An Economy in a Debt Trap: Iraqi Debt 1980-2020.

• Author: Jiyad, Ahmed M.

INTRODUCTION

THIS ARTICLE WILL EXAMINE THREE variables -- war, debt and oil -- in an organic manner in an examination of cause and effect in Iraq during the period 1980-2020. The 1980s began with Iraq recognized as being one of the highly promising countries in the Middle East and the Third World in terms of its economic development: a donor country, a creditor country, a modestly outward FDI player, (1) a cash country, and owner of an estimated U.S. $36 billion in foreign assets. By the close of the 1980s however, following the devastation of an eight-year war with Iran, Iraq faced -- for the first time in its history -- a serious debt-related liquidity problem. The 1990s began with a vast accumulated and acute but manageable external debt, and the Iraqi invasion of Kuwait, which ushered in the largest and most draconian economic sanctions regime in history. Iraq now faces a new millennium with astronomical war reparations payments, mounting debt and a once prosperous economy in ruins. No specific solution has been propo sed by which Iraq can relieve its debt burden with every passing year intensifying the burden the Iraqi people will be required to bear. Indeed, as long as Iraq is kept under siege and its economy is, with all practicality, a "captured" one, the debt issue has been relegated to the shadows of more pressing humanitarian concerns.

The focus of this article is on four decades of indebtedness covering the period of 1980-2020. The methodology to address this complex issue is summarized in the figure on the following page.

The model utilizes the two most recognized and commonly employed debt sustainability criteria (DSC): debt service to export ratio (DS/E) and present value of debt plus interest to export ratio (PVD+I/E). In this regard the model takes the highest ratio in either criteria as MTIT: the Maximum Tolerable Indebtedness Threshold and makes the assessment of excessive indebtedness (i.e., above MTIT) accordingly. The model also considers the and/or of excessive indebtedness under either criterion as an indication of absolute non-sustain ability of indebtedness. This means two flows will have to be estimated: an outflow and inflow. For the outflow side the country's external financial obligations must be assessed. To do this two cases have been chosen: case one represents old debt (O) and new debt (N), and case two represents 0, N, AF (Arab Funds) and WR (war reparations). For each case there are four repayment options in increments of 10, 15, 20, and 25 years. The inflow side of the relationship depends on oil export s, oil prices and hence oil revenues. While oil production is a given, oil export is a residual after deducting domestic requirements for oil related products. Two price scenarios were used in the calculations: a constant price of $20/b with an incremental of one dollar (increase for inflation) per year. For practical considerations a $5/b increase on the basic price is incorporated for every five years, thus scenario II is based on $20, $25, $30, and $35 during 2000-2004, 2005-2009, 2010-2014, and 2015-2019 respectively. The reader is advised, however, not to consider these price scenarios as forecasting the price of oil. Far from that they are used only to demonstrate the serviceability of indebtedness under two assumed prices.

A brief discussion on the progression and profile of Iraqi indebtedness since the onset of the 1980s is provided in the first section of this paper. Section two then examines both old debt and the new debts incurred. The new debt is needed to enhance the country's oil production capacities and resultant oil export revenues, as well as the costs associated with servicing old debt. In the third section an in-depth sustainability analysis is conducted. Finally, conclusions, strategies and options for the future are presented in section four.

ONE: PROGRESSION AND PROFILE OF IRAQI INDEBTEDNESS

Through a combination of wartime conditions and unwise decision-making, Iraq gradually moved towards the entanglement of national indebtedness. The first step on the path of the debt trap was taken when the Iraqi government was given the directive to continue with the implementation of the five year economic plan of 1981-85 in spite of the ongoing war with Iran and the heavy damage inflicted on the country's export facilities in the war's early stages.

The situation had worsened further when, in April 1982, Syria closed the oil pipeline passing through its territories thereby causing an immediate and further loss of export production of some 700 thousand barrels per day. When Iraq's foreign assets, estimated at $36 billion at the commencement of hostilities with Iran, began to evaporate through increased wartime spending, the continued spending on development projects and the false illusion and mentality of "business as usual" at a time when oil revenues declined considerably, all forced Iraq to request a deferral of contractual dues. Most of these contractual dues were deferred for two years and made payable by four equal semi-annual installments. Once deferred payment arrangements were under way new directives were released making the availability of external financing as a necessary condition for the awarding of new non-military project contracts. This naturally meant fresh and project-related credit facilities. When the first payments of these deferrals came due there were many signs of both comfort and optimism among the concerned decision makers in Iraq that installments due in 1985, from 1983 deferred payments arrangements, could be met on schedule.

The optimism was attributed to three primary factors: first, the debt service on $2.1 billion due in that year was clearly attainable; second, it was thought that the U.S. dollar would continue to hold its strong position against other major currencies, thereby reducing the real value of non-dollar debts in terms of oil revenues; and third, the expected 0.5 million barrel per day increase in export capacity expected to be available by the end of September 1985, following the construction of the first stage IPSA-1 pipeline, which linked southern Iraqi oil fields with the East and West crude oil pipeline in Saudi Arabia at the Red Sea port of Yanbu.

Such optimism began to fade away when the value of the U.S. dollar started a downward trend during the first quarter of 1985 and more so when the decline was institutionalized by the G-5 Plaza Agreement in September of that year. (2) Additionally, oil prices continued in a downward trend causing a serious deterioration in Iraq's terms of trade and further deepening its financial crises. The financial situation in 1986 deteriorated even further, with that year proving to be a financial disaster due to the collapse of oil prices. Though Iraq's oil production increased by nearly 18 percent in 1986 over 1985 levels, oil export earnings decreased by 27.2 percent. (3)

Faced with conditions of declining purchasing power - due to the combined effects of collapsed oil prices and weakened U.S. dollar - Iraq had intensified bilateral efforts for more financial facilities in terms of new credit and guaranties on the one hand and debt rescheduling on the other hand. Most of the credit facilities and related deferred payments arrangements which were concluded in 1983 and 1984 with Europeans were, relatively, of similar structure; 85 percent to 90 percent of the foreign currency payments due in each year were to be deferred for two years with repayment by four equal semiannual consecutive installments. The remaining 15 percent to 10 percent were either paid in cash or financed through commercial credits. Though Iraq had actually requested these conditions, in reality they were agreed upon in 1982/3, among the OECD Export Credit Group within the Berne Union. In addition to arrangements for deferred payments and debt rescheduling, Iraq managed to obtain fresh credits from a variety o f sources: financial markets, official credits, and multilateral lending institutions. During the 1980s Iraq took the necessary domestic arrangements pursuant to debt reality. These included central "political" management, legislative matters, and operative aspects. (4) The following table summarizes the main parameters of Iraq's debt during 1980-1990.

Data in the above table and the analysis that follows is made on the basis of a detailed time series (1980-1990) data on the "identified" Iraqi debt according to the OECD, which does not cover all Iraqi debt. (5)

Debt stock, which is often defined and reported as debt outstanding at the end of a given period of time - normally a year - measures the total debt liabilities of a given country. At the beginning of the 1980s Iraqi debt was almost negligible. It was less than $2.5 billion in 1980 before it began a gradual and continuous advance to reach $22.8 billion in 1990. In fact such increases in the debt took place on an annual basis -- except in 1988, the year Iraq-Iran war ended, when total identified debt decreased by around $300 million due to a decline in the long term non-concessional and short term debts. It should be noted that debt accumulation had expedited from 1984 onwards. This was a natural outcome of the diplomatic efforts of 1982/3, after the Iraqi-American rapprochement, which proved to be very significant breakthrough development not only in economic relations between the two countries but also for its impact on the economic and financial relations between Iraq and many other countries. (6)

Depending on its maturity, debt is either of a long or short term. In general long-term credit, which has a maturity of longer than one year, is primarily related to project financing and major trade financing. Short-term credit, which has maturity of one year or less, is primarily related to non-major trade supplies. Long-term debt had increased annually from $2.5 billion to $16.3 billion between 1980 and 1989 before it fell down to...