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Iraq Debt Debate Already Under Way

by David Chance, Reuters, 19 March 2003


LONDON -- Iraq will pay its debts after Saddam Hussein is removed but will need a big write-off so the once-prosperous country's economy can grow again, an exiled former central banker who is also a senior opposition figure said.

Salah al-Shaikhly is a senior member of the Iraqi National Accord opposition group exiled in London.

He was a governor of the Iraqi Central Bank in the 1970s, the director of the Bureau of Statistics, the deputy director of state planning and the head of Iraq's overseas humanitarian aid program.

He also headed the Arab Bureau of the United Nations Development Program in 1978 before he was prevented from returning to Iraq in the middle of the 1980s.

He said the country's economy had been ruined by Saddam Hussein's military adventures, which have run up huge debts.

"The debt has accumulated. In our estimate it is in the region of $112 billion," al-Shaikhly said.

"[The debt] is with governments like Russia, France and Bulgaria for the supply of arms," he said, adding that he believed Russia and France were the biggest creditors with $8 billion to $9 billion apiece.

Bulgaria is owed $1.3 billion, and there is $1 billion in traded loans owed to private sector banks.

Figures for Iraqi debts vary.

The current Iraqi government puts debts at $42.1 billion at the end of 1991, but that figure excludes interest and $30 billion of loans from Gulf states, which Iraq regards as grants, paid by those states to protect them from Iran in the 1980s.

Iraq and Iran fought a war between 1980 and 1988.

The World Bank estimates that with almost no debt payments made after 1990, foreign debt had risen to $126 billion by the end of 1998, of which $47 billion was arrears on interest.

"The reason it is difficult to find accurate figures is that during the 1980s when all of the technocrats departed, a number of departments were authorized to sign agreements with international financial institutions -- the palace, acting as the Treasury, was an authorized signatory, the Ministry of Finance, the Military Industrialization Ministry, the Central Bank," al-Shaikhly said.

What is clear is the pattern of the increasing militarization of the economy.

Independent economists estimate that in 1970, 19 percent of the gross domestic product was spent on the military, rising to 23 percent in 1980. From 1981 to 1988, military spending amounted to $111 billion, or 40 percent of that period's GDP, and 154 percent of oil revenues.

This military spending bankrupted the economy, prompting Saddam Hussein's disastrous invasion of Kuwait.

Although the future economic state of Iraq is a matter for speculation, plans are being made.

Iraqi economists, including al-Shaikhly, have been planning with the U.S. State Department and U.S. Treasury an economic plan for the country, post-Saddam, which includes debt resolution.

Most analysts accept that it would be impossible for Iraq's degraded oil infrastructure to deliver any meaningful improvement in standards of living to the population while at the same time paying out up to $300 billion in reparations for the 1990 invasion of Kuwait as well as servicing its commercial debts.

What is expected is that Iraq would win generous write-offs from creditors along the lines of those granted to former Yugoslavia, which saw 66 percent of its debts forgiven.

"It [Yugoslavia] is a very attractive model," said al-Shaikhly.

"Definitely we would like some of [the debt] to be negotiated away. The other part we have to negotiate, we can have an equity exchange," al-Shaikhly said.

A deal along the lines of Yugoslavia could massively boost the value of the $1 billion in private sector loans, which, although illiquid, are trading at around 15 cents on the dollar, up from eight to 10 cents in September last year.

Yugoslav debt has risen to 50 cents on the dollar from eight cents in the past two and a half years, but Iraq could be a far better bet because of its hugely valuable oil reserves and the increasing likelihood of some kind of debt-for- equity swaps.

Even so, Iraq will need time to get its house in order as it would take 50 years to repay the debts at current oil production levels given that a quarter of revenues go to reparations for the invasion of Kuwait.

"We have to extend the period of payment," al-Shaikhly said.

"We need a holiday of two to five years before we start paying debts,otherwise we should not make any progress," he said.

Yugoslavia won a six-year grace period on its sovereign debts with 22 years to repay.

But however willing post-Hussein Iraq might be to renegotiate the majority of its sovereign debts, Al-Shaikhly took the same view as the current regime: that the $30 billion from the Gulf Arab states should be excluded from any repayment negotiation plans.

Among middle-income developing countries, Iraq's impoverishment is unique.

According to Iraqi officials, per capita income has fallen to $150 per year, less than 42 cents a day, compared with a UN-defined poverty level of $2 a day, and down from $4,000 per year prior to 1991.

Copyright © 2003 Reuters
Reprinted for Fair Use Only.

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