An Economy in a Debt Trap: Iraqi Debt 1980-2020.

INTRODUCTION

THIS ARTICLE WILL EXAMINE THREE variables -- war, debt and oil -- in an organic manner in an examination of cause and effect in Iraq during the period 1980-2020. The 1980s began with Iraq recognized as being one of the highly promising countries in the Middle East and the Third World in terms of its economic development: a donor country, a creditor country, a modestly outward FDI player, (1) a cash country, and owner of an estimated U.S. $36 billion in foreign assets. By the close of the 1980s however, following the devastation of an eight-year war with Iran, Iraq faced -- for the first time in its history -- a serious debt-related liquidity problem. The 1990s began with a vast accumulated and acute but manageable external debt, and the Iraqi invasion of Kuwait, which ushered in the largest and most draconian economic sanctions regime in history. Iraq now faces a new millennium with astronomical war reparations payments, mounting debt and a once prosperous economy in ruins. No specific solution has been propo sed by which Iraq can relieve its debt burden with every passing year intensifying the burden the Iraqi people will be required to bear. Indeed, as long as Iraq is kept under siege and its economy is, with all practicality, a "captured" one, the debt issue has been relegated to the shadows of more pressing humanitarian concerns.

The focus of this article is on four decades of indebtedness covering the period of 1980-2020. The methodology to address this complex issue is summarized in the figure on the following page.

The model utilizes the two most recognized and commonly employed debt sustainability criteria (DSC): debt service to export ratio (DS/E) and present value of debt plus interest to export ratio (PVD+I/E). In this regard the model takes the highest ratio in either criteria as MTIT: the Maximum Tolerable Indebtedness Threshold and makes the assessment of excessive indebtedness (i.e., above MTIT) accordingly. The model also considers the and/or of excessive indebtedness under either criterion as an indication of absolute non-sustain ability of indebtedness. This means two flows will have to be estimated: an outflow and inflow. For the outflow side the country's external financial obligations must be assessed. To do this two cases have been chosen: case one represents old debt (O) and new debt (N), and case two represents 0, N, AF (Arab Funds) and WR (war reparations). For each case there are four repayment options in increments of 10, 15, 20, and 25 years. The inflow side of the relationship depends on oil export s, oil prices and hence oil revenues. While oil production is a given, oil export is a residual after deducting domestic requirements for oil related products. Two price scenarios were used in the calculations: a constant price of $20/b with an incremental of one dollar (increase for inflation) per year. For practical considerations a $5/b increase on the basic price is incorporated for every five years, thus scenario II is based on $20, $25, $30, and $35 during 2000-2004, 2005-2009, 2010-2014, and 2015-2019 respectively. The reader is advised, however, not to consider these price scenarios as forecasting the price of oil. Far from that they are used only to demonstrate the serviceability of indebtedness under two assumed prices.

A brief discussion on the progression and profile of Iraqi indebtedness since the onset of the 1980s is provided in the first section of this paper. Section two then examines both old debt and the new debts incurred. The new debt is needed to enhance the country's oil production capacities and resultant oil export revenues, as well as the costs associated with servicing old debt. In the third section an in-depth sustainability analysis is conducted. Finally, conclusions, strategies and options for the future are presented in section four.

ONE: PROGRESSION AND PROFILE OF IRAQI INDEBTEDNESS

Through a combination of wartime conditions and unwise decision-making, Iraq gradually moved towards the entanglement of national indebtedness. The first step on the path of the debt trap was taken when the Iraqi government was given the directive to continue with the implementation of the five year economic plan of 1981-85 in spite of the ongoing war with Iran and the heavy damage inflicted on the country's export facilities in the war's early stages.

The situation had worsened further when, in April 1982, Syria closed the oil pipeline passing through its territories thereby causing an immediate and further loss of export production of some 700 thousand barrels per day. When Iraq's foreign assets, estimated at $36 billion at the commencement of hostilities with Iran, began to evaporate through increased wartime spending, the continued spending on development projects and the false illusion and mentality of "business as usual" at a time when oil revenues declined considerably, all forced Iraq to request a deferral of contractual dues. Most of these contractual dues were deferred for two years and made payable by four equal semi-annual installments. Once deferred payment arrangements were under way new directives were released making the availability of external financing as a necessary condition for the awarding of new non-military project contracts. This naturally meant fresh and project-related credit facilities. When the first payments of these deferrals came due there were many signs of both comfort and optimism among the concerned decision makers in Iraq that installments due in 1985, from 1983 deferred payments arrangements, could be met on schedule.

The optimism was attributed to three primary factors: first, the debt service on $2.1 billion due in that year was clearly attainable; second, it was thought that the U.S. dollar would continue to hold its strong position against other major currencies, thereby reducing the real value of non-dollar debts in terms of oil revenues; and third, the expected 0.5 million barrel per day increase in export capacity expected to be available by the end of September 1985, following the construction of the first stage IPSA-1 pipeline, which linked southern Iraqi oil fields with the East and West crude oil pipeline in Saudi Arabia at the Red Sea port of Yanbu.

Such optimism began to fade away when the value of the U.S. dollar started a downward trend during the first quarter of 1985 and more so when the decline was institutionalized by the G-5 Plaza Agreement in September of that year. (2) Additionally, oil prices continued in a downward trend causing a serious deterioration in Iraq's terms of trade and further deepening its financial crises. The financial situation in 1986 deteriorated even further, with that year proving to be a financial disaster due to the collapse of oil prices. Though Iraq's oil production increased by nearly 18 percent in 1986 over 1985 levels, oil export earnings decreased by 27.2 percent. (3)

Faced with conditions of declining purchasing power - due to the combined effects of collapsed oil prices and weakened U.S. dollar - Iraq had intensified bilateral efforts for more financial facilities in terms of new credit and guaranties on the one hand and debt rescheduling on the other hand. Most of the credit facilities and related deferred payments arrangements which were concluded in 1983 and 1984 with Europeans were, relatively, of similar structure; 85 percent to 90 percent of the foreign currency payments due in each year were to be deferred for two years with repayment by four equal semiannual consecutive installments. The remaining 15 percent to 10 percent were either paid in cash or financed through commercial credits. Though Iraq had actually requested these conditions, in reality they were agreed upon in 1982/3, among the OECD Export Credit Group within the Berne Union. In addition to arrangements for deferred payments and debt rescheduling, Iraq managed to obtain fresh credits from a variety o f sources: financial markets, official credits, and multilateral lending institutions. During the 1980s Iraq took the necessary domestic arrangements pursuant to debt reality. These included central "political" management, legislative matters, and operative aspects. (4) The following table summarizes the main parameters of Iraq's debt during 1980-1990.

Data in the above table and the analysis that follows is made on the basis of a detailed time series (1980-1990) data on the "identified" Iraqi debt according to the OECD, which does not cover all Iraqi debt. (5)

Debt stock, which is often defined and reported as debt outstanding at the end of a given period of time - normally a year - measures the total debt liabilities of a given country. At the beginning of the 1980s Iraqi debt was almost negligible. It was less than $2.5 billion in 1980 before it began a gradual and continuous advance to reach $22.8 billion in 1990. In fact such increases in the debt took place on an annual basis -- except in 1988, the year Iraq-Iran war ended, when total identified debt decreased by around $300 million due to a decline in the long term non-concessional and short term debts. It should be noted that debt accumulation had expedited from 1984 onwards. This was a natural outcome of the diplomatic efforts of 1982/3, after the Iraqi-American rapprochement, which proved to be very significant breakthrough development not only in economic relations between the two countries but also for its impact on the economic and financial relations between Iraq and many other countries. (6)

Depending on its maturity, debt is either of a long or short term. In general long-term credit, which has a maturity of longer than one year, is primarily related to project financing and major trade financing. Short-term credit, which has maturity of one year or less, is primarily related to non-major trade supplies. Long-term debt had increased annually from $2.5 billion to $16.3 billion between 1980 and 1989 before it fell down to $14.3 billion in 1990. Short term debt on the other hand displayed a fluctuating pattern; after its slight decline in 1983 to $2.2 billion it began to increase annually to reach $5.8 billion in 1987, then fall again to $5.2 billion a year later before picking-up to a record high of $8.5 billion in 1990. Debt composition shows that the contribution of short-term debt to total debt had been fluctuated in both absolute and relative terms at the same time that total debt was on the rise. Thus, it is safe to conclude that total debt was not sensitive to the fluctuations in the short-t erm debt. As short-term debts are, by definition, non-accumulative on a yearly basis the higher the contribution it has and the faster it grows the more of a liquidity problem it represents. A higher short-term debt obligation reduces a country's ability to service its long-term obligations, thereby causing a decline in the latter and increase in the former, further deepening the liquidity problem. A study by Donald Donovan suggests that countries with acute debt servicing problems during the 1981-82 period had experienced an un-proportionally high short-term debt in relation to available foreign reserves. (7) Furthermore, in addition to its increasing contribution to total debt, short-term debt had registered an extremely high annual rate of increase in 1989 (25 percent) and in 1990 (31 percent). In fact such annual rates for short-term debt had outstripped those of long-term debt, both concessional and non-concessional, as well as total debt during 1988-1990. This constitutes a significant signal of debt st ress and shift in debt composition to the detriment of the country.

Long-term debt comprises concessional and non-concessional debt. While the contribution of concessional debt to total long-term debt during the period prior to 1984 was not significant, ranging between 22 percent in 1980 and 3 percent in 1983, the gap between the two types of debt began to narrow from 1984 onwards. Some 63 percent of long-term debt in 1984 was non-concessional and this had been reduced further to 52 percent in 1990, which represented an improvement for the benefit of Iraq's economy since concessional loans, such as those extended by the OECD included a grant element ranging from at least 25 percent for ODA loans to at least 35 percent for loans under the OECD "Consensus". (8) However, the decline of the interest rate in the financial market had seriously undermined the concessionality of OECD loans. Identified long-term credit was generated from three groups; the OECD countries and capital markets; multilaterals; and non-OECD countries. Among the three sources of credit multilaterals stand as the lowest with debt ranging between $79 million and $368 million in 1981 and 1990 respectively, and the majority of this debt was non-concessional. Obviously such a low contribution by multilateral institutions and low concessionality reflects both the attitude of these institutions, such as the Worl d Bank and IMF, towards Iraq due to the ongoing war with Iran on one hand and the inability of Iraq to engage these institutions. Furthermore, most of this category of debt is underreported as it is held by regional multilateral institutions. (9) When Iraq's debt to OECD countries and banks reached its peak in absolute terms at $9.4 billion in 1989 it represented 58 percent of Iraq's long-term debt. The majority of OECD debt was generated by official, officially supported or guaranteed export credits. However, commercial bank credits had showed a remarkable jump during 1988-90 compared with the previous period. The ODA's contribution was very low indeed, with its highest level of $408 million in 1987 falling gradually thereafter. Non-OECD creditor countries come next to credits from the OECD area. Credits from non-OECD countries, second in terms credits to Iraq, had been increasing continuously during the 1981-90 period. Almost all this credit had come from the former socialist countries (FSCs). Two significa nt upward movements took place; the first was in 1982, labeled the Iraqi-American economic breakthrough effect, and the second was the 1986 visit to the Soviet Union, where Saddam Hussein met with Soviet leader Mikhail Gorbachev.

DEBT SERVICE

Debt service statistics usually include payment of principal debt (i.e. amortization of long-term debts, and payments of accrued interest on both long-term and short-term debt), and does not include payment of the short-term debt. (10) On the basis of the identified debt, Iraq had serviced its debt during the period 1980-1990 to the tune of $24.2 billion. Most of this amount -- $20.2 billion representing 95.6 percent -- was made to the OECD countries and international capital markets. The remaining was paid to the multilaterals, with $438 million representing only 2.1 percent, and $501 million representing 2.3 percent to non-OECD countries.

These figures could indicate that favorable treatment and preference was given to OECD creditors since their share in Iraq's debt service was much more than their share in Iraq's total identified debt. They could also indicate substantial differences between the terms of maturity that were made available by OECD and non-OECD countries. Most OECD credit that was offered to Iraq had a maturity of 2 to 5 years while those from non-OECD countries, mainly the FSCs, had a maturity of 10 years. Thus, the $501 million paid by Iraq to this group of countries could represent interest payments only. Furthermore, using oil as a form of direct means of debt payment could very well bypass OECD statistical reporting. Rescheduling of non-OECD debt beyond 1990 could be an additional explanation. Finally, these figures could indicate that while they make their credit to Iraq identifiable the non-OECD countries did not fully report the servicing of their debt by Iraq. Total debt service payments of $24.2 billion were divided be tween amortization of the long-term debt of $17.5 billion, interest on the long-term debt of $3.6 billion, and interest on short-term debt of $3.1 billion. (11) Amortization of long-term debt had followed a systematic pattern; increasing from a reduced level of $1.l billion in 1980 to $1.9 billion in 1982, then falling gradually to $965 million in 1984 before it increased again reaching $2.5 billion in 1986, only to fall gradually during the next two years to $1.2 billion in 1988 before it again increased to $2.5 billion in 1989 before falling sharply to $601 million during the year of invasion of Kuwait.

This repeated pattern of low amortization for two years followed by a third high payment year represents a bunching phenomenon, which can be explained by the following two factors. First, since OECD creditors had received 96 percent of what Iraq had paid to service its debt, the practices of this group of creditors clearly had an impact in shaping this bunching pattern. The first practice was generated through a decision taken by OECD members of the Berne Union when Iraq requested the deferment of dues that were not paid to some European firms and companies in 1982. The decision at that time was to defer the annual dues for two years, to be paid by four equal semi-annual installments. Subsequent deferments would follow the same structure. The second practice was related to the repayments pattern of 2 to 5 years for new credits offered under the "Consensus", where most of the utilized credits had the lower instead of the higher maturity period. Second, the attitude of the Iraqi decision maker was characterized by bilateral and case-by-case approaches. Such an approach, in spite of its tactical advantages, made the smooth repayment of debt very difficult. The difficulties were compounded due to the overlapping of the three types of debt: deferment of dues on an annual basis, the rescheduling of arrears, and the repayment of fresh credit both in the long and short terms.

The bunching of amortization logically generated two similar patterns: bunching of interest payments on long-term debt and, hence, bunching of total service payments. The data, when examined on an annual basis, shows exactly this pattern. As expected the bunching phenomenon caused serious concerns for the debtor country, generates uncertainty, and when coupled with high and increasing short-term debt obligations represents an acute liquidity problem. It is rather disquieting to note that while short-term debt was less than half of the stock of long-term debt in any given year (with the exceptions of 1982 and 1990), the difference between interest payments of the two types of debt was only $500 million. This indicates that interest rates on short-term debt were much higher than that of long-term debt. Such a possibility does exist, considering that almost all short term credit was made available by commercial banks outside of official export credit and guarantee facilities at the then prevailing interest rate within international financial markets.

NET FLOWS AND NET TRANSFERS

These two concepts describe the net effect of borrowing and repayments on the flow of financial resources into and from the debtor country. Net flows, defined as disbursements minus principal repayments, measures whether new financing exceeds repaid debt. While positive net flows of long-term debt increases debt stock, it reflects the appreciated credit worthiness of the borrowing country, especially when such positive net transfers persist over a period of time.

A net transfer refers to disbursements minus the sum of interest payments for both short and long-term debts and principal repayments. Negative net transfers imply that total debt service payments exceed gross inflows - that net real resources are being transferred from the economy - and that a trade surplus is thus required. Since OECD data does not include net flows, net transfers or disbursements, these three variables were estimated for the 1981-1990 period. (12) From these estimates it seems that long-term lending had been favorable to Iraq, a trend that was interrupted and terminated by the invasion of Kuwait. All three variables - disbursements, net flows and net transfers - indicate a positive net effect of borrowing and repayments on the flow of financial resources to and from Iraq during the years prior to the invasion. But the estimates also show that 1988, the year the Iran-Iraq war ended, was a low point in the positive direction. Disbursements, or new money, declined sharply from $5.143 billion in 1987 to $1.533 billion the following year. Net flows in 1988 were less than one-tenth their level in 1987, and net transfers registered in 1988 the only negative value. While a significant recovery of all three variables had taken place in 1989 the invasion of Kuwait caused them to slide deeply into negative territory. By a way of comparison the World Bank estimated that the Middle East and North Africa region had in 1987 a positive net flow of $3 billion and a negative net transfer of $12 billion. (13) During that same year Iraq had a positive net flow and net transfers of $3.2 billion and $2.3 billion respectively.

Thus, the credit and deferred payment facilities obtained by Iraq during the 1980s had left their marks on the country's economic and trade relations. What was identified as an economic breakthrough with and the continued credit from America had more than doubled the U.S. share of total Iraqi imports from 4.3 percent in 1982 (ranked 4th) to 10.7 percent in 1987 (ranked 2nd). (14) The "Financial Protocols" with the UK initiated in October 1983 gradually pushed Iraq into fourth place among the UK's largest markets in the Middle East in 1988. (15) The invasion of Kuwait and the devastating aftermath from the coalition aerial bombardment and United Nations economic sanctions not only terminated these trends but also pushed Iraq backwards a number of decades in development. The focus in the next section of this article will be on Iraq's indebtedness that began during the 1980s, deepened in the 1990s, and may remain unserviced for decades to come.

TWO: OLD DEBT AND OIL RELATED NEW DEBT

One of the explicit assumptions of this article is that Iraq -- under current oil production capacity will not be in a position to service the country's accumulated debt. Therefore, the enhancement of the country's ability to generate significant revenues is the only way by which it can face its debt obligations. The oil sector is the pivotal and indeed the only sector that is capable of generating a substantial and regular flow of external revenues into Iraq. Assessing Iraq's outstanding debts, as well as examining the possibilities of enhancing oil production, domestic demand for oil, oil exports and revenues, as well as by combining the obligations of both old and new debts will allow for an accurate estimate of Iraqi debt service requirements.

The "Old" Debt

Prior to May 1991 no official Iraqi statistics examining the country's debt were publicly available. Official Iraqi data on its level of debt was made public for the first time when the Iraqi representative at the United Nations presented a memorandum to the Security Council. (16) The estimated stock of the country's total external debt was U.S. $42.097 billion, excluding interest and funds from Gulf countries, which the memorandum considered as "grants". The repayment of this debt was scheduled as follows: $23.468 billion due but not paid up to the end of 1991, $4.922 billion in 1992, $4.824 billion in 1993, $4.612 billion in 1994, $2.950 billion in 1995, and $1.321 billion after l995. (17)

The Iraqi figures represented the totality of the country's military and civilian debt excluding, as stated by the memo, interest and GCC funds. As no new credits have been extended to Iraq after August 1990, the OECD figure of $22.846 billion represents a very high percentage of non-military debts to the OECD countries at the time of the invasion of Kuwait. The remaining $19.251 billion covered military related debts to the OECD countries as well as all debts to developing countries, to non-GCC Arab countries, to multilateral institutions, and to the FSCs. Thus, the figure of $42.097 billion represents the outstanding stock of Iraqi debt at the end of 1991. The Iraqi government has proffered that its interest rate on its debt be repaid at an annual rate of 8 percent. The present value of Iraq's total debt has been calculated -- on the basis of capitalized interest -- at 8 percent per annum, from and including 1991 to the end of 1999. Thus, the present value of Iraqi debt at the end of 1999 is $84.152 billion ; including $42.055 billion in accumulated compounded interest. These figures clearly demonstrate that due to the effect of compounding interest that total debt has doubled between 1991 and 1999. Exchange rate effects on both principal debt and accrued interest were not taken into consideration in these calculations, nor were default penalties or surcharges considered. (18) For the balance of this article this total will be referred to as "old debt".

If Iraq was to repay its accumulated debt, as it stood at the end of 1999, by equal annual installments beginning in the year 2000 -- at an 8 percent annual rate of interest on the debt balance -- the amount of annual "old debt" service would depend on the length of repayment period. For this purpose, it is assumed that Iraq would be offered a choice between four repayment options of 10, 15, 20, and 25 years. By utilizing a popular annuity method a representative estimated annual payment figure may be clarified. Using a debt service that repays the entire principal debt as well as the accrued interest in the selected repayment period is utilized and the results of such a calculation is presented in Table 2.

There is always a trade-off between repayment options and annual debt service, and the resultant amount of total paid interest over the repayment period. On one end the shorter repayment period is the higher annual debt service and thus lower accumulated interest payments. The reverse option is also available with a longer repayment period lowering the annual debt service and thus, higher accumulated interest payments. Under normal circumstances this is intended to give the borrower an opportunity to make a decision on which time horizon is more convenient considering the capacity to service debt obligations under the chosen option. These calculations show that, to service its "old" debt, the Iraqi economy has to allocate a minimum of $7.883 billion annually over a 25-year repayment period, or a maximum of $12.541 billion annually over a 10-year repayment period. The picture becomes even more disturbing if we look into how much the economy endures in terms of total paid interest under either of the two option s. If Iraq chooses the shorter repayment option it will pay as much as $41.259 billion in interest over the ten year period or almost three folds of that, a staggering $112.930 billion, if the country chooses to pay its debt over a 25 year period. Further, the calculation indicates that accumulated debt at the end of 1999, which is $84.152 billion, generates interest payments of a magnitude equal to that debt-load at a cross over point between repayment periods of 15 and 25 years, which could be a repayment period of 18 years. Finally, it should be remembered that the original debt was $42.097 billion at the end of 1991. With Iraq having been unable to service its debt under the economic boycott initiated in August of 1990 that same amount generates an accumulated interest burden of $83,314 billion under a ten-year option or $154,985 billion under the twenty-five year option.

How Serviceable is the Iraqi Debt?

To answer such a question one needs first and foremost to explore Iraq's ability to generate future oil revenues. To do this we will estimate in this part of the article possible oil production, domestic demand for oil and oil export as a residual of the former two variables.

Oil Production

Both Iraqi and international sources estimates Iraq's proven oil reserves at 112 billion barrels (b/b) and believe they could reach 214 b/b in the future. (19) In addition the country is endowed with 3360 billion m3 of proven gas reserves. Current production capacity is estimated to be 2.5 million barrels daily (mb/d) and, according to Iraqi plans, could rise to 3 mb/d within a few months of the lifting of the UN sanctions if Iraq was then able to implement its plan for oil sector expansion. Capacity could then increase to 4 mb/d a year during the years following the lifting of the embargo and by 2010 to between 5.5 and 6 mb/d and to 7 mb/d by year 2020. Current export capacity is 1.8 mb/d, and domestic demand on oil products is 0.7 mb/d. In the following assessment the most recent Iraqi development plan will be used as a base for calculations, as follows:

Year (1) 2000: 3 mb/d

Years (2 & 3) 2001-2002: 3.5 mb/d

Years (4 & 5) 2003-2004: 4.0 mb/d

Years (6 & 10) 2005-2009: 5.0 mb/d

Years (11+) 2010 plus: 6.0 mb/d

Part of oil production has to be allocated for domestic market requirements, which was estimated to be 0.7 mb/d in the late 1990s. (20) Assuming the level of 0.7 mb/d as current domestic oil consumption, including oil used for electricity generation, it is very reasonable to anticipate it to increase during reconstruction and the post-sanctions era. While it is rather easy to anticipate the increase in domestic consumption, it remains speculative to say at what rate this increase could be. The difficulty could come from many factors, the most important of which is the course of reconstruction and economic policy. Using historical patterns could lead to misleading figures through overestimation. For example between 1981 and 1986 domestic demand for oil more than doubled when it increased from 198 thousand to 447 thousand barrels per day. (21) Similar trends emerged after the Gulf War when it increased from 227 thousand to 419 thousand barrels per day between 1991 and 1996. (22) Accurate estimates of future dom estic demand for oil is needed in order to deduct it from the given production to measure export levels. The rate of increase is only speculative since data has been accrued during abnormal circumstances. Thus, a level of 2 percent as an annual rate of increase in domestic oil consumption will be used within the model.

Oil Export and Revenues

Annual oil exports during the next twenty years are calculated on the basis of planned oil production and estimated domestic consumption. The expansion of Iraq's production and export capacities from its current level of 2.5 mb/d to the projected levels will require substantial financial resources that the country is currently lacking. These requirements have been estimated to range between $18 billion and $30 billion. Undoubtedly, development cost in Iraq will be relatively cheap in comparison with other OPEC and non-OPEC producing countries. By using 1995 data on future sustainable production capacities and required investment, (23) investment requirements to develop production capacity of one barrel per day in Iraq will be $2000, $2167, and $2571 for production capacities of 4 mb/d, 6 mb/d, and 7 mb/d in years 2000, 2010, and 2020 respectively. Iraqi sources have estimated $20 billion to be the required investment to reach a 6.0 mb/d level "although higher investment is needed to maintain the rate at the s aid level." (24) These estimates indicate a capacity cost of $3333/b per day which remains to be the lowest, or one of the lowest-cost countries to find and produce oil. However, agreements with Russia and China have given different capacity costs. For the Russian agreement a figure of $5833/b per day was given, while for China it was $16250/b per day. (25)

Opening Up the Oil Sector

Considering the substantial financial requirements that are needed to achieve the above-mentioned production capacities and the absolute inability of the Iraqi economy to generate such requirements outside of the oil sector, this sector remains will continue to be the principle vehicle in this process. It has been a cliche among Iraqi economists to characterize the Iraqi economy as being structurally distorted due to its heavy reliance on oil. While it is true that former economic policies did not succeed in transferring this resource into sustainable production assets, two decades of veracious wars and crippling sanctions have only deepened this structural distortion even further. Therefore, oil remains the only possible source of income to finance the development of the sector itself, as well as national reconstruction efforts, debt servicing, and war reparation obligations etc. Though all available information indicates the readiness of the Iraqi authorities to open up this vital sector to foreign investor s however, data indicates that the country had not been receptive in the past and thus less attractive to such investors even when a government privatization programme was adopted. (26) The annual average of FDI inflows into Iraq had been extremely poor -- standing at only $2 million during 1983-88, and $3 million during 1986-91 -- representing much less than even 1 percent of the region's FDI during both periods. (27) However, in February 1990, fully appraised oil fields were included in a scheme to encourage foreign contractors to participate in oil sector development. The terms for such involvement provided for contractors to finance their work and once the contracted field came on stream, their investment was to be repaid out of subsequent production of the newly developed fields. At that time, according to one oil specialist, a consortium led by US Occidental had initiated a deal to develop the North Rumaila field. (28)

Iraq now offers three different co-operation venues to foreign investors in the oil sector: (29)

1. Participation in what the authorities label as "national efforts" to bring oil capacity to its pre-Gulf War level of 3.5 mb/d through normal service contracts;

2. The development of new capacities of 2.5 mb/d to reach the target of 6 mb/d through both PSCs (classical Production Sharing Contracts) and service contracts; and

3. Exploration, and possible development of viable fields, of nine blocks in the Western Desert through service/risk contracts.

Though the main terms and conditions as well as the related fields and areas are different, the common denominator among these three options is the requirement of the foreign partners to finance their contractual involvement.

Thus far three significant agreements with a total investment of well over $7 billion have been concluded with Russia, Turkey and China. (30) Further, a Canadian company had negotiated (probably concluded) an exploration and development risk contract worth $250 million on one of the oil fields in the Western Desert, (31) and other development contracts for the Majnoon and Bin Umer fields had been negotiated with the French companies Elf and Total respectively. According to Iraqi plans a production capacity of 6 mb/d is achievable within 10 years, or by the year 2010. Logically, development expenditures of the estimated $20 billion should be spread over that period depending on actual work done. The following assumptions will then be incorporated into the model:

1. Iraq will be able to generate the necessary amount from various external sources through borrowing, which will be identified as Iraq's "new debt";

2. An interest rate of 8 percent per annum is payable on this new debt;

3. Repayment of all "new debt" will commence at the midpoint of the development period (i.e. starting from 2005 onwards);

4. Annual debt service is calculated under four options of repayment period in years: 10, 15, 20, and 25.

Under these reasonable assumptions and by using the debt recovery annuity method projected in Table 2, the annual "new debt" service and total interest that would be paid for each of the four options of repayment is demonstrated in Table 3.

Aggregate Annual Debt Service

Assuming Iraq will be able to only borrow the needed $20 billion to enhance and increase oil production the reality of the model's assumption is, another matter. Under such an assumption the aggregate annual debt service is a combination of both old and new debts as were calculated above. While the two debts have similar repayment options under a unified interest rate of 8 percent per annum, they differ in the commencement year of their respective repayment periods: it is year one (2000) for old debt and year six (2005) for new debt. The calculations shown in Table No. 4: Annual Service of "Old" and "New" Debt, found on the following page, demonstrate that during the first five years Iraq would have to allocate a minimum of $7,883 billion, if a 25 year repayment option were chosen, or a maximum of $12,541 billion, if a shorter repayment period of 10 years were chosen. The situation would become more difficult and less manageable during the second five-year period as the annual debt service for the respective repayment periods would range between $9,757 billion and $15,522 billion.

This means that for each repayment option annual debt service during the first six years (2000-2005) annual debt service would be confined to old debt, but from 2006 onwards it would be a combination of both debts. Chart 1 demonstrates the progression of annual "old" and "new" debt service during the coming two decades.

Oil Export Revenues

Export revenues during the period under consideration in this article (2000-2020) were estimated under two sets of price scenarios: scenario "I" assumes a constant real price of $20 per barrel during the entire twenty year period under study; scenario "II" assumes some periodic improvement in the price as follows: $20 per barrel during the first five years, $25/b during the second five years, $30/b during the third five years, and $35/b during the last five year period. Of note, under both options export revenues go through cyclical declines at every level of production plateau due to increased domestic consumption. Based on the above assumptions estimated oil export and revenues are shown in the following table (Table 5: Oil Production, Export and Revenues) and charts.

According to the assumed realization of the planed production capacities, oil production can increase to 3 million barrels per day (md/d) during year one from the date sanctions are lifted. No one knows for sure when that will be, under what conditions, and at what scale -- total or partial, immediate or gradual. In the model the year 2000 is taken as year one. Total oil production was planed to increase gradually to reach 5 mb/d in the year 2005 and to 6 mb/d in 2010 where it will remain until the year 2020. Domestic oil consumption increases smoothly and continuously from 700 thousand-barrels daily to over one million barrels daily by the end of the period under study so long as this consumption remains within the assumed 2 percent growth rate per annum. Oil available for export is the residual production after deducting domestic consumption requirements. Hence, oil exports will increase from approximately 2.3 mb/d in year one to approximately 5 mb/d in year twenty. During the first five years oil revenues are projected to increase from $16.5 billion to $23.3 billion; but from year six onwards total oil proceeds will be dependent on the price scenario as shown in Chart 3.

Under Scenario I oil revenues will reach their peak of $36.9 billion in the year 2010 at the completion of the 6 mb/d of production capacity, when they will then begin to decline gradually to $35.9 billion by the twentieth year. This decline in oil revenues is not price related but rather is caused by the reduction in oil available for export due to increased domestic consumption.

Under Scenario II, with periodic price increases from $20 to $35 at $5 per barrel intervals every five years, oil revenues peak at $63.5 billion in year 16 before then declining. Needless to say that any price variation higher or lower than what we have assumed will affect the calculated oil revenues in directions similar to that of the prices.

THREE: SUSTAINABILITY ANALYSIS AND ASSESSMENT

Debt sustainability represents the ability of the indebted country to fully meet current and future debt obligations without resorting to debt relief, rescheduling or accumulating arrears, and without compromising economic growth requirements. Many key indicators with specific values or thresholds were suggested and used to assess debt sustainability. In the literature on debt one can find various types of indicators and ratios which are used to measure the magnitude, scale and severity of the debt burden, and to classify the level of indebtedness of the country under study. Some of these measures emphasize the absolute volume -- such as the stock of outstanding debt or debt service -- while others are of a relative and proportional nature. However, absolute measures are unable to significantly improve understanding, as debt magnitude by itself is not the problem; the real problem is the ability of the national economy to service its debt in a sustainable manner. Therefore, it is more meaningful to examine de bt in relation to the capacity of the borrower to fulfill its contractual obligations vis-a-vis the creditors. Though debt comprises both a stock, which is total debt, and a flow, which is debt service, what constitutes the problem is the flow (debt service) more than the stock (total debt). More importantly this flow is better understood in relation to other flows generated by the borrower's economy. Relative measures could be related to economic variables, such as GDP or GNP, or financial variables, such as export revenues, or fiscal variables such as the government budget or expenditures etc.

Debt (D)/GDP Ratio

One of the most widely used measures of indebtedness is total debt (D) in relation to the gross domestic product (GDP) or gross national product (GNP) of the borrowing country: the higher the ratio the more indebted the country is. The World Bank uses this ratio to determine the level of indebtedness: (32) if the present value of future debt service (i.e. current debt stock plus interest; taking account of the concessionality of debt stock), exceeds the critical value of 80 percent of GNP, the country is considered as severely indebted; if the critical value is not exceeded, but the ratio is 60 per cent or more of the critical value, the country is classified as moderately indebted; finally, if the ratio is less than 60 per cent of the critical value the country is less indebted. Others had used the nominal value of debt stock instead of present value of future debt service. (33)

By using the annual nominal value of debt stock, the D/GDP ratio for Iraq was calculated during the 1980s. The ratio had increased every year from 5.2 percent in 1980 to its highest level of 35.4 percent in 1987 before it declined to 30.5 percent in 1990. Obviously, when this ratio is on the rise it implies that the growth rate of external debt is higher than those of GDP, which registered negative growth rates in some years during that period. It is evident that this ratio had been much less than the critical threshold devised by the World Bank. However, this calculation was based on most, but not all, Iraqi debt and it is in nominal current value -- not the present value of future debt service. If all debt were identified, future payments were known, and the discount factors were chosen, it would be possible to then estimate this ratio according to the World Bank's procedure and thereby be in a better position to determine the level of this ratio for Iraq. (34) However, due to the very drastic distortions i n all macroeconomic variables during the entire decade of the 1990s it makes no sense to use unrealistic official Iraqi GDP or GNP data which negates the use of this type of ratio at the present time.

Debt/Export (D/E) Ratio

A more reasonable way to look at debt is through export revenues (or total inflow including FDIs, expatriates remittance, grants and aids, and transit revenues in addition to exports) since debt has to be satisfied and paid for with foreign currency. This ratio -- and the (DS/E) ratio which follows -- are widely used as indicators of a potential sustainability problem or solvency. Iraq's Debt/Export ratio had been over the 200 percent level during the second half of the 1980s, with the exception of 1989 when it was 185 percent due to the marked improvements in export revenues.

Debt Service/Export (DS/E) Ratio

Comparing debt service to export revenues can be considered a suitable measure to the country's ability to service its debt: a lower DS/E ratio implies solvency while a higher ratio implies stress, liquidity or cash flow problems. Any country, according to The Economist (35) that spends more than 40 percent of its annual export revenues on servicing its debt is likely to face severe economic problems. UNCTAD uses a lower threshold range of 20-25 percent. (36) and the World Bank & IMF use a threshold of 15 percent. DS/E ratio had registered its highest level in 1986 at 48.6 percent when the first "bunching" of debt service coincided with the decade's lowest level of export revenues. The second highest DS/E ratio of 30 percent accrued in 1989 during the second "bunching" in debt service, but this time it was counterbalanced by Iraq's high export revenues.

DS/GDP

From a wider perspective and considering the potential of the country DS/GDP ratio can provide a reasonable measure of long-term indebtedness, especially in a country endowed with an internationally tradable commodity that can generate sufficient foreign exchange such as oil. This ratio is, however, more meaningful for strategic rather than short and medium-term decision making on the parts of creditors. DS/GDP ratio had been less than 5.5 percent during the entire 1980s with the exception of 1986 where it registered its highest level of 7.5 percent. Needless to say, any improvement in oil export revenues could have significant effects on the values of some of aforementioned ratios. However, these ratios do not reflect a clear picture of Iraqi debt, especially during the last three years of the 1980s, since they are based on OECD statistics, which in turn cover only part of the debt. Thus, total Iraqi identified debt by the OECD in 1991 -- U.S. $21.2 billion -- was a little over half of what the Iraqi governm ent stated publicly. Nevertheless, Iraq's financial difficulties prior to the Gulf War were a reflection of many factors: an ambitious industrialization program (37) with a strong focus on military technology, military requirements during the Iran-Iraq war, (38) the debt rescheduling structure, relatively high levels of short-term debt, and export revenues. The implication was that the debt problem and the financial difficulties Iraq was facing were manageable in relation to Iraq's resources and capabilities when placed within a long-term perspective and under conditions of normal economic and political activity, and that is why many observers had concluded in early 1989 that the following two to three years (1991-92) were to be crucial. (39) The highly distorted data of the 1990s makes the DS/GDP ratio as unreliable as the (D)/GDP ratio examined above.

Though scholars accept the two most common indicators -- present value of total debt to export ratio and debt service to export ratio -- chosen by the IMF and the World Bank, three concerns are raised within the literature: first, there should be more indicators; second, there is a degree of arbitrariness in the choice of value or threshold; and finally the time horizon -- how long should the indicator's value be over the specific threshold -- to indicate sustainability. (40) In the following pages these two ratios will be used to assess the sustainability of Iraqi debt in the coming two decades under the two cases used in the model. Both cases will make the assessment according to debt service/export revenues ratio first before negotiating with the present value of the debt/export ratio.

Case One: Old and New Debts

As discussed earlier this case will assess the sustainability of former and forthcoming debts. The two categories of debt are combined into one case in the model to reflect the belief that old debt is unserviceable without the new debt.

I- Debt Service/Export Ratio: the IMF and World Bank use a 15 percent threshold for debt service to export ratio while UNCTAD uses threshold ranges of 20 and 25 percent. The calculations on the following table and within charts four and five clearly indicate that under either scenario with regards to oil prices as well as by using the most favorable assumptions of an orderly expansion of production and export capabilities as planned by the government of Iraq, Iraq will be unable to overcome its current levels of indebtedness within the first ten years of the lifting of economic sanctions.

This will be the case regardless of whether the repayment period chosen is 10 or 20 years. It will, however, be more difficult with shorter than with longer repayment period. Under scenario I, Iraq would have to set aside between one-half and three quarters of its annual export earnings to service its current level of indebtedness for a duration of ten years if it were to choose a ten-year repayment option. The corresponding debt-service-to-export ratio under a 15-year repayment option would be 60 percent of annual export revenues in the first year declining gradually to 33 percent in the fifteenth year. The twenty-year repayment option would see the ratio range between 52 percent at the commencement of the repayment period and end at a level of 29 to 30 percent by the twentieth year. The ratio under option four -- repayment over 25 years -- remains very high: 42 percent in year one declining to a level of 27 percent in year 25.

Under scenario II the situation would also remain intolerable during the first ten years of any of the four repayment options. The debt service-to-export-earnings ratios for year one to year ten would range: from 76 percent to 42 percent in option one; from 60 percent to 33 percent in option two; from 52 percent to 28 percent in option three, and from 48 percent to 26 percent in option four.

Moving on to the second criteria of debt sustainability.

II. Present Value of Total Debt/Export Ratio: when determining the present value of total debt-to-export ratio within any given year the IMF and World Bank use a 200-220 per cent threshold while UNCTAD utilizes a threshold range of 200-250 percent. The present value of debt, adopted by the LMF, the World Bank and UNCTAD, is determined as the total of future debt service including principal debt and accrued interest adjusted for the concessionality element of the debt stock. Before examining the model further five clarifications must be made -- one related to interpretation and the others to methodological structure. First, to clarify the confusing and contradictory nature of the ratios when they are accorded to the present value of total debt plus interest/ export ratio (PVD+I)/E and debt service/export ratio (DS/E). When we consider the four options of repayment periods within the model the DS/E ratio is inversely related to repayment period (i.e. it is usually lower in the longer repayment period than in th e shorter repayment period), as we have already seen.

However, with the present value version of debt sustainability the situation is the reverse (i.e. positively related to repayment period). The (PVD+I)/E ratio, as we shall see below, is lower with the shorter repayment period and higher with the longer repayment period. The reason for this is simple. For any given debt the outstanding balance, and thus accrued interest, is lower with shorter repayment than that with a longer period. However, this also means a higher debt service, since amortisation of that given debt is larger with shorter repayment. Therefore, when we relate the present value of debt-plus-interest and debt service to export earnings we get inverse trends with regards to repayment options. This means that when using the present value of debt one should always keep in mind and take into account the associated implication on debt service in assessing debt sustainability. As both ratios are not mutually exclusive (i.e. they do not replace each other but must be used concurrently), the highest in magnitude and longest in duration should be considered when assessing the country's ability to service its debt obligation.

A second point of clarification is also due as applying the (PVD+I)/E ratio to Iraq is both rather unique and problematic at the same time for a number of reasons. First, whatever concessionality, or grant element, the OECD credits to Iraq had at the time of utilization, such concessionality had in fact been eaten up by the large difference in interest rates between the then OECD export credits interest rate (a high one) and commercial interest rates (which were lower). In other words, the grant element that was a positive in the 1980s had turned into rapidly accumulated burden during the 1990s as interest rates on the OECD export credits were to remain fixed until the entire loan was repaid. Second, under the embargo no debts have been repaid from mid-1990 onwards, making the present value of Iraqi debt a compounded total since that time. The present value of "old" debt is now compounded and based on two rates: the interest rate, which determines the nominal cash out-flow of debt service, and the discount ra te, which determines the present value of that cash out-flow. Leaving the effects of inflation and exchange rate aside, three possibilities present themselves: first, if both rates are equal then the present value of future debt is equal to the present value of "old now compounded" debt; however, if the interest rate is higher than the discount rate then the present value of future debt is also higher than the present value of "old now compounded" debt; and finally if the interest rate is lower than the discount rate then the present value of future debt is also lower than the present value of "old now compounded" debt.

An argument can be made for an 8 percent interest rate on the bases of historical precedence and declarations by the Iraqi authorities. But the selection of any discount rate, over or below the 8 percent rate, would only be an educated guess. To examine this discount rate as a measure of debt relief two factors should be kept in mind: first, this is a matter for negotiation; and second, to which debt -- "old" or "new" -- it should be applied. Third, even if the issues of interest and discount rates were settled, the issue of repayment period would still need to be examined. For any given debt the annual amortization of that debt, and hence outstanding balance of that debt, depends on the numbers and values of repayment installments. Assuming equal and annual installments leaves debt maturity as the decisive factor. A debt of $10 million payable over five years, with the same rate for interest and discount, gives an outstanding debt balance (in this case present value of future debt) of $8, $6, $4, $2, and $0 for years one, two, three, four, and five respectively. If that same debt is payable over ten years, the corresponding balance will be $9, $8, $7, and so on. Obviously if the annual balances of the same debt are divided under different repayment periods on the same "export revenue" for the corresponding year different ratios will result: a higher debt service/export ratio with a shorter repayment period, and lower debt service/export ratio with a longer repayment period.

Fourth, apart from the "old" and the "new" debts there remains the issue of outstanding funds from the Gulf States. A contentious issue that is hanging between the Iraqi position, which considers them grants and the Gulf countries position that identifies them as loans. Finally, the issue of Iraq's war reparations; though this outstanding amount cannot be classified as a debt it represents a very serious obligation on the country's financial resources. It would be totally unrealistic and methodologically disingenuous to exclude it from the picture of the present value of external financial obligations. It is the model's goal to present a holistic approach to debt sustainability, therefore this category of external obligations will be included as well as the funds claimed as loans from the states of the Arabian Gulf in our assessment of the present value of all obligations under case two. The following chart shows the calculation of the present value of the outstanding balance of total debt plus interest on th at balance as a percentage of annual export earnings under scenario I. For practical considerations, the model is limited to the first ten years of all four options for repayment. According to this criterion Iraqi debt is unsustainable. The number of first years of unsustainability under each of the four options of repayment and for all three thresholds in scenario "I" are presented in the following table.

Though under all three thresholds Iraq indebtedness is unsustainable, the number of years during which the unsustainability prevails is higher with the lower threshold. It should be remembered that for each year at a higher threshold there should be an implicit year, or years, for the lower threshold. This is why higher years at a lower threshold and lower years at a higher threshold are included in the model. Attention should also be paid to the time sequence as the unsustainability of debt at a higher threshold accrue earlier than at lower threshold.

The data in Table No. 7 should be interpreted in the following manner. Under all thresholds the debt is unsustainable during the first four years under option one. The first three years the 250 threshold is unsustainable. With no values lower than 220 and equal to or higher than 200 the total number of years of unsustainable debt remains four under option one. Options two and four have a similar structure to option one, but option three is slightly different. In the first ten years under this option debt is unsustainable, in the first eight of them debt is unsustainable at a threshold of 250, the ninth at 220, and the tenth at a threshold of 200. Alternatively, at a threshold of 200 percent, the above number of years of unsustainable indebtedness ranges from 4 years, under option one of repayment, to 10 years under both options three and four; with the most severe and difficult threshold of 250 percent and the above years of debt sustainability are usually lower, ranging from 3 years to 9 years for option one and four respectively.

The profile of (PVD+I)/E under scenario "II" is similar to that under scenario "I" with higher ratios. Hence, the number of years during which debt is unsustainable is slightly lower in scenario "II" compared with scenario "I". However, both scenarios are equal during the first five years due to the assumption of the standard $20/b price of oil used in both scenarios.

Obviously, all these ratios of debt service or present value of debt to export earnings -- under either scenario -- are much higher than MTIT, the maximum thresholds of debt sustainability indicator for any developing country as envisaged by the IMF, the World Bank, UNCTAD, and all scholars on debt and development. All the possibilities explored here represent the best case scenario: that Iraq's debt is limited to what Iraq has acknowledged; that external financing is available to enhance oil production to 6 mb/d as planed by the Iraqi government; that world demand for oil and OPEC production levels permit Iraq to produce the required amount and then export almost 80 percent of that capacity; that "old" and "new" debts are repayable in options ranging between 10 and 25 years at an 8 percent interest rate; and that oil prices range between $20/b to $35/b during the coming twenty years. Any significant deviation from these assumed conditions could have a direct impact on Iraq and its indebtedness.

Case Two: All External Financial Obligations

However, even under the best case scenario outlined above there still is two important factors that could drag Iraq even deeper into a web of indebtedness. These two factors are the Arab debt/fund and war reparations. The question then becomes one of if these two items are incorporated into this analysis how problematic will they be to Iraq's ability to ease its indebtedness. Before making the necessary calculations in order to answer this question these two issues must be examined in more detail.

Arab Funds (Debt or Grant)

It is important to differentiate between the following three categories of Arab funds:

I. Funds from the GCC, mainly Kuwait, Saudi Arabia and UAE;

II. Debt to non-GCC Arab countries; and

III. Debt to Arab and regional financial and multilateral institutions such as the Arab Monetary Fund (AMF), APICORP, Arab Fund for Economic & Social Development (AFESD), Islamic Development Bank (IDB), and the private sector.

The bulk of Iraq's debt to Arab countries belongs to the first category since the debt to the second category had been usually paid, to varying degrees, in regular intervals -- which means their stock value is lessened in comparison with non-Arab creditors. The same is also valid for the debt to Arab financial institutions and the private sector. Returning to the category of funds from the GCC it would appear that there was no agreement on the exact amount outstanding. Philip Alger estimated the debt to the "major Gulf States" alone to be $40 billion. (41) In November 1988, a report based on information prepared by the American Embassy in Baghdad stated that Iraq had "received between $30 and $50 billion from friendly Arab countries." (42) Keith Bradsher has quoted the amount of $40 billion (43) while yet another estimate placed the figure of $50-60 billion for Kuwait and Saudi Arabia alone. (44) Finally, Iraqi official sources place the figure at $30 billion. (45) The figure of Iraq's outstanding debt to its fellow Arabs is a highly contentious issue. Iraq considers the funds as "grants" while the countries that have conferred the funds classify them as a debt. In very general terms what constitutes debt from a legal and operational perspective may be described as requiring:

* Legal instrumentation or documentation: commercial papers, agreements, protocols etc.

* Interest rates;

* Actual dates and amounts of disbursements; and

* A number and type of installments, grace period and maximum repayments period.

The legal instruments or documentation specifies clearly, among other things, that one party is the creditor while the other party is the debtor and the amount involved is agreed to be a debt or an obligation on the part of the debtor. It is not always necessary, though, that debt be established on a legal and documented basis alone. Oral, non-documented and mutual consent agreements may constitute forceful and solid foundations for debt proof, especially in societies where the moral code of conduct or the customary law affirms such practices. The basic point here is that whether under constitutional or customary law the amount involved should be considered and seen by both parties as a loan/debt. Debt could curry a specified rate of interest or be interest free: the first is called active debt while the latter is passive debt. Again the distinction between the two should be made by agreement between the debtor and the creditor.

Credit or a loan should not be considered as debt unless and until it is disbursed or utilized. The actual disbursement of credit or utilization of a loan established at the beginning of a debt occurrence, and interest accumulation if debt is of an active nature. Finally, the repayment structure; debt has to be repaid in a certain manner and in a specified period: the number of periodic installments, the amount of each installment, the grace period, and the final maturity of the entire loan. Out of these four basic elements the repayment structure of debt stands as the most important. If debt repayment was not established then, for all practical purposes, the debt is non-repayable and this would be enforced further if the debt were of a passive nature. Sometimes the occurrence, or the starting point of repayment, is subjected to conditions or some other events -- but not a specific time frame. Such conditions, or other events, may include general and very widely used phrases in the Arab and Muslim societies s uch as "Alla kareem" -- God is generous, or "insh 'alla" -- God willing -- which implies the improvement in the debtor's ability to honor his obligation towards the creditor. When this improvement took place debt repayment then depends largely on the goodwill and the moral conduct of the debtor, the relationship between the two parties, and above all the prevailing economic conditions of the debtor. If these four elements were proven to exist in any degree it would be rather unreasonable or indeed impossible for Iraq to consider the funds as grants. Furthermore, the Iraqi claim is rather inconsistent: if these funds were to be grants then why did Saddam Hussein call them debts when requesting their cancellation!

One may also look to this issue from other angles: there were many examples when Arab countries, either individually or collectively extended financial assistance, on the grounds of acute political and wartime crisis', to other Arab countries, and no such funding was seen or considered as debt. Furthermore, there is a widespread belief that these amounts were unlikely to be paid back. It has been reported by diplomatic sources that "Saudi Arabia no longer even bothered to keep the loans on its books." (46) Noteworthy, however, is that with the $14 billion outstanding with Kuwait the situation is slightly different. According to Mohamed Heikal, Kuwait "... was not inclined to write off its earlier loans, but said it would not seek repayment of them." (47) Finally, some Arab governments have bilaterally cancelled large amounts of debt and arrears held by many developing countries, especially those of Sub-Sahara Africa, who were facing dire economic difficulties. (48) It could be reasoned that a fellow Arab coun try who had suffered unprecedented destruction is also entitled to a similar action of debt forgiveness and cancellation. No matter how the situation will be resolved regarding this category of outstanding funds, if labeled as debt the amount taken for the model will be $30 billion. Furthermore, it was, is and will be interest free, and Iraq may repay them in any of the four options of 10, 15, 20, and 25 years, deriving an annual amortisation amount of $3, $2, $1.5, and $1.2 respectively.

War Reparations

In addition to eleven years of crippling comprehensive and strict economic sanctions, the strictest ever imposed on any country by the UN or any multilateral body, (49) Iraq was also subjected to the further burden of war reparations. War reparations were imposed on Iraq pursuant to Security Council Resolutions No. 687, 692, and 705. Briefly, no more than 30 percent of Iraq's petroleum and petroleum product exports are earmarked for compensation. But this ratio is subject to review as Article 19 of SCR 687 indicates to "take into account the requirements of the people of Iraq, Iraq's payment capacity as assessed in conjunction with the international institutions taking into consideration external debt service and the needs of the Iraqi economy." The accumulated war reparation claims, according to the UN Compensation Commission, currently exceeds $220 billion. What has become evident may be surmised in the following four points:

1. War reparations, as items of financial obligation upon Iraq, take precedence before and have priority over anything else. Therefore, it is the first funds deducted from export revenues;

2. Iraq's payment capacity is no longer a sovereign issue but shall be assessed in "conjunction" with the assigned international institutions. Furthermore, Iraq was not explicitly mentioned as a party in this process though the country is the subject matter. On the other hand the "international institutions" are not specified which could leave the door open for yet another source of disagreement. Therefore, the assessment" could drag on for a long time and cost an immense amount, a process that could further aggravate Iraq's indebtedness and delay reconstruction efforts;

3. The wording puts "external debt service" before the "needs of the Iraqi economy." This could have many serious implications: first, it might strengthen the position of Iraq's creditors in any future debt-related negotiation to the detriment of Iraq; second, it might place reconstruction and development requirements hostage to unfavorable debt settlement; and third, it could dictate the course of specific development and reconstruction efforts that could be geared to service debt and war reparation payments at the expense of other sectors of the economy and society;

4. The fact that 30 percent of oil-related export revenues have been earmarked for war reparations immediately implies that Iraqi indebtedness, even of one single dollar, has become unsustainable and will remain so as long as this ratio is deducted from export earnings. The Security Council would have been aware of the implications of such a ratio on debt sustainability, leading to speculation that the real intention was to push the Iraqi economy even further into the trap of indebtedness for many decades to come.

One might argue that since war reparations are linked to the country's export earnings from "petroleum and petroleum product exports" Iraq could evade such a heavy obligation by choosing a non-oil dependent reconstruction path. Such a proposition is far from viability and reality since the Iraqi economy is structurally dependent on the oil sector and reconstruction efforts would be very limited without the needed revenues generated by the oil sector. No other sector of the Iraqi economy can produce enough surpluses to service the country's mounting debt. Finally, as a matter of fact the only international business opportunities that are finalized -- or almost so and waiting for the lifting of the sanctions regime -- are those related to the oil sector.

In all practicality the provision of war reparations would put Iraq in a very detrimental "catch 22" situation: reconstruction efforts require oil revenues, but oil revenues result in the payment of war reparations, hence war reparations undermine reconstruction efforts, and so on. One might argue that since war reparations are imposed by a UN resolution, they could be removed by a further resolution. Using a regime-related analysis and considering the political stalemate and correlation of power structure within the UN Security Council this proposition is far-fetched as well. Even if reparations were terminated by a new resolution the fact that much documentation has been accumulated at the disposal of the UNCC constitutes powerful legal evidence at the hands of the concerned individuals, corporations, entities, organizations and governments in their claims against Iraq. Nevertheless, a new resolution suspending or revising the provisions for war reparations, coupled with an internationally acceptable politi cal system in Iraq could relax to a remarkable degree the constraints of external financial obligations on the country. Taking this into consideration, and to show how damaging the reparations obligation could be with the deduction of 30 percent of annual export revenues during the period 2000-2020 until, if export revenues are sufficient enough, the $220 billion are paid, will be factored into the model as well. In doing so debt ratios, or sustainability indicators, are assessed not in relation to export revenues as such but to "disposable" export revenues (i.e. export revenues minus 30 percent earmarked for war reparation).

Debt Service/Disposable Export Revenues

The Debt Service/Disposable Export Revenues calculation shows that when 30 percent of export revenues are set aside for reparations debt service will absorb what remains of disposable export revenue. In fact, under a repayment option of 10 years, all of Iraq's disposable export earnings would not be large enough to service its debt obligation. During the first three years under this repayment option the ratio exceeds the 100 percent mark, while during the next seven years the ratio ranges between 87 percent and 96 percent of disposable export income. Under option two debt ratios begin at 105 percent in year one and trend down to 56 percent in year 15. As for option three the ratio of debt service to disposable exports begins at 87 percent in the first year and ends at a 48 percent level in the 20th year. Option four provided a similar pattern: year one would provide a 79 percent ratio trending down to year 20 with 44 percent of debt service to disposable export earnings.

From the calculation shown in the table above and the chart below one can easily see that debt service/ disposable export income ratios exceed any threshold of debt sustainability for a considerable period. The worsening of these ratios -- under both price scenarios -- is a direct outcome of war reparations on one hand and the inclusion of Arab debt on the other. Furthermore, because the ratios during the early years of any repayment option exceeds the maximum tolerable threshold by many folds, this in effect means that debt service during the remaining years of any repayment option will become even more unsustainable. This leads to the inevitable conclusion that war reparations and the inclusion of Arab finds renders Iraqi indebtedness unsustainable during -- at a minimum -- the first twenty years following the lifting of economic sanctions. To elaborate, scenario II -- as the most favorable to Iraq on the export revenue side, as well as being the maximum tolerable threshold of 25 percent of export revenues is revealing. Under repayment option one Iraq has to endure more than five-folds that maximum threshold in year one down to nearly three-folds in year ten. By definition the economy cannot service such a burden over ten long years. If it is assumed that such excessive debt obligations during these first ten years -- deferred over to the following ten years or financed through new borrowing payable over the same next ten years -- then it becomes abundantly clear that at least for the first two decades of the new millennium Iraq will remain trapped in a web of debts.

Present Value of Total Obligations to Disposable Export Revenues

The calculations in the following table and charts have been made to include all of Iraq's financial obligations: old and new debts, Arab funds and war reparations. As discussed above, to put debt sustainability in its proper and correct perspective a holistic view must be adopted which reflects all four external financial obligations outlined above. As expected and due to the significant magnitude of war reparations and the inclusion of Arab funds in these calculations, this indicator of debt sustainability becomes more and more unsustainable (i.e. exceeding by far the 200 percent threshold).

Under price scenario "I" the ratio of present value of all obligations to disposable export income remains over the aforementioned threshold for a considerable period under all four repayment options. The number of years during which unsustainability prevails is 18 under either options one and two, and 19 and 20 years under options three and four respectively. The level of excess unsustainability for the four options ranges between 220 percent to 2810 percent under option one; 240 percent and 2850 percent under option two; 230 percent and 2860 percent under option three; and 270 percent and 2870 percent under option four.

Under price scenario "II" the ratio remains very critical in both the level and duration of unsustainability, though expectedly of course, lesser than under scenario "I". Under repayment option one the ratio value begins with 2810 percent in year one (2000) down to 230 percent in year 13 (2012); for option two the corresponding values are 2850 percent to 220 percent in year 14; according to option three the ratio goes from 2860 percent to 240 percent in year 15; and for the last option the values are 2870 percent in year one to 290 percent in year 15 (2014).

The highest ratio of unsustainability under both scenarios occurs usually in the first year of all four repayment options then reduces gradually to their lowest levels at the end of the twentieth year under consideration. This implies that unsustainability shall prevail for much longer than the twenty years projected in the model. The implications of such a situation are dire. Twenty years of absolutely unsustainable debt would mean Iraq is and will continue to be entangled within a serious chronic economic crisis that shall determine the prospects of its social and economic development for many decades to come. Naturally, domestic policies have much to do in this regard, but considering the magnitude of debt, the gigantic amount of reparations, and the provisions governing these two items, the economic crisis as outlined above shall be largely externally determined. Furthermore, on the revenue side, which is the other side of the debt and reparation equation, export earnings is solely determined by oil deman d and prices, both of which are also externally determined.

FOUR: CONCLUSIONS, STRATEGIES AND OPTIONS

Thus far it has been established that even under the most favorable conditions Iraq's indebtedness is absolutely and emphatically unsustainable during the next two decades. The rationale behind the debt sustainability threshold is that if a developing country is forced to service its debt beyond MTIT rates it then, due to domino effects, can only do so on the account of its future growth. In other words a debt repayment policy that compromises economic growth and social development of the indebted country could very well trap that country in an impoverishing indebtedness for considerable period of time. The prospect becomes gloomier if war reparations and Arab funds are incorporated with formal old and new debts. To service its old debt alone the country has to access fresh credit to increase its oil production so that it can generate the needed foreign exchange. In other words the level of indebtedness (old debt and the new oil capacities related debt) has to increase during the next ten years before any sig nificant and serious debt repayment can start.

What can Iraq do to manage such an extremely complex situation? To begin with, the differentiation between the four categories of external financial obligations must be established: Arab funds, war reparations, new debt and old debt. Each one of these has its own premise, background, complexities, difficulties and legal status requiring special consideration and suitable handling strategies. First, the war reparation issue is not only the most complex and solidly formulated on an international legitimacy status -- and thus the most "political" -- but also the most crippling to the prospect of the Iraqi economy for reasons outlined above. Serious investigation of the war reparations and their impact must be completed. If such work is done in collaboration with the UN Compensation Committee (UNCC) invaluable insights on the issue could be forthcoming, the modalities used, procedure of verification, categories, and magnitude of claims, as well as how to deal with it in the future. It must be established whether Arab funds are either debts or grants. This article has suggested an objective criterion of four elements that could help to decide the status of these funds. If they are classified as debt, and interest free, with no fixed maturity and repayment schedule then this debt has a secondary priority after interest bearing debt. Otherwise, the passive debt becomes an active one.

I have narrowed the likelihood of new debt and made it limited to the oil sector. In the absence of radical change in the current relationship between Iraq and the international community, it is very unlikely that the country will receive meaningful new credits outside of the oil sector unless its old debt issue is dealt with. Iraq can deal with its old debt by choosing one of three strategies: the "intransigent" strategy, the "milk-cow" strategy, or the "MTIT" strategy. An assessment of these three strategies will be based on three broad areas: context (i.e. the main components, options, and nature of the suggested strategy); success (the likelihood of success in attaining sustainable indebtedness); and effects (i.e. the possible outcome and the effectiveness of the suggested strategy and in which direction).

The "intransigent" strategy is basically a deliberate unilateral differentiated and discriminatory "non payment" strategy. According to this strategy Iraq would declare a moratorium on its debt and request the creditors to write it off. It is therefore a confrontational strategy and evidence of procrastination. To what extent this strategy would contribute to loosening Iraq's indebtedness is highly unlikely. In fact, the country now has no leverage on, or better negotiation position in comparison with its creditors, to force them acquiesce to such a strategy or accept it under duress. Since Iraq is in need of new debt it cannot include all its creditors in this action. Therefore, some differentiation and discrimination becomes inevitable. In such a situation such an Iraqi action will definitely violate one important clause -- in the Latin "pari passo" meaning the equal or parallel treatment of all debts -- that is present in many loan agreements which the country concluded during the 1980s and which remain as valid documentation of the old debt. Even without such a clause the unilateral non-payment declaration is a drastic step that in fact leads to the immediate cessation of any possibility for fresh credit and reduces the country's credit worthiness.

It is likely that a moratorium would produce a counter moratorium: an Iraqi moratorium on debt could very well prompt "collective" international moratorium or "co-ordinated" moratoriums on commercial and official credits to Iraq by international creditors and creditor countries. Furthermore, any Iraqi assets or even financial transactions abroad could become subject to legal action. In short, the intransigent non-payment strategy is an extremely risky and harmful one for Iraq to pursue at a time when the country is in urgent need of fresh credit and new openings towards the international financial market. A strategy such as this cannot succeed in elevating the burden of indebtedness. On the contrary it could very well aggravate the problem even further.

A second possibility suggested is the "milk-cow" strategy. According to this alternative Iraq would suspend payments of its principal debt, but pay the accrued interest. The suspension of debt for a specified or unspecified period of time could be through unilateral Iraqi action or mutual consent. A unilateral action could face the same difficulties and problems mentioned with regards to the "intransigent" strategy. However, a mutual consent action could make relations between the debtor and its creditors much smoother, though it would not guarantee the availability of fresh credits. According to this strategy Iraq would need to earmark over $6.7 billion annually as accrued interest on the outstanding balance of its "accumulated" old debt. This would mean that Iraq would pay -- in interest -- an amount equal to the whole of its old debt within 12.5 years and the volume of old debt would remain intact. In addition to the high uncertainty regarding the availability of any new credit this strategy is also expens ive. For example, if Iraq were to repay its old debt over 40 years it would pay the entire debt plus interest with $7.1 billion per annum, as compared with $6.7 billion annually with the principal debt remaining in full under the "milk cow" strategy. Also, due to the constant level of old debt Iraq's debt exposure would remain high on the books of its creditors. This could have two further consequences: long-term credit would become scarcer as time passed, and short-term credit would become very expensive when (and if) it was available. Another disadvantage of this strategy is its inflexibility and insensitivity: it does not take into consideration the other financial obligations held by Iraq on the outflow side, and the downward changes in export revenue of its inflow side. Furthermore, a prolonged milk-cow strategy could very well domesticate the economy into a debt trap condition and close the door for any debt relief or debt sustainability solution. In sum, this strategy could not have a good probability of success in reducing Iraq's indebtedness. It might contribute to worsening it due to elements of uncertainty with which it is associated. Furthermore, it is costly and thus it is a strategy of attrition more than of debt relief.

MTIT--Maximum Tolerable Indebtedness Threshold--strategy is basically a negotiated, pragmatic and comprehensive strategy, which relies on internationally accepted premises. In fact, this is not a debt-oriented strategy but rather a development driven one for a heavily and seriously indebted country. According to this strategy the debtor country declares its acceptance of its debt obligations and suggests proposals on how to deal with its indebtedness within a comprehensive assessment, package and vision that is not confined to debt only. The reliance on and inclusion of internationally acceptable and widely used criteria on debt sustainability that accommodate for development requirements of the debtor as well as interest and concerns of the creditors adds legitimacy and strengthens Iraq's negotiating position. From a negotiation standpoint the inclusion of an objective criteria that is used by the IMF, the World Bank, UNCTAD, and many scholars could very well lead to a win-win negotiated outcome. (50)

Under such a strategy all external financial obligations of the country could be co-opted under one umbrella, including old and new debts, war reparations and reconstruction and development requirements. Furthermore, this strategy could very well accommodate the possible outcome or purpose of the first two strategies but under a different climate. If Iraq negotiated to have any annual debt service that exceeds MTIT considered a "forced moratorium on debt" (strategy one) then one could argue that such excess should be considered as 'forgiven debt" (strategy three-Iraqi side). Prolonging debt repayment to longer periods so that annual debt service can be reduced to the level of sustainability could also be a counter argument (strategy three-creditors side). But this could very well cause Iraq to pay amounts closer to that envisaged by the "milk-cow" strategy with a significant difference being a lower debt balance. One of the potential utilities of this strategy is its ability to deliver what might be called "p ositive indebtedness": the conversion of financial indebtedness into desirable social, economic, environmental and political targets. However, this strategy would not be an easy one or indeed feasible if the current political stalemates with the international community were prolonged or worsened, a very likely eventuality in the foreseeable future. Furthermore, this strategy should not be considered as a wish list but rather as an act of pragmatism including some painful measures on behalf of the Iraqi government. Therefore, if Iraqi decision-makers were to choose this type of strategy they would have to give it very serious thought and take careful, comprehensive and appropriate preparations. The experiences of many indebted developing countries, including Arab ones, are indeed very relevant in this regard. (51)

Iraqi decision-makers should not be under any illusions with regards to at least three things: first, Iraqi negotiators would not be permitted to be in the driver's seat if and when such negotiations take place; second, the scale of indebtedness, the complexity of the issue and this type of strategy would require concerted multilateral commitments more than fragmented bilateral solutions; and third, there is no single or easy solution to or quick fixes for this problem in either the short or medium terms. MTIT strategy begins first and foremost by establishing the quantitative and qualitative aspects of indebtedness, how and in what magnitude unsustainable Iraqi debt is. A high level, well qualified, and specialized debt management mechanism would have to draft the main ingredients and outline of this strategy that Iraq could then pursue -- taking into consideration the legal standing and governing external credit of its major creditors. Among the possible items that are directly related to debt are: debt rel ief (forgiveness and/or reduction), restructuring, swap, buyback, rescheduling, conversion and fresh credit. Other economic items of indirect, but very significant and indeed relevant relation to debt have to be incorporated within any MTIT debt sustainability strategy. Economic reforms, restructuring, privatization, and FDI incentives are among these other items. Finally, considering the special case of Iraq all this might be totally dependent upon a new and more open participatory political climate.

Ahmed M. Jiyad is a freelance Middle East economist who has worked in Iraq, the UK, USA and Norway as both an academic and private consultant.

ENDNOTES

(1.) Ahmed M. Jiyad, "Iraq's Foreign Investments", Council of Ministers-External Economic Relation Committee (EERC), (Baghdad: 1982). (In Arabic).

(2.) The Group of 5 Plaza Agreement was concluded between the governments of the United States, United Kingdom, Japan, West Germany and France. The aim was to reduce the value of the US dollar in order to improve the US trade balance.

(3.) Daily oil production figures are from US Department of Energy, 1988, Table 10.1b, p.113. Oil export earnings were calculated by deducting non-oil exports from total exports. Non-oil exports data are from, Ministry of Planning- C.S.O, 1986 & 1987, tables 8/1, p. 156. Figures on total exports are from, IMF, DOT, 1987.

(4.) For more details see Ahmed M. Jiyad, "Iraq's Indebtedness: From Liquidity to Unsustainability." Paper presented before a conference on "Frustrated Development: The Iraq Economy in War and in Peace," organized by the University of Exeter, Centre for Arab Gulf Studies, Exeter, UK. 9-11 July 1997; see also, Ahmed M. Jiyad, Debt Problem of Iraq, Asharq AL-Awsat, London, 5, 6, 7, 8, and 26 August 1997 (in Arabic).

(5.) This data are used here for analytical purposes on composition, trends, structure, and sources of debt, but they will not be used for sustainability analysis.

(6.) Frederick W. Axelgard, "The United States-Iraqi Rapprochement," in Z. Michael Szaz (ed.), Sources of Domestic and Foreign Policy in Iraq. (Washington, D.C.: American Foreign Policy Institute, 1986), pp. 43-57.

(7.) Donald Donovan, "Nature and Origin of Debt-Servicing Difficulties: Some Empirical Evidence," Finance & Development. Vol. 21 (Washington D.C.: IMF/World Bank, December 1984), pp. 22-25.

(8.) UNCTAD. Trade Development Report 1996. (UNCTAD, 1996), p. 56.

(9.) Iraq had concluded ten project loans with AFESD between 1980 and 1990 at a total amount of KD 59.725 million and disbursements of KD 18.575 million. (AFESD, Annual Report 1991, Kuwait); the outstanding balance of Iraq's debt to the IDB amounted to IsD 113.4 million. (IDB, Annual Report: 1991-1992. #1412H, Jeddah, Saudi Arabia, '1991-1992', pp. 164, 174); finally, the outstanding balance of Iraqi "principal" debt to AMF was AAD 49.850 million (AMF, Annual Report 1995: Abu Dhabi, UAE).

(10.) A borrowing country may incur, in fact, additional costs other than interest rate. Some of these additional cost are payable once and are called up-front costs such as management fees while other are proportional such as commitment fees levied on the remaining balance of the unutilized credit.

(11.) The figures for amortization and interest could be slightly different since the data for 1980 and 1981 were the aggregate of debt service and long-term debt only.

(12.) Jiyad, (1997), op. cite.

(13.) World Bank. Word Development Report 1989. (New York: Oxford University Press, 1989), p. 18.

(14.) Ahmed M. Jiyad. The Impact of Oil on the Iraqi Economy & Economic Relations. (Boston: Humphrey-Fletcher Visiting Fellowship Program, Fletcher School of Law and Diplomacy, Tufts/ Harvard Universities, Massachusetts, USA.), table (3-7), p.94.

(15.) Middle East Economic Digest, (24 March 1989), p. 20.

(16.) Middle East Economic Survey, (13 May 1991), pp. D6-D9.

(17.) This extremely high figure for 1991's payment obligation does not reflect simply a "bunching" phenomenon but also indicates substantial -- in value and occurrence -- arrears prior to 1990. I also expect, on the basis of previous trends, a significant portion of this figure is a short-term debt not paid during 1990 and 1991.

(18.) We should not underestimate the effects of including these penalties in the final accumulated debt. Such an effect could be substantial, as is evident from the following example: at the end of 1991 Iraqi principal debt to the Arab Monetary Fund (AMF) was 49 million AAD (Arab Accounting Dinnar), and the penalty interest on arrears was only 4 million AAD. But at the end of 1997 and for the same principal debt the penalty interest on arrears had increased by more than six fold to reach 29 million AAD. See AMF, AR, 1991 and 1997.

(19.) Cyrus H. Tahmassebi, "The Changing Structure of World Oil Markets and OPEC's Financial Needs," OPEC Bulletin. (March 1995), Pp. 7-12; Ibrahim A. H. Ismail, "Raising Oil Output in Major Producing Regions: the financial implications," OPEC Bulletin. (November-December 1995), pp. 14-19; Fadhil Chalabi, "Post-War Iraq's Oil Capacity: Present Situation and Future Prospects." Paper presented before a conference on "Frustrated Development: The Iraqi Economy in War and in Peace" Centre for Arab Gulf Studies, University of Exeter, Exeter, UK. 9-11 July 1997.

(20). The domestic consumption of 0.7 mb/d was according to the Iraqi Minster of Oil Amer M. Rashed, Asharq Al-Awsat, No. 7 (London: August 1997). This figure is much higher than the 0.419 mb/d reported by OAPEC, AR 1996.

(21.) Data from 1981 to 86 are taken from Annual Abstract of Statistics, Iraq, 1989.

(22.) Data for 1991 to 96 are from OAPEC, AR 1995 (p.84) and 1996 (p.53).

(23.) Ismail, Ibrahim A H, op., cite.

(24.) Ghazi M. Haider and Faraj, H. Shamkhi, "Iraqi Oil: The Potential, Need and Opportunities," OPEC Bulletin. (April 1998), pp. 9-15.

(25.) I should emphasize that these estimates for China are a combination of equal initial investment and operation cost. Nevertheless a capacity development cost of $8225/b per day is still not cheap at all. Also, I should mention that the Iraqi estimate is an overall average covering various types of oil fields and reserves. Furthermore, it appears that Iraqi estimates did not include the cost of investment, (i.e., interest on borrowed capital). Bad habits die hard!

(26.) Ahmed M. Jiyad, "Privatisation as a New Development Paradigm: Preliminary Lessons from the Arab Countries", Paper presented before International Symposium on Public Initiative in the Economy. Istanbul, Turkey, October 6-8, 1997, and published in TMMOB, Kamu Girisimciligi, Harbiye-Istanbul, Turkey, 1997. (in Turkish), pp. 103-114.

(27.) UNCTAD, World Investment Report 1995. (New York: UNCTAD, 1995), p.394; see also, World Investment Report 1998. (New York: UNCTAD, 1998), p. 363.

(28.) Naji Abi-Aad, "Foreign Upstream Participation: Some Observations on Trends Among Middle East Oil Producers," OPEC Bulletin. (October 1997), pp. 7-10.

(29.) For further details see Haider and Faraj, op.cit.

(30.) In May 1997, Iraq and Turkey signed an agreement for the construction of a 1300km natural gas pipeline linked to the port of Ceyhan at an estimated cost of $2.5b and with an annual capacity of 10bcm. OAPEC, Monthly Bulletin. Vol. 23, No. 7 (Kuwait: July 1997).

(31.) OPEC, OPEC Bulletin, Vol. XXIX, No. 1 (January 1998).

(32.) World Bank, "World Debt Tables 1994-95: External Finance for Developing Countries," (Washington, D.C.: The World Bank, Vol. 1., 1995).

(33.) Luisa E. Sabater, "Multilateral Debt of Least Developed Countries," (New York: UNCTAD Discussion Paper No. 107, November 1995).

(34.) The discount rates used by the World Bank to calculate the present value of future debt are many: the interest rates charged by OECD countries for officially supported export credits; the most recent lending rates for the non-concessional multilateral loans; and average interest rates for export credit donated in currencies other than the French Franc, German Mark, Italian Lire, Japanese Yen, British Pound, and U.S. Dollar (See World Bank 1994, Vol. 1. pp. 49-50).

(35.) The Economist (London) 1995, pp. 83-84.

(36.) UNCTAD, Trade Development Report 1996. (New York: UNCTAD, 1996).

(37.) It had been reported that, by the end of 1988, companies from various countries were working on projects with an estimated total value of $12 billion. (Middle East Executive Report, May 1989, p. 16).

(38.) The value of imported, and paid for, military equipment alone cost $102 billion. See Appendix I "Note from the Iraqi Minister of Foreign Affairs, Mr. Tariq Aziz, to the Secretary General of the Arab League, 16 July 1990," in Pierre Salinger and Eric Laurent, Secret Dossier: The Hidden Agenda Behind the Gulf War. (London: Penguin Books, 1991).

(39.) This conclusion emerged from the February 1989 Conference in London on "Cease Fire in the Gulf: Economic & Financial Prospects," a summary of the papers appeared in the Arab Banker, 1989. pp. 8-13. See also MEED (3 March 1989), p. 8.

(40.) For discussion of sustainability indicators and other debt ratios see Matthew Martin, "A Multilateral Debt Facility: Global and National," in UNCTAD. International Monetary and Financial Issues for the 1990s- Vol. VIII, (New York: UNCTAD, 1987), pp. 147-176; Luisa E. Sabater, Multilateral Debt of Least Developed Countries, Discussion Paper No. 107, November, UNCTAD.1995; UNCTAD, TDR 1996, p. 51; and J.C. Berthelemy and A. Vourc'h, 1994-95 edition, pp. 60-67.

(41.) MidEast Markets, 1989: 16:5/5.

(42.) Middle East Executive Reports, 1988: 11-16.

(43.) Bradsher, Keith., 1991. Cited by Alnasrawi, Abbas, 1994: p.124.

(44.) Marion Farouk-Sluglett and Peter Sluglett, 1990: 273.

(45.) The figure was mentioned by Saddam Hussain during the Arab Summit held in Baghdad on 28 May 1990 and reported in Pierre Salinger with Eric Laurent, op., cite, 1991. p. 30. Saddam, as reported, had referred to the amount as debts and requested their cancellation.

(46.) Judith Miller and Laurie Mylroie, 1990: 9.

(47.) Mohamed Heikal, 1993: 209.

(48.) For two years only, 1990 and 91 official debt forgiveness by Arab countries, mainly GCC, was more than $9 billion compared with $10 billion by the twenty developed countries members of DAC. See World Bank, WDT op. cite, Table 3.3, p. 41.

(49.) Cortright D., and Lopez G.A. (eds.), 1995.

(50.) Ahmed M. Jiyad, 1993.

(51.) For detailed review of some Arab countries in this matter see A. T A1-Sadik and N. A. Latefa, 1998, (in Arabic).

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Table No. 1

PROFILE OF IDENTIFIED IRAQI DEBT
 ($US MILLION)

                    1980   1985   1990

Long term debt      2491   8510  14301
Short term debt            4329   8544
Total Debt          2491  12839  22846
Total Debt Service  1116   2143   1347
Disbursements       2391   3471  -1363
Net Flows            552   1972  -1964
Net Transfers              1328  -2711
Table 2

OLD DEBT REPAYMENT OPTIONS AND COST

Repayment Option  Annual Debt  Total Interest Paid
    (years)         Service        ($ billion)
                  ($ billion)

      10Y           12.541            41.259
      15Y            9.831            63.320
      20Y            8.571            87.269
      25Y            7.883           112.930
Table 3

NEW DEBT REPAYMENT OPTIONS AND COSTS

Repayment Option  Annual Debt  Total Paid Interest
    (years)         Service        ($ billion)
                  ($ billion)

      10Y            2.981            9.806
      15Y            2.337           15.049
      20Y            2.037           20.741
      25Y            1.874           26.840
Table 4 ANNUAL SERVICE OF "OLD" AND "NEW" DEBT ($BILLION)

Year    10 Y    15 Y    20 Y   25 Y

2000  12,541   9,831   8,571  7,883
2001  12,541   9,831   8,571  7,883
2002  12,541   9,831   8,571  7,883
2003  12,541   9,831   8,571  7,883
2004  12,541   9,831   8,571  7,883
2005  15,522  12,168  10,608  9,757
2006  15,522  12,168  10,608  9,757
2007  15,522  12,168  10,608  9,757
2008  15,522  12,168  10,608  9,757
2009  15,522  12,168  10,608  9,757
2010   2,981  12,168  10,608  9,757
2011   2,981  12,168  10,608  9,757
2012   2,981  12,168  10,608  9,757
2013   2,981  12,168  10,608  9,757
2014   2,981  12,168  10,608  9,757
2015   0,000   2,337  10,608  9,757
2016   0,000   2,337  10,608  9,757
2017   0,000   2,337  10,608  9,757
2018   0,000   2,337  10,608  9,757
2019   0,000   2,337  10,608  9,757
Table 5 OIL PRODUCTION, EXPORT AND REVENUES

            Oil Production
  Domestic Consumption & Export (mbd)
          Year  Production      Domestic       Export
                               Consumption

          2000    3,000           0,714        2,286
          2001    3,500           0,728        2,772
          2002    3,500           0,743        2,757
          2003    4,000           0,758        3,242
          2004    4,000           0,773        3,227
          2005    5,000           0,788        4,212
          2006    5,000           0,804        4,196
          2007    5,000           0,820        4,180
          2008    5,000           0,837        4,163
          2009    5,000           0,853        4,147
          2010    6,000           0,870        5,130
          2011    6,000           0,888        5,112
          2012    6,000           0,906        5,094
          2013    6,000           0,924        5,076
          2014    6,000           0,942        5,058
          2015    6,000           0,961        5,039
          2016    6,000           0,980        5,020
          2017    6,000           1,000        5,000
          2018    6,000           1,020        4,980
          2019    6,000           1,040        4,960

                        Export Revenues ($bn)

          Year        Scenario I         Scenario II


          2000          16,459             16,459
          2001          19,956             19,956
          2002          19,852             19,852
          2003          23,345             23,345
          2004          23,235             23,235
          2005          30,324             37,905
          2006          30,211             37,763
          2007          30,095             37,619
          2008          29,977             37,471
          2009          29,856             37,320
          2010          36,933             55,400
          2011          36,808             55,212
          2012          36,680             55,020
          2013          36,550             54,825
          2014          36,417             54,625
          2015          36,281             63,492
          2016          36,143             63,250
          2017          36,002             63,003
          2018          35,858             62,751
          2019          35,711             62,494
Table 6 DEBT SERVICE/EXPORT RATIO

                       D.S/E Ratio, Scenario I

Year      10 Y            15 Y         20 Y      25 Y
2000      0,76            0,60         0,52      0,48
2001      0,63            0,49         0,43      0,40
2002      0,63            0,50         0,43      0,40
2003      0,54            0,42         0,37      0,34
2004      0,54            0,42         0,37      0,34
2005      0,51            0,40         0,35      0,32
2006      0,51            0,40         0,35      0,32
2007      0,52            0,40         0,35      0,32
2008      0,52            0,41         0,35      0,33
2009      0,52            0,41         0,36      0,33
2010      0,08            0,33         0,29      0,26
2011      0,08            0,33         0,29      0,27
2012      0,08            0,33         0,29      0,27
2013      0,08            0,33         0,29      0,27
2014      0,08            0,33         0,29      0,27
2015      0,00            0,06         0,29      0,27
2016      0,00            0,06         0,29      0,27
2017      0,00            0,06         0,29      0,27
2018      0,00            0,07         0,30      0,27
2019      0,00            0,07         0,30      0,27

                       D.S/E Ratio, Scenario II

Year      10 Y            15 Y          20 Y      25 Y
2000      0,76            0,60          0,52      0,48
2001      0,63            0,49          0,43      0,40
2002      0,63            0,50          0,43      0,40
2003      0,54            0,42          0,37      0,34
2004      0,54            0,42          0,37      0,34
2005      0,41            0,32          0,28      0,26
2006      0,41            0,32          0,28      0,26
2007      0,41            0,32          0,28      0,26
2008      0,41            0,32          0,28      0,26
2009      0,42            0,33          0,28      0,26
2010      0,05            0,22          0,19      0,18
2011      0,05            0,22          0,19      0,18
2012      0,05            0,22          0,19      0,18
2013      0,05            0,22          0,19      0,18
2014      0,05            0,22          0,19      0,18
2015      0,00            0,04          0,17      0,15
2016      0,00            0,04          0,17      0,15
2017      0,00            0,04          0,17      0,15
2018      0,00            0,04          0,17      0,16
2019      0,00            0,04          0,17      0,16
Table 7 DURATION, YEARS OF DEBT UNSUSTAINABILITY SCENARIO "I"

Threshold  Option 1  Option 2  Option 3  Option 4

   250        3         5         8         9
   220        4         7         9         10
   200        4         7         10        10
Table 8 DURATION, YEARS OF DEBT UNSUSTAINABILITY SCENARIO "II"

Threshold  Option 1  Option 2  Option 3  Option 4

   250        3         5         5         5
   220        4         5         6         7
   200        4         5         7         9

The number of years during which debt is unsustainable under scenario II
ranges between four years under option one and nine years under option
four of repayment.
Table 9 DEBT SERVICE TO DISPOSABLE EXPORT INCOME RATIO

                       Debt Service/Disposable
                          Export Income, I

Yr              10Y        15Y         20Y       25Y
00              135        103         87        79
01              111        85          72        65
02              112        85          72        65
03              95         72          62        56
04              96         73          62        56
05              87         67          57        52
06              88         67          57        52
07              88         67          57        52
08              88         68          58        52

                         Debt Service/Disposable
                            Export Income, II

Yr                10Y          15Y         20Y       25Y
00                135          103         87        79
01                111          85          72        65
02                112          85          72        65
03                95           72          62        56
04                96           73          62        56
05                70           53          46        41
06                70           54          46        41
07                70           54          46        42
08                71           54          46        42
09  89  68  58  52  71  54  46  42
10  12  55  47  42   8  37  31  28
11  12  55  47  43   8  37  31  28
12  12  55  47  43   8  37  31  28
13  12  55  47  43   8  37  32  29
14  12  56  47  43   8  37  32  29
15   0   9  48  43   0   5  27  25
16   0   9  48  43   0   5  27  25
17   0   9  48  43   0   5  24  22
18   0   9  48  44   0   4  19  17
19   0   9  48  44   0   4  19  18
Table 10 PRESENT VLAUE OF ALL OBLIGATIONS TO DISPOSABLE EXPORT INCOME

                           Present Value of all
                              Obligations I
                            Export Disposable
                                 Income I

Yr        10 Y                    15 Y      20 Y      25 Y
00        28,1                    28,5      28,6      28,7
01        21,9                    22,5      22,8      22,9
02        20,7                    21,6      22,0      22,3
03        16,4                    17,4      17,9      18,2
04        15,3                    16,6      17,2      17,6
05        11,7                    12,8      13,4      13,8
06        10,6                    12,0      12,7      13,1
07        9,6                     11,2      12,0      12,5
08        8,5                     10,3      11,3      11,8
09        7,4                     9,5       10,6      11,2
10        5,5                     6,9       7,8       8,4
11        5,0                     6,1       7,2       7,8
12        4,5                     5,3       6,5       7,2
13        4,0                     4,6       5,8       6,5
14        3,5                     3,8       5,1       5,9

                           Present Value of all
                              Obligations II
                            Export Disposable
                                Income II

Yr        10 Y                    15 Y      20 Y      25 Y
00        28,1                    28,5      28,6      28,7
01        21,9                    22,5      22,8      22,9
02        20,7                    21,6      22,0      22,3
03        16,4                    17,4      17,9      18,2
04        15,3                    16,6      17,2      17,6
05        9,3                     10,2      10,7      10,9
06        8,3                     9,4       10,0      10,3
07        7,4                     8,7       9,3       9,7
08        6,4                     7,9       8,7       9,1
09        5,5                     7,2       8,0       8,5
10        3,2                     4,2       4,8       5,2
11        2,7                     3,5       4,2       4,6
12        2,3                     2,8       3,6       4,0
13        1,8                     2,2       3,0       3,5
14        1,3                     1,5       2,4       2,9
15  3,1  3,3  4,4  5,3  0,7  0,8  1,5  2,0
16  2,7  2,8  3,7  4,6  0,3  0,4  0,9  1,4
17  2,2  2,4  3,0  4,0  0,0  0,1  0,4  0,9
18  1,8  1,9  2,3  3,4  0,0  0,0  0,2  0,6
19  1,4  1,4  1,6  2,7  0,0  0,0  0,1  0,5