economic situation improves, then [creditors] will be inclined to ask more of us,” he said. “So the next government will try its luck at the debt issue.”

Officials close to the International Monetary Fund say it is unclear whether the caretaker government taking over on June 30 will be able to commit Iraq to a debt rescheduling deal and an IMF agreement that would have to be reached before a Paris Club deal.

Although Iraq could receive as much as 80 per cent debt forgiveness, the remaining $24bn it would have to service could be a burden on the economy and a politically sensitive issue for an unelected government. The caretaker administration is not expected to bind Iraq to any long-term commitments and will focus on preparing the country for January elections.

However, Mr Pachachi insisted yesterday that the next government would have full sovereignty and therefore the ability to negotiate the debt. He is a leading member of a group working on a document that will define the functions of the new government.

Iraqi and US officials have lobbied for a write-off of Iraq’s debt, arguing that the country should not be made to pay for debts incurred by Saddam Hussein’s regime. Iraqi officials insist they do not recognise some of the debt owed to Arab countries and want an end to reparation payments to Kuwait for Iraq’s 1990 invasion.

James Baker, former US secretary of state and now US envoy on Iraqi debt, earlier this year held discussions with creditors that included Russia, which is owed $8bn. He received numerous pledges of debt forgiveness, but experts say negotiations are still needed to agree on specific levels of reduction.

The debt issue could become part of the sensitive discussions over the new UN Security Council resolution on Iraq, which will define the terms of sovereignty of the new government and seek support for the continued US military presence in the country.

Mr Pachachi said Iraq wanted the resolution to give the country until 2007 to start repaying debt – the same terms that exist in the current UN resolution.

A delegation from the Iraqi ministry of foreign affairs travelled to New York this week to take part in discussions on the new resolution, amid complaints in Baghdad that world powers should not decide the fate of Iraq without consultation with Iraqis.

More serious discussions with UN Security Council members, however, will wait until the announcement of a new Iraqi prime minister and a president, decisions that could come as early as next week.

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