Freeing Iraq from debt

My article on the Iraqi debt crisis was published by the Institute of War and Peace Reporting here, and republished elsewhere. 

When Saddam's statue fell in the centre of Baghdad, one might have been forgiven for feeling a little of the "liberators'" triumphalism in a free Iraq. However, as Iraq rejoins the "international community", it has become clear that Saddam will be with Iraq for some time yet - not least, in the form of some $380 billion Iraq owes in debt and reparations claims.

During the 1980-88 war with Iran, Saddam spent $111 billion on the military, including a $30 billion loan from the Gulf States and a $17 billion loan from Kuwait. It was these loans that led to the first Gulf war after Kuwait's demands for repayment, coupled with low oil prices, led to growing tension with Iraq and, finally, to Saddam's invasion of Kuwait.

Determining the exact levels of Iraq's debts is contentious. The best estimate is probably the Centre for Strategic and International Studies' figure of $383 billion: $127 billion in loans, $199 billion in reparations and $57 billion in contractual obligations. Of this some $4 billion is owed to France, much of it to pay for F1 fighters and Exocet air-to-surface missiles, and $9 billion is owed to Russia for purchases of MIG fighters and helicopters. Apart from these two countries, the biggest creditors are the Gulf states, who are owed some $30 billion.

Even if this figure were massively discounted, Iraq would still be in the World Bank's most burdened category for highly indebted poor countries.

Although it has the second biggest oil reserves in the region, Iraq is able at present to pump only about $10 billion of oil a year, just 2 per cent of the money Saddam borrowed. The Iraqi people, having been impoverished by war, then war, then sanctions, then war again, are unable to pay the $15,000 they would each owe if the people were made to pay the debt their leader incurred building palaces and buying guns.

In 1980, the average per capita income in Iraq was $4,000. Today it is $150.

Thankfully, moves are being made to cancel Iraq's debt. These moves are being led by the United States, but supported by a broad coalition of groups inspired by the Jubilee 2000 movement that campaigned for the cancellation of all Third World debt. This movement managed to bring debt cancellation into the public consciousness and force G-8 governments to make moves to cancel the debt. Jubilee Iraq, formed in London in March, is campaigning for the complete cancellation of the Iraqi debt, arguing that "unless the Iraqi people are freed from Saddam's debts, they will never be able to rebuild their lives."

"If Saddam turns out to be alive, he and his Ba'ath party cronies should be required to spend the rest of their lives crushing rocks and paying every dollar they earn to the creditors," said Jubilee Iraq spokesperson Justin Alexander. "But the Iraqi people have no such obligation. At last they have a chance of freedom and ownership of Iraq and its assets."

The debt could be cancelled through an official Paris Club meeting or through the mechanism of the International Monetary Fund.

Retired US Gen. Jay Garner, whom the US intends to direct the restructuring effort, has urged the German and French governments to forgive Iraq's debt. The British government has agreed to cancel some but not all, of the $1.6 billion debt it is owed.

Iraq's debt to the United States currently stands at $5 billion, to which must be added $3.4 billion in reparations claims from the first Gulf war. The US government, however, has a vested interest in wiping the debt that Saddam created: if the debt were not cancelled, the US would have to explain why Iraqis were still suffering from Saddam's legacy even after a war which it said would free the country from oppression. There is a further incentive for the US government to relieve the debt: if oil starts flowing again in Iraq, and American companies start working again there, oil revenues might be impounded by creditors if the debt was not relieved.

The German, French and Russian governments - those who most opposed the war, on humanitarian grounds - are now the countries that are most opposed to writing off the debt.

One argument says that if Iraq's debts were cancelled, creditors would consider any future lending risky. Yet a debt-free, democratic Iraq, with a predictable stream of revenue from oil, would be a much more appealing country to lend to than one saddled with $383 billion of old debts. Another criticism is that debt cancellation introduces what economists call "moral hazard" into the debtor-creditor relationship. This argument says that governments seeing debt cancellation will borrow money they have no intention of repaying in the expectation that it will be written off in due course. But cancellation of debts incurred by a deposed dictator does not set a precedent for the cancellation of debts accumulated in a democracy for the benefit of the people.

The issue of the $172 billion in reparations for the first Gulf War raises further questions about the appropriateness of punishing the Iraqi people for Saddam's actions. On April 8, the United Nations Compensation Commission issued payments totalling $860 million to 370 successful claimants, including $738 million to Kuwait. The money came from the oil-for-food programme, the mechanism supposed to alleviate suffering in Iraq. The payment was made the day after the UN announced a "massive shortfall" in emergency humanitarian funds. 

The debt crisis in Iraq also brings up a larger set of questions. Dictators support their rules through loans, and thus far the international community has not been too concerned with the legitimacy of the regimes it loans money to. If Iraq's debts are cancelled, this would hopefully usher in an era in international finance in which companies and governments could no longer be ruled simply by the profit motive, but would have to consider the legitimacy of the governments to which they were lending.

Joshua Craze is a project coordinator for Jubilee Iraq