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March 31, 2009 No.
438

Western Countries Cancel Iraqi Debt, Gulf Countries Don't

Introduction

During the long years of Saddam Hussein's rule in Iraq, economic data were treated as top national secrets, and the revelation of such data to unauthorized persons could bring the death penalty. Therefore, it was only after the fall of the regime that the extent of Iraq's enormous sovereign debt, estimated at the time in excess of $120 billion, was to become a public record.

After the invasion of Iraq in April 2003, it became evident that the country's economic and social development could not be initiated with so much external debt overhang, and the issue was taken up by the Paris Club.

At the September 2003 meeting in Dubai of the G-7, the finance ministers [1] called on the Paris Club "to make its best effort to complete the restructuring of Iraq's debt before the end of 2004." According to U.S. figures, Iraq owed Paris Club members approximately $40 billion. Of this amount, $21 billion was principal and $19 billion was interest. The IMF estimated Iraqi debt held by non-Paris club governments - primarily the oil-rich Arab countries in the Persian Gulf - at $60 billion to $65 billion, and debt to commercial creditors at roughly $15 billion. [2]

The Paris Club Tackles the Iraqi Debt

The Paris Club is an informal group of financial officials from 19 of the world's richest countries, which provides indebted countries and their creditors such financial services as debt restructuring, debt relief, and debt cancellation. Debtors are often recommended by the International Monetary Fund after alternative solutions have failed. [3]

At its meeting on November 21, 2004, the Paris Club recommended a three-stage plan to reduce debt owned by Iraq by 80%. The first stage was to immediately cancel 30% of debt owned by Iraq to each Paris Club country. The second stage was to start the implementation of an IMF program following which another 30% would be cancelled. The remaining 20% of the initial stock would be abdicated upon completion of the last IMF program. [4] Most creditor countries, including the U.S., the U.K., France, China, and Russia, have adopted the recommendation, in full or in part. The oil-rich Arab Gulf countries have been the exception, despite many promises to the contrary.

Most recent data from the U.S. Department of State indicate that over the past three years, Iraq's debt has been reduced by $66.5 billion. With the participation of all members, the Paris Club cancelled a total of $42.3 billion. The U.S. cancelled 100% of Iraq's debt of $4.1 billion. Other Paris Club members agreed to cancel 80% of Iraq's debt. A number of non-Paris Club members have cancelled a total of $8.2 billion, on Paris Club terms.

Iraq's Failed Attempts to Resolve Debt Issue with Gulf Countries

The Iraqi Finance Ministry has sent several messages to the Arab countries, notably Kuwait and Saudi Arabia, confirming Baghdad's readiness to hold talks to settle the Iraqi debt. However, Finance Ministry director-general finance Muhammad Al-Hariri has noted bitterly, "We were expecting, for some time, that these states would resolve the issue and follow the path of several other countries around the world that have cancelled the debt due them from Iraq, but the Arab countries have remained bystanders." He added that the attitude of the Gulf states is "politically motivated, because some of these countries do not recognize the new changes in Iraq."

The Iraqi daily Al-Da'wa, issued by Prime Minister Nuri Al-Maliki's political party of the same name, has been far more explicit in its criticism of the Gulf countries for their refusal to cancel Iraqi debts. In an article entitled "Iraq Is Not Obliged to Pay Odious Debts," Rassim Qassim writes that most of the debts accrued by Iraq were "the result of actions by the previous dictatorial and unconstitutional regime, and they are primarily in the form of damages sustained by countries during the invasion and occupation of Kuwait or the result of wars and crises that led to the isolation that regime…" When that regime fell, writes Qassim, "it was assumed that countries which had opposed the previous regime and its programs would drop the odious [illegitimate] debt, and they are now asking the suffering Iraqi people to bear the responsibility of the actions of the despot [Saddam Hussein.]"

Qassim goes on to say that "the new Iraq - with its elected constitutional government and its democratic institutions - is not obliged to pay these debts and it is not obliged to acknowledge them… The civilized world and, specifically, Europe, has responded to the Paris Club, which cancelled 80% of the odious debts, and the European Union is trying to cancel the rest and open a new page with emerging Iraq. The international community has begun to view Iraq in a different perspective - as the sole country in the region that enjoys democratic, multi-party and constitutional parliament."

After underscoring Iraq's great economic potential, the author warns of "the impediments being placed on it by countries which have regimes that are incompatible with democratic orientation and which insist on retaining the false debts that were imposed on Iraq." He concludes by calling on the Gulf countries to reexamine their calculations and to keep in mind that "causing harm to Iraq would not endure, and what goes around comes around." [5]

Reflecting the same views, Hilal al-Ta'aan writes in the Iraqi government daily Al-Sabah that most of the loans given to Iraq by foreign and Gulf countries were made with the certitude that they had a military objective - to arm Iraq and support its war against Iran. [6]

The Doctrine of Odious Debts

The two articles echo the doctrine of "odious debts." Proponents of the doctrine asset that some of Iraq's debt could potentially be classified as non-legitimate under international law, since they were undertaken during the Hussein regime and that international law should be able to expunge these debts. Patricia Adams, who is associated with Probe International, a Toronto-based organization devoted to the issue of "odious debts," quotes Russian legal scholar Alexander Sack, who, in 1927, defined the Doctrine of Odious Debts, as follows:

If a despotic power incurs a debt not for the needs or in the interest of the State, but to strengthen its despotic regime… this debt is odious…. This debt is not an obligation for the nation; it is a regime's debt, a personal debt of the power that has incurred it, consequently it falls with the fall of this power. [7]

Reparations as Debt

Apart from the external debt, there is the issue of reparations to Kuwait and, to a lesser extent, to Saudi Arabia, stemming from the occupation of Kuwait by Iraq, the looting of the country and setting fire to its oil fields.

Following the occupation of Kuwait, the United Nations imposed sanctions against the Iraqi regime. Security Council Resolution 661, of 1990, prohibited all nations from buying Iraqi oil and from selling Iraq any commodities except food or medicines. Under the same resolution, the United Nations Compensation Commission (UNCC) was established as a subsidiary organ of the Security Council to process claims and pay compensation for losses and damage suffered as a direct result of Iraq's 1990-1991 invasion and occupation of Kuwait. Initially, 30% of revenues from the sale of Iraqi oil was to be channeled through the UNCC; that proportion was later reduced to 5%, and it has remained at that level, but with a larger revenue base. The Commission receives about $220 million a month.

There were approximately 2.7 million claims submitted, for a total of over $350 billion. Of these claims, 1.54 million (57%) resulted in some sort of award. The total approved by the UNCC was $52 billion. In March of this year, the UNCC paid out $972.4 million, bringing the total to $24.4 billion. Kuwaiti companies and state entities received the lion's share of the latest round of compensation, amounting to $725.1 million, followed by Saudi Arabia with $148 million, the U.S. ($76 million) and Turkey ($23.3 million). Another $28 billion remains to be paid to settle all outstanding claims.

The Commission has adopted a policy of paying individuals first, with the result that the remaining sum is owed to government entities (including state oil companies) of Kuwait and Saudi Arabia.

Kuwait, which has received nearly $14 billion from the UNCC, is still owed about $27 billion, or almost all of the remaining outstanding compensation of $28 billion, to be paid by Iraq through the UNCC.

Conclusion

There is no doubt that Kuwait suffered enormously as a result of its occupation by Iraq and the brutal administration, established by Saddam Hussein, that followed. The country was systematically looted, many of its citizens were murdered or taken as prisoners to Iraq without leaving a trace. Reparations were justified. But how much reparations should be assessed, and collected, should be negotiated in a spirit of generosity as befit two neighborly Arab countries that must live side by side for a long time.

The issue of debt is of an entirely different genre, because loans extended to the Iraqi regime during the Iraq-Iran war were equally beneficial to lender and borrower alike, and this factor should be kept in perspective as the parties seek to bring the issue to a close. A strong and prosperous Arab Iraq may serve again as a dam against a raging Persian tide that threatens to sweep the Middle East in its wake. And this factor, above everything else, could only be ignored by the debtor nations at their own peril.

*Dr. Nimrod Raphaeli is the Editor of The MEMRI Economic Blog, www.memrieconomicblog.org .

Endnotes:

[1] The G7 (Group of 7) countries are: The United States, Japan, Canada, Germany, the United Kingdom, France and Italy. Russia joined the group, which has now become the G8. All G8 members belong to the Paris Club.

[2] Congressional Research Service, CRS Report to Congress, Order Code RS21765, updated January 19, 2005.

[3] The permanent member-nations of the club are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, Russia, Spain, Sweden, Switzerland, the United Kingdom and the United states.

[4] Iraq, Paris club Press Release, (Paris), 21 November 2004.

[5] Al-Da'wa (Baghdad), May 11, 2008.

[6] Al-Sabah (Iraq), May 11, 2008.

[7] www.odiousdebts.org/odiousdebts/index.cfm?DSP=content&ContentID=7759 (posted June 26, 2003).