Iraq economy digging out of debt

Special correspondent John Zarocostas recently interviewed the governor of the Central Bank of Iraq, Sinan Mohammed Rida Al-Shabibi, in Geneva about Iraq’s troubled finances and the country’s economic outlook. Now 64, he earned a master’s degree in economics at Manchester University in England and a doctorate in economics from Bristol University there. Until 1980, he worked for Iraq’s Planning Ministry, and later, for more than 20 years, with the U.N. Conference on Trade and Development.

Question: What’s the situation in Iraq’s efforts to obtain forgiveness of the huge foreign debt (estimated at $120 billion to $130 billion) inherited from the former government of dictator Saddam Hussein?

Answer: Since the end of November 2004, we have had a Paris Club agreement stipulating that 80 percent of the debt be forgiven — and for this to be effective in three stages.

[Editor’s note: The Paris Club comprises 19 wealthy governments that are permanent members, with large claims on other governments throughout the world, plus other lenders that apply the rules in the Paris Club Agreed Minutes for canceling or restructuring claims on debtor countries.]

The first stage … implemented on Jan. 1, 2005, removed 30 percent of the debt.

The second stage, to cancel another 30 percent, effective upon the signing of the standby agreement with the International Monetary Fund (IMF), came at the end of December 2005. The final 20 percent will be forgiven on the successful application of the program [set by the donors].

We have this program, and we are going to include a lot of reforms in the fiscal and monetary areas — for example, for the central bank maintaining some level of reserves, economic stability in general, and stability of the exchange rate, and all these things.

And, of course, in the fiscal area, what is important is the reduction of subsidies — especially fuel subsidies — and the increase in prices. This was a … [requirement] to have the second agreement, and this happened and is decreasing the deficit in the budget.

The fact that you increase the price of gasoline makes a reduction of subsidies possible. We had [a gasoline-price increase] during the middle of December. They were good conditions in order to have another 30 percent of the debt forgiven, because, you know, the Paris Club is very important. It’s a template to be used for other creditors, and we are working very hard with non-Paris Club creditors, including the Arab creditors. …

We actually had a very important landmark in terms of reduction of the private debt, commercial debt. Already, we applied the Paris Club terms to that, and as part of it, we did debt buyback for the smaller amounts. Another part is debt-for-debt exchange.

We actually had the commercial debt reduced from 100 percent to 20 percent, and the 20 percent will be converted to bonds. Through that, for the first time, Iraq will enter the international market.

First, the Paris Club provided 80 percent debt reduction, and then we applied the Paris Club terms to the non-Paris Club and to private creditors. We negotiated these terms, so the club was very useful for that.

That’s why we were able to negotiate successfully with the other creditors — non-Paris club, socialist and Eastern European countries, and the private creditors.

So now, I would say we are on the right road in restructuring the debt and reducing it. Probably in three years’ time, Iraq will have a debt that is equivalent to gross domestic product (GDP), after its being five to six times the size of GDP.

Q: Have you managed to stabilize the Iraqi dinar?

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