IRAQ: DEBT PROBLEMS PERSIST (DELETED)

Created: 1/13/1989

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Iraq: Debt Problems Persist

Higher oil revenues have improved Iraq's debt servicing record and increased lis accesse* credits, but Baghdad continues to reschedule most of its debt. We believeillion debt will continue io grow during the nest several years as Baghdad seeks financing for reconstruction and civilian and military imports and treats most debt repaymentow priority. Iraq will not reduce its debt until oil revenues rise iignincaaily. probably not before the. Baghdad's creditors are likely to tolerate Iraq's debt servicing problems during the near terra. Continued poor debt management, however, would probably cause lenders to further restrict already limited credit linet to Iraq, forcing cats in civilian spending and risking greater popular dissatisfaction with President Saddam Husayn's regime sHgsvP

From Riches to Rags

Baghdad's extensive use of foreign loans2 has transformed Iraq from one of the Third World's richest countries to one of iu largest debtors. The accumulation of debt stems from Baghdad's decision to cootinue pursuing an ambitious economic development program despite the outbreak of war with Iranivilian spending remained high while military expenditures increased and oil exports fell sharply because ofamage to oil facillli

In response to the worsening financial picture,3 Baghdad adopted domesiic aottcriiy measures and begin borrowing from trading partners and its Persian Gulf Arab allies. Iraq's foreign debt roser>short-term tradathe war to roughly wo billion atn addition. Iraq's Gulf allies, principally Saudi Arabia and Kuwait, provided about SJ6 billion in financialsold on Baghdad's behal (fert-during the

We doubt Baghdadtins deb* regardless of whether or not the Saudis and Kuwait* formally cancel iii

Iraq's inability to meet its financial obligations to creditors during the war led it to reschedule rnost of its debt, including short-term trade credits and interest payments, large debt payments due combined with low world oil pricesinancial crisis in Iraqaghdad signed bilateral rescheduling accords with most of its creditors and ignored most other requests for payment. Iraq's poor payment record caused governments that had not-already cut off credit lines to do so, forcing Iraq to scramble to pay for essential imports.)

More Payments Brinjr, More Credits Higher oil revenues allowed Iraq to Improve its debt servicing record somewhat. Oil earnings of roughlyillion last year werepercent higher than6 when Baghdad's financial woesrisis point. Iraq has been making larger and more timely debt payments compared with two years ago. according to diplomatic and press reporting. Even so. Iraq is paying most of its creditorsortion of what they arejustcontinues to reschedule most of its debt. Last year Iraq rs-schsduiedillion in debt due during thend is see king to reschedule several billion dollars

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Baghdad will probably coniinueid! concessions from mosi of iul lean during ihc near term. Many lenders view Iraq's large oil reservesuarantee of iu eventual ability to pay off itsview that Iraqi otntiab encourage. Many suppliers are eager tooothold in the potentially lucrative Iraqi market and to participate in postwar reconstruction and development projects. Suppliers want u> resolve debt disputes ind areheir gewersrnenu to guarantee new crediu lo Baghdad, especially ia light of the recent anncuncerneats that tbe United Kingdom and the United Slates will provide large credit facilities to Iraqhisnvironment will continue to limit creditors' willingness and ability to force Iraq to negotiate debt agreemenuultilateral Instead of bilateral basis. Furthermore, creditors probably realize thai if ihey refuse to

raqi debt they risk not getting paid at all.

the war by promising them preferential treatment and higher payments after the conflict ended. Some lenders are likely io lose patience if Baghdad fails to deliver on these promises. Iraq faces large debt tcrvice payments in thehen much of iu debt rescheduled during the past few years come* due Continued failure U> service iu short-term debt, ia particular, could cause govern menu and banks to cut off short-term crediu.naaoial crisis similar to tba oneaghdad would be forced to curtail civilian imports aad development spending, slowing economic recovery. Such cutbacks would be likely lo increase popular dissatisfaction with Saddam Husayn's regime, particularly because Iraq's war-weary population has high eapectations for economic unprovemen t. aawaaaV

Over the longer term, we believe Iraq rsetter position ihan most Third World countries to improve iu debtor status. Iu vast oilpossesses ihc second largest oil reserves in theBaghdadeliable source of income. Furthermore. Saddam Kusaya's pride aod aversion io foreign dependence will probably moiivtte him to eventually try to pay off the del

Longer Term Risks

Creditors'current guarded optimism could change, however, if Baghdad fails to further improve its debt servicing record now that the war with Iran is over. Iraq elicited concessions from many creditors during

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