Who Owns Iraq?
by Zaid Al-Ali
IMF, World Bank Consider Iraq's Future (2003)
November 21, 2004, the 19 industrialized nations that make up the
so-called Paris Club issued a decision that, in effect, traces the outline
of Iraq's economic future. The decision concerns a portion of Iraq's $120
billion sovereign debt -- a staggering amount that all concerned parties
recognize is unsustainable. In their proposal to write off some of the debt,
the Paris Club members took advantage of the opportunity to impose
conditions that could bind the successor government in Baghdad to policies
of free-market fundamentalism.
Iraqis, in general, are contemptuous of the idea that loans made to Saddam
Hussein's government should be repaid. Much of that debt was contracted for
purposes such as purchasing military equipment that was used to invade
neighboring countries, which is not a spending priority that the Iraqi
people voted to pursue. Iraqis and international campaigners argue that much
of Iraq's debt is in fact "odious" -- a category of debt that should not be
repaid because the loan proceeds were used against the interests of the
indebted country's population. "Odious debt" need not be written off or
forgiven; it is simply not owed at all because it is illicit in nature. A
number of legal precedents on odious debt exist, but from a strictly legal
point of view, authorities such as the Paris Club are under no obligation to
apply the precedents or even to take them into account.
The Paris Club probably calculated that Iraq will not invoke the odious debt
doctrine to refuse any repayment whatsoever. Such action would invite a
boycott on the part of public and private lending institutions, leading to a
severe shortage of capital and guaranteed economic meltdown. Iraq will
likely stop repaying only if repayments were exerting such budgetary strain
that it would be better off not paying back its debt, regardless of whether
or not capital flows dried up. As the creditor nations are perfectly aware,
compelling Iraq to repay its debt completely would push the country into an
economic crisis so severe that debt servicing would halt.
It was therefore decided long ago that a portion of the debt would have to
be written off. Although this reduction is often couched in humanitarian
terms, the reality is that creditors are simply vying to bleed Iraq as much
as possible without actually killing it.
Paris Club agreed to write off a portion of Iraq's debt in three stages.
The first 30 percent, amounting to $11.6 billion, is to be written off
unconditionally. A second 30 percent reduction will be delivered "as soon as
a standard International Monetary Fund program is approved." A final 20
percent reduction will be granted "upon completion of the last IMF board
review of three years of implementation of standard IMF programs." In other
words, 30 percent of Iraqi debt will be excused only if the IMF and Iraqi
authorities agree on an economic "reform" package, and another 20 percent
will be written off only if the Fund is satisfied that Iraq has implemented
the terms of that package.
Since 1947, the IMF has extended loans to debt-ridden, developing countries
in return for those countries' adherence to "conditionalities," typically
including privatization of state enterprises and other major restructuring
of the economy. In the case of Iraq, 50 percent of the debt piled up by the
country's former dictator -- amounting to $19.38 billion -- is tied to as
yet unspecified conditionalities. As Paris Club members claim around $40
billion, Iraq will still owe $7.78 billion to the Paris Club even if the IMF
certifies its adherence to the conditionalities. If Iraq does not satisfy
the Fund, it will owe $27.16 billion to the society of 19 industrialized
As soon as the substance of the Paris Club's decision was made public, the
Iraqi National Assembly issued a statement declaring that "[Iraq's] debts are odious
and this is a new crime committed by the creditors who financed Saddam's
oppression." Sheikh Muayyad of Baghdad's Abu Hanifa mosque, the one raided
by U.S. troops in mid-November, added: "In the Paris Club process, the enemy
is the judge, and this cannot be fair." Although Iraqis rightly object to
the deal's failure to acknowledge the odious nature of much of the debt,
their incentive to meet the terms of the Fund's program will be very strong.
What type of future can Iraq expect under the guidance of the IMF? Two cases
from recent history offer some clues.
Southeast Asian crisis of 1997 is a commonly cited illustration of IMF
ideology in practice. Reacting to rumors that Thailand would devalue its
currency, the baht, speculators confirmed the prophecy by moving capital out
of the country and converting it into dollars, thereby weakening the baht. A
number of other factors converged to send the entire region into a brutal
recession, as foreign investors withdrew money into dollar accounts in
"safer" places. The mass flight of foreign capital from Southeast Asia was
possible mainly because many of these countries had undertaken capital
market liberalization reforms prior to 1997 -- upon the advice of the IMF.
As the crisis spread, the IMF offered approximately $95 billion in loans to
the afflicted countries, but not without stipulating conditionalities. Most
importantly, the Fund required governments to balance their budgets,
inducing governments to slash important social programs and abandon their
goal of full employment. These "reforms" came at great social cost. In
Indonesia, for example, riots broke out the day after the government cut
food subsidies. In addition, the IMF insisted that Southeast Asian countries
boost interest rates to attract foreign capital back to their banks. The
ironic result was that a number of domestic firms were forced into
bankruptcy, widening the recession and diminishing the region's allure for
The countries that swallowed the IMF's poison pill -- including Thailand --
were still in recession in 2000. Malaysia, on the other hand, famously
rejected the Fund's advice and followed its own path. Pegging its currency,
the ringgit, to the dollar and cutting interest rates, Kuala Lumpur ordered
that all ringgit invested offshore be repatriated within one month, imposed
tight limitations on transfers of capital abroad and froze the repatriation
of foreign capital for 12 months. In the meantime, the country took the time
to restructure its corporate and banking laws. As a result, Malaysia emerged
from recession much sooner and with a smaller debt than its neighbors.
the 1990s, the IMF held up Argentina as a shining example for
others to follow, but there, too, its recommendations are now closely
associated with economic disaster. Before Argentina entered a recession in
1998, the IMF enjoyed control over the country's economic policies through
past loans and the conditioning of other financial packages upon a "standard
IMF program." Argentine authorities happily carried out all the demanded
reforms, including selling off huge amounts of state property and opening up
just about every industry in the country to 100 percent foreign ownership.
Before Argentina's eventual economic collapse in 2002, for instance, foreign
institutions dominated the banking industry. While these banks readily
provided funds to multinational corporations, and even to large domestic
firms, small and medium-size firms complained of a lack of access to
capital. The resulting lack of growth was pivotal. Many argue that the main
culprit in Argentina's dramatic crash was not the IMF but the government,
which never saw anything wrong with selling off the country wholesale. Even
if so, the IMF certainly did not help.
By the time the crisis started in 1998, the Argentine government had already
incurred a large amount of foreign debt. The recession caused tax revenues
to plummet, therefore aggravating its balance of payments problem. Buenos
Aires made up the difference by increasing borrowing from international
lenders such as the IMF. The Fund provided $3 billion in 1998, $13.7 billion
in 2000 and a pledge for a further $8 billion in 2001. In addition, it
arranged for an additional $26 billion to be granted by other sources at the
end of 2000. The bailout came with strings attached: the IMF decreed that
Argentina should, among other things, balance its budget by drastically
cutting public spending and by raising taxes. The Fund aimed thereby to make
the country more attractive to foreign capital, but the downside was that
unemployment worsened and vital social programs were canceled. Despite the
astronomical sums made available to Argentina, and despite the government's
budget cuts, the recession's effect could not be overcome, and the gap in
the budget continued to grow until the government could no longer sustain
Argentina officially defaulted on its debt of $141 billion on January 3,
2002, and devalued its currency over IMF objections shortly thereafter.
Investors lost confidence in the Argentine economy and began pulling their
money out of the country. The government foresaw that the outflow of capital
might cause a banking failure and so imposed a limit of $1,000 per month on
withdrawals by ordinary Argentinians. In addition, officials converted bank
deposits that were originally made in dollars into local currency, thereby
increasing the liabilities of the population, as debts that were incurred in
dollars remained in dollars. Following the devaluation, the debts of
ordinary Argentinians increased in value by over 300 percent.
In the six months following the devaluation, Argentina's gross domestic
product dropped by 16.3 percent. As of June 2002, 19 million people out of a
total population of 35 million were earning less than $190 per month. Amidst
riots, looting, increased crime and police brutality, 8.4 million
Argentinians were destitute, with monthly incomes of less than $83 per
month. Reports surfaced of malnutrition and children missing school in order
U.S. "more, not less" mentality on debt
a July 2004 report from its Independent Evaluation Office, the IMF
conceded that it should not have continued urging Argentina down the
budget-cutting road after "the growing vulnerabilities in the authorities'
choice of policies" became apparent. Instead, the report concluded, the Fund
should have diverted its loan funds to help Argentina cover "the inevitable
costs of exit" from its chosen policies. But this internal audit of the
IMF's role in the crisis makes clear that the Fund has not altered its basic
views about what indebted countries should do to reduce their burdens.
"During the pre-crisis period," reads a July 29 press release on the audit,
"the IMF correctly recognized fiscal discipline and structural reform, labor
market reform in particular, as essential to the viability of the
convertibility regime." Further, the IMF believes that Argentina should have
done more, not less to adhere to its program before the crisis:
"Conditionality was weak, and Argentina's failure to comply with it was
To date, the approach of the Bush administration in Iraq strongly suggests
that the same "more, not less" mentality will govern their recommendations
for Iraq's economic future. Most infamously, the Coalition Provisional
Authority (CPA), which ruled Iraq from May 2003 to June 2004, legislated
that "[a] foreign investor shall be entitled to make foreign investments in
Iraq on terms no less favorable than those applicable to an Iraqi investor,
unless otherwise provided herein." This Order 39 also provides that
"[f]oreign investment may take place with respect to all economic sectors in
Iraq, except that foreign direct and indirect ownership of the natural
resources sector involving primary extraction and initial processing remains
prohibited." Order 39 also substituted a flat tax of 15 percent for Iraq's
system of progressive taxation, wherein the top rate was 45 percent.
Assuming that the successor government in Baghdad does not overturn Order
39, the long-standing ban on foreign investment in Iraq has been abolished,
allowing foreigners to own up to 100 percent of any enterprise except those
controlling oil and other natural resources. Although foreign ownership of
land remains illegal, companies or individuals will be allowed to lease
properties for up to 40 years. Another CPA decree, Order 81, sets out the
circumstances under which the reuse of seeds by farmers constitutes patent
infringement. For the U.S.-British occupation authority, such neo-liberal
policies were an article of faith. Speaking to journalists aboard a U.S.
military transport plane in June 2003, ex-CPA head Paul Bremer emphasized
the need to privatize government-run factories with such enthusiasm that his
voice could be heard over the din of the cargo hold. "We have to move
forward quickly with this effort," he said. "Getting inefficient state
enterprises into private hands is essential for Iraq's economic recovery."
It is uncontroversial to argue that U.S. policies and interests are widely
reflected in the decisions taken and the statements made by the Iraqi
interim authorities. In relation to debt and IMF programs, however, the
government of Iyad Allawi seems to have surpassed all expectations.
On September 24, three Iraqi interim ministers sent a "letter of intent" to
the managing director of the Fund. Such letters -- a standard requirement in
IMF procedure -- are officially the work of national authorities, though IMF
officials typically dictate their content themselves. A quick examination of
the Iraqis' letter of intent, as well as the documents on Iraq already
published by the IMF, reveals multiple references to "restoring Iraq's
external debt sustainability," "tax reform," "financial sector reform,"
"restructuring state-owned enterprises" and "macroeconomic stability." The
tenor of these documents bears a remarkable resemblance to the Fund's
prescriptions for Argentina and Southeast Asia during the 1990s. Absent from
the letter, moreover, is any statement about the priority that Iraqi
authorities or the IMF will place upon reduction of unemployment. A
statement on Iraq issued by the IMF's deputy managing director on September
29, meanwhile, makes not a single reference to unemployment or to poverty.
On October 14, the Iraqi interim government took still another step in the
direction of free-market fundamentalism when it applied for membership in
the World Trade Organization.
The Arab creditors
make matters worse, and despite all the attention garnered by the Paris
Club negotiations, most of the debt incurred by the deposed regime is not
actually owed to Paris Club members. Iraq's main creditors are Arab states.
Saudi Arabia claims $30 billion, while Kuwait demands repayment of a further
$16 billion in debt as well as more than $30 billion in reparations from
Iraq's invasion and occupation of the country from 1990-1991. Billions of
dollars are also claimed by the United Arab Emirates, Qatar and other Arab
countries. Finally, on October 25, Iran was reported to have claimed $97
billion in reparations from Iraq for damage caused during the Iran-Iraq war
At first, Arab creditors were loath even to consider writing off any of the
Iraqi debt. Kuwait was particularly intransigent, eliciting a rather
confused reaction from senior U.S. officials. "I have to say that it is
curious to me," Bremer said, "to have a country whose per capita income,
GDP, is about $800...that a county that poor should be required to pay
reparations to countries whose per capita GDP is a factor of ten times that
for a war which all of the Iraqis who are now in government opposed." Bremer
was referring to monies transferred to Iraq during the 1980s, which were
most probably intended to assist Iraq in its war against Iran.
Iraq, under Saddam Hussein and subsequently, has long argued that these
funds were grants and not loans. Kuwait obviously disagrees. Kuwaiti Foreign
Minister Muhammad Sabah Al Salim Al Sabah affirmed on December 1 that Kuwait
has in its possession official documents demonstrating the transfer of
monies to Iraq. "Any single dinar that Kuwait paid to Iraq without a legal
and official proof will be worthless," he said. But, from a legal point of
view, the fact that transfers were made does not suffice to prove that Iraq
is under any obligation to pay back any money unless the terms of the
transfer are specified. If creditor nations insist on being rigid in their
interpretation of the law, and argue that they have no obligation to apply
the doctrine of odious debt to Iraq, then Iraq should not hesitate to argue
that a loan is not a loan without a written contract to prove it. It is
unclear whether such contracts exist. What is true of Kuwaiti "debt" is also
true of Saudi Arabian claims.
There is a solid legal basis, by contrast, for enforcing the war reparations
claimed by Kuwait, as they are based on UN Security Council resolutions.
Iraq will have difficulty avoiding payment of any amounts claimed by the
Kuwaitis and granted by the UN Compensation Committee, unless Iraq decides
unilaterally to refuse payment, which may or may not work out in its favor.
A classic example of how developing nations surrender
sovereignty over their economies
Saddam Iraq offers a perfect illustration of how the industrialized
world has used debt as a tool to force developing nations to surrender
sovereignty over their economies. Iraq had no bargaining chip -- save its
economic weakness -- with which it could have forced Paris Club members to
write off a greater portion of debt. Indeed, had Iraq's economy been in
better shape, less of its debt would have been written off. The odious debt
doctrine has considerable moral force, but it is not binding, and it comes
as no surprise that Iraq's creditors do not think in altruistic terms. Nor
does the Iraqi case even constitute a precedent that other highly indebted
countries could use in their favor; the Paris Club was careful to note that
Iraq's is an "exceptional situation." What implications does the November 21
Paris Club deal have for activists seeking to ameliorate the financial
burdens thrust upon poor countries by corrupt regimes?
When arguing with government officials in relation to existing debt,
campaigners face two obstacles. First, the legal context in which existing
debt was contracted cannot be modified retroactively, and there is therefore
no legal obligation on the creditor's part to determine whether or not the
subject matter of a financial agreement is illicit. Second, there is a clear
financial disincentive for creditor nations and financial institutions to
forgive outstanding loans. Neither of these obstacles applies to future
debt. Any reform that is put in place today will necessarily apply to loans
made in years to come. In addition, the legal status of future debt has no
real impact on a lender's balance sheet.
Campaigners should move to establish the equivalent of odious debt doctrine
for loans yet to be lent. The legal framework relating to international
loans can be reformed through a number of different mechanisms, including,
but not limited to, a new international convention, or a Security Council
resolution. The European Union could even begin drafting an international
convention, while leaving open the possibility for other states to ratify
the agreement in the future.
Many argue that if repayment of loans were subject to scrutiny of how the
borrower spent the money, loan funds would dry up. So the international
convention or Security Council resolution should provide for a mechanism for
dispute resolution or to refer all disputes to an already existing dispute
resolution mechanism. One possibility would be for the International Center
for the Settlement of Investment Disputes, a tribunal organized under the
auspices of the World Bank, to deal with international lending disputes.
Whatever the case may be, the advantage that opting for a particular dispute
resolution mechanism would present in practice is that it would allow for
the creation of a significant body of law that would serve to clarify rules
relating to the illicit purpose exception.
Any such reforms will come too late for Iraq, however. As creditor nations
are unlikely to have a change of heart and forgive a greater portion of
Saddam's odious debt, the new Iraqi government will need to determine
whether there are ways to force debt renegotiation and to resist pressure to
adopt IMF prescriptions. The first priority should not be to please outside
creditors. It should be to reduce unemployment and to redistribute wealth in
such a way as to reduce social divisions, something that is particularly
important in Iraq. The struggle over Iraq's economic future has moved from
Paris to Iraq.
Zaid Al-Ali practices international commercial arbitration law in Paris and
works with Jubilee Iraq, an organization advocating debt relief for Iraq. He
is also the editor of iraqieconomy.org
Reprinted by special permission of the
Middle East Reasearch and Information Project (MERIP)
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May 19, 2005 (http://www.albionmonitor.com)
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