The United States is making debt relief a cornerstone of its postwar reconstruction plan. But many hurdles remain, including the lack of an Iraqi government and a cool reception from some creditor nations.
No one is sure how much debt has stacked up, though estimates range to $200 billion, making Iraq one of the world's most indebted developing countries.
"It's vitally important to address this issue to give the economy some breathing space to recover," said Bart Fisher, a trade specialist and secretary of the U.S.-Iraq Business Council, which is presenting a rebuilding plan to American officials this month.
Iraq's reconstruction needs are expected to be enormous, ranging from $20 billion annually for the first several years to $600 billion over a decade. Washington wants wealthy countries to chip in by writing off some of the debt they are owed.
"The debt levels are large relative to the economy, they go back a long time, and they haven't been serviced for a number of years," U.S. Treasury Secretary John Snow said last week before promising to lobby the Group of 7 industrial nations.
Back in the 1970s, Iraq was flush with oil money and Saddam shelled out cash to build sewers, highways, hospitals and airports.
But the prosperity ended with huge debts from the 1980-1988 war with Iran, and Iraq's invasion of Kuwait in 1990 and the resulting 1991 Gulf War. Consequent economic sanctions and falling oil revenue, due to aging and neglected petroleum facilities, have made it even more difficult for Iraq to pay off what it owes.
Iraq came a step closer to clearing its books Thursday, when the so-called Paris Club of creditor nations agreed to start talks on how to handle the money members are owed.
Baghdad owes the club's 19 members, including the United States, Japan, Germany and Russia, an estimated $26 billion. But that includes only principal, not interest that has gone unpaid on most of the debt since the 1970s.
Club secretary Delphine D'Amarzit said creditor nations will begin taking inventory at its April 23 meeting. To wipe away debts, D'Amarzit insisted, "we'll have to have an Iraqi administration in front of us."
A semblance of government is crucial to seal a debt-relief deal. But with U.S. troops still encountering scattered resistance in Iraq and electricity and food scarce, it could be weeks or months before a civil administration is in place.
In the meantime, Snow said it is important to assess the size of the problem.
Russia alone is owed at least $7 billion in Soviet-era debt. Most debtor countries, however, can't agree on an overall figure.
Although Iraq owes about $26 billion to the Paris Club, its total debt could spiral as high as $200 billion when other foreign debt and reparations from the 1991 Gulf War are rolled in.
Complicating matters is the fact that Russia, Germany and France
nations initially opposed to the U.S.-led war on Iraq — are among Iraq's biggest creditors and have given a cool response to Washington's call for debt relief.
"They realize it's the U.S. burden, and I imagine many of them will stand back and say, 'What's in it for us?"' said Phyllis Bennis, a Middle East expert with the Institute for Policy Studies in Washington.
Relief could include full write-offs, partial write-offs or debt rescheduling. A debt-for-investment swap would grant creditor countries or their companies special investment rights in the new Iraq, if they wipe the slate clean.
To get a handle on the size of the reconstruction costs — and how much other countries might be willing to write off — the International Monetary Fund and the World Bank decided earlier this week to go to Iraq to assess the situation.
The last time an IMF team visited Iraq was in 1983.