IRAQ - Delay To War Reparations.

The swingeing cut in Iraqi oil income flowing to the UN Compensation Commission (UNCC), charged with reparations for Iraq's 1990 invasion, could leave Baghdad paying compensation for decades. The UNCC, which met on June 24-26, expects to receive no more than about $600m this year, compared with $3 bn in 2002, following a UN Security Council decision in May to cut the body's share of Iraq's oil revenues from 25 to 5%. UNCC spokesman Joe Sills said on June 23: "Compensation payments will be drastically reduced. There will be much, much slower settlement of debts". Even restoration of Iraqi oil production to its pre-war levels of 3m b/d would provide the UNCC with less than half its 2002 income.

The UNCC has approved claims of $44 bn to individuals, companies and governments, but has so far paid out $17.6 bn, leaving more than $26 bn owing. Large claims amounting to $170 bn have yet to be resolved. The Kuwait Investment Authority (KIA) has filed an $86 bn claim, the biggest; but the UNCC said it did not expect the award to exceed $5 bn. Kuwait has also lodged environment-related claims of $80 bn which will be assessed next year, when the UNCC is to wind up its work.

Kuwait on June 23 protested that priority had been given to small claims at the outset and now that instalments were being paid on larger claims it was not fair to reverse the process. "The UNCC was not established for humanitarian purposes. [Prioritisation] would be unfair to the government of Kuwait and to the Kuwaiti people who suffered the most", said Khalid Al Mudaf, head of Kuwait's "public authority for the assessment of compensation for damages resulting from Iraqi aggression".

The Iraqi debt exceeds $100 bn. Like the pre-invasion skirmishes, the battle lines over this now reflect divisions between France, Germany and Russia, on the one hand, and the US on the other. Senior US officials initially called for debt forgiveness in the light of Saddam's evil regime. More recently they have backed off, employing the term "debt relief", which covers anything from short-term deferral to forgiveness. US Treasury officials have also agreed that the debt should be handled in the Paris Club of creditor nations. Germany, however, says this means rescheduling only, a position probably shared by France and Russia.

In an article published on June 22 by the FT, David Mulford (international chairman of Credit Suisse First Boston and a former undersecretary at the US Treasury) and Michael Monderer (a consultant on sovereign debt and a former director of the US Treasury Office of International Debt Policy) said: "the US should resume its original position on forgiveness but for a different reason: assisting Iraq's recovery. And the Paris Club should not be the forum for negotiations. Anything less would compound the tragedy suffered by the Iraqi people during decades of Ba'athist oppression".

The experts proposed the following: (1) a three-year moratorium on Iraqi debt payments without interest accruing; (2) an international Iraqi debt commission of financial "wise men" to be established to examine all claims and to disallow debt used for state security or military aggression - with only loans for verifiable economic purposes to be collectable; (3) the commission should chair talks to restructure the remaining legitimate debt with a substantial reduction in present value through a partial write-off or extended rescheduling - with the commission to be "empowered to force unco-operative creditors to accept an agreement consistent with Iraq's reconstruction and development needs"; and (4) setting a debt/equity swap programme to encourage private investment in Iraq and give companies a role in the rebuilding, with claims to be "sold to investors at deep discounts and redeemed into private sector investments or privatisations".