Volume 1 - Iraq Watch

Industrial Diversification and ManufacturingIndustrial development, diversification and manufacturinghave gone through numerous phases in Iraq.In the mid-1970s a strong emphasis was placed onimport substitution and the government establishedfood-processing industries in smaller towns throughoutthe country. However, the main focus of developmentwas on the petroleum sector, and refining,natural gas processing and some part of supplies forthe industry developed in Basra and Kirkuk. Thecement and building supplies industry also expandedrapidly. By the late 1970s the emphasis in developmentplanning shifted toward heavy industry anddiversification away from oil. Iron and steel productionwas set up with French assistance at Khoral-Zubair and the defense industrial sector received ahigh priority. However, objectives were ill defined andthe economy’s concentration on oil was never challenged.Inevitably, as with all other segments of theeconomy, manufacturing and industrial diversificationwas scaled down when the Iran-Iraq war began andnever recovered.Foreign DebtIraq’s indebtedness has been the result primarily ofthe war with Iran. Iraq traditionally had been free offoreign debt and had accumulated foreign reservesthat reached $35 billion by 1980. These reserves wereexhausted in the early stages of the war with Iran. It isestimated that from 1980 to 1989 Iraq’s arms purchasesalone totaled $54.7 billion. Following the war,Iraq was faced with the dilemma of paying off shorttermdebts to western creditors estimated between$35 to 45 billion at high interest rates. However,the Regime resisted western attempts through theInternational Monetary Fund (IMF) and World Bankto reschedule the debt primarily because Baghdadbelieved it could negotiate more favorable terms dealingwith countries bilaterally.Iraq’s foreign debt was comprised of western creditprovided for military assistance, development financeand export guarantees. This assistance has beenestimated at $35 billion in principal. The formerSoviet Union and Russia also provided loans to Iraqvia the Paris Club during the 1980s and 1990s for thedevelopment and production of military programs(Figure 10). Gulf States such as Saudi Arabia, Kuwaitand the United Arab Emirates provided an additional$30 to 40 billion in financing to fight Iran (Figure11). Although the Gulf States considered the financialsupport provided to Iraq to be a loan, Iraq believedthat the Gulf States were required to provide help toIraq in its fight to prevent the spread of radical Iranianfundamentalism.In addition to the money borrowed by Iraq during the1980s, Iraq has had compensation claims made forreparations of damage inflicted during the invasionand occupation of Kuwait during 1990 and 1991.The United Nations Compensation Commission(UNCC) was responsible for processing and collectingsuch claims as authorized by UNSCR 692. TheOFF program provided that 30 percent of Iraq’s oilsales would be used to settle compensation claimsauthorized by the UNCC. This figure was reduced to25 percent in December 2000 and was set at 5 percentwhen oil exports resumed after OIF. As of 7 May2004, claims totaling $266 billion have been adjudicatedand claims worth $48 billion have been awardedby the UNCC. Additional claims worth $83 billionneed to be resolved.Another source of potential financial obligationsaccrued by Iraq since 1990 were contracts signed withcountries such as Russia, UAE, Egypt, China, France,and the Netherlands mainly in the energy and telecommunicationssectors. Because of UN Sanctionsduring the period, the contracts were not executed. Itis uncertain if these contracts will be honored in thefuture.Iraq’s total foreign debt compared to GDP from1989 until 2003 was not sustainable (Figure 12).Iraq was borrowing much faster than it was producingfor over a decade (see Figure 13).210