IRAQ: NO END IN SIGHT TO DEBT BURDEN

Created: 4/12/1990

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DIRECTORATE OF INTELLIGENCE0 Iraq: No End in Sight to Debt Burden Summary

Iraq faces serious problems servicing lis foreign debt. Baghdad is unlikely lo begin paring downillion debt any time soon because it considers most debtow priority in favor of spending on strategic military and civilian projects, and it is incurring new debt

oismal repayment record, Iraq will probably coniinue to secure debt relief--including limited new credits-from most of Its creditors, who have little other choice if they hope to receive any repayment or compete In Ihe potentially lucrative postwar Iraqi market. M

Debt remains the major constraint to Iraq's postwar economic recovery.

0 Deb; payments will siphon off financial resources well into.

o Although Bagiiaad wiB try to insulate military and oil projects from financial

constraints, as poor repayment record will restrict its access to new financing of the magnitude needed to fund many reconstrvcthnmjects and to increase imports

ied to fund many rccoetstructjQn^jects growth in nonoU sexton. i

enough to spur

Baghdad probably wants to maintain access lo credit guarantees available from the United States despite recent political strains in the relationship. Any loss of these guarantees would jeopardize adequate servicing of aboutillion in Iraqi debt backed by the United States. Baghdad would probably not suspend payments if Washington refused lo release the0 million of SI billion in CCC credit guarantees allocated to Iraq for0 but almost certainly would if the entire CCC program were cancelled or seen to be politically dead because of Congressional opposition, p

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From Richer to Poorer

Iraq's extensive use of foreign loans2 has transformed it from one of tbe Third World's richest countries and net creditors into one of its problem debtors. The accumulation of debt stems from President Saddam Husayn's decision to continue pursuing an ambitious economic development program despite the outbreak of war with Iranraq boosted civilian spending while military expenditures rose and oil exports fell sharply because of the war. This^guns and butter" policy rapidly drained Iraq's foreign assetsillionllionoreign assets stood at aboutillion at the end of last year.

response to the worsening financial situation, Baghdad adoptedmeasures and began borrowing heavily from abroadt obtainedand credit guarantees from foreign governments, commercial banks, andto finance imports-including some military equipment-and projects.Iraq's foreign debtshort-term tradethendts Persian Gulf allies provided

; financial assistance, mostly oil sold on Baghdad's is unnxeiy to De repaid. |

Iraq has experienced payment problems3 that have forced it to reschedule the bulk of payments due annually-including short-term credits, interest payments, and previously rescheduled dcbt-and accumulate large arrears. It has negotiated debt rescheduling agreementsilateral basis in an effort to play creditors off against each other and obtain concessional repayment terms. Debt servicing problems climaxedhen world oil prices plummeted and large debt payments fell due. Iraq's already dismal payment record worsened, causing creditors that had not already cut off credjtlincs to do so and forcing Baghdad to scramble to pay for essential civilian imports. J

Debt Problems Persist In Postwar Period

Saddam's policy is to treat most debtow priority in favor of reconstructing the economy, improving depressed living standards, and maintaining high military spending. Press reports indicate the regime has embarkedillion multiyear investment plan for postwar reconstruction and development of industry and infrastructure. Baghdad has spent several billion dollars since theonstructing oil export facilities, expanding portndustries, and rebuilding the cities of AI Basrah and AI Faw,[

adding further burden to Iraq's heavy repayment schedule in the next two years.

We estimate Baghdad met onlyofprincipal and interest payments due9percent rise in oil revenues lor the year. It rescheduled nearlyillion owed to France, West Germany, and Italy and is trying

CONTRACI

| It also boosted civilian imports last year byercent to tne highest level2 to help meet pent-up consumer demand and quiet popular grumbling. Although imports of military raatenel were reduced byillion last year, we believe the regime diverted most if not all of these savings to the development of its own military industries. The acquisition of new financing for postwar projects and imports has complicated debt servicing woes because most of these credits are short-

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remaining payments thai were due io other oeditorsccording iopress reporting. To conserve foreign exchange, Baghdad used oil toseveral major crediton last year, including Japan, Turkey. Brazil, and Yugoslavia. Although we estimate it9 than ihc year before, it did so in rootl cases io unlock new credits, thuset reduction in its debt.

Baghdad continues to repay its debtelective basis, giving priority to suppliers of key goods or new credits as well as to important pouueafallies;

o II generally has made prompt payments for important oil projects, including the construction of its pipeline through Saudi Arabia and the restoration of its offshore oil terminal at Mina al Bakr.

o The United States has received timely debt payments, mostly because it has provided significant new agnail rural credit guarantees

o Iraq has granted priority in recent years to repaying its debt to Jordan-mostly in the form of oil deliveries-because of its gratitude for Jordanian support during the war as well as concern about Amman's serious economic problems.

o Baghdad began making back payments on Egyptian remittances late last year after publicity about its mistreatment of Egypiian workerserious disruption of its relations wilh this important Arab Cooperation Council ally.

la contrast, major creditors generally have had to bear the brunt of Baghdad's debt servicing problems.

Iraq's persistent debt servicing problems have restricted severely its access to new loans. Most commercial banks remain unwilling to extend unsecured loans to Baghdad. Several governments--in an effort to promoteagreed to guarantee more trade and project financing since the cease-fire, giving Iraq access to about S5 billion in financing lastost of these credits are short-term, however, and contingent upon repayment of old debt, allowing Baghdad to merely roll over its debt to some creditors. I

Outlook

We believe debt problems will remain the major constraint to Iraq's postwar economic recovery. Debt payments will siphon financial resources away from more

servicing record will restrict access to new financing of the magnitude needed to fund many reconstruction projects and to increase imports of raw materials and equipment enough to spur growth in nonoil sectors.

1 Ncaih-erf (be aoTtmmcm arOkugpfl pmatoc*io Iraq arc tied lo the wthMtof foa* mod lervim fnm final ia ibcmrici.

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SECRET NOFORN

Iraq will probably not begin paring down iis debt (ot several years. Repayment of most old debt willelatively low priority in favor of spending on strategic military and civilian projects, particularly in view of the regime's confidence that it can secure concessions from its creditors. In addition, Baghdad will incur new debt as il obtains financing iV reconstruction projects and higher levels of imports. We believe it will try to reschedule at least half of the V7 hitlion due annually during tbe next few years. |

Despite its dismal repayment record, we believe Baghdad will continue lo secure debt relief in the form of reschedulings and limited new credits from most of iis

o Most creditors probably realize that providing such concessions is the most effective way of eliciting at least some repayment of old debt from Iraq.

o Many creditor governments are heavily dependent on oil imports and want to maintain good relations with Iraq, which possesses the second largest proved oil reserves in the world.

o Many governments are likely toimited amount of new credits or credit guarantees because they are under pressure from domestic firms anxious to participate in this potentially lucrative market.

We believe competition between government creditors to help their firmsoothold in the Iraqi market will continue to discourage them from banding together to force Baghdad to negotiate debt accordsultilateral basis-as most debtors do-except in the unlikely event that Iraq ceases servicing its debi altogether. |

Implications For the United States

Although ties with Washington have been damaged by several recent events, Baghdad probably wants to maintain access to credit guarantees available from the Commodity Credit Corporation (CCC) and Eximbank. Iraq relies on tbe CCC program, in particular, toignificant amount of food and other agricultural commodities on credit. In addition, Baghdad believes the provision of these credit

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aranteesositive signal to other lenders that Washington has confidence in iq'she loss of the CCC program would lead Iraq to see* agricultural gooos trom alternate suppliers willing to sell on credit. Although few individual countries would be likely to supply new credits to Baghdadevel commensurate to the CCC any time soon. Iraq would probably bc able to access smaller credit facilities available from several countries.

Any loss of US credit guarantees would jeopardize continued adequate servicing of aboutillion in Iraqi debt backed by the United States. We believe Baghdad would continue to make repayment ioriority only if it believed doing so would help restore the credits in the short term. If Iraq believed there was no possibility for new credits, the United States would lose its special repayment status, in our judgment. Baghdad would probably not suspend payments if Washington refused to release the0 million ofillion in CCC credit guarantees allocated to Iraa forut almost certainly would if the entire CCC program wen cancelled or seen to be politically dead because of Congressional opposition.

US-Iraq) Commercial Relations

Tbe provision of US credit guarantees to Iraq has buoyed the substantial increase in bilateral tradehe extension7 billion in credit guarantees by the CCCas helped Iraq become tbe largest Middle Eastern market for US agricultural goodsajor world market as well Substantial agricultural sales-which comprise aboutercent of US sales to Iraq-have helped makeajor source of Baghdad's civilian imports. Iraq has also0 million in short-term credit guarantees availablembankj

US imports from Iraq have also increased significantly. US purchases of Iraqi oil have jumped fromo faraboutercent of Baghdad's total oil exports and eight percent of net US oil imports.

Iraq has pursued closer bilateral commercial ties because it wants to increase its economic importance to the United Slaten In hopes of offsetting what Baghdad regards as Iran's greater geopolitical value to Washington. In addition, tbe Iraqis have high regard for US goods and technology. To encourage stronger des, Baghdad

has:

o Treated Washingtonavored creditor; as recently as February Iraqi diplomats told US officials that Iraq continues to give preference to repayment of aboutillion in US-guaranteed debt

0 Lobbied for medium-term credit guarantees from Eximbank and pushed for the formationoint economic commission.

o Stressed lhe prospects for lucrative contracts in Iraq in the future as well as the importance of its massive oil reserves to long-term US and western energy needs.

Iraq also gave extensive publicity to the US pavillion at the annual Baghdad Trade Fair last November, including the unprecedented visit of Iraqi Deputy Prune Minister Sadun Hammadl and two other ministers to tbe paviUion.

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