The IMF
and the Future of Iraq
Zaid
Al-Ali
(Zaid Al-Ali
practices international commercial arbitration law in Paris and
works with Jubilee Iraq, an organization advocating debt relief for
Iraq. He is also the editor of
www.iraqieconomy.org.)
December 7,
2004
On November 21,
2004, the 19 industrialized nations that make up the so-called Paris
Club issued a decision that, in effect, traces the outline of Iraq's
economic future. The decision concerns a portion of Iraq's $120
billion sovereign debt -- a staggering amount that all concerned
parties recognize is unsustainable. In their proposal to write off
some of the debt, the Paris Club members took advantage of the
opportunity to impose conditions that could bind the successor
government in Baghdad to policies of free-market
fundamentalism.
Iraqis, in
general, are contemptuous of the idea that loans made to Saddam
Hussein's government should be repaid. Much of that debt was
contracted for purposes such as purchasing military equipment that
was used to invade neighboring countries, which is not a spending
priority that the Iraqi people voted to pursue. Iraqis and
international campaigners argue that much of Iraq's debt is in fact
"odious" -- a category of debt that should not be repaid because the
loan proceeds were used against the interests of the indebted
country's population. "Odious debt" need not be written off or
forgiven; it is simply not owed at all because it is illicit in
nature. A number of legal precedents on odious debt exist, but from
a strictly legal point of view, authorities such as the Paris Club
are under no obligation to apply the precedents or even to take them
into account.
The Paris Club
probably calculated that Iraq will not invoke the odious debt
doctrine to refuse any repayment whatsoever. Such action would
invite a boycott on the part of public and private lending
institutions, leading to a severe shortage of capital and guaranteed
economic meltdown. Iraq will likely stop repaying only if repayments
were exerting such budgetary strain that it would be better off not
paying back its debt, regardless of whether or not capital flows
dried up. As the creditor nations are perfectly aware, compelling
Iraq to repay its debt completely would push the country into an
economic crisis so severe that debt servicing would halt.
It was
therefore decided long ago that a portion of the debt would have to
be written off. Although this reduction is often couched in
humanitarian terms, the reality is that creditors are simply vying
to bleed Iraq as much as possible without actually killing it.
STRINGS
ATTACHED
The Paris Club
agreed to write off a portion of Iraq's debt in three stages. The
first 30 percent, amounting to $11.6 billion, is to be written off
unconditionally. A second 30 percent reduction will be delivered "as
soon as a standard International Monetary Fund program is approved."
A final 20 percent reduction will be granted "upon completion of the
last IMF board review of three years of implementation of standard
IMF programs." In other words, 30 percent of Iraqi debt will be
excused only if the IMF and Iraqi authorities agree on an economic
"reform" package, and another 20 percent will be written off only if
the Fund is satisfied that Iraq has implemented the terms of that
package.
Since 1947, the
IMF has extended loans to debt-ridden, developing countries in
return for those countries' adherence to "conditionalities,"
typically including privatization of state enterprises and other
major restructuring of the economy. In the case of Iraq, 50 percent
of the debt piled up by the country's former dictator -- amounting
to $19.38 billion -- is tied to as yet unspecified conditionalities.
As Paris Club members claim around $40 billion, Iraq will still owe
$7.78 billion to the Paris Club even if the IMF certifies its
adherence to the conditionalities. If Iraq does not satisfy the
Fund, it will owe $27.16 billion to the society of 19 industrialized
nations.
As soon as the
substance of the Paris Club's decision was made public, the Iraqi
National Assembly, the closest thing Iraq has to a representative
institution, issued a statement declaring that "[Iraq's] debts are
odious and this is a new crime committed by the creditors who
financed Saddam's oppression." Sheikh Muayyad of Baghdad's Abu
Hanifa mosque, the one raided by US troops in mid-November, added:
"In the Paris Club process, the enemy is the judge, and this cannot
be fair." Although Iraqis rightly object to the deal's failure to
acknowledge the odious nature of much of the debt, their incentive
to meet the terms of the Fund's program will be very strong. What
type of future can Iraq expect under the guidance of the IMF? Two
cases from recent history offer some clues.
POISON
PILL
The Southeast
Asian crisis of 1997 is a commonly cited illustration of IMF
ideology in practice. Reacting to rumors that Thailand would devalue
its currency, the baht, speculators confirmed the prophecy by moving
capital out of the country and converting it into dollars, thereby
weakening the baht. A number of other factors converged to send the
entire region into a brutal recession, as foreign investors withdrew
money into dollar accounts in "safer" places. The mass flight of
foreign capital from Southeast Asia was possible mainly because many
of these countries had undertaken capital market liberalization
reforms prior to 1997 -- upon the advice of the IMF.
As the crisis
spread, the IMF offered approximately $95 billion in loans to the
afflicted countries, but not without stipulating conditionalities.
Most importantly, the Fund required governments to balance their
budgets, inducing governments to slash important social programs and
abandon their goal of full employment. These "reforms" came at great
social cost. In Indonesia, for example, riots broke out the day
after the government cut food subsidies. In addition, the IMF
insisted that Southeast Asian countries boost interest rates to
attract foreign capital back to their banks. The ironic result was
that a number of domestic firms were forced into bankruptcy,
widening the recession and diminishing the region's allure for
investors.
The countries
that swallowed the IMF's poison pill -- including Thailand -- were
still in recession in 2000. Malaysia, on the other hand, famously
rejected the Fund's advice and followed its own path. Pegging its
currency, the ringgit, to the dollar and cutting interest rates,
Kuala Lumpur ordered that all ringgit invested offshore be
repatriated within one month, imposed tight limitations on transfers
of capital abroad and froze the repatriation of foreign capital for
12 months. In the meantime, the country took the time to restructure
its corporate and banking laws. As a result, Malaysia emerged from
recession much sooner and with a smaller debt than its
neighbors.
ARGENTINA'S
EXAMPLE
Throughout the
1990s, the IMF held up Argentina as a shining example for others to
follow, but there, too, its recommendations are now closely
associated with economic disaster. Before Argentina entered a
recession in 1998, the IMF enjoyed control over the country's
economic policies through past loans and the conditioning of other
financial packages upon a "standard IMF program." Argentine
authorities happily carried out all the demanded reforms, including
selling off huge amounts of state property and opening up just about
every industry in the country to 100 percent foreign ownership.
Before Argentina's eventual economic collapse in 2002, for instance,
foreign institutions dominated the banking industry. While these
banks readily provided funds to multinational corporations, and even
to large domestic firms, small and medium-size firms complained of a
lack of access to capital. The resulting lack of growth was pivotal.
Many argue that the main culprit in Argentina's dramatic crash was
not the IMF but the government, which never saw anything wrong with
selling off the country wholesale. Even if so, the IMF certainly did
not help.
By the time the
crisis started in 1998, the Argentine government had already
incurred a large amount of foreign debt. The recession caused tax
revenues to plummet, therefore aggravating its balance of payments
problem. Buenos Aires made up the difference by increasing borrowing
from international lenders such as the IMF. The Fund provided $3
billion in 1998, $13.7 billion in 2000 and a pledge for a further $8
billion in 2001. In addition, it arranged for an additional $26
billion to be granted by other sources at the end of 2000. The
bailout came with strings attached: the IMF decreed that Argentina
should, among other things, balance its budget by drastically
cutting public spending and by raising taxes. The Fund aimed thereby
to make the country more attractive to foreign capital, but the
downside was that unemployment worsened and vital social programs
were canceled. Despite the astronomical sums made available to
Argentina, and despite the government's budget cuts, the recession's
effect could not be overcome, and the gap in the budget continued to
grow until the government could no longer sustain debt repayments.
Argentina
officially defaulted on its debt of $141 billion on January 3, 2002,
and devalued its currency over IMF objections shortly thereafter.
Investors lost confidence in the Argentine economy and began pulling
their money out of the country. The government foresaw that the
outflow of capital might cause a banking failure and so imposed a
limit of $1,000 per month on withdrawals by ordinary Argentinians.
In addition, officials converted bank deposits that were originally
made in dollars into local currency, thereby increasing the
liabilities of the population, as debts that were incurred in
dollars remained in dollars. Following the devaluation, the debts of
ordinary Argentinians increased in value by over 300 percent.
In the six
months following the devaluation, Argentina's gross domestic product
dropped by 16.3 percent. As of June 2002, 19 million people out of a
total population of 35 million were earning less than $190 per
month. Amidst riots, looting, increased crime and police brutality,
8.4 million Argentinians were destitute, with monthly incomes of
less than $83 per month. Reports surfaced of malnutrition and
children missing school in order to beg.
MORE, NOT
LESS
In a July 2004
report from its Independent Evaluation Office, the IMF conceded that
it should not have continued urging Argentina down the
budget-cutting road after "the growing vulnerabilities in the
authorities' choice of policies" became apparent. Instead, the
report concluded, the Fund should have diverted its loan funds to
help Argentina cover "the inevitable costs of exit" from its chosen
policies. But this internal audit of the IMF's role in the crisis
makes clear that the Fund has not altered its basic views about what
indebted countries should do to reduce their burdens. "During the
pre-crisis period," reads a July 29 press release on the audit, "the
IMF correctly recognized fiscal discipline and structural reform,
labor market reform in particular, as essential to the viability of
the convertibility regime." Further, the IMF believes that Argentina
should have done more, not less to adhere to its program before the
crisis: "Conditionality was weak, and Argentina's failure to comply
with it was repeatedly accommodated."
To date, the
approach of the Bush administration in Iraq strongly suggests that
the same "more, not less" mentality will govern their
recommendations for Iraq's economic future. Most infamously, the
Coalition Provisional Authority (CPA), which ruled Iraq from May
2003 to June 2004, legislated that "[a] foreign investor shall be
entitled to make foreign investments in Iraq on terms no less
favorable than those applicable to an Iraqi investor, unless
otherwise provided herein." This Order 39 also provides that
"[f]oreign investment may take place with respect to all economic
sectors in Iraq, except that foreign direct and indirect ownership
of the natural resources sector involving primary extraction and
initial processing remains prohibited." Order 39 also substituted a
flat tax of 15 percent for Iraq's system of progressive taxation,
wherein the top rate was 45 percent.
Assuming that
the successor government in Baghdad does not overturn Order 39, the
long-standing ban on foreign investment in Iraq has been abolished,
allowing foreigners to own up to 100 percent of any enterprise
except those controlling oil and other natural resources. Although
foreign ownership of land remains illegal, companies or individuals
will be allowed to lease properties for up to 40 years. Another CPA
decree, Order 81, sets out the circumstances under which the reuse
of seeds by farmers constitutes patent infringement. For the
US-British occupation authority, such neoliberal policies were an
article of faith. Speaking to journalists aboard a US military
transport plane in June 2003, ex-CPA head Paul Bremer emphasized the
need to privatize government-run factories with such enthusiasm that
his voice could be heard over the din of the cargo hold. "We have to
move forward quickly with this effort," he said. "Getting
inefficient state enterprises into private hands is essential for
Iraq's economic recovery."
It is
uncontroversial to argue that US policies and interests are widely
reflected in the decisions taken and the statements made by the
Iraqi interim authorities. In relation to debt and IMF programs,
however, the government of Iyad Allawi seems to have surpassed all
expectations.
On September
24, three Iraqi interim ministers sent a "letter of intent" to the
managing director of the Fund. Such letters -- a standard
requirement in IMF procedure -- are officially the work of national
authorities, though IMF officials typically dictate their content
themselves. A quick examination of the Iraqis' letter of intent, as
well as the documents on Iraq already published by the IMF, reveals
multiple references to "restoring Iraq's external debt
sustainability," "tax reform," "financial sector reform,"
"restructuring state-owned enterprises" and "macroeconomic
stability." The tenor of these documents bears a remarkable
resemblance to the Fund's prescriptions for Argentina and Southeast
Asia during the 1990s. Absent from the letter, moreover, is any
statement about the priority that Iraqi authorities or the IMF will
place upon reduction of unemployment. A statement on Iraq issued by
the IMF's deputy managing director on September 29, meanwhile, makes
not a single reference to unemployment or to poverty. On October 14,
the Iraqi interim government took still another step in the
direction of free-market fundamentalism when it applied for
membership in the World Trade Organization.
INTRANSIGENT
ARAB CREDITORS
To make matters
worse, and despite all the attention garnered by the Paris Club
negotiations, most of the debt incurred by the deposed regime is not
actually owed to Paris Club members. Iraq's main creditors are Arab
states. Saudi Arabia claims $30 billion, while Kuwait demands
repayment of a further $16 billion in debt as well as more than $30
billion in reparations from Iraq's invasion and occupation of the
country from 1990-1991. Billions of dollars are also claimed by the
United Arab Emirates, Qatar and other Arab countries. Finally, on
October 25, Iran was reported to have claimed $97 billion in
reparations from Iraq for damage caused during the Iran-Iraq war of
1980-1988.
At first, Arab
creditors were loath even to consider writing off any of the Iraqi
debt. Kuwait was particularly intransigent, eliciting a rather
confused reaction from senior US officials. "I have to say that it
is curious to me," Bremer said, "to have a country whose per capita
income, GDP, is about $800...that a county that poor should be
required to pay reparations to countries whose per capita GDP is a
factor of ten times that for a war which all of the Iraqis who are
now in government opposed." Bremer was referring to monies
transferred to Iraq during the 1980s, which were most probably
intended to assist Iraq in its war against Iran.
Iraq, under
Saddam Hussein and subsequently, has long argued that these funds
were grants and not loans. Kuwait obviously disagrees. Kuwaiti
Foreign Minister Muhammad Sabah Al Salim Al Sabah affirmed on
December 1 that Kuwait has in its possession official documents
demonstrating the transfer of monies to Iraq. "Any single dinar that
Kuwait paid to Iraq without a legal and official proof will be
worthless," he said. But, from a legal point of view, the fact that
transfers were made does not suffice to prove that Iraq is under any
obligation to pay back any money unless the terms of the transfer
are specified. If creditor nations insist on being rigid in their
interpretation of the law, and argue that they have no obligation to
apply the doctrine of odious debt to Iraq, then Iraq should not
hesitate to argue that a loan is not a loan without a written
contract to prove it. It is unclear whether such contracts exist.
What is true of Kuwaiti "debt" is also true of Saudi Arabian claims.
There is a
solid legal basis, by contrast, for enforcing the war reparations
claimed by Kuwait, as they are based on UN Security Council
resolutions. Iraq will have difficulty avoiding payment of any
amounts claimed by the Kuwaitis and granted by the UN Compensation
Committee, unless Iraq decides unilaterally to refuse payment, which
may or may not work out in its favor.
LESSONS FOR
REFORMERS
Post-Saddam
Iraq offers a perfect illustration of how the industrialized world
has used debt as a tool to force developing nations to surrender
sovereignty over their economies. Iraq had no bargaining chip --
save its economic weakness -- with which it could have forced Paris
Club members to write off a greater portion of debt. Indeed, had
Iraq's economy been in better shape, less of its debt would have
been written off. The odious debt doctrine has considerable moral
force, but it is not binding, and it comes as no surprise that
Iraq's creditors do not think in altruistic terms. Nor does the
Iraqi case even constitute a precedent that other highly indebted
countries could use in their favor; the Paris Club was careful to
note that Iraq's is an "exceptional situation." What implications
does the November 21 Paris Club deal have for activists seeking to
ameliorate the financial burdens thrust upon poor countries by
corrupt regimes?
When arguing
with government officials in relation to existing debt, campaigners
face two obstacles. First, the legal context in which existing debt
was contracted cannot be modified retroactively, and there is
therefore no legal obligation on the creditor's part to determine
whether or not the subject matter of a financial agreement is
illicit. Second, there is a clear financial disincentive for
creditor nations and financial institutions to forgive outstanding
loans. Neither of these obstacles applies to future debt. Any reform
that is put in place today will necessarily apply to loans made in
years to come. In addition, the legal status of future debt has no
real impact on a lender's balance sheet.
Campaigners
should move to establish the equivalent of odious debt doctrine for
loans yet to be lent. The legal framework relating to international
loans can be reformed through a number of different mechanisms,
including, but not limited to, a new international convention, or a
Security Council resolution. The European Union could even begin
drafting an international convention, while leaving open the
possibility for other states to ratify the agreement in the future.
Many argue that
if repayment of loans were subject to scrutiny of how the borrower
spent the money, loan funds would dry up. So the international
convention or Security Council resolution should provide for a
mechanism for dispute resolution or to refer all disputes to an
already existing dispute resolution mechanism. One possibility would
be for the International Center for the Settlement of Investment
Disputes, a tribunal organized under the auspices of the World Bank,
to deal with international lending disputes. Whatever the case may
be, the advantage that opting for a particular dispute resolution
mechanism would present in practice is that it would allow for the
creation of a significant body of law that would serve to clarify
rules relating to the illicit purpose exception.
Any such
reforms will come too late for Iraq, however. As creditor nations
are unlikely to have a change of heart and forgive a greater portion
of Saddam's odious debt, the new Iraqi government will need to
determine whether there are ways to force debt renegotiation and to
resist pressure to adopt IMF prescriptions. The first priority
should not be to please outside creditors. It should be to reduce
unemployment and to redistribute wealth in such a way as to reduce
social divisions, something that is particularly important in Iraq.
The struggle over Iraq's economic future has moved from Paris to
Iraq.

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