Debt relief agreement for Iraq – a travesty of justice
Iraq joins Jubilee Research’s call for independent arbitration

By Susanna Mitchell
Jubilee Research at nef

29^th November 2004

The agreement reached on November 21^st between the member countries of the Paris Club of bilateral creditors and representatives of the US-appointed interim government of Iraq has been condemned as inadequate and unjust by the Economic and Financial Committee (EFC) of the Iraq National Assembly, who are calling for a fair and transparent arbitration process (an FTAP or Jubilee Framework) conducted under United Nations rules to examine their external debt position.[1]

Iraq currently owes $38.9 billion to Paris Club creditors, a sum representing less than a third of an external debt burden estimated at between $120 billion and $135 billion (a figure that does not include $71.6 billion in outstanding war-related compensation claims, an Iranian claim of $97.2 billion, and possible Iraqi-Jewish lost property claims of up to $100 billion).[2] The new Paris Club agreement recommends an eventual debt reduction of 80% of the present debt owed to their members, reducing the total debt stock from $38.9 to $7.8 billion.

This offer is generally seen as a compromise between the United States request for a 95% reduction, and the 50% cancellation originally suggested by European creditors, and the relief is to be delivered in stages, subject to various caveats that tie Iraq into an economic programme dictated by the international financial institutions. An initial cancellation of part of the late interest representing 30% of the debt stock as at January 2005 has been offered, but the remaining debt stock is deferred up to the date of the approval of an IMF standard programme. This first cancellation will result in the write-off of $11.6 billion, and the remaining debt stock is to be rescheduled over a period of 23 years including a grace period of 6 years, bringing the debt stock down by a further $11.6 billion. An additional tranche of debt reduction representing 20% of the initial stock will also be granted upon completion of the last IMF Board review of three-years of implementation of standard IMF programmes. Click here for full details of Paris Club agreement.

By any standard of justice, and from many different viewpoints, this creditor driven agreement is both unfair and unsatisfactory. Iraq itself is very unhappy with the terms of the deal, and the Interim Iraqi National Assembly immediately tabled a document repudiating the agreement. This resolution asserts that since almost all the country’s debts can be classified as ‘odious’ they are not legally enforceable, and the Paris Club is therefore in no position to decide rescheduling arrangements or impose relief conditions on the Iraqi government. Instead Iraq claims a 95% cancellation of all its outstanding debts, and demands that ‘creditors place no conditions on the cancellation, such as the requirement that Iraq implement certain economic and financial policies’.

Unless these demands are met, they declare that they will repudiate their obligations, and in order to demonstrate their ‘continued respect for justice and due legal process and the international law’ will ‘offer persistent creditors the opportunity of a fair and transparent arbitration process conducted in accordance with United Nations rules, and to which creditors will be invited to appoint a fair portion of arbitrators.’[3]

For many reasons, we support this call for a fair and independent arbitration process (FTAP). Firstly, it is outrageous that the current Paris Club offer avoids any challenge to its members' practice of lending to questionable and corrupt governments, and forces the Iraqi people to bear the responsibility for debts that should never have been lent to Saddam Hussein. Worse still, the IMF conditionalities imposed by the deal will condemn Iraq to the same policy framework that has already proved so disastrous in Africa, Eastern Europe and much of Latin America, serving only to further the interests of foreign investors and Western financial institutions, rather than the welfare of the Iraqi people. Such policies would destroy the autonomy of the new Iraqi Government even before it takes office, and impose yet more hardship on a population already tested almost beyond bearing.

In addition, as Iraq itself points out, the country will still be left with unsustainable external debt obligations, many of them in the form of unpaid UN Compensation Commission claims and bilateral debts to Kuwait, Saudi Arabia and other countries outside the Paris Club. As with all unsustainable debt, these claims should be independently assessed and adjudicated.

From the perspective of other economies with unsustainable debt burdens, it is also crucial to establish the precedent for a FTAP. Although we would not in any way deny that Iraq should be accorded debt relief, it is clearly grossly unfair that the same kind of treatment is simultaneously denied to other countries who are equally poor, and whose people are no less deserving. Nigeria, for example, carries a huge and unsustainable external debt burden amounting to around 70% of its GNI, over 83% of which ($27.37 billion) is owed to the Paris Club.[4] But although its GNI per capita, standing at just under $300 per annum is one of the lowest in the world and 70% of its population are living on less than $1 a day, it has been offered no cancellation by the Paris Club. Instead, continual reschedulings have seen its debt mount steadily until penalties for non-payment exceeded even the interest on productive loans.

If such anomalies are to be avoided, FTAP must become the accepted method of dealing with all instances of unsustainable sovereign debt. So long as creditor cartels are allowed to play judge and jury in what is virtually a bankruptcy court, the verdict will inevitably be influenced by the pursuit of creditor agendas. In the case of Iraq, where enormous contracts are available for reconstruction purposes, and control of the country’s huge oil resource is of particular significance, Western creditors have an especial interest both in limited debt ‘forgiveness’ and in establishing economic dominance through their financial institutions. Such aims neither further the aims of justice, democracy nor global peace, and the Iraq/Paris Club deal again illustrates the need for radical reform of the present system.