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2.3 Iraq’s debt cancellation: uneven efforts hinder economic stability
and raise public concerns
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Paris Club initiative cancelling Iraq’s debt: locals perceive a new form of dependence
The magnitude of Iraq’s huge economic obligations was revealed after the fall of Saddam
Hussein’s regime. With Iraq’s debt having accumulated at the time to over USD 120 billion
–most recent estimates refer to a staggering USD 140 billion debt with accrued interest –
and posing a direct threat to the country’s stability, the Paris Club comprising 19 of the
world’s richest countries, initiated a series of financial services including debt restructuring
and debt cancellation.
In efforts to allow reconstruction and economic development to take place in Iraq, the
Paris Club Agreement of 2004 provided for a three-stage plan to reduce Iraq’s debt by 80
percent: the first stage was to immediately cancel 30 percent of its debt to each Paris Club
country, whereas the second and third stages involved the implementation of International
Monetary Fund (IMF) programmes ensuring further debt cancellation.
US urging Iraq debt to be wiped in return for implementing IMF reforms
Notably, with US President Bush urging European and Arab leaders to write off debts owed
by Iraq in return for the latter implementing IMF programmes, over the past three years the
country’s debt has been reduced by USD 66.5 billion.
A total of USD 42.3 billion debt owed by Iraq to Paris Club members was cancelled with the
US writing off all of Iraq’s debt, amounting to USD 4.1 billion.Furthermore, according to an estimated total of USD 8.2 billion whilst commercial creditors have written off a total
debt of USD16 billion.
In February 2008, Russian Finance Minister Alexei Kudrin and Iraqi Foreign Minister,
Hoshyar Zebari, signed a bilateral agreement to forgive 93 percent of Iraq’s debt to Russia,
which is USD 12 billion out of the total debt currently standing at USD 12.9 billion. The
first stage of the agreement, which is in line with the Paris Club Agreement of 2004,
involves the cancellation of 65 percent of the debt to be written off, with the remaining
USD 4.5 billion to be cancelled in two subsequent stages subject to further negotiations. It
is foreseen that Iraq would pay Russia the remaining seven percent of the debt, including
capitalization of interest for the period 2005-2008, making the first payment in early 2009.
Following efforts to reduce Iraq’s external debt, the country’s economic partnership with its
former creditors has shifted considerably. For instance, Russia and Iraq have signed a
memorandum of trade and economic cooperation, paving the way for Russia to fully
participate in all projects and tenders to be held in Iraq, and to invest up to USD4 billion
in the country including on long-term joint projects in the oil and natural gas sectors.
Iraqis’ concerns over IMF-style reforms
However, the implementation of IMF-style economic and political reforms as envisaged in
the Paris Club Agreement of 2004 and advocated by US President Bush in exchange for
external debt cancellation has raised public concerns. Importantly, such reforms allow
international actors to penetrate Iraq’s oil market and to make use of its invaluable oil
reserves.
The public increasingly perceives this as an exploitation of their resources; many Iraqis
have expressed their distress and have called for their country’s economic and political
autonomy.
The reforms imposed by international actors and the IMF are widely
regarded as giving rise to a new form of economic reliance. Instead of moving from debt
obligation to economic dependence and foreign exploitation, Iraqis would prefer to have
held negotiations with Iraq’s creditors to reach an agreement alleviating the country’s
financial burden. With satisfactory progress under an IMF programme required for the final
20 percent of the Paris Pact debt relief, the Iraqi public considers that it is progressively
losing ownership of its resources, its economic prosperity and the country’s future.
Arab countries perpetuate Iraq’s debt
Regrettably, the efforts of the Paris Club members to resolve Iraq’s debt issue were not
supported by the Arab countries, particularly Kuwait and Saudi Arabia. Notably, Saudi
Arabia represents one of Iraq’s largest creditors.
In addition to the external debt, the issue of Iraq’s reparations to the Gulf countries
following the Iraqi invasion and occupation of Kuwait has been a major impediment to the
country’s economic stability. The number of compensation claims submitted by individuals,
government entities and companies following Iraq’s occupation of Kuwait reached
approximately 2.7 million, totalling over USD 350 billion.
The United Nations Compensation Commission (UNCC) approved a total of USD52 billion;
the current outstanding compensation to be paid to Kuwait and Saudi Arabia by Iraq
through the UNCC amounts to USD28 billion. The refusal of these oil-rich Arab countries
to cancel the multi-billion dollar debt has not only been hindering Iraq’s economic growth
but has also thwarted good neighbouring relations. In light of the vital role of Iraq in
regional security and stability, the rebuttal of its wealthy neighbours to forgive most of its
debt and the perpetuation of a politically and economically weak Iraq is detrimental to all
of its regional countries.
It is feared that if Iraq is required to meet its substantial debt obligations to these
countries, the country’s economy will effectively collapse and its society will disintegrate,
hence leaving political space for another extremist leader to fill. In this context, the Iraqi
public has grown increasingly critical of its neighbours refusing to begin negotiations in
order to forgive part of the debt owed to them.
“…we have to think very broadly in the international community of everything we can do to
help Iraq get to a position of stability and security. So while debt relief may have no immediate
linkage for the day after tomorrow on violence, it’s still very important to do because it helps
chart a long-term potential for prosperity in Iraq.”
US Ambassador Ryan Crocker, 3 May 2007 |
How to promote a healthy and sovereign Iraqi economy?
Iraq’s enormous debt poses a direct impediment to the country’s security and stability. A
stagnant and highly indebted economy will create further friction and frustration, allowing
radical elements to exploit these grievances and garner support. Amid public concerns and
criticisms over Iraq’s debt cancellation in return for the implementation of IMF-style
reforms, and the refusal of neighbouring countries to hold negotiations with the Iraqi
government on this issue, a conciliatory decision must be reached without delay.
- Visible results
Iraqis must feel that their welfare and security are put at the forefront of efforts.
International financial assistance must have a more visible, substantial and nonexploitative
impact on the lives of ordinary Iraqis. By forgiving all or most of the country’s
external debt following negotiations and based on a set of agreed principles, Iraq’s
creditors would contribute to alleviating the country’s financial burden and setting the
foundations of a healthy economy. Importantly, this will send a clear and strong message
that Iraq’s creditors, including its neighbours Kuwait and Saudi Arabia are not acting out of
sectarian interests but, instead, actively seek to bring stability in Iraq and the region.
- Iraqi ownership
Promoting stability and prosperity in Iraq requires not only a healthy and flourishing
economy but also a sovereign economy. Ownership should be given to Iraqis; they must
have a principal stake in their future and be able to manage and maximize the potential of
the country’s resources. As part of the efforts to promote Iraqi ownership, the Iraqi
government and its largest creditors should hold negotiations in order to reach an
amicable, genuine agreement regarding the country’s debt obligations. Debt cancellation in
return for the implementation of Western-style reforms is widely viewed by Iraqis as an
imposed policy seeking to exploit Iraq’s oil and other resources without prior negotiation.
Conversely, the refusal by Iraq’s neighbours to forgive its debt has been perceived as a
deliberate action to hinder Iraq’s reconstruction and the prosperity of its people. It is vital
that Iraq’s neighbours and international partners project their efforts and proposed action
in Iraq in a constructive manner, considering the needs and priorities as expressed by the
Iraqis themselves. Thus far, the US and its partners have primarily embarked on aggressive
tactics, increasingly regarded as repressing the Iraqis.
- Build trust
The policy debate and strategic actions must shift, aiming at altering negative perceptions
and building trust between the Iraqis and the regional and international partners. Iraqis
must also begin viewing international partners as allies and ensuring that creditors’ debt
cancellation plans are a genuine effort to promote economic development and stability in
the country. Agreeing terms and targets for fiscal responsibility as part of an overall plan to
forgive Iraq’s external debt will help promote Iraqi ownership and will accordingly be
viewed to the benefit of the Iraqi people.