May 2004: Iraqis Getting a Raw Deal on Debt

Iraq's huge odious debts must be eliminated, not merely “rescheduled”
May 1, 2004

During the World Economic Forum in Davos, Switzerland, last January, 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 U.S. 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 American firms. In return, Canadian companies will be permitted to participate in lucrative sub-contracts.

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

A year ago, 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, however, 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. Last December, 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. 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 are claiming 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 U.S. 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 (CPA) 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 last year’s annual meetings of the IMF and World Bank, the CPA announced a sweeping set of economic policies that The Economist labelled “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 placed 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.

Baker's first mission was to France, Germany and Russia, the largest creditors among the countries that opposed the invasion of Iraq. These countries had already agreed at last summer’s G-8 Summit in 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% 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 IMF. According to Rieffel, a Paris Club decision on Iraqi debt will follow the June 30, 2004 date when the CPA is scheduled to cede power to another body whose composition was still under debate as this article was being written. (What is clear is that the June 30 date was dictated by the U.S. presidential election timeline, not by the needs of the Iraqi people).

Whatever new body takes over nominal, if limited, powers in Iraq after June 30 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.)

A newly formed group, Jubilee Iraq, representing Iraqis and citizens in many of the 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.

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." U.S. and U.K. 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.

As for Canada’s role, there is no breakdown of the CS$750 million in debts said owed to Canada, but 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 U.S. 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. 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 soldiers were active on the ground in Iraq as part of an officer exchange program with the U.S.

• 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 U.S. troops for duty in Iraq.

Canada's actual collaboration with the U.S. 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, U.S. 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 has pledged 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.

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.


(John Dillon is research coordinator for KAIROS, an ecumenical coalition for economic justice. This article was adapted from a longer report he prepared for the KAIROS website: