I raq’s future depends on the country finding its footing. The most important precondition is peace and stability. Free and fair elections, the foundation of a healthy democracy, are also vital. Ultimately, however, Iraqis must believe that they will have a better life. Without a functioning and growing economy — and hopes of prosperity — no government will win the support of the Iraqi people, and unrest will continue.
Baghdad faces considerable obstacles in achieving this goal, but the future looks brighter after the Paris Club of creditors decided last weekend to help Iraq write off nearly 80 percent of its debts.
Iraq owes about $125 billion to creditors. Some $42 billion is owed to members of the Paris Club, a group of 19 nations that includes Japan, the United States, Russia and European nations. The remainder is owed to various Arab and Eastern European governments.
Servicing the debt imposes a considerable debt on the government in Baghdad; estimates of the size of the debt have grown by about $5 billion since the U.S.-led invasion over a year ago. That sum is a heavy burden for a country that is rebuilding after a decade of sanctions, deeply embedded structural corruption and war.
The U.S. has been pressing for substantial relief for Iraq — about 95 percent of all money owed. That call has been echoed by the World Bank, which last year concluded that Iraq needed about two-thirds of its debt relieved if its economy was to recover. Washington has been opposed by European governments, Germany and France in particular, which argue that an oil-rich country like Iraq can afford to pay back its creditors. They have been pushing for relief of about 50 percent.
France has suggested that the Paris Club write off about half of Baghdad’s debt, postpone debt service for three more years, and then reconsider the issue when Iraq’s economy is in better shape. (Paris, like Moscow, has long-standing ties with the previous Iraqi government and this relationship — and the debt it created — has contributed to their reluctance to endorse more significant relief.)
The stalemate was broken last weekend when U.S. Treasury Secretary John Snow and his German counterpart, Finance Minister Hans Eichel, agreed on a three-stage, four-year deal. Under it, the Paris Club would immediately forgive about 30 percent of Iraq’s debt; an additional 30 percent would be tied to adherence to an International Monetary Fund program; and then a final 20 percent would be linked to the outcome of that effort. In all, about 80 percent of Paris Club debt would be written off, although some argue that the deal should be contingent on economic developments in Iraq: If the country’s economy recovers, then the size of the write-off could diminish. Equally important, a deal with Western creditors would put pressure on Iraq’s fellow Arab nation creditors to follow suit.
Japan will be affected by the deal. This country is Iraq’s largest creditor among the Paris Club nations; Tokyo is owed about $4.1 billion, excluding arrears. Japan has pledged $5 billion in aid to help the reconstruction of Iraq, but the disbursements have been held up because of the security situation in that country as well as Baghdad’s debt status. The deal opens the way for Japan to provide those funds.
Japan has traditionally opposed debt forgiveness, arguing that leniency creates moral hazard by encouraging irresponsible behavior on the part of other governments that will expect their own debts to be forgiven.
Earlier this month, Nigeria’s President Olusegun Obasanjo urged creditor nations to cancel the debt load of African countries rather than reschedule it, arguing that repayments have contributed to the poverty and misery on the continent. That call will be taken up with renewed vigor in the aftermath of the Iraq deal. Iraq’s circumstances, however, are unique with potentially severe short-term consequences if there is a failure to aid that country.
The continuing rancor in the international community that has followed the U.S. decision to invade Iraq does a disservice to all governments — none more so than Baghdad’s. Even worse, the people of Iraq are being forced to pay for political differences in the West.
Even if other governments choose not to actively participate in or contribute to the reconstruction of Iraq — a decision that we believe is mistaken, given the stakes — they can help ease the burden that the new government in Baghdad has inherited from Saddam Hussein. Debt relief is the very least they can do.
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