Debts Today | Reparations | Origins of Debt | Odious Debt

IRAN-IRAQ WAR: FINANCING SADDAM

When Saddam Hussein consolidated his control of Iraq on 11 July 1979, the country had cash reserves of $36bn and no long term foreign debt. Just over a year later, in September 1980, Saddam invaded Iran. The war lasted eight years and cost around a million lives. Part of Saddam’s legacy is huge borrowing during the war which today is threatening to keep the Iraqi people enslaved and impoverished.

Debt enabled vast unprecedented military spending to constitute up to three quarters of Iraq’s GDP.[1] Between 1981-85 oil revenues were just $48.4bn, while military spending was two and half times higher at $120bn.[2] Taking 1982 as an example, military imports were $6.4bn and non-military imports were $21.5bn while export earnings were just $10bn, leaving a trade deficit of $17.9bn.

This huge imbalance between earnings and expenditure was possible precisely because many countries made loans and exported goods, including weapons systems, on credit. Because of the Islamic revolution in Iran both Western and Soviet countries supported Iraq, as did most Arab states. Saddam had plenty of willing creditors and the end of the war the US Export-Import Bank estimated that Iraq owed $27bn to Western countries and $50bn to the Gulf states.

DEBT CRISIS SPARKS ANOTHER WAR

As Iraq emerged from the war and attempted to rebuild it faced a serious financial crisis due to a low oil price and annual debt services obligations of around $3bn. By mid-1990, Iraq had an inflation rate of 40% and only enough cash reserves for three months of imports.

On 17 July Saddam accused Kuwait and the United Arab Emirates of conspiring with the United States to cheat on oil production quotas and keep the price low. As the situation escalated, Egyptian President Husni Mubarak and Saudi King Fahd arranged a meeting between Kuwaiti and Iraqi officials, in Jeddah on 31 July, to find a peaceful solution. The Iraqi representative, Izzat Ibrahim Ad-Duri, walked out, complaining of Kuwaiti reluctance to forgive Saddam's debt to Kuwait.[3]

According to King Hussein of Jordan (now deceased), the Al-Saud (Saudi Arabia) and al-Sabah (Kuwait) families agreed, in a closed door meeting before the conference, to forgive their debt claims and give $10bn to help repay the rest of Saddam’s debt. But on 30 July Kuwait’s foreign minister, Sheikh Sabeh Ahmed al-Jaber al-Sabah, the Emir’s brother, ridiculed the Iraqi army to Jordanian diplomats and said, "If they don't like it, let them occupy our territory ... we are going to bring in the Americans."[4] At Jeddah the next day, he announced to Ad-Duri that Kuwait was only offering $500m (instead of $10bn). Two days later Iraq invaded.

The subsequent events: the occupation of Kuwait, the Gulf War and 13 years of sanctions not only devastated Iraq but also increased the already critical foreign debt overhang. Firstly no debt was serviced during the sanctions period, resulting in a build up of interest and arrears. The total effect of this is not yet clear, but has probably resulted, on average, in a doubling or tripling of debt claims. On top of this loan debt, Iraq was landed with an immense reparations bill. The exact amount of this bill is not yet decided because the UN Compensation Commission, which began work in 1991, has not yet completed its assessment of claims. About two thirds of the $351bn claims have been settled at $46bn, of which $18.5bn has been paid from the Oil for Food fund. UN Security Council resolution 1483 (22nd May) provided for the continuation of reparation payments, using 5% of Iraqi oil revenues, after the end of the Oil for Food program.

SCALE OF THE DEBTS TODAY

Saddam’s Iraq was one of the few countries which did not report its debt statistics to the World Bank Debtor Reporting System, so there are no collated figures currently available. No documents from the Iraqi ministry of Finance have yet emerged, and may have been lost in the recent chaos.

The creditor countries, although now demanding repayment, have taken some time to come up with figures for their own claims. This may be partly because of the secrecy of some of the loans, and partly because, after thirteen years of sanctions during which the debt was not serviced, they had written off any expectations of repayment. The Paris Club, which is a cartel of major creditors including all the G8 countries, finally published tables of its claims on 10th July, 3 months after the fall of Baghdad. However it was not able to give the total claims with interest and arrears, but only the principal value of the debt claims ($21bn). The IMF was expected to report in mid-July on non-Paris Club debt, but this has not yet emerged.

Jubilee Iraq has collated all the figures in the public domain and estimates that the total debt is within the range $95-153bn. This excludes outstanding reparations claims, which will probably settle at around $50bn when the UNCC completes its assessment at the end of this year.

If one compares the total of debt and reparations (around $200bn) to Iraq’s GDP ($32bn in 2000) and export earnings ($15bn in 2002) then it becomes clear that Iraq is the world’s most heavily indebted country by a wide margin. Moreover, it is a country with urgent relief and reconstruction needs (estimates range from $100-600bn). Although loan debt is not yet being serviced, ongoing reparation payments are diverting critical funds from humanitarian relief. On 8 April, the very day that Kofi Annan received a mandate to use the Oil for Food fund to meet emergency needs, and as the UN launched a flash appeal to fund relief, $870m was paid from Oil for Food to Kuwait, Britain and others. More recently, on 23 June, the UN called for $259m to meet a shortfall in humanitarian relief, while the UNCC simultaneously announced that it expected to take a further $600m from Iraq this year. The contradiction in these announcements is very clear; giving with one hand and taking with the other.

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ODIOUS DEBT

Past experience suggests that relying on the altruism of creditors is unlikely to provide a solution to Iraq’s debt crisis. The G8 have still only delivered a third of the $100bn debt relief which, responding to the Jubilee 2000 campaign, they promised to 41 poor countries at the 1999 Cologne summit. Even this was conditional on those counties submitting to extensive and damaging IMF economic liberalisation programs. Recently the US Congress rejected $300m in debt relief for the Congo, a country which has also undergone years of dictatorship and war.

The solution to this problem comes from an unexpected source, Alexander Sack, a Russian legal expert working in Paris in the 1920s. Sack codified into the legal doctrine of “dettes odieuses” a concept which had been applied a number of times over the previous forty years and which arguably has roots in Aristotle. In 1883 Mexico repudiated debts that had been contracted by the Habsburg Emperor Maximilian to suppress an uprising and maintain his sovereignty over Mexico; in 1898, after the American-Spanish war, the US repudiated Cuban debts contracted by Spain; in 1923 a tribunal ruled against Britain in a dispute over loans made to Costa Rica’s former dictator Federico Tinoco.

Odious debts, are the “personal” debts of a particular regime. They are contracted without the consent of the people and are not spent in their interests. The vast majority of Saddam’s debts fall clearly within this category since he presided over a period in which the Iraqi people were decimated and impoverished while huge sums were pilfered by the Ba’ath leadership and spent on the military and state oppression. All the creditors were well aware of what was happening with loans they were providing.

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APPYLING THE DOCTRINE: AN ARBITRATION TRIBUNAL

Aside from debt campaigners and Iraqis from across the political spectrum, support for applying the odious debt doctrine has come from unexpected sources. The billionaire George Soros has said that it would “send a signal to the financial markets that it's dangerous to deal with oppressive regimes” and the Chairman of CSFB investment bank David Mulford has proposed an international commission that would “disallow debt used for state security or military aggression. Only loans for verifiable economic purposes should be collectable.”[5] Unusally, neocon think-tanks such as the Heritage Foundation and the Centre for Contemporary Conflict have published reports almost identical to those from Oxfam and WDM.

The fairest way to apply odious debts would be through an international arbitration tribunal. There is plenty of international precedent and case law to construct such a tribunal which would be composed, in equal parts, of Iraqi, creditor and neutral jurists. Any creditors that wish to claim repayment from the Iraqi people for loans made to Saddam would submit an argument to the tribunal demonstrating that the loans were beneficial. The tribunal would debate and rule in public on each claim and agree repayment terms for any legitimate debt. This process would dramatically reduce Iraq’s debt, set a clear precedent for other countries which have inherited debt from dictators and discourage creditors from financing the Saddams of the future.

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[1] Sinan al Shabibi (1997) Prospects for Iraq’s Economy
[2} Wajeeh Elali (2000) Dealing with Iraq’s Foreign Indebtedness
[3] Report to US Congress (1992) Conduct of the Persian Gulf War
[4] The Village Voice (5/3/1991) Interview with King Hussein
[5] Financial Times (22/6/2003) Iraqi debt, like war, divides the west