Written by Justin Alexander of Jubilee Iraq
September 2005
Debt - Introduction
Iraq has an outstanding debt load of around $115bn (reduced this year from around $125bn in the first trance of Paris Club relief) on top of $33bn of unpaid war reparations. This means that the ratio of debt and reparations to export earnings is around 750%, way beyond the IMF’s recommended maximum ratio of 162%. The Paris Club, which holds $42bn, about a quarter of the total debt and reparations, agreed in November 2004 to reduce their claims by 80% in three trances linked to economic conditionalities. The US is topping this up to 100% relief but no other countries have followed suit. Even if all creditors match the Paris Club terms, and this looks far from certain, Iraq will still be left with $25bn debt along with the $33bn reparations. Additionally there is a very large reparations claim from Iran, although this has little international backing.
Aside from the ongoing internal conflict, these claims are arguably the greatest threat to Iraq’s future. As Clare Short, the then UK Minister for International Development, said on the day after Baghdad fell: “The level of debt and claimed reparation payments is so great that they could lock a naturally wealthy economy into an inability to recover.” The threat is not merely the attrition of the Iraqi budget but also the undermining of Iraq’s ability for self-determination and the resentment of Iraqis to the creditors countries and to their own government for diverting precious resources to service what they see as the personal debts of the Saddam regime.
The affect on the budget is already noticeable in reparations payments alone, even without debt payments (there is a moratorium on payments until 2006, extended to 2008 for the Paris Club portion of the debt). In the 2 years since the fall of Saddam, Iraq has paid $2.4bn in reparations, more than the combined annual health and education budget of $1.5bn in 2004. Reparation service is fixed at 5% of oil revenues by UNSCR 1483 while demands for debt service in 2006 could range from $2-5bn. Even without these demands the Iraqi budget would be expected to run a deficit in the coming years.
The reason Iraq went from a position of zero-debt (and $36bn cash reserves) in 1979 to $125bn debt in 2003 was because of the vast expenditure on the Iran-Iraq war ($120bn in the just first 4 years) together with a distribution of oil exports by that war (just $48bn in those same first 4 years). The difference was made up by foreign loans and grants (there is an ongoing dispute over whether payments from the GCC countries was structured as loans or grants provided out of fear of the Iranian revolution spreading).
Odiousness
There has been unusually broad-based international support for the argument that the debt is “odious” -a doctrine in international law dating back to the 1920s which states that loans made with open eyes to totalitarian regimes that spend the money against the interest of the people, for example on warfare, internal repression and corruption, are not valid state debts. Paul Bremer stated: “[the debt is] a result of Saddam’s economic incompetence and aggressive wars,” while his CPA economic advisor (now Polish Prime Minister) Marek Belka quantified this: “about 90% of Iraq’s virtual debt is war-related.” The Jubilee Iraq campaign (www.jubileeiraq.org), an alliance of Iraqi economists and lawyers with international debt campaigners, has garnered support for a proposed arbitration tribunal on odious debt from parliamentarians in many countries, including bills in the US Congress (supported by 31 Representatives including senior members of both parties) and the British Parliament (support from over 100 MPs).
Iraqis from across the political spectrum argue the case forcefully, for example PUK representative Perweez Mohammed has said: “The creditors cooperation enabled Saddam to presiding over atrocities such as Halabja and mass graves. Saddam never spent money for the benefit of the Iraqi people, but just for himself and his followers.” While interim Prime Minister, Iyad Allawi wrote in the Independent: “The vast majority is “odious” debt, used to build up the war machine of the ousted regime, largely through arms purchases supported by the lending countries.” And Ayatollah al-Hakim announced: “The creditors committed an act of oppression against the people of Iraq by providing Saddam’s regime with these funds. There is no question about the odious nature of these debts”. The clearest expression of Iraqi feeling on this issue was a resolution passed unanimously by the Interim National Assembly on 30 November in response to the Paris Club agreement, states: “This debt is odious and is not the Iraqi people debt. It must be cancelled immediately, completely and unconditionally.” Criticising the Paris Club deal for being phased over 3 years, partial and conditional. The Assembly’s Resolution, threatening immediate repudiation of the debt unless the creditors offered a better deal, was never implemented because of the elections and then wrangles over the formation of the transitional government (in fact some commentators have suggested the Paris Club agreement was deliberately rushed through at the end of 2004 because of the scheduled elections).
Some creditors argue that if Iraq pushes the argument that the debt is odious further this will undermine its chances of future loans and investment. However many in the finance community disagree with this. A Wall Street Journal editorial read: “We wouldn’t blame Iraq’s leaders if they decided that some of those financial obligations are indeed odious. And given that this is such an extreme case, international lenders probably wouldn’t hold it against them for long.” Even East-West Debt, an Antwerp-based debt collection firm, admitted “Stiffing the holders of the original loans may not impede Baghdad’s ability to get new loans.” A one-off repudiation of debt on the clear criteria of odiousness does not phase commercial lenders, and a country with little overhanging debt clearly has a far better credit rating than Iraq today with the world’s highest debt/export ratio.
Conditions on Debt Relief
As the National Assembly resolution made clear, Iraqis are not merely concerned about repayment of debt they consider odious, but also with conditions attached to debt relief. For the Gulf countries the conditions are likely to be a complex web of political horse-trading, as yet unnegotiated. For the Paris Club the conditions are economic policies which will be fully articulated in the IMF Standby-Agreement expected to be announced in September. Already the IMF has been meeting with Iraq, giving an overview of its priorities in September last year, when it demanded: “the implementation of key structural reforms to transform Iraq into a market economy.. in which progress must be made in 2005… including tax reform, financial sector reform and restructuring of state-owned enterprises.” A key demand is the phasing out of subsidies on fuel (initially by $1bn a year) and the end of the food ration has also been discussed. The concern about these IMF conditions are twofold. Firstly they may be socially and economically damaging. The IMF itself has admitted a degree of failure in Argentina which essentially ceded control of its economy to the IMF through the 90s because of its vast debt (which incidentally was largely accumulated by the military government and many consider to be odious) leading up to the economic crisis in 2002. Secondly, even if the IMF does recommend the optimal economy policies, Iraqis are unhappy with ceding control over their economy just as they begin on the promised path towards democracy and self-determination.
Professor Joseph Stigitz, the Nobel Prize former chief-economist of the the World Bank, recently spoke at debate on Iraq at Columbia University. He gave the example of the IMF’s policies in Russia in the 1990s, in which the communist economy was rapidly replaced by a liberalized and privatized one, causing the GDP to fall by 50% and the poverty level to rise from 2% to between 20-40%. This strategy, which he says is precisely what the US and IMF are applying to Iraq “has almost an unfailing history of failure.” Elsewhere Stiglitz wrote “In theory, the IMF supports democratic institutions in the nations it assists. In practice, it undermines the democratic process by imposing policies.” This is echoed by Iraqi economist Salih Yasir: “IMF conditions neglect the social consequences of economic policies. An IMF structural adjustment program would create more social tension and cause a social explosion which might destroy the transition to democracy.” Weshah Razzak, an Iraqi exile working as a senior economist for the New Zealand government wrote: “When I look at past IMF policy errors I get frightened. Iraq stands no chance of success if the IMF makes policies like those it made in the past.”
Reparations
Historians generally agree that the reparations imposed on Germany after the 1st World War contributed significantly to the economic crisis which propelled Hitler to power. After the 2nd World War and most major conflicts since then the international community has taken a different approach and not pressed large reparations on the losers in conflicts. The UN Compensation Commission, established in 1991, was an exception to this general rule. After 14 years of deliberation it completed is assessment of the $368bn of claims, awarding a total of $52bn of which $19bn has been paid to date.
Iraqis have long complained that they were not allow sufficient representation at UNCC meetings, and that as a result incorrect and excessive awards have been made. This was backed up on 9 January 2005 when the UN Office of Internal Oversight Services released its assessment of the UNCC, suggesting that Iraq may have overpaid by around $5bn (a quarter of the amount paid to date). The Independent Inquiry Committee into the UN Oil-for-Food gave this account: “The IAD also raised significant issues about claims processing and claims decisions at the UNCC, which, in OIOS’ view, resulted in significant overpayments to claimants… Many very large potential overpayments were identified… including double compensation, currency exchange errors, and calculation errors.”
Since the fall of Saddam, Iraqis have also been arguing a stronger case that, as fellow victims of that regime, they should not be held responsible for any reparations payments. The Youth Democracy Organization, representing Baghdad students, wrote: “When the Ba’athist regime invaded Kuwait, we Iraqis were as much victims as the Kuwaitis. Where is the international commission providing compensation for us?” At the final UNCC session on 28-30th June 2005 the Iraqi Deputy Foreign Minister Mohammed Hamud Bidan requested that ” we stop the payments of 5% from oil revenues…it is too much for us. We think it is time now to stop and leave Iraq to negotiate directly with the states concerned.”
Suggested Action Points:
1) Encourage all creditors to match the Paris Club’s 80% and ideally go beyond this.
2) Request the Paris Club to delink debt-relief from IMF conditionality.
3) Establish a UN team to investigate the possibility of an odious debt tribunal do determine fairly when of the debt claims are legitimate and which are odious.
4) In a new UN SCR end the requirement for 5% of oil revenues to go to reparations and leave Iraq to negotiate bilaterally with claimant countries and/or request for the UNCC to reassess the outstanding awards in the light of claims of overstatement.
