The cost of rebuilding Iraq

What has to be done?

The task is “dauntingly huge”. Iraq has a command economy with a failed agricultural sector and has seen no real investment since 1982. Add to this a complete lack of an effective banking system and five million people without access to water and food (pre-war 2). The nations main source of drinking water, the River Tigris receives half a million tonnes of raw sewage everyday due to 50% of the countries sewage plants either functioning poorly or simply not existing where they once did.

The electricity system is decaying, largely because sanctions have prevented the acquisition of materials needed to make repairs as these parts could have been used in weapons of mass destruction. Current estimates suggest that without any damage from the war, it would cost $20 billion to repair the electricity systems to 1990 standards.

Add to this the roads, transport and governance structures and the countries involved in the rebuilding have a very large to do list.

How poor are the Iraqis?

Very poor - Iraq is a potentially prosperous country with a long history of learning and literacy. In the North, free from Ba’ath control, the predominantly Kurdish population have a prospering economy of food production and textile factories.

Further south, a combination of sanctions, corrupt officials and serious under investment has seen the average earnings of Iraqis fall from $4000 per year in 1980 to $150 today. Some 60% of the population are completely dependant on handouts from the government. Meanwhile, the country is seriously indebted to the rest of the world.

How much debt does Iraq have?

Estimates range from $62bn to $130bn – mostly owed to other Middle Eastern States. This represents between 2 and four times the size of the economy, the highest debt to GDP ratio in the world. On top of this it owes over $320bn in reparations to the Kuwaitis and a further $57.2bn for contracts signed with (largely Russian) companies. Iraqis are calling for debt forgiveness of all “Saddam era” debts, but this would anger the Russians as well as many poorer debtor nations.

Won’t oil help dissolve the debts?

Before the war, 70% of Iraqi oil revenues went on food and medicines. Even with that level of spending, UNICEF reports an alarming 30% chronic malnutrition rate amongst children under five. For a considerable time after the war the bills will be higher and oil revenues will be almost entirely spent in this way.

Many have suggested upping Iraq’s oil production. While this could provide an extra 6 million barrels a day, the surge of oil onto the OPEC controlled market would probably lead to a crash in oil prices, reducing the amount of money that Iraq would receive. It would also require billions of dollars of investment to get the oil fields to these new production levels.

What other sources of finance can Iraq look to?

Hussein and his supporters are thought to have between $6bn and $30bn hidden in a web of bank accounts across the world. However the past ten years have seen reduced tracking of these accounts and so recouping any money contained within them would be extremely difficult.

What about foreign aid funds?

Yugoslavia and Afghanistan received hefty funding from Japan and Europe, but in today’s global climate this level of funding is in short supply. The UN estimates its agencies will need $123bn to meet “immediate humanitarian needs”, with billions more needed in years to come, but so far it has only received pledges for $37bn. The UN is also concerned that heavy spending in Iraq could compromise its ability to deliver aid to African countries, where AIDs and war have led to mass starvations.

So who will pay?

Russia, France and Germany argue that the coalition forces should be responsible for providing humanitarian goods to sustain the population. One certainty is that without a massive international rescue package there is only one source of finance – the United States. Economists suggest that it may have to provide a minimum of $100bn, probably using Treasury Bonds as collateral. With inflation accounted for, this is almost as much as spent by the US under the Marshall Plan to rebuild Europe after WW2. So far the US has said that it is “considering” putting aside $2.5bn for aid and rebuilding.

Where the rest of the money will come from remains the subject of political debate and guessing.

Originally written 11 April 2003

• The Week - News Digest
• The Daily Telegraph
• The Economist
• Reuters
• The Politics Of Fear