U.S. Forgives Iraq Debt To Clear Way for IMF Reforms

21 December 2004 by Brian Dominick


While Washington pats itself on the back for forgiving Iraqi debt owed since the 1980s, critics say the relief comes with dangerous strings attached and argue that the debt should have been null and void.

The NewStandard, Dec 19 - In a move that took a full step beyond expectations, the US Departments of State and Treasury announced yesterday the dissolution of all outstanding debt they previously claimed Iraq owed Washington.

Consistent with a plan arranged last month at a meeting of top industrialized nations, whereby the countries would eventually relieve approximately 80 percent of the debt Iraq is said to owe them collectively, Friday’s move was the first among many planned to eventually forgive the bulk of Iraq’s crippling debt burden. In exchange, Iraq will surrender its economic sovereignty to global financial institutions, provide foreign investors greater access to Iraqi natural resources, and increase investment opportunities for multinational corporations.

According to the three-stage agreement reached last month at a meeting of the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

— an organization seating representatives of nineteen economic powers, including the United States, Japan, Russia and many European countries — 30 percent of Iraq’s estimated $40 billion (USD) debt to those nations is to be relieved outright, with no strings attached.

The next 30 percent of the debt is scheduled for relief as soon as Iraq approves an arrangement with the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
(IMF), which will design “structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
” programs intended to “revive” Iraq’s floundering economy by privatizing industries and services currently run by the government as well as opening various investment opportunities up to foreign capitalists.

The Paris Club nations have pledged to relieve another 20 percent of Iraq’s debt to them once Iraq fulfills obligations under the IMF arrangement, some three years down the road; leaving just 20 percent — still nearly $8 billion — to actually be paid back.

Secretary of State Colin Powell and Treasury Secretary John Snow announced the cancellation of Iraq’s debt to the United States at a Friday afternoon signing ceremony. The total amount relieved was around $4.1 billion, reduced from closer to $4.5 billion by a prior reallocation of taxpayer funds originally intended for Iraqi reconstruction but “reprogrammed” to pay off a portion of Iraq’s debt to the US in September. (previous coverage)

Also in attendance were Iraqi Finance Minister Adil Abdul Al-Mahdi and Sinan Shabibi, governor of the Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
of Iraq. The two men have been instrumental in representing Iraq during negotiations with the US, the Paris Club and the IMF.

At Friday’s ceremony Secretary Snow said the historic debt cancellation demonstrated “our unwavering commitment to the Iraqi people and to their efforts to achieve sustainable reforms and stability for their country.

Those “reforms,” however, are at the center of a quiet controversy. In order to hold up its end of the deal just signed in Washington, Iraq will have to become beholden to the instructions of the IMF.

Since its inception more than 50 years ago, the IMF has come under increasing criticism for its policies toward Third World nations. In most heavily indebted countries, the Fund’s structural adjustment programs have become equated with foreign dependence, rising wealth inequality, increased poverty, and uncontrollable debt.

Although the details of the program IMF officials have in store for Iraq are not yet known, arrangements with the Fund typically include numerous economic adjustments, such as “austerity measures” that reduce public services like health care and education; an emphasis on exporting natural resources; adherence to “free market” principles fostering openness to foreign investment and business presence; as well as the privatization of industries currently owned and operated by the state.

The IMF says it plans to reach a specific arrangement with Iraq’s new government sometime after the January 30 elections, but since the relief of a large amount of Iraq’s external debt is dependent on approval by the Fund, it is expected that the IMF will have considerable leverage Leverage This is the ratio between funds borrowed for investment and the personal funds or equity that backs them up. A company may have borrowed much more than its capitalized value, in which case it is said to be ’highly leveraged’. The more highly a company is leveraged, the higher the risk associated with lending to the company; but higher also are the possible profits that it may realise as compared with its own value. in its negotiations with Iraqi leaders.

Justin Alexander is the founder of Jubilee Iraq, a donor-funded nongovernmental organization working toward the unconditional relief of most of the debt foreign creditors claim Iraq owes them. Reached in London, Alexander told The NewStandard he predicts that reforms imposed by the IMF will resemble investment and trade rules established unilaterally by US occupation chief Paul Bremer during his tenure prior to the installment of Iraq’s current interim government. United Nations Security Council Resolution 1483 had given Bremer the power to manage occupied Iraq within the parameters of international law.

Under Order 39 of what quickly became known as “the Bremer Laws,” Iraqi industries and markets are laid wide open to foreign investment with few restrictions, in Alexander’s words, “making it very difficult for the current [Iraqi] interim government or the next interim government to step back from any of these policies.” What is more, explains Alexander, is that those US-imposed policies “make it very difficult for Iraqis to choose their own economic system.

Bremer was sure to cement Order 39 and others with Article 26 of Iraq’s interim constitution, which ensured that once sovereignty was handed over to the US’s hand-picked interim government led by Iyad Allawi, that government could not change the Bremer Laws.

Since that transfer of official authority from the occupying powers, Iraq’s interim government has begun accepting debt relief in exchange for the responsibility to demonstrate its openness to IMF-imposed reforms and adjustments. In a memorandum attached to a “letter of intent” sent by Central Bank Governor Shababi and Finance Minister Al-Mahdi to the IMF last September, the men expressed their US-installed government’s apparent eagerness to engage with the Fund.

New financial sector legislation has paved the way for the creation of a modern financial sector,” the letter touts, going on to boast that “three foreign banks have already been licensed to begin operations” and that “a number of foreign banks have shown interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. in acquiring a minority ownership stake in private Iraqi banks.”

The letter also explains that Iraqis are willing to make sacrifices to demonstrate their commitment to turning the Iraqi economy around. “By [2005] the government will increase the domestic prices of oil-derivative products (including gasoline), a measure that is expected to bring US$1 billion in revenue in 2005” and “demonstrate the willingness of Iraqi people to implement fundamental reforms to put Iraq’s public finances on a strong footing in the medium term.

In an oil-rich country with a 60 percent unemployment rate reported by the Ministry of Labor and Social Affairs — a figure many analysts consider quite conservative — Iraqis presently wait several hours in gasoline lines that measure kilometers in length, definitely demonstrating a resolve of some form, though saving their government $1 billion annually is probably not foremost on their minds.

There are also potential conflicts of interest in play as many of the government ministers, technocrats and executives who will negotiate final arrangements with the IMF will personally prosper from privatization measures.

There has been no shortage of speculation about the effects of an IMF-imposed economic regimen in Iraq. “After an endless succession of courageous last stands and far too many lost lives,” wrote analyst and journalist Naomi Klein in the September issue of Harper’s, “Iraq will become a poor nation like any other, with politicians determined to introduce policies rejected by the vast majority of the population, and all the imperfect compromises that will entail.

But those same Iraqi power brokers have more interest still in similar reforms that nevertheless respect Iraqi sovereignty and give Iraqi investors a local advantage. According to Alexander, Iraqi intellectuals and political players alike are well-informed that IMF involvement has meant disaster in countries such as Argentina, Philippines and former Soviet bloc states, and “are not going to just lie back and let this happen.

In Alexander’s view, if Iraq’s national industries are to be privatized, “it should happen at a pace and in a way that Iraqis judge to be appropriate, rather than a very quick fire sale.

Some critics believe that nearly the entire foreign debt that creditors claim Iraq owes them is illegitimate, or “odious” in the language of international finance, because the money was obtained by the previous regime of Saddam Hussein and used against the interests of the Iraqi public. As Alexander points out, the bulk of Iraq’s debt was accrued by Hussein in order to finance his most brutal and selfish endeavors. “They are not legitimate state debts, but rather the personal debts of the despotic regime,” he wrote earlier this year.

Abbas Alnasrawi, a professor of economics at the University of Vermont and another debt critic, notes that countries like the United States and Western European nations provided loans to the former dictator with full knowledge that he would use the funds to buy weapons for use in illegal wars, or that he would simply enrich himself while the Iraqi people suffered. “After all, most of the proceeds of the loans were spent in the economies of lending countries to purchase war materiel,” Alnasrawi wrote in a recent analysis.

But while odious debt rules have been understood in international finance since the fall of Czarist Russia, creditor nations still bear primary discretion on such matters, according to Zaid Al-Ali, an international law arbitrator and editor of the website IraqiEconomy.org.

Even Friday’s cancellation of 100 percent of Saddam Hussein’s debt owed to the United States does not amount to an admission that the debt was technically odious or otherwise null and void. Each and every creditor nation with a claim to any portion of Saddam Hussein’s estimated $120 billion in external debt can decide how much, if any, to forgive. What remains unforgiven can be held against post-Saddam Iraq and likely used as leverage by countries hoping to gain more direct and specific investment and marketing advantages than the IMF may offer them.

Two of Saddam Hussein’s biggest creditors, Kuwait and Saudi Arabia, have not followed the example of the Paris Club and are holding out until next year before negotiating relief of debt they say Iraq owes them. However, Kuwait is not expected to forgive reparations the UN ruled Iraq must pay the oil-rich monarchy as a result of Hussein’s thwarted attempt to annex that country. Some Kuwaiti politicians have, however, alluded to an interest in exchanging some of the contested monies for the expanded interest of Kuwaiti firms in Iraqi reconstruction and investment opportunities.

Conspicuously absent from international talks so far has been any discussion of reparations some people believe the United Nations member states — most prominently the US — should pay to the people of Iraq for imposing more than twelve years of extremely harsh sanctions that the UN itself found had caused the deaths of several hundred thousand Iraqis.




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COMMITTEE FOR THE ABOLITION OF ILLEGITIMATE DEBT

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