Iraq's odious debts

15. 12. 2005 - Antje Queck

Let's go back to November 2004. On November, 21st the Paris Club of creditors agreed to write off 80 % of the Iraqi debts: 30% immediately, 30% when a restructuring deal was agreed with the IMF with the last 20% to arrive on completion of this deal. Obviously this relief was not enough and the Iraqi economy is still struggling.
This June Laith Kubba, the Iraqi Prime Minister's spokesman, said: „As for writing off the debts of Iraq, there are conditions to reducing the support of the government for basic services. Iraq has 10 billions of debts, and I think we cannot avoid this“.
By the way, how many Paris Club members - do you think - have already signed a bilateral agreement with Iraq? Ten days ago, on October 5 - almost a year after the Paris Club deal - Italy has become the 3rd Paris Club country (after Canada and the US) to ratify.
But why are 80 % debt relief not enough? Even if the non Paris Club creditors agree to 80% reductions Iraq would still be shackled with over $25bn of debt, on top of more than $31bn in war reparations and the repayments for any new debts to the IMF and others.
But we are not here to discuss questions of debt sustainibility. We want to have a look at the legitimacy of the debts. So let's see where the debts come from.

The historical development of Iraq’s debts

At the beginning of the 1980s Iraq appeared to be one of the pillars of hope in the Middle East. The economy was growing and the living standard compared to other states of the region was one of the highest. Iraq was a donor country and owned an estimated US$ 36 billion in foreign assets.

But at the end of the 1980s, after the devastating eight-year war with Iran, which cost around a million lives, Iraq was faced for the first time in its history with a serious liquidity problem caused by its foreign debt.

In 1982 Syria had closed an oil pipeline crossing its territory to the Iraqis. The result of this was a further slump in export production. In the further course of events the terms of trade further deteriorated due to a downwards trend in both the US dollar and oil prices. External funding for nonmilitary projects was seen as a way out of these financial shortings.

In 1983, for example, Iraq’s gross domestic product declined by about 7%, while its external debts rose by 33 %. Vast military spending constituted up to three quarters of Iraq’s GDP. Between 1981-85 oil revenues were just $48bn, while military spending was two and half times higher at $120bn. 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 almost $18bn.

Between 1983 and 1989 the majority of credits were extended on the basis of existing agreements. In 1987 and 1988 a good number of prolongation agreements were concluded to transform Iraq’s short-term debts into medium-term liabilities. That was the beginning of the debt spiral.

The huge imbalance between earnings and expenditure was possible because many countries made loans and exported goods, including weapon systems, on credit. Because of the Islamic revolution in Iran both Western and Soviet countries supported Iraq, as did most Arab states. Some countries like the German Democratic Republic even sold weapons to Iraq and to Iran at the same time. 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.

The invasion of Kuwait brought Iraq face to face with horrendous reparation claims as well as with economic sanctions that seek their match in history. In the 1990s the debt doubled due to the accumulation of interest. In the course of two decades Iraq’s foreign debt alone rose from US$ 2.5 billion (1980) to an estimated US$ 120 billion (2004).

Why are the debts odious?

In my first presentation on odious debts today I told you about the three criteria that constitute an “odious” character of debts.

(1) The debt has not received the general consent of the nation,
(2) the borrowed funds are contracted and spent in a manner that is contrary to the interests of the nation and
(3) the creditor lends in awareness of these facts.

So the first question is: Did the Iraqi people consent to the country’s borrowing? The answer is quite simple. No, they did not. Iraq under Saddam Hussein was a totalitarian dictatorship: There was only one official ideology – the pan-arabian and only one single mass party led by Saddam Hussein. Iraq had a system of terroristic police control, supporting but also supervising the party for its leaders, and directed not only against demonstrable "enemies" of the regime, but against arbitrarily selected classes of the population. The monopoly of control of all means of communication, such as press, radio, motion pictures a swell as of all means of effective armed combat was in the hands of the party. The entire economy was centrally controlled and directed.

Because of Iraq's oil wealth Saddam Hussein was at least at the beginning also able to buy political loyality. Later on his regime was more and more based on violence.

The second question is: Have the borrowed funds been contracted and spent in a manner according to the interests of the nation? This question is much more difficult. To answer it one would have to look at each single contract seperately.

What I can do is to name three categories where one could generally question the benefit. An absence of benefit is likely if the money was used for:
(1) the war against Iran that means weapons etc.
(2) the regime of oppression and the relating violations of human rights
(3) the personal unjust enrichment of the regime.

Let's begin with what Sack would call war debts. The war against Iran caused a massiv economic damage, which has negative effects on the development of the country to this day. Besides the death of thousands of soldiers and civilians, a broken infra-structure and a devastated economy, the war debts are a very heavy burden. All loans that enabled Saddam to wage this war should be declared odious. The former General Director of the Iraqi Finance Ministry said, that 65 % off all borrowed money has been used for military purposes.

Iraq should also repudiate all loans that were used for the various secret services, the jails for political prisoners and the state owned media. One can not overestimate the degree of supervision and oppression in Saddam's Iraq. It was a really system of meta control.

Curds were the ones who had to suffer the most under the regime. You might remember the Anfal-Campaign. At least 67 villages and cities were poisend with gas - the most famous being Halabja. There hadn't been such a massive use of chemical weapons since World War I.
When the Shiits revolted at the end of the second Gulf War Saddam Hussein payed 5.000 Dinar for each man killed.

Also not in the interest of the Iraqi people were loans that were used for the personal enrichment of the regime. It's said that US$ 30bn should have been transfered to accounts in foreign banks. Saddam Hussein knew how to use money for his personal pleasure. 78 palaces were build for him and his family.

Did all this happen unnoticed by the international community? No one could really question that Iraq waged an aggressive war against Iran. Every financial and material support must count as an act of political will. The violation of human rights was also obvious. Newspapers reported the execution of his fellow party members when he carried out his coup d'état. The U.S. state department stated in 1988 the Iraqi government would „possibly be the worst violator of human rights anywhere in the world today.“

Nonetheless there were a lot of good reasons for states and companies to invest in Iraq. On the one hand the west had to look for another partner after the Iranian Revolution and Iraq seemed to have never ending financial resources. On the other hand especially the Gulf states followed the developments in Iran suspiciously.

Although after two years of war it became clear that the war wouln't end very quickly, the creditors still granted loans. No wonder - US$ 500 bn should have been earned by selling military equipment to both Iraq and Iran.
Only three countries were responsible for 80 % of the military equipment: the Soviet Union, France and China.

With all suppliers the same sample shows up: Iraq threatened to stop the debt service payments, should the creditors stop their weapon supplies. The Baath regime even succeeded to play off the creditors against each other and to negotiate even more favorable financing conditions: For example the Soviet Union offered better conditions as France, and prevented thereby a 3-bn-dollar-Deal over 60 French Mirages.

A particularly obvious example of ignoring well-known facts by creditors is the financing of a chemistry plant by the British export credit agency. A leading civil servant of the State Department had warned several times of the high risk that mustard gas could be manufactured with the exported technology. In order not to endanger the trade relations, the 14 million Pound Deal nevertheless was approved by the Minister of Trade.

Irrespective of the necessity to examine each case individually the responsibility of the creditors as community is to be stressed . The Iraqi economy would had broken down in 1982 without the support from the foreign countries. An observer is quoted: "One of the main props of Iraqi military turnaround since the parlous days of 1982 has been the supply of foreign credit. Totally economic collapse which staved off through the generosity of the Arab states of the Gulf and then the pumping in of OECD and Soviet credit."

C. Summary

Let me summarize. A closer view on Iraq's debts according to Sack's doctrine confirms the doubts about their legitimacy. The first criteria, the absence of consent, can be considered without a doubt as fulfilled. The regime clearly was a dictatorship. The fact that there was no open opposition under these circumstances is not amazing and by no means an indication of the population's support for the policy of the Saddam regime. Also for the second criteria, the absence of benefit, a set of examples for clear misuse has been mentioned.

Every creditor could have known that the money would be used not in the interest of the population. All countries, which supplied military equipment during the Iraq-Iran-war on credit, did this consciously. While Russia, France and China were involved to a considerable degree in the armament of the Iraqi army, the Gulf States supplied the necessary money.

So who should pay for that?


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