Iraq's Odious Debt Must be Eliminated, Not Rescheduled
Updated

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	As the US occupation of Iraq continues, the question of Iraqi debt has become a vexing issue both for governments as well as debt campaigners. The following analysis provides an up to date recounting of the key issues and players involved in the struggles over what to do about outstanding Iraqi debt, the role of Canada, and the position of Jubilee Iraq.

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	Contents

• Odious Debts
• Creditors Want Paris Club to Reschedule Debts Without Declaring Them Odious
• Jubilee Iraq Demands Outright Cancellation
• Baker's Mission
• Madrid Conference Falls Short
• Halliburton Overcharged for Fuel and Meals
• Arab States More Cautious
• Debt Owed to the Iraqi People
• Canada's Role

During the January 2004 World Economic Forum in Davos, Switzerland, Prime Minister Paul Martin announced that Canada would write off “the vast majority” of the C$750 million Iraq owes to federal agencies. Media reports implied that this debt reduction would occur right away. In fact the Prime Minister’s announcement put Canada squarely behind a US plan to delay Iraqi debt rescheduling until it could be tied to the acceptance of economic policies approved by the International Monetary Fund.

Canada is collaborating with a Bush Administration plan to reduce debts owed mostly to opponents of the invasion of Iraq, thus freeing up oil revenues for reconstruction projects led by US firms. In return Canadian companies will gain an opportunity to participate in lucrative sub-contracts.

Substantial, but still partial, debt reduction will only occur through the Paris Club of creditor governments after the IMF approves the economic policies of a new government in Baghdad. The US is counting on the IMF to insist on continued privatization of state companies and foreign ownership of Iraqi banks, mines and factories.

	Odious Debts

In April of 2003 Bush Administration officials started talking about how the people of Iraq should not be saddled with debts incurred by Saddam Hussein “to buy weapons and to build palaces.” Debt campaigners quickly seized the initiative pointing out how these debts constitute a prime example of odious debts as they were contracted by a dictatorship, without the consent of the people and with the full awareness of the creditors. These debts should never have to be repaid by the Iraqi people.

Since then the Bush administration has backed away from allowing the cancellation of Iraqi debt to set a modern precedent for the application of the doctrine of odious debt. Instead it wants only to restructure Iraqi debts, not eliminate them. In December of 2003, President Bush appointed former Secretary of State James Baker III as his special envoy to seek international agreements on restructuring Iraqi debt. Baker's mission also includes the task of explaining the administration's plans for Iraq to skeptical nations in Europe and the Middle East.

The World Bank now estimates Iraqi debt at around US$120 billion, not including another US$100 billion in reparations owed to Kuwait and other states as compensation for damages inflicted during the first Gulf War. About US$45.5 billion is owed to Arab countries including Kuwait, Egypt, the United Arab Emirates, Saudi Arabia, Jordan and Morocco. US$21 billion is owed to Western members of the Paris Club as well as Russia, Brazil and South Korea (see table below). Poland, Bulgaria and Hungary are owed about US$5 billion. Other states, including China and Turkey, are owed a further US$9 billion while private creditors claim US$12 billion

The debate over Iraqi debt intertwines with other questions concerning the behaviour of the occupying powers, the disposition of future oil revenues and the allocation of contracts for reconstruction and oil production potentially worth US$500 billion. The United Nations Security Council has recognized the US and Britain as "occupying powers" in Iraq. Under the Geneva Conventions the occupying powers are obliged to provide for the needs of the Iraqi people but they are not allowed to make wholesale changes to their institutions. Since the Coalition Provisional Authority set up by the occupying powers is not a legally established government, it cannot contract loans that future Iraqi governments will be obliged to pay. Furthermore, under Paris Club rules debt relief agreements can only be signed with sovereign governments.

At the September 2003 annual meetings of the IMF and World Bank the Coalition Provisional Authority announced a sweeping set of economic policies that The Economist labeled “a capitalist dream”. The CPA declared that 200 Iraqi state companies would be privatized, that foreign firms could retain 100% ownership of Iraqi banks, mines and factories and that no restrictions would be replaced on repatriation of profits from Iraq.

Journalist Naomi Klein notes that these measures are illegal under the 1949 Geneva Conventions and the 1907 Hague Regulations governing the behaviour of occupying forces. Under these Conventions occupying powers are supposed only to administer the affairs of a territory and are not allowed to sell off its assets to foreign owners. What if a future Iraqi government wanted to reverse the CPA’s policies and renationalize some of the privatized firms? One way to head off such an exercise of Iraqi sovereignty is to give the IMF a role in determining future economic policies.

	Creditors Want Paris Club to Reschedule Debts Without Declaring Them Odious

Mr. Baker's first mission was to France, Germany and Russia, the largest creditors among the countries who opposed the invasion of Iraq. These countries had already agreed at last summer’s G8 leaders Summit in Evian, France to refer Iraqi debt reduction to the Paris Club where the rescheduling of government to government debts has been decided since 1956. The Paris Club meets in secret and has no mandate to judge the legitimacy of debts, but only discusses how to stretch out payments or write-off the portion that can never be collected. The best terms that the Paris Club has ever offered (outside of the 90% write-off for low-income countries under the Heavily Indebted Poor Countries initiative) was a 66 percent reduction of debts owed by the former Yugoslavia after the ouster of Slobodan Milosevic. Some commentators, such as Lex Rieffel of the Brookings Institution, say that write-offs for Iraq could be as high as 80%.

The Paris Club is a creditors’ institution, not a neutral body. Moreover, the Club always insists that before debt relief can be granted a country must agree to adhere to strict structural adjustment conditions overseen by the International Monetary Fund. According to Rieffel, a Paris Club decision on Iraqi debt will follow the June 30, 2004 date when the Coalition Provisional Authority is to cede power to another body whose composition is still under debate. (While it is clear that national elections will not take place before June 30, as this note is being written in late February it is still not clear what kind of interim body will take over from the CPA. What is clear is that the June 30th date is dictated by the US presidential election timeline, not by the needs of the Iraqi people).

The new body that does take over nominal, if limited, powers on Iraq after June 30th will have to come up with an economic recovery program that it would submit to the IMF for approval by the end of September, 2004. Once the IMF approves the plan the bulk of Iraqi debts would be rescheduled until the last day of the recovery plan which could be the end of 2005 or 2006. The debts would not be cancelled until the Paris Club met again to review how successfully Iraq had implemented the IMF-supported program. Only then would actual debt reduction commence and it would still be stretched out over three more years with each year’s reduction contingent on meeting new performance requirements under a new IMF structural adjustment program. Thus final debt relief might not arrive until the end of 2009.

The following table gives the breakdown of US$21 billion in debts owed to traditional members of the Paris Club as well as to Russia, Brazil and South Korea who have been invited to participate in the discussion even though they are not regular Club members. Although the table records outstanding debts as of Jan 1, 2003, the Paris Club says "All this debt results from credits contracted before August 2nd, 1990", that is, prior to the first Gulf War. The table does not include another US$21 billion worth of accumulated arrears on interest payments that could not be made during twelve years of sanctions when the international community controlled the revenues from Iraqi oil sales.

The disposition of these debts has become caught up in a larger debate between the US- and British-led “Coalition of the Willing” and opponents of the invasion. Hence for our purposes the amounts claimed are recorded in two columns according to each country's initial support for or opposition to the invasion of Iraq. In the case of debts owed to Russia, the Paris Club lists the amount owed as US$3,450 million in accordance with the formula it has used in the past to adjust downward the value of Soviet era debts. However, the Russian government still says the debts owed to it amount to US$8 billion.

Outstanding Iraqi Debts According to th Paris Club as of Jan. 1, 2003
(US$ millions excluding interest arrears)

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	Jubilee Iraq Demands Outright Cancellation

A newly formed group, Jubilee Iraq representing Iraqis and citizens in many creditor countries, has begun a campaign to make sure that once an independent government is formed Iraq's illegitimate debts will be repudiated if they are not cancelled beforehand. Jubilee Iraq objects to a debt restructuring deal under the auspices of the Paris Club because it will ignore the odious nature of debts from Saddam's regime. Instead it will be based only on Iraq's ability to pay, as are all Paris Club settlements.

"Iraq will be forced to pay large amounts of odious debts, whitewashed by the language of 'debt forgiveness'", says Jubilee Iraq. The group predicts that "Iraq will be drained of up to US$5 billion a year" in debt payments, based on a study by Richard Segal, a London-based analyst working for a private brokerage firm called Exotix. "Critically, a Paris Club restructuring will rob Iraq of economic freedom, by requiring that it adhere to an IMF structural adjustment program. This will mean rapid privatization, foreign asset stripping and little support for fledgling Iraqi businesses. Iraq's freedom will be reduced to choosing the colours of the flag and the tune of the national anthem, while the important economic decisions will all be made by foreign institutions which are unaccountable to Iraqi voters, leading to an early disillusionment with democracy - fertile ground for future Saddams."

Jubilee Iraq recently interviewed over two dozen leading Iraqis of various political views, ranging from the interim Minister of Finance to Islamic militants who oppose the Coalition Provisional Authority. Jubilee Iraq reports that "They unanimously asserted that debts incurred by Saddam are odious and should not be repaid. Some said the creditors should pay compensation for the harm they did by financing Saddam's wars and oppression." Mohammed Kamil, a young Iraqi democrat interviewed by Jubilee Iraq explained: "When Saddam executed people he used to charge their families for the bullets - this is precisely what the creditor countries who financed Saddam are asking of Iraqis today." The consensus among Iraqis then is that one of the first acts of an elected Iraqi government should be to repudiate all illegitimate debts.

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	Baker's Mission

When President Bush himself made phone calls on December 10, 2003 to the leaders of France, Germany and Russia to urge them to give a sympathetic hearing to Baker's pleas for Iraqi debt reduction, these leaders were fuming over an edict issued the previous day by the Pentagon. Deputy Defense Secretary Paul Wolfowitz had just signed a policy directive that cynically uses the prospect of profitable reconstruction contracts to lure other countries into cooperating with US policies in Iraq. The Pentagon directive says that companies from countries that did not support the invasion of Iraq would be excluded from bidding on US$18.6 billion worth of contracts for such things as building power plants and water projects. The official rationale for the policy states “Limiting competition for prime contracts will encourage the expansion of international cooperation in Iraq and in future efforts.” (emphasis added) In other words this means the Pentagon hawks think they can bribe other nations into sending troops to Iraq to relieve US soldiers and even to co-operate in future military adventures aimed at other “regime changes”.

Germany immediately called the new policy “unacceptable” and Russia responded by ruling out any debt relief for Iraq. France said that there was no easy way to quickly reduce Iraq's debts. But after the capture of Saddam Hussein on Dec. 13, 2003 and visits to Paris and Berlin by James Baker, France and Germany softened their criticism. European diplomats said Baker carried threats of further unspecified repercussions as well as promises of co-operation in his negotiating kit. After Baker visited Moscow, Russia’s Deputy Foreign Minister made a link between debt rescheduling and the recognition of suspended contracts signed by Russian oil companies with Saddam’s regime explicit. He said “progress in settling one [issue] will undoubtedly help reach success in talks about the other.” Russia's biggest oil company, Lukoil, signed a US$20 billion contract in 1997 to develop an Iraqi oil field. Later another Russian firm, Zarubezhneft, was granted a concession, potentially worth US$90 billion, to develop another field

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	Madrid Conference Falls Short

One reason why the Bush administration is pushing so hard for debt relief is because
its efforts to win multilateral financial support for reconstruction in Iraq have fallen far short of what it hoped to raise. Moreover, the sabotage of oil pipelines has reduced expectations of an early gush of oil export revenues.

The US tried to put an optimistic face on the October, 2003 “donors’ conference” held in Madrid by claiming that US$13 billion had been raised for Iraqi reconstruction. But this was only about one third of the US$36 billion target and over two-thirds of the pledges made were for loans, not grants. Canada pledged $300 million at the Madrid Conference of which about $60 million has already been dispersed by the Canadian International Development Agency. A recent World Bank estimate puts the amount that will actually be delivered as grants in 2004 at only US$685 million.

The fact that Iraq lacks a democratically elected government raises a serious question about ultimate responsibility for repaying any reconstruction loans. Since the Coalition Provisional Authority appointed by the occupying powers is not a legally established government, it follows that any debts incurred during the reconstruction process to date are also the responsibility of the occupying powers.

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	Halliburton Overcharged for Fuel and Meals

Other countries have every reason to be skeptical that contributions they make - whether through grants, loans or debt relief - will be spent to benefit Iraqi people. Halliburton, the firm that Vice-President Dick Cheney's ran until he became Bush’s running mate in 2000, has so far received about US$5 billion worth of contracts from the Pentagon without competitive bidding. On Dec. 10, 2003 it was revealed that a Halliburton subsidiary overcharged the US Army Corps of Engineers by US$61 million for fuel delivered to Iraq from Kuwait. Halliburton charged US$2.64 a gallon, more than twice as much as what was paid to other suppliers. In addition, a Halliburton subsidiary is accused of overcharging the US military by another US$67 million for providing meals to soldiers.

These scandals may be only the tip of an iceberg. According to a study by Christian Aid up to US$4 billion of all the funds transferred to the US-appointed Coalition Provisional Authority after the war have “effectively disappeared into a financial black hole” with no public accounting.

It is no wonder then that European countries have been unwilling to write off the debts immediately or contribute more funds for reconstruction without reassurances concerning how the monies would be used. Prior to Baker's visit, a French government spokesperson had said "For the Paris Club to act … would require some kind of formal action on Iraqi sovereignty”, such as a UN Security Council resolution recognizing a timetable for the occupying powers to withdraw and for democratic elections to establish an Iraqi government. However, after Baker's intervention France, Germany and the US issued a statement implying that having a new government in place is not a precondition for moving forward on debt restructuring. After Baker visited Tokyo, the Japanese government pledged "substantial debt reduction" for Iraq through the Paris Club in 2004.

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	Arab States More Cautious

Baker did not have as much success when he visited the Arab states. At a December 2003 meeting of the Gulf Co-operation Council in Kuwait, Saudi Arabia's foreign minister said that Iraq's main Arab creditors would only negotiate with a sovereign government and not with the US-appointed Interim Governing Council. At the same meeting Kuwait's prime minister said that Iraq should not be freed from repayments, "because it is a country that can repay its debts." In a revealing turn of phrase Baker told the Washington Times “Getting some of the Middle Eastern countries committed to [our plan] won’t be easy because they don’t want to give their debt reduction to us. They’d rather give it to the new government to create political favour with it.” (emphasis added)

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	Debt Owed to the Iraqi People

While much has been made of the odious debts left behind by Saddam Hussein, too little attention has been given to the debts owed to the Iraqi people. Jubilee South declares that "The people of Iraq are the victims not only of a dictatorship, but of the deaths of thousands … by way of massive destruction, environmental disaster and the misery caused by two wars and 12 years of embargo." US and UK forces used massive amounts of extremely toxic and radioactive uranium-tipped projectiles to destroy lives and life-support systems in Iraq. Estimates of the number of civilian deaths from the latest war range from 7,935 to over 10,000.

Clearly Iraqi debt write-offs will only be decided in light of broader considerations. A just solution must involve recognition of the debts left behind by Saddam Hussein as odious debts that must be cancelled outright and not just rescheduled by the Paris Club. Furthermore debts incurred for reconstruction must be seen as the responsibility of the occupying powers who also have a moral, if not a legal, obligation to make reparations for all the damage caused by their invasion and the decade of sanctions that preceded it.

The Bush administration is manipulating the fact that debts incurred by Saddam Hussein are indeed odious in an opportunistic fashion as a way of freeing up future oil revenues for its own ends. This continues a pattern of using debt cancellation not as a principled measure to free peoples from illegitimate debts but as a tool for achieving geopolitical goals. For example, at the time of the first Gulf War the elder President Bush granted US$12.4 billion in debt relief to Egypt in return for its support during that war. The opportunism is evident in how the Bush Administration refuses to acknowledge that the debts of so many other fallen regimes ranging from Mobutu in Zaire to Marcos in the Philippines to the generals in Argentina are also odious and therefore illegitimate.

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	Canada's Role

While there is no breakdown of the CS$750 million in debts said owed to Canada, it appears they primarily represent credits from the Canadian Wheat Board. Since Canada is only offering debt relief through the Paris Club, the Martin government is complicit with US plans to tie debt relief to IMF-administered structural adjustment conditions then severely constraining any post-occupation government’s economic policy options. Canada should write off the debt in its entirety independently of the Paris Club when a new democratic government is formed in Iraq. But Canada's responsibility does not end there as Canada must also contribute to the reparations owed to the people of Iraq.

Despite the Chrétien government's refusal to give overt diplomatic support to the invasion of Iraq, Canada offered much more covert collaboration in the invasion than most Canadians realize:

• Canadian warships led the multinational naval task force in Persian Gulf protecting US aircraft carriers launching air strikes against Iraq;
• Some Canadian troops were active on the ground in Iraq as part of an officer exchange program with the US;
• Canadian military personnel aboard AWACS aircraft helped co-ordinate air strikes;
• At least three Canadian military transport planes helped to supply the coalition forces during the war;
• Canada sent 2,000 troops to Afghanistan, in part to free up US troops for duty in Iraq.

Canada's actual collaboration with the US in Iraq no doubt contributed to the January, 2004 announcement by the Bush administration that Canada will be allowed to bid on future reconstruction contracts. At the time US officials made it clear that "the key to any additional changes [to the list of eligible bidders is] how aggressively those nations forgive Iraqi debt."

Canada should not only support the total cancellation of the odious debts, but also provide reparations for past covert support for the invasion and destruction in Iraq. More than the $300 million Canada pledged at the Madrid donors' conference will be needed if the Iraqi people are to be adequately compensated for all they have suffered under the Hussein dictatorship, the invading armies and years of economic sanctions. Additional monies to pay the debt owed to the people of Iraq must not come at the expense of development assistance for other peoples.

Finally, Canada must recognize the illegitimacy of the debts still being serviced by other peoples who suffered under cruel dictatorships. The odious debts burdening the people of so many other countries including South Africa, the Democratic Republic of the Congo (formerly Zaire), Nigeria, the Philippines, Argentina, Brazil and Uruguay, to name just a few of the most prominent examples, must also be eliminated.

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