LONDON, 31 March 2003 — If truth is the first casualty of war, then reconstruction ought to be the first opportunity after war. But for the Iraqi people the benefits of reconstruction may prove elusive for at least two decades, if not more. The realities are painful. Since the first Gulf War which saw Saddam Hussein’s troops ejected from Kuwait, the Iraqi economy has been ravaged by the Saddam regime and has been under a permanent state of siege, exacerbated by UN sanctions. Iraq’s non-compliance with UN resolutions prompted the tightening of the sanctions noose. Child mortality rose from 65 deaths per thousand live births in 1984 to 130 in 1999. Over a million children have perished because of lack of adequate medical facilities, equipment, and drugs.
Before its invasion of Kuwait, Iraq probably had the best equipped and manned medical service in the Arab world. The UN instituted an “Oil for Food & Medicine Program” in 1996. Oil revenues were meant to pay for services, but both the Saddam regime and the bureaucracy of the UN Program wasted millions of dollars of these revenues. At the 2002 annual meetings of the World Bank and International Monetary Fund (IMF), held in Washington D.C. last September, Issam Rashid Hwaish, governor of the Central Bank of Iraq, outlined the devastation caused by UN sanctions to his country. Governor Hwaish seems to have raised some valid points which the UN should shed some light on.
The program, admonished Governor Hwaish, has been turned into “a program for oil for United Nations expenses and compensation (presumably for Kuwaiti claims against damage caused by the invasion), instead of meeting the needs of the Iraqi people with their own funds.” Hwaish alleged that large sums from suspended contracts and other unused funds remain unavailable because of the policy adopted by the United States. “From the time this program began to end September 2002, Iraq has exported oil valued at about $57.3 billion, of which the United Nations has received $24.6 billion. The value of the food and humanitarian goods that Iraq received as of Aug. 31, 2002 was $20.7 billion, or an average of $3.5 billion per year. The average annual per capita share amounts to $144, or $12 per month for each Iraqi citizen. Contracts that have been suspended or canceled for insignificant or illogical reasons or without specifying the reasons amounted to $4.4 billion as of Aug. 31, 2002.”
The figures may have some validity, but in a closed and authoritarian society such as Iraq under Saddam Hussein, there is no transparency and accountability how even these revenues from the Oil for Food & Medicines Program was used by the regime. The tragedy for the Iraqi people is that with a decayed financial system and billions of dollars of Iraqi assets frozen in especially the Western countries, Iraq ran up a massive debt which today totals some $382.3 billion, of which $199 billion or 52 percent is owed as compensation due to the last Gulf War; pending contracts for the current Gulf War amount to $57.2 billion; and an estimated $127.7 billion is owed as ordinary sovereign debt.
According to the World Bank, Kuwait, Russia and the Gulf States are the main creditors of this sovereign known debt. But the alarming thing is that 43 percent of the $127.7 billion estimate is interest payments.
Iraq’s economy is also highly dysfunctional, dominated completely by the regime and its Baathist aparatus. Inflation is estimated at just under 100 percent; GDP growth for 2002 is estimated at -7 percent; the value of the Saddam dinar has depreciated sharply to a current black market level of about 2,700 dinars to $1 (in 1983 one Iraqi dinar was worth just over $3). Iraq became fragmented after the last war, with the north of the country controlled by Kurdish warlords, complete with their own political, economic, security and even currency (the so-called Swiss dinar).
With all this indebtedness, infrastructure, educational, medical, and housing needs, Iraq’s vast oil wealth will not be able to flow fast enough to meet such a heavy burden. In 1989 Iraq used to pump some 2.8 million barrels per day of crude oil. This fell to just under 2 million barrels per day in 2002, well above the all-time low of 0.3 million barrels per day just after the end of the first Gulf War. Oil remains Iraq’s major export earner by far.
Whatever plans the United States Agency for International Development (USAID) has for Iraqi reconstruction, Iraq’s indebtedness and potential litigation by Russian and French companies, may act as an economic disincentive for companies to get overly exposed to Iraqi risk. Unless of course the US, UK and other countries in poll position for the contracts are prepared to guarantee the obligations.
Russia’s Deputy Premier Viktor Khristenko has already warned that Moscow will defend its rights in Iraq. Russian oil companies such as Tafneft and Lukoil have invested over $1 billion in the Iraqi oil industry since 1996.
The war it seems will be a protracted conflict. But the US and its Allies remain adamant that they (together with the hapless Iraqi people) will turn out to be decisive victors. Assuming this is the post-war scenario, a reconstruction plan should encompass the following key ten factors.
• The setting up of a transitional coalition of national unity — bringing together the Iraqi Sunnis, Shias, Kurds, monarchists, secularists and so on. It will function under a US/UN governor and technical administration. The task of the coalition is to agree on a new political dispensation and constitution for a democratic federal Iraq, and eventually to take over the duties and responsibilities of the US/UN administration. A key requirement here must be transparency and accountability of how the funds in the name of the Iraqi people are being raised, allocated, and used.
• The return of the Iraqi diaspora, especially those professionals with vital skills in administration, finance, economics, medicine, education, and other fields. There should be incentives for Iraqis to return to their homeland to help in the rebuilding of the country.
• The US, because of its role in ousting the regime, must shoulder part of the reconstruction. It is also funding the initial reconstruction contracts, even though the bidding process is steeped in conflicts of interest and other non-transparent issues.
• Involvement of the Arab League, OIC countries and the Islamic Development Bank (IDB). This could politically mitigate the pre-eminence of the US and UK in Iraq’s postwar reconstruction. Gulf private liquidity and the IDB should be principal participants in Iraqi reconstruction.
• Forgiving debt and interest payments — if Kuwait and the Gulf states and other creditors are genuinely concerned about the plight of the Iraqi people, they should at least write off the interest payments on the debts owed to them by Iraq. The principal should also be restructured to take into account the serious indebtedness of Iraq and the dire needs of the Iraqi people.
• Iraq is going to need massive injections of FDI flows both from the West and from the Muslim countries, in particular the Gulf states. The World Bank (Iraq is a founder member of the World Bank and the IMF); the IDB; the various Arab funds; will feature strongly — bilateral aid arrangements will be needed until the Iraqi economy and financial system is rehabilitated, restructured, and re-launched.
• Every effort must be made to trace the estimated $12 billion to $15 billion stashed away by Saddam Hussein and his family members in overseas bank accounts and investments. However the costs of tracing them must be controlled so that lawyers and investigators do not excessively benefit from what rightfully belongs to the Iraqi people.
• Iraq should be a de-militarized zone. The country would need the most basic defense requirements. But any attempt to re-arm beyond this basic requirement must be strongly discouraged.
• Institutions like the civil service; the judiciary, hospitals, schools, counseling services must be rehabilitated given the traumas suffered by the people over the last decade.
• The role of the private sector needs to be institutionalized at the onset. It could form the backbone of the economy given all the opportunities that will inevitably rise from a major oil-based economy.