VOL. XLVI

No 10

10-March-2003

IRAQ

The Cost Of War And Reconstruction, Iraqi Debt – Who Will Foot The Bill?

As the wrangling between the US and other members of the UN Security Council over the need for a second resolution sanctioning a war against Iraq continues, the debate over how much the war and all the associated operations are going to cost, (and who is going to have to pay for it), is hotting up. Some US House Democrats have recently attacked the Bush administration for its failure to provide cost estimates for the war, with Representative James Moran charging that the public is deliberately being kept in the dark. Senator Robert Byrd noted that the US cannot rely on large financial contributions from several European allies at odds with the US over whether to go to war, and Senator Edward Kennedy has said that the administration must clearly explain where the money to fight would come from. Deputy Defense Secretary Paul Wolfowitz, who appeared before the House Budget Committee, refused to be pinned down, however, saying that uncertainty over the course that the war might take makes meaningful estimation of cost almost impossible. “If we cost every single (scenario), we’d maybe give you a range between $10bn and $100bn and you’d say that’s useless, and you’d be right,” he said.  On the question of financial assistance from other nations, Wolfowitz said that he expects lots of contributions after the war, including from nations that oppose military action.

Nevertheless, MEES soundings indicate that the nature of the current crisis is very different from the previous war against Iraq. In 1991, there was a clear casus belli and the aim of the UN-sanctioned operation was to eject Saddam Husain’s armies from Kuwait and not to topple him from power. On that occasion, the US prevailed upon its allies in the Gulf (Saudi Arabia and the UAE) and elsewhere (Japan and Germany), to pay for the vast majority of the operation (MEES, 3 March and 7 October 2002). This time, with its sights firmly set on regime change in Baghdad, the US is having to factor in not only the military cost, but the cost of humanitarian assistance and post-war reconstruction, in addition to interest costs, and the cost of foreign assistance to obtain cooperation from regional allies. And having failed to convince a large sector of international opinion of the need for a war, President Bush may find that much of the financial burden will rest on the US, particularly the cost of military action, despite Mr Wolfowitz’s claims. Indeed, with President Bush’s administration already facing a record budget deficit of $304bn this fiscal year, there are some who feel that the cost of war with Iraq is being deliberately hidden to prevent their tax cutting plans from being derailed. According to a Washington Post editorial on 3 March, “There is more at stake here than whether lawmakers will allow themselves to be played for the fools that the administration apparently takes them to be. It’s whether the country can afford what the president is proposing.”

MEES also learns that another factor which the US must consider is Iraq’s parlous financial position. While Iraq has been forced to pay compensation for the 1991 Gulf war, the crippled state of its economy means that it is in no position to meet the full costs of its debt obligations and the costs of reconstruction, and it will need extensive external support to get back on its feet. MEES estimates suggest that an optimum scenario for the Iraqi economy (which is overwhelmingly dependent on oil revenues) involves a level of crude production of some 2.5mn b/d at a price of $25/B. This would produce annual revenue of $22.8bn. MEES sounding indicate that annual current expenditure amounts to about $15bn, which would leave only around $7bn a year to cover Iraq’s debts, compensation claims and reconstruction. Precious little, if anything, would be left to help finance the possible cost of a war and peacekeeping and humanitarian operations in the aftermath. Having said this, however, assistance is likely to be more forthcoming following military action, than financial support for the US has been prior to possible military action.

The Cost Of War

The task of estimating the cost of a war against Iraq has been occupying US government departments and policy institutes and think-tanks all over the world. Cost estimates tend towards the upper end of the range indicated by Paul Wolfowitz, and figures recently given by administration and congressional officials put the price-tag at $61-95bn. This is in addition to the proposed defense budget for next year of $379.9bn and would likely be funded by a mid-year spending bill. It also compares with the cost of the 1991 Gulf War which the US Civil War Center puts at $61.1bn ($79.9bn in 2003 dollars). The Congressional Budget Office (CBO) puts the cost of a three-month conflict at $45bn for a heavy ground deployment scenario including 370,000 troops, and $34bn for a heavy air deployment scenario including 250,000 troops (compared to around 540,000 troops in 1991). A report published at the same time by the Democratic staff of the House Budget Committee assessed costs for 1-2 months of fighting deploying 125,000-250,000 personnel at $32.6-59.8bn (MEES, 7 October 2002). The London-based International Institute for Strategic Studies (IISS) has cited the CBO figures for cost of the conflict, noting that troop deployment is likely to be smaller than in 1991, and targets are more contained due to the existence of the no-fly zones. Michael O’Hanlon, a defense expert at the Brookings Institute, however, supports an estimate at the upper end of the range, saying $50-100bn was “the right plausible range – just for the US and just for the war itself.”

Post War Operations And Reconstruction

Cost estimates rise steeply when the operations which would follow a regime change in Iraq are factored in. According to William Nordhaus, Sterling Professor of Economics at Yale University, the cost of occupying Iraq would be $75-500bn (MEES, 16 December 2002). Nordhaus says that it is “difficult to see how a successful occupation of Iraq could be less than five years and it might easily extend for two decades.” His estimates, he says, are consistent with peacekeeping operations in the Balkans and the size and scope of the task in Iraq. In the best scenario, Nordhaus puts a price tag of $121bn on the campaign, and in the worst case he says it could reach $1.6 trillion. His estimate for reconstruction costs is $25-100bn. A similar study conducted recently by two Australian academics, Warwick McKibbin and Andrew Stoeckel, forecast that a ‘best case’ scenario of a war lasting a few weeks with just 1-2 years of reconstruction would cost the US $491bn over the next seven years, with global costs of $1.04 trillion, mainly due to higher fiscal deficits. A long war with five years of rebuilding, they say, would triple the global cost to $3.57 trillion. Both the CBO and the IISS put a figure of $12-48bn a year on the cost of a peacekeeping force of 50,000-200,000 troops occupying Iraq following a regime change.

Iraq’s Financial Burden

Iraq’s financial burden consists of debt amounting to $127bn, pending contracts worth some $57.2bn, and Gulf War compensation of $27.1bn (the difference between compensation awarded and compensation paid out), and whatever is awarded by the United Nations Compensation Commission (UNCC) for the remaining claims totaling $197.4bn. Iraq’s liabilities therefore stand at a total of $211.3bn. Assuming a similar proportion of roughly 30% of remaining claims to the UNCC are approved, resulting in an additional bill of around $60bn, Iraq’s financial burden would reach $271.3bn.

Foreign Debt

According to a report published in January 2003 by the US Center for Strategic and International Studies (CSIS)[1], estimates of Iraq’s debt vary widely from $62-130bn[2]. The disparity in estimates is due in part, says the CSIS, to a disagreement between Iraq and its neighbors over the nature of approximately $30bn in assistance given to Iraq by several Gulf states during the Iran-Iraq war. While Iraq considers these to have been grants, the creditors view them as loans which must be paid back. Including accrued interest which is estimated at some $47bn also boosts the figure for Iraq’s debts considerably. According to the CSIS, the US Department of Energy’s 2001 estimate for Iraq’s debt was $62.2bn, while the World Bank/Bank for International Settlements puts the figure at $127.7bn, including $47bn for accrued interest. CSIS puts Iraqi debt to Kuwait at $17bn, the Gulf states at $30bn, and Russia at $12bn. Iraq’s debt is primarily short-term from private commercial banks and companies and as a result matures more quickly and at higher rates of interest. Judged against World Bank standards for the maximum sustainable debt-service-to-export threshold for Heavily Indebted Poor Countries (HIPC) of 15-20%, Iraq’s ratio is poor, even assuming a discounted figure for Iraqi debt and a highly favorable repayment schedule.

Pending Contracts

Russia accounts for 90% of pending contracts with Iraq, or a total of some $52bn, according to the CSIS. The remaining 10% is accounted for by the Netherlands, UAE, Egypt, China and France.

Gulf War Compensation

Compensation claims arising from the Iraqi invasion of Kuwait and the ensuing Gulf War of 1991 are dealt with by the UNCC, a quasi-judicial process established in 1991 following UN Security Council Resolution 692. Total claims made to the UNCC amount to almost $350bn, with unresolved claims of $197.4bn, and resolved claims of $150.2bn of which compensation of $43.8bn has been awarded and $16.7bn has been paid out. Compensation awards are currently funded by a 25% cut from Iraqi oil revenues. Of the remaining unsettled claims the largest portion (40%) is put forward by Kuwait, with other sizeable claims from Jordan (8%), Saudi Arabia (7%), UK (4%) and India (4%).

Gulf War Compensation Claims: Unresolved And Resolved Claims, Awards, And Payouts

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Source: United Nations Compensation Commission (UNCC).

Debt To Kuwait Should Be Invested In Iraq’s Reconstruction, Says Study

A study currently being prepared in Kuwait suggests that the Iraqi debt to Kuwait (which Kuwait puts at $27bn) should be invested in the reconstruction of Iraq following a possible regime change in Baghdad, financial sources have told Kuwaiti daily al-Qabas. The study assumes that compensation from a new regime in Iraq would be delayed because of the burden on the country’s finances. Under the proposals put forward, the Kuwait Investment Authority (KIA) would hold a portfolio of the money awarded to Kuwait by the UNCC and invest it in rebuilding Iraq’s infrastructure and agriculture and oil sectors. Kuwait would then be able to liquidate its assets at a later date by selling its assets to the private sector. The proposal would be put forward in a letter to the UN in the event of regime change in Iraq and would require approval from both the UN and the new Iraqi Government.