Iraqi Sovereign Debt
The seven-year US occupation of Iraq is officially over. The invasion of Iraq kicked off a new era in both Iraq and the Middle East. The official end of the invasion may have a similar effect. However, it is still too early to think about post-US withdrawal in Iraq because the US military will continue to remain in the country. Although Iraq held elections six months ago, its politicians still haven’t agreed on a government and a prime minister, while its parliament is not meeting. As a result, Iraqi citizens are not getting the public services they have a right to expect. The absence of a government also means that the alleged leaders of the country are prepared to ignore the choices voters made at the polls in March, showing them supreme contempt.
American petroleum companies presumed to have had the inside track to oil concessions, but the situation appears to be completely different with the American petroleum companies having been largely outmaneuvered by a spate of foreign firms including BP, China National Petroleum, Total of France, and Russia’s Lukoil.
During its initial assessment in 2004, the IMF optimistically forecast oil production in Iraq to double in five years while the country’s ministry of oil was expecting to at least treble its production levels. Those years have passed all too quickly. According to the ministry, crude production in Iraq this year has averaged 2.4 million barrels per day (bpd), no different from the levels reported in February 2003. The grim reality is oil production in Iraq has not increased in more than a decade. Then again, neither has electricity production. The ministry now plans to increase production to 6 million bpd in the next four years and double once more in a decade. Though hardly a realistic plan, this would make Iraq a leading producer in the Gulf. The output expansion deadlines do not allow enough time to build the pipelines, ports and other facilities needed to transport enormous amounts of oil.
In 2010, Iraq signed bilateral debt restructuring agreements with each of the 18 members of the Paris Club. These agreements settle more than $51.1 billion of debts from the Saddam era outstanding to Paris Club countries.
There was a study in 2003 conducted by the International Monetary Fund on the debts owed by Iraq to non-Paris Club countries. The study found that there were debts owed to 55 countries. In 2005, Iraq contacted these countries and settled $19.5 billion in debt with all but thirteen. Currently, the Iraqi government is actively working to resolve its outstanding debts with these countries. The United Arab Emirates has canceled of 100%of the debt owed to it by Iraq and Morocco is likely to do the same. China has also agreed to cancel 80% of debts owed by Iraq and have entered into a trade agreement in 2009 valued at $3.8 billion.
Iraq has made great strides to resolve outstanding debts owed to non-governmental creditors. Companies, which had claims from the Saddam era, have been contacted and 13,000 individual claims have been resolved valued over $20.9 billion. These claims have been agreed upon to be settled by either a cash payment representing 10.25% of the outstanding claim or in the form of bonds with a face value of 20% of the old debt, with interest payable twice annually for 17 years. There is however $629 million in debts owed that is held by commercial creditors which have been left unresolved. There are believed to be many other claimants who have not registered their claims. Iraq has set up a system for claimants to register their claims with Ernst & Young, the representatives of Iraqi debts, for verification. The Iraqi Government has assured its commitment to settle all debts and claims inherited from the former regime, and to continue to deal with them until all have been cleared.
The struggle to secure a stable government and secure the local economy is essential to keep Iraq from becoming a socioeconomic vacuum in the Middle East. Although violence in the country is lessening there remains the trouble with insurgents attacking the petroleum infrastructure. These attacks are causing the most important industry in Iraq to be underproductive. This with the aggressive debt reconciliation programs is the tightrope the Iraqi government is walking. Should the petroleum industry produce at a less than satisfactory level, the question of where the funds needed to repay the outstanding debt will come from or will Iraq be forced into default.
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