BEAN COUNTING IN BAGHDAD: DEBT, REPARATIONS, RECONSTRUCTION, AND RESOURCES By Robert Looney*
The Iraqi economy is in complete shambles. Even worse, the population is burdened with up to $400 billion in debt, reparations and contractual commitments made under Saddam Hussein’s regime. This article examines the fiscal challenges facing the country over the next decade. Given likely oil revenues, it considers whether there will be enough money to reconstruct the economy and revitalize the oil industry? Even on the assumption of considerable debt forgiveness and foreign aid, it appears impossible to meet the government’s operating and reconstruction costs without some sort of privatization of the oil sector.
The 1980s began with Iraq being Oil-for-Food program. About 40 percent of recognized as one of the most promising the nation's children are suffering from countries in the Middle East and the malnutrition.”(2) developing world. It was a donor country Even before the 2003 conflict, clean as well as a significant international drinking water was increasingly scarce, creditor. The central bank held with generation of electricity lagging approximately $36 billion in foreign further and further behind demand. There is assets.(1) Per capita annual income was no banking system and, for the time being, around $4,000, and with a growing middle not even a national currency. The country's class and the start of a modern industrial citizens are burdened with massive foreign sector, the country was poised for take-off obligations accrued by Saddam Hussein. to high-sustained growth. A plausible These include foreign debts, war scenario at the time would have reparations, and outstanding contractual anticipated, by 2003, the country having a arrangements. Gross Domestic Product (GDP) of close to The sections that follow examine Iraq's $400 billion, with a per capita income of fiscal challenges and possible financial $15,000, being self-sufficient in food, and strategies over the next decade. What exporting a wide variety of industrial options are available under United Nations products. Security Council (UNSC) Resolution 1483, Instead, Iraq sealed its demise in 1980 (3) as well as the resolutions coming out of by invading Iran. Two wars and a decade the May 2003 G-8 Finance Ministers' of sanctions later, GDP is not $400 billion meetings?(4) Which strategies seem best but $30 billion, and per capita income is from the perspective of Iraq's $2,000 at best. As Jim Lacey has noted, reconstruction? Under reasonable “Industry has ceased to exist and assumptions, will there be enough money unemployment may be as high as 50 to reconstruct the economy and revitalize percent. The agricultural sector is in the oil industry? complete disarray, leaving more than 60 percent of the population to rely on the UN 60 Middle East Review of International Affairs, Vol. 7, No. 3 (September 2003) Bean Counting in Baghdad: Debt, Reparations, Reconstruction, and Resources
THE DEBT TRAP with a pessimistic forecast being around The exact level of Iraq's debt is $15 billion. Of this, an estimated $11 to controversial. A generally accepted figure $13 billion will be needed just to run the is $383 billion (5): $127 billion in loans, government and revitalize the oil industry. including $47 billion in accrued interest, Restoring and revitalizing the oil industry $199 billion in reparations and $57 billion through reconstructing its infrastructure in contractual obligations. Assuming the and the development of new fields may run Arab Monetary Fund's 2002 population up to another $35 billion over the next 10 estimate of 22.81 million, this translates years.(7) into a per capita debt of around $16,790. Even if all of the $22 billion were Put in perspective, this is about 10 times as earmarked for debt servicing, the total great as Argentina's at the time of that amount of outstanding debt would be country's economic meltdown in 2001. As reduced by only around 5 percent per year. another basis of comparison, Germany's Accrued and on-going interest payments World War I reparations totaled about might reduce this figure to 1 percent or 2 twice its gross domestic product (GDP). percent. Even if 50 percent of Iraq's These debts proved to be an impossible anticipated future export income is diverted burden and were never paid in full. Iraq's to meet debt repayment, it would take more debts amount to around 15 times its annual than 35 years to pay off current GDP.(6) Iraq did not make any attempts at obligations.(8) In short, as it is currently servicing the debt in the 1990s, but even if structured, the country's debt is simply not it had, its entire annual oil revenues during serviceable. this period would not have met the yearly Similarly, even if war reparations claims interest charges. Simply put, the country is were dismissed, Iraq would still have $117 bankrupt. billion of foreign debt obligations. IMF and Making matters worse, not only is the World Bank Guidelines suggest that debt country staggering under one of the world's for the very poorest countries should be no highest debt burdens, but a significant more than 150 percent of exports. With its proportion of loans also made no GDP of $30 billion, Iraq could sustain a contribution to the country's debt servicing debt of perhaps around $21 billion. (9). capability, as they were contracted for Even here, there would be very little left purely military-related purposes. For over for reconstruction or repair of the oil example, $37 billion is in loans from the industry which generates the country's debt Gulf States ($17 billion from Kuwait servicing capacity in the first place. alone) for support during the 1980-88 war Iraq's debts are among the postwar with Iran. France is owed $4 billion, issues that continue to divide the United mostly to pay for F1 jetfighters and Exocet States from countries that opposed the air-to-surface missiles, and $9 billion is U.S.-led invasion. France, Germany and owed to Russia for purchases of MIG Russia, which led the anti-war camp, are jetfighters and helicopters. owed a large portion of the debts run up Many observers feel that unless Iraq is during Saddam Hussein's rule. They have relieved of its debt burden in one way or balked at U.S. proposals for debt another there will not be sufficient funds forgiveness, but have said they would be for any sort of meaningful reconstruction open to relief in the form of delayed and of the country's economy nor will it be able stretched-out payments. to restore its vital oil sector. An optimistic For the next several years at least, Iraq's estimate of the country's likely oil revenues debt situation will no doubt be greatly over the next decade is $22 billion per year, affected by the implementation of UNSC Middle East Review of International Affairs, Vol. 7, No. 3 (September 2003) 61 Robert Looney
Resolution 1483, and to a lesser extent, the resources needed for reconstruction during resolutions coming out of the G-8 Finance the transition period, oil sales will be Ministers meeting in May 2003. immunized against attachment by international creditors or others with claims UN SECURITY COUNCIL against the former regime until December RESOLUTION 1483 31, 2007. Clearly, legal claim to Iraqi oil While dealing with a broad range of revenues had seemed the likeliest way for issues, UNSC Resolution 1483 (adopted creditors to get some money back. At the May 23, 2003) ends 13 years of sanctions, very least, this wording gives Iraq a strong and so has particular importance for the hand in any future formal Paris and London Iraqi economy’s future development and Club debt renegotiations. It might even the resources available to that country.(10) allow it to repudiate its oil debt and still Sanctions had been imposed to compel raise fresh capital. Saddam Hussein's compliance with the --Terminates the Oil-for-Food program agreement that ended the 1991 war, in six months. The resolution allows the especially the requirements to eliminate secretary-general, in coordination with weapons of mass destruction and to refrain coalition authorities and the Iraqi Interim from threatening its neighbors. The Administration, to continue to prioritize resolution should greatly assist in the contracts previously approved and funded economy's recovery and economic by the UN for delivery to meet the transformation in several respects: immediate needs of the Iraqi people. --It lets Iraq rejoin the global market. By Action on contracts judged to be of abolishing trade restrictions, the resolution questionable usefulness in light of the will permit Iraq to import and export goods changed circumstances will be postponed freely. until an internationally recognized --Returns oil revenues to Iraq. Oil representative government is established revenues from export sales will be and in a position to make its own deposited in the Development Fund for determination. One billion dollars of Iraq, housed in the Central Bank of Iraq. unallocated funds in the UN escrow The fund will be monitored by an account will be transferred to the international board that includes Development Fund for Iraq to provide for representatives of the UN Secretary immediate reconstruction needs. General, the International Monetary Fund, --Provides for compensation. There will the Arab Fund for Social and Economic be continued funding of the UN Development, and the World Bank. Compensation Commission (UNCC), Independent public accountants reporting which deals with outstanding claims for to the board will audit the fund to ensure victims of Saddam's aggression in Kuwait. full transactional transparency. Five percent of oil proceeds are to be --Ensures Iraqi revenues are spent on deposited into the UNCC Compensation Iraqi reconstruction. The resolution Fund. This is down from 25 percent under underlines that the Development Fund will the Oil-for-Food program. be used in a transparent manner for the Basically, the Resolution grants broad humanitarian needs of the Iraqi people, power to the United States and Great economic reconstruction, and repair of Britain to manage Iraq for at least a year. Iraq's infrastructure, and the costs of Iraqi For the economy and the country's debt civilian administration. burden, the resolution buys some breathing --Temporarily immunizes oil sales. To space. The resolution opens the way for ensure that Iraqis have access to the critical putting the oil sector back on its feet and 62 Middle East Review of International Affairs, Vol. 7, No. 3 (September 2003) Bean Counting in Baghdad: Debt, Reparations, Reconstruction, and Resources back generating the revenues the country did not expect Iraq to resume its debt needs. Because all proceeds from the sale payments until 2005.(12) of oil will flow into the newly formed Unfortunately, despite these promising Development Fund, its administrators (after signs, the debt issue is likely to become allocating 5 percent for Kuwaiti claims) increasingly contentious as the United will have to grapple simultaneously with States pushes for write-offs of large parts four competing claims on their funds— of Iraq's liabilities. There are indicators of humanitarian needs, reconstruction, widespread reluctance and/or disinterest on revitalization of the oil sector, and debt the parts of many other countries and servicing. institutions.(12) In April 2003, after initial reluctance, THE G-8 RESOLUTIONS OF MAY the World Bank and the IMF agreed to play 2003 the normal role in Iraq's redevelopment "at At their May 2003 meeting in the appropriate time." Also in April, Horst Deauville, France, the G-8 finance Kohler, managing director of the IMF, said ministers also addressed Iraq’s debt it was "premature to speak about debt problems. The resolutions coming out of forgiveness, which should be a matter for this meeting called for the Paris Club of Iraq's creditors to discuss."(14) Some of creditor nations to overhaul its rules for Iraq's bilateral creditors appear inclined to negotiating financial relief for countries oppose debt cancellation. In the case of like Iraq that are heavily indebted but do Russia and Germany, for instance, Russian not qualify for the special assistance President Vladimir Putin and German available to the poorest states—the HIPC Chancellor Gerhard Schroder initially said initiative. The Paris Club's 19 members, that they would contemplate a write-off of which include most of the advanced some of Iraq's debt but the Russian finance industrial countries, are believed to be minister, Alexi Kudrin, has since declared owed an estimated $21 billion, plus a that Russia does not have a policy of debt similar amount in interest. (11) Most of the forgiveness, and Germany's finance debt dates from the 1970s and has been minister Hans Eichel has categorically accruing unpaid interest since then. announced his intention of recovering the The move should lead to the Paris Club $4 billion owed to his government.(15) offering debt-relief measures tailored more to the individual needs of countries. There STRATEGIES FOR REDUCING is also the possibility the new initiative will FOREIGN OBLIGATIONS put pressure on creditors to write off some Realistically, despite the resistance of debts in exceptional cases. Still, the process Iraq's major creditors, the country's debt of tackling Iraq's debt burden looks certain will have to be: (a) forgiven—in part or in to be complex and protracted. Although whole, possibly as an application of the some G-8 officials sympathetic to the U.S. odious debt doctrine; (b) radically position said that the Paris Club initiative restructured to string it out over many years should lead to debt restructuring and write- after an initial moratorium period on offs for Iraq, others more disposed towards servicing; or (c) eased by eclectic the French/German/Russian position solutions—contract cancellation, debt questioned whether this would necessarily equity swaps, partial privatizations, etc.(16) be the case. In a related action, the G-8 The United States and United Kingdom as Finance Ministers resolved not to attempt occupying powers will have, within the to secure any repayment on Iraqi debts for context of Iraq's reconstruction, at least another year. The Paris Club itself considerable influence over the path and Middle East Review of International Affairs, Vol. 7, No. 3 (September 2003) 63 Robert Looney direction of Iraq's debt resolution. In this policies might not be sufficient to attain regard, Secretary of Defense Donald sustainable external debt levels within a Rumsfield has laid out some general reasonable period of time and without guidelines with regard to financial additional external support. A group of 41 assistance and other economic issues: countries were deemed to be in such a --Favor A Market Economy. Decisions situation and considered candidates for the will favor market systems, not Stalinist new Heavily Indebted Poor Countries command systems, and activities that will (HIPC) initiative.(18) begin to diversify the Iraqi economy The HIPC initiative was launched in beyond oil. The coalition will encourage September 1999, and Iraq was not included moves to privatize state-owned enterprises. in the group. To be eligible for special --Oil. The Coalition Provisional assistance under the program a country has Authority will develop a plan for the Iraqi to meet certain criteria: (1) be eligible only oil industry based on transparency. Iraq's for concessional assistance from the IMF oil wealth will be used and marketed for and World Bank; (2) face an unsustainable the benefit of the Iraqi people. debt burden, beyond available debt-relief --Priority Sources of Funds. In assisting mechanisms such as Naples terms (where the Iraqi people, the United States will play low-income countries can receive a its role but should not be considered the reduction of eligible external debt of 67 funder of first and last resort. The percent in net present value [NPV]); and American people have already made a (3) establish a track record of reform and significant investment to liberate Iraq, and sound policies through IMF and World stand ready to contribute to rebuilding Bank supported programs.(19) efforts. But when funds are needed, before For Iraq to become eligible at this point, turning to the U.S. taxpayers, the coalition the country would have to complete a will turn first to Iraqi regime funds located successful first phase. This would entail a in Iraq; Iraqi funds in the UN Oil-for-Food three-year period of adopting adjustment Program; seized frozen Iraqi regime assets and reform programs supported by the IMF in the United States and other countries; and World Bank. During that time, the and international donors across the country could receive debt relief from Paris globe.(17) Club creditors and other official bilateral and private creditors, as well as traditional CONVENTIONAL DEBT concessional assistance from donors and FORGIVENESS multilateral institutions. The case for debt forgiveness has gained The HIPC route might seem a logical increased credence in recent years. After solution for Iraq once the country is back many years of agonizing over developing on its feet and ready to move ahead with country debt, in 1996 the international reforms and a reorganization of the financial community finally recognized economy. Unfortunately, because it may that the external debt situation of a number take Iraq several years to reach this stage, of low-income countries, mostly in Africa, HIPC is not a realistic near-term option for had become dire, jeopardizing any the country's policymakers. prospects for future growth and The Deauville G-8 summit tried to deal development. For these countries, even full with Iraq and its treatment as a HIPC use of traditional mechanisms of country by recommending changing the rescheduling and debt reduction, together rule of the Paris Club “to include in with continued provision of concessional exceptional cases non-HIPC” countries. financing and pursuit of sound economic According to this line of reasoning, Iraq’s 64 Middle East Review of International Affairs, Vol. 7, No. 3 (September 2003) Bean Counting in Baghdad: Debt, Reparations, Reconstruction, and Resources exceptional case derives from the bankers have shown little enthusiasm for sanctions, wars, and poverty that it has the odious debt doctrine. "They'd prefer not suffered. However, a subsequent Paris Club to be in the business of judging whether a Decision on Ecuador suggests that the Paris regime is illegitimate. They also like to get Club is probably not up to the task of paid back. And no one wants countries to sorting out the subtleties of Iraq’s renege every time a general stages a situation.(20) In fact, Iraqi debt has been coup."(25) rallying on the hopes that a restructuring Some commentators have gone so far as settlement will be worked out. By mid- to argue that increased use of the odious July 2003, Iraqi syndicated loans were debt doctrine could destabilize the global being traded at 25-32 cents on the dollar, credit markets by making creditors fearful up from about 20 cents around the time of that other countries might one day describe the war.(21) their debt as odious. Their main point: it is not hard to imagine circumstances in ODIOUS DEBT DOCTRINE which, say, a newly democratic China One radical option is for Iraq to might try to shed the external debt—$170 repudiate all of its international debt. This billion at the end of 2001—of the "odious" action would be based on making the case undemocratic regime it replaced.(26) that Saddam’s government was an odious Lenders to Iraq warn that adopting this regime.(21) Michael Kremer and Seema policy could do irreparable harm to Iraq's Jayachandran of Harvard University, for ability to borrow in the future. Yet a debt- example, argue that after a change of free, democratic (hopefully) Iraq, with a regime, a country's new government should predictable stream of revenue from oil, have no legal obligation to service the should be a much more appealing country odious debt of an illegitimate to lend to than one saddled with up to $400 predecessor.(23) The odious doctrine is an billion in debts.(27) idea dating back to the Spanish-American Interestingly, two of the main arguments war of 1898. In theory, establishing the against forgiveness hardly apply to Iraq. right of a country such as Iraq to write off There is no obvious "moral hazard," odious debt would have potentially huge forgiveness would not reward any bad benefits, not least of which would be to behavior of a new Iraqi government, nor— discourage banks from lending to similar given the unique circumstances—would it tyrants that might one day be overthrown. generate expectations that similar Indeed, setting out precise rules for what generosity would be forthcoming in the constitutes an odious regime, and thereby future. As the Economist noted, "Likewise, making it harder for such regimes to because a new government would be borrow, may be a better form of economic clearly unconnected to the Saddam regime, sanction than the traditional approach of refusing to repay all its debts might not obstructing trade. Restrictions on trade hurt hinder the government from borrowing ordinary people, whereas making it harder fresh capital—though it is certainly to borrow hurts those in charge. plausible that creditors might look more Beginning in the late 1990s, a kindly on Iraq, and thus charge it a lower worldwide campaign called Jubilee 2000 rate of interest, if it continued to pay attempted to call attention to the concept of existing creditors something, after a formal odious debt. Unfortunately, the doctrine of rescheduling." (28) odious debt has gained little momentum in Certainly, from Iraq's point of view, the international law.(24) As might be ideal solution is for creditor countries and imagined, most Western governments and commercial lenders to write off a Middle East Review of International Affairs, Vol. 7, No. 3 (September 2003) 65 Robert Looney substantial portion of the debt, perhaps as legitimate debt with substantial reduction much as 80 percent and to allow a in present value through a partial write-off moratorium on all payments and or extended rescheduling. The commission reparations for five to ten years. The odious should be empowered to force debt doctrine would be an ideal way to do uncooperative creditors to accept an this and, as noted above, there would not agreement consistent with Iraq’s necessarily be a risk penalty attached to the reconstruction and development needs. country's future borrowing. The United --There should be a debt/equity swap States and other members of the Paris Club program to encourage private investment in creditor group essentially did just that for Iraq and give companies a role in Yugoslavia, another recent odious-type rebuilding. Claims could be sold to case, after the war in Kosovo in 2001.(29) investors at deep discounts and redeemed John Snow, newly appointed Secretary into private sector investment or of the Treasury, has given his tacit blessing privatizations.(31) to the odious debt doctrine: "Certainly the people of Iraq shouldn't be saddled with THE ISSUE OF REPARATIONS AND those debts incurred through the regime of WAR-RELATED DEBT the dictator who is now gone."(30) Contemplating the victorious allies at Given its position under resolution the Versailles peace conference in 1919, 1483, the United States has a lot of the famous English economist John leverage in pressuring countries to write off Maynard Keynes observed, "reparation was their claims on Iraq—prolonged legal their main excursion into the economic wrangling would no doubt mean they field, and they settled it as a problem of would be locked out of future lucrative theology, of politics, of electoral chicanery, contracts in a country with the world's from every point of view except that of the second largest oil reserves. economic future of the states whose destiny There are a number of variations on the they were handling."(32) Keynes rightly odious debt theme, and no doubt one will foresaw that this neglect would have gain more credence in the future. disastrous consequences. Unfortunately, Nevertheless, it is unlikely all of the Keynes' wisdom, if even acknowledged, is country’s debts will be written off largely being ignored. Given the country's completely under the odious debt doctrine. dire straits, the 5 percent of Iraq's oil However, something along the lines revenues to be allocated for this purpose proposed by Mulford and Monderer seems under Resolution 1483, even though it is to balance Iraqi needs with those of its down from 25 percent under the Oil-for- creditors: Food program, is still excessive. --There should be a three-year Almost all of the personal claims arising moratorium on Iraqi debt payments without from Iraq's previous wars have been interest accruing. settled. What remains are reparations --An international Iraqi debt demanded by other countries. These consist commission of financial “wise men” should mainly of outstanding claims by Kuwait be established to examine all claims and to ($17 billion), Saudi Arabia ($25 billion) disallow debt used for state security or and the other Gulf countries stemming military aggression. Only loans for from assistance provided to Iraq during the verifiable economic purposes should be Iran-Iraq war in the 1980s. Using the collectable. odious debt doctrine noted above, Iraq --The commission should chair could easily build a good moral and negotiations to restructure the remaining probably legal case that the population 66 Middle East Review of International Affairs, Vol. 7, No. 3 (September 2003) Bean Counting in Baghdad: Debt, Reparations, Reconstruction, and Resources should not be burdened for wars in which As in the case above, long litigation by they were forced to participate. If these the Russians, French and Chinese would obligations are grants, as the Iraqis claim, probably result in those countries being then they may be a moot point. If they are completely frozen out of future loans as the Gulf states argue, the situation reconstruction and development projects in becomes difficult to resolve, in part Iraq. This would be a tremendous loss as because any significant increase in Iraqi oil the potential amounts of future work are production is likely to drive down world oil enormous. The administration of Saddam prices into the $13 to $15 a barrel range, Hussein had developed a strategic plan to something the Saudis and Kuwaitis do not increase production capacity from 3 million wish to see. To stabilize the price at around barrels per day to 6 million in six to seven $29 a barrel they will have to reduce their years at a cost of $25 to 30 billion. Every own output, while at the same time forgive indication is that this plan will move ahead. their neighbor's past debt—something each country is unlikely to readily agree to. BOTTOM LINE: COUNTING THE BEANS OUTSTANDING CONTRACTS The considerations noted above lead to The odious debt doctrine would also some likely budgetary figures (summarized seem to apply to the $57 billion in in Figure 1 in Appendix, below). For debt outstanding contracts, mainly to Russia, servicing, it is unlikely all will be written France and China. Many of these claims off under the odious debt doctrine. are for questionable contracts for oil Although ideal from Iraq's situation and exploration and development. As noted, that of the Middle East as a whole (and Resolution 1483 sets up a procedure for the despite U.S. efforts), there is sufficient evaluation of outstanding contracts. opposition amongst the creditors to make However, it is not clear whether the UN this a non-starter. Instead, the Paris Club is will have ultimate authority to approve or likely to work out some sort of debt disqualify a contract. restructuring that will amount to annual In any case, the Iraqis and American payments in the $2-3 billion range. administrators are taking matters into their According to Richard Segal, director of own hands. Just three days after Resolution research at the emerging market brokerage 1483 was passed, Iraq's oil minister firm Exotix, Iraq is “likely to be forgiven announced that three oil production two-thirds of its Paris Club debt.”(34) contracts signed by the previous regime Settlement will also require a credible with Russian and Chinese companies economic program and an agreement with would be either terminated or frozen. the International Monetary Fund (IMF). Phillip Carroll, the former Shell executive Similarly, reparations imposed on chosen by the Pentagon to advise the oil Iraq will probably not vary significantly ministry, said that there was some doubt from Resolution 1483's mandated 5 percent whether existing foreign contracts "gave of oil revenues—depending on the likely the Iraqi people the full benefit of their oil range of oil revenues of $15-$22 billion, wealth."(33) No doubt, however, some of this adds another budgetary cost of $750 the outstanding contracts will meet million to $1.25 billion annually. Carroll's criteria for approval. Reading While many of the contracts signed by between the lines of public statements, a the previous regime are likely to be very rough figure is somewhere around 20- invalidated, perhaps up to 20 percent will 30 percent. be approved on merit or because of intense political pressure. This would add around Middle East Review of International Affairs, Vol. 7, No. 3 (September 2003) 67 Robert Looney another billion to the budget. However, successful reconstruction and recovery given the cost of oil sector restoration program. While the country would likely (estimated at $35 billion), this would only be able to thrive under an international aid reduce the share of other bidders and not be program as ambitious as the Marshall Plan an additional charge to the anticipated $3.5 that helped Europe recover from the billion annual cost. ravages of World War II, there is no If we assume yearly government indication that donor countries are lining functions to run around $11 to $13 billion, up to provide funds of this magnitude. No a range often mentioned by experts, and doubt significant amounts of aid funds, add on approximately $10 billion for both humanitarian and development, will reconstruction over the next ten years, this flow into Iraq but these will be far short of brings total annual expenditures to between the likely budgetary shortfalls associated $27.25 and $30.75 billion for the next with the necessary outlays to put Iraq's decade. economy on a steady, self-sustained growth With projected oil revenues in the $15 path. to $22 billion range this leaves an annual However, the situation is far from shortfall of between $5.25 and $15.75 hopeless. There are a number of available billion. This figure is a bit more pessimistic options. The key to success is for the Iraqi than one produced by Henry Azzam, who authorities to look at the complete picture forecasts deficits beginning at $8.7 billion with each action evaluated in terms of its in 2004, and then slowly decreasing until contribution to the restoration of self- reaching a surplus of $3.3 billion in sustained growth within a reasonable 2010.(35) period of time—roughly 10 years. Such However, even the $15 billion oil evaluations would take into account debt revenue figure may be overly optimistic. servicing alternatives, reconstruction costs, Thamir Ghadhban, the American-appointed economic reforms, industrial head of Iraq’s oil ministry, has suggested diversification and so on.(38) Within this that unanticipated difficulties with power context, a number of initiatives might be supplies would likely reduce the 2003 explored by a new Iraqi government. production target from 2.5 million to 2 Debt Servicing Priorities: Link debt million barrels per day.(36) With 500,000 payment priorities so that they are barrels needed as fuel for Iraq’s power proportional to the amount of new plants and domestic use, and another investment. Countries that are willing to 200,000 needed to maintain pressure in loan/invest new funds in Iraq would existing fields, that leaves only a little over receive priority on the servicing of their 1 million barrels per day for export.(37) debts. An unambiguous formula could be While this figure could pick up, by the worked out so that each country would middle of 2003 much of the early optimism know where it stood in terms of receiving concerning Iraq’s oil exports financing a speedy compensation for past loans. The large share of reconstruction costs had idea is to provide a tangible inducement to dissipated in favor of more guarded countries to actively participate in Iraq's estimates. economic recovery. Debt Forgiveness: Donor countries CONCLUSIONS might set up a formula linking debt The reality is that Iraq is bankrupt. Even forgiveness to Iraq's economic under fairly optimistic debt restructuring performance. For example, each percent and oil revenue assumptions, it will simply average annual increase in non-oil output not have the resources to implement a might be linked to a certain percent of the 68 Middle East Review of International Affairs, Vol. 7, No. 3 (September 2003) Bean Counting in Baghdad: Debt, Reparations, Reconstruction, and Resources
country's debt forgiven. This would whereby a certain proportion of provide Iraqi authorities with a real payments/royalties are placed in a fund incentive to diversify the economy away earmarked for direct payment to Iraqis. from oil through economic reforms, (41) This would not only make the sector's privatization schemes, and supportive privatization more palatable, but it would governmental budgets whose capital also help create the purchasing power allocations went to projects with quick necessary to support the country's payoffs. industrial diversification efforts. Creative Debt Conversions: No doubt, Given the country's likely fiscal position many countries are concerned with the over the next decade, how well a new Iraqi environmental damage done under the government handles technical and political previous regime. To speed up cleanup and challenges associated with the privatization restoration, many might find debt of the oil sector will no doubt ultimately conversion schemes similar to the highly determine if Iraq will soon rejoin the ranks successful debt for nature plans developed of the world's prosperous countries. after the Latin American debt crisis of the 1980s. *Robert E. Looney is a professor of Privatization of the Oil Sector: It is economics and Associate Chairman for somewhat ironic to say that Iraq is Instruction, Department of National bankrupt when it is sitting on an asset Security Affairs, at the Naval Post worth up to $200 billion or so for Graduate School, Monterey California. He producing reserves and perhaps as much as has written twenty books on various $1.5 trillion for total reserves (producing, aspects of economic development with an known and suspected reserves).(39) If the emphasis on the budgets of Middle Eastern Iraqi authorities are serious about and South Asian countries. reconstruction, they will eventually have to come to grips with the reality that NOTES privatization of the oil industry, either 1. Ahmed M. Jiyad, "An Economy in a partial or full, may be necessary for fiscal Debt Trap: Iraqi Debt 1980-2020," Arab reasons. The type of privatization will Studies Quarterly, Vol. 23, No. 4, (Fall affect the stream of revenues derived from 2001), p. 15. the industry. Full privatization of 2. Jim Lacey, “How to Rebuild Iraq,” Time, producing reserves might bring in $100 April 18, 2003. billion early on, but would diminish
Supplement I: Background Information on
Middle East Review of International Affairs, Vol. 7, No. 3 (September 2003) 71 Robert Looney
APPENDIX Figure 1: Iraq: Fiscal Framework
Outstanding Realistic Possible Likely Reconstruction Debt by Expenditure Likely Solutions Outcome Needs Type Requirements Resources
Five Year Moratorium
$2-3 billion Reduction Yearly $127 billion annual debt Foreign Aid/ and Government Foreign Debt servicing Assistance ? Restructuring Functions $11-13 billion Cancellation Under Odious Debt Doctrine General Reconstruction Reconstruction $10 billion per up to $100 10 Year year billion Moratorium
$199 billion $0.75-1.25 $2.75-4.25 Annual Oil Compensation 5% Oil billion billion Revenues and War Revenues Debt Related Reparations annually $15-$22 Billion
Cancellation Under Oil Industry Oil Industry Odious Debt $3.5 billion Restoration Doctrine per year $35 billion over 10 years
Impartial Review- Annual Competitive $27.25-30.75 Budgetary Bidding annual Shortfall expenditures $5.25-15.75 billion
$57.2 billion Cancellation $1 billion Pending Under annually for oil/ Foreign Odious reconstruction Contracts Principle work
Partial Cancellation Under Odious Principal
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