June 2, 2003
Introduction
The 1980s began with Iraq recognized as being one of the most promising countries in the Middle East and in the developing world. It was a donor country as well as a significant international creditor. The central bank held approximately $36 billion in foreign assets (Jiyad, 2001, p.15). Per capita income was around $4000 and, with a growing middle class and the start of a modern industrial sector, the country was poised for take-off to high-sustained growth. A plausible scenario at the time would have anticipated the country having a Gross Domestic Product (GDP) of close to $400 billion, with a per capita income of $15,000, self sufficient in food, and an exporter of a wide variety of industrial products.
Instead, Iraq sealed its demise in 1980 with its invasion of Iran. Two wars and a decade of sanctions later, GDP is not $400 billion but $30 billion—per capita income is $2000 at best. Industry has ceased to exist and unemployment is optimistically estimated to be around 50%. The agricultural sector is in complete disarray, leaving more than 60% of the population dependent on handouts from the United Nations' Oil-for-Food program. Approximately 40% of the nation's children are suffering from malnutrition. Even before the 2003 conflict, clean drinking water was increasingly scarce, with electricity generation having difficulty meeting the reduced needs of an impoverished nation. There is no banking system and, for the time being, there is not even a national currency. Perhaps even worse, the country's citizens are burdened with massive foreign obligations accrued largely by Saddam Hussein. These include foreign debts, war reparations, and outstanding contractual arrangements.
This Strategic Insight examines Iraq's fiscal challenges and possible financial strategies over the next decade or so. What options are available under UN Resolution 1483 of May 23, 2003, as well as the resolutions coming out of the May 2003 G-8 Finance Ministers' meetings? Which strategies seem best from the perspective of Iraq's reconstruction? Under reasonable assumptions, will there be enough money to reconstruct the economy and revitalize the oil industry?
The Debt Trap