Making Iraq Creditworthy

Below is a Letter to the Editor printed in the Financial Times (London) on June 15, 2004. The full headline, “Laudable but unsound approach to making Iraq creditworthy” was shortened for use on this site.

From Mr Lex Rieffel.

Sir, I appreciate the prominence you give to the disadvantages of treating Iraq’s obligations as “odious debt”. But I must take exception to a couple of other points in your June 10 editorial “Give me liberty and give me debt”. Although you are correct in pointing out the connection between debt sustainability and oil prices, linking the amount of debt reduction for Iraq to oil revenues or gross domestic product is not a sound approach at this stage due to great uncertainties over the authorities and the capabilities of the “sovereign” government that will take over on July 1.

There is another way to avoid the evils of serial write-downs a` la Highly Indebted Poor Countries Initiative or granting disproportionate relief. The Evian Approach adopted by the Paris Club last year opens the door to a two-stage process. Before the end of this year, the Paris Club could reschedule all of Iraq’s overdue and coming due payments until the beginning of 2007, with a very small amount of interest charged in the interim. At the end of 2006, when all concerned should have a better sense of Iraq’s ability to service external debt, a definitive reduction of the outstanding amounts could be negotiated.

Yes, the Paris Club has adopted some “mechanistic formulae”, mostly linked to G8 Summit agreements on debt relief for HIPCs, but the Paris Club has more flexibility for dealing with middle-income countries like Iraq than you give it credit for. And, yes, the creditors must show “swiftness, fairness and flexibility”, but these laudable goals are not as easy to achieve at the same time as you imply. The critical point is that no amount of debt relief will guarantee satisfactory economic growth. Only sensible policies, deftly implemented and supported by the Iraqi public, can make the country creditworthy.