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DEBT, REPARATIONS, RECONSTRUCTION, and RESOURCES by Robert Looney*

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DEBT, REPARATIONS, RECONSTRUCTION, and RESOURCES by Robert Looney* 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.
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