Order Code RS21765
March 9, 2004
CRS Report for Congress
Received through the CRS Web
Iraq: Paris Club Debt Relief
Martin A. Weiss
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
Iraq owes the United States and other creditors $120 billion in debts. Of this
amount, $40 billion is owed to the Paris Club group of creditors. The U.S. share of this
amount is around $4 billion. Non-Paris Club countries, mostly Persian Gulf countries,
are owed around $60 - $65 billion. The remaining debts are to private commercial
creditors. Iraqi debt relief is a high priority for both the President and Congress (H.R.
2482). This report will discuss efforts to implement Iraqi debt relief and highlight some
policy concerns. This report will be updated as events warrant.
Iraqi debt relief is a high priority for both the Bush Administration and Congress.
President Bush appointed James A. Baker III as his personal envoy on the issue of Iraqi
debt in December 2003. Since then, Secretary Baker has met with numerous international
leaders to discuss and secure commitment on Iraqi debt relief from other Paris Club
member countries. In addition to Secretary Baker’s negotiations, The Iraqi Freedom
From Debt Act (H.R. 2482) has been introduced in the House of Representatives. This
bill calls on Iraq’s creditors to cancel or significantly reduce their Iraq debts. Any U.S.
debt relief must be authorized and appropriated by Congress, as required by The Federal
Credit Reform Act of 1990 (P.L. 101-508, Title V).
In October 2003, after the release of a major World Bank and United Nations
economic needs assessment report for Iraq1, World Bank President James Wolfensohn
said that Iraq’s debts needed to be reduced by 33%, from roughly $120 billion to $80
billion in order to fund reconstruction needs and long-term economic development.2
Iraq’s current oil revenues and international donor assistance are limited. Morever, it
would be difficult for a future sovereign Iraqi government to secure new lending, either
from the private or public sector, until the existing debt claims are resolved.
1 The Iraq Needs Assessment report is available at [http://www.worldbank.org/mna]
2 Crutsinger, Martin, “World Bank Calls on Rich Countries to Forgive Two-thirds of Iraq’s Debt”
Associated Press, October 29, 2003.
Congressional Research Service ˜ The Library of Congress

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At the September 2003 G-7 finance ministers meeting in Dubai, member countries
called on the Paris Club3 “to make its best effort to complete the restructuring of Iraq's
debt before the end of 2004."4 According to the U.S. Department of the Treasury, Iraq
owes Paris Club members approximately $40 billion. Of this amount, $21 billion is
principal and $19 million is interest. The International Monetary Fund (IMF) estimates
Iraqi debt held by non-Paris club governments - primarily in the Persian Gulf - at $60 to
$65 billion, and debt to commercial creditors at roughly $15 billion.5
According to most estimates, the United States is owed $4 billion ($2.2 billion in
principal and $1.8 billion in interest). This debt is from commercial credits guaranteed
by the U.S. government. Between 1983 and 1990, the Commodity Credit Corporation
(CCC) – an agency of the U.S. Department of Agriculture (USDA) – guaranteed about
$5 billion in commercial credits for the sale of U.S. agricultural products to Iraq.
In 1990, the United Nations (U.N.) imposed economic sanctions on Iraq after its
invasion of Kuwait. The Iraqi government subsequently defaulted on its U.S. and other
international debts. After the end of major combat operations in May 2003, the U.N.,
among other things, lifted sanctions and sheltered Iraq from a potential rush of debt
claims. U.N. Security Council Resolution 1483 prohibits any country from initiating debt
claims against the proceeds of Iraq’s petroleum or gas industries until January 1, 2008.6
Until this time, the resolution requires any proceeds from these industries be deposited
in the Development Fund for Iraq, held by the Central Bank of Iraq. Furthermore, the
Resolution requires countries to freeze any funds or other financial assets and
immediately transfer them to the Development Fund for Iraq, unless they are themselves
the subject of legal dispute. Nonetheless, the IMF anticipates some debt servicing before
the end of 2004.7
Prior to any actual Paris Club debt relief, an IMF program must be put in place for
Iraq. The IMF published a macroeconomic assessment for Iraq in October 2003, and is
conducting debt analysis that will form the basis for any future IMF lending to Iraq.
Special Envoy’s Efforts So Far
After Secretary Baker was chosen by President Bush to head the Iraq debt relief
effort, he traveled to Europe, Asia, and the Middle East for discussions with foreign
government officials. His efforts have elicited public statements from various countries
expressing their willingness to support debt relief. Japan reportedly has stated that it is
3 The Paris Club is an informal group of the eighteen countries, who as the major international
creditors, on occasion collectively reduce or reschedule official debts owed to them by poor and
developing countries. For more information, see: CRS Report RS21482, The Paris Club.
4 Statement of G-7 Finance Ministers and Central Bank Governors, September 20, 2003.
5 Interview with Lorenzo Perez, head of Iraq mission team, IMF Survey, Number 2, Volume 33,
February 2, 2004.
6 The text of United Nations Security Council Resolution 1483 is available at
[http://www.un/org/docs/sc]
7 Interview with Lorenzo Perez, head of Iraq mission team, IMF Survey, Number 2, Volume 33,
February 2, 2004.

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willing to forgive “the vast majority” of the $7.75 million it is owed by Iraq, if other Paris
Club countries follow suit.8 Russia, which holds around $8 billion in Iraq debt,
announced its willingness to forgive more than $4 billion in debt if its companies are
eligible to restart oil-contracts signed with the Hussein regime.9 Germany and France are
owed around $4.4 billion and $5.5 billion, respectively. In a joint statement issued in
December 2003, Germany, France, and the United States announced that they agree in
principal to debt forgiveness, but deferred disclosing any estimates of debt relief until
further debt analysis is conducted. Canada and Italy have also expressed their willingness
to take part in a Paris Club debt relief program.
Among Paris Club members, there exists an important rule known as comparability
of treatment between different creditors. This means that a debtor country cannot grant
to one creditor a deal better than the consensus reached for the entire group of Paris Club
countries. At such time that a Paris Club agreement is reached, many members would
like to see the comparability of treatment extended to Iraq’s non-Paris Club creditors.
Since approximately two-thirds of Iraq’s debt is held by non-Paris Club countries,
for maximum effectiveness of debt relief to be effective in facilitating economic
development, significant participation by these other debt-holders is important. During
January 2004 meetings with representatives from Saudi Arabia, Kuwait, the United Arab
Emirates (UAE) and Qatar - four Persian Gulf countries who combined hold
approximately $50 billion in Iraqi debt - Secretary Baker reportedly received assurances
that the Persian Gulf countries would significantly reduce their Iraq debt holdings once
a sovereign government is established.10
In January 2004, U.S. Treasury Secretary John Snow and Presidential Envoy Baker
briefed the World Bank and the International Monetary Fund on the status of Mr. Baker’s
discussions. According to the World Bank, Mr. Baker gave assurances that Iraq debtor
countries have agreed to write off approximately 66% of Iraq’s debt.11
Paris Club Options for Iraq
Strong Administration support for Iraq debt relief potentially contributed to the Paris
Club’s Fall 2003 announcement that is was creating a new approach - The Evian
Approach - that would offer debt relief for middle-income countries such as Iraq.12 13 The
8 “Japan/Iraq: Tokyo Offers Debt Forgiveness” Oxford Analytica, December 29, 2003.
9 White, Gregory L. “Russia Offers Iraq Debt Relief” The Wall Street Journal Europe, December
23, 2003, A2
10 Baker Secures Promises of Iraq Debt Relief from Gulf Oil States, Agence France Press,
January 21, 2003.
11 Iraq Country Report, Economist Intelligence Unit, March 2004. p. 24.
12 According to the World Bank, middle income countries are those with gross national income
(GNI) per capita greater then $745 and less than $9205. The World Bank estimated in 2003 that
Iraq would be classified as a lower middle income country.
13 The Evian Approach is named after the June 2003 G-7 Summit, held in Evian-les-Bains, France
(continued...)

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Evian approach applies to countries other then the Highly Indebted Poor Countries
(HIPC). The latter are already eligible for significant debt reduction.14
Under traditional Paris Club guidelines, Iraq’s petroleum and gas reserves would
render it ineligible for debt relief. According to the new Evian Approach, a country
seeking debt relief will first undergo an IMF debt analysis. This analysis is to determine
whether the country suffers from a liquidity problem, a sustainability problem, or both.
The Iraqi economy is dependent on it petroleum revenues. Although the U.S. government
projects exports of $16.6 billion in 2004, and $21.2 billion in 2005, the very large amount
of Iraq’s debt, $120 billion, raises concerns.15 Debt servicing draws money away from
reconstruction efforts, and is a disincentive for many to invest in Iraq. Iraq’s annual debt
service without any debt relief would be $7.2 billion a year, or 37% of its estimated 2004
gross domestic product, according to credit rating agency Fitch/IBCA.16
If it is determined that a country suffers from only a liquidity problem, its debts
would be rescheduled until a later date. If the country is also determined to suffer from
debt sustainability problems, where it not only lacks the current resources to meet its debt
obligations, but also the amount of the debt adversely affects its future ability to pay, they
would be eligible for debt reduction. Since Iraq appears to have both debt liquidity and
sustainability concerns, it is now potentially eligible for debt reduction.
Debt relief for Iraq under this approach would be through a multi-year, three-stage
process, beginning with the creation of a sovereign Iraqi government and the
implementation of an IMF program. The first stage of a Paris Club program would be a
so-called “flow treatment.” This is a standard Paris Club agreement that provides debt
rescheduling to help a country through a temporary balance of payments problem. The
standard rescheduling period is one year. However, creditor countries have accepted debt
rescheduling for up to three years.
At such time (between one and three years) when there is a performance record of
Iraqi compliance with IMF loan conditions and on-time payments to Paris Club creditors,
the second stage would begin. This stage includes a second arrangement with the IMF.
For countries with debt sustainability problems that are treated under the Evian Approach,
none of the Paris Club’s standard terms would be used. A full range of treatment options
from additional rescheduling to debt reduction would be considered. In the third stage,
after successful implementation of the subsequent IMF program, the debt treatment would
be completed. Under this staged approach, Iraq would only receive the full benefits of
13 (...continued)
where the approach was first discussed.
14 See: “Debt Reduction - HIPC Initiative” in CRS Report RL31811, Appropriations for FY2004:
Foreign Operations, Export Financing, and Related Programs.
15 Doggett, Tom, “U.S. Sees 73 pct Jump in Iraqi Oil Export Revenue,” Reuters, January 21,
2004.
16 Chance, David, “Iraq Needs Big Debt Write-Off - Fitch Ratings Agency,” Reuters, February
25, 2004.

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debt relief (at stage three) if it makes substantial economic reforms throughout the
treatment process.17
In a February 2004 article, Lex Rieffel of the Brookings Institution summarized the
possible application of the “Evian Approach” to the Iraqi debt situation in five steps: (1)
creation of a sovereign, internationally recognized Iraqi government; (2) agreement by the
new Iraqi government to an IMF financial support program; (3) after agreement is
reached on an IMF program, the majority of Iraq’s Paris Club debt could be rescheduled
to the end of its IMF program (either the end of 2005, 2006, or some time in 2007
depending on the length of the IMF program); (4) after completion of the IMF program,
a Paris Club debt reduction agreement would be reached, if the IMF and the Paris Club
deem Iraq’s performance under the IMF program successful; and (5) an Iraqi debt
reduction plan is implemented over multiple years, with each year’s amount tied to
economic performance targets.18
Policy Concerns for Congress
Congressional Procedure for Debt Relief. The United States is a key
member of the Paris Club, and Congress has an active role in both Paris Club operations
and U.S. policy regarding debt relief overall. Congress must be involved in any official
foreign country debt relief. The Federal Credit Reform Act of 1990 (P.L. 101-508, Title
V) requires that Congress authorize and appropriate an amount equal to the net present
value (NPV) of any international debt forgiven by the United States. During 2004, the
Department of the Treasury will work with other agencies to determine the exact amount
of Iraq’s debt to the United States. The NPV value of this debt may likely be smaller than
the face value of the outstanding debt. The NPV decided on is determined by many
factors including the length of the debt contracts and the borrowers creditworthiness.
The executive branch would request appropriations from Congress for debt
forgiveness for Iraq after the Paris Club countries mutually decide on a total amount of
debt forgiveness. Since actual debt forgiveness would occur after a one to three year IMF
program, an appropriations request would not be made until 2005 or 2006 at the earliest.
During the initial period, when Iraq’s debt would be rescheduled, no congressional
appropriations are required for debt relief.
Since the initial rescheduling could last up to three years, it might be necessary to
revise the NPV estimate of Iraq’s debt. If the Iraqi economy recovers during the next few
years, and its creditworthiness improves, the NPV of Iraq’s debt to the United States may
be higher at the point of appropriation than current estimates suggest.
Comparability of Treatment. In the case of Iraq, where two-thirds of the debt
is held outside the Paris Club, ensuring participation and achieving equal terms from
private creditors and the non-Paris Club countries who hold the bulk of Iraq’s debt are
major challenges. Many Paris Club countries have stated that they do not want to reduce
their Iraq debt and then have Iraq’s non-Paris Club creditors rescind their offers of debt
17 For more on the Evian Approach, see: [http://www.clubdeparis.org]
18 Rieffel, Lex, “Reducing Iraq’s Foreign Debt,” The Miami Herald, February 6, 2004.

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forgiveness. Many Paris Club members have stipulated that their participation in debt
relief would be contingent on some agreement on how non-Paris Club debt is treated.
Policy Consistency Towards Other Countries. Some analysts express
concerns that Iraq is receiving preferential treatment of its debts. Nigeria, Indonesia,
Kenya, and Georgia also recently emerged from decades of authoritarian and autocratic
rule, and are saddled with extensive government debt, yet receive nowhere near the level
of international exposure that has been given to the Iraqi situation.19 According to Salih
Booker, the head of Africa Action, a Washington-based lobbying group, “It's an
outrageous double standard.”20 Mr. Booker argues that the executive branch is taking a
special interest in Iraq solely for political reasons and that sub-Saharan Africa is equally
in need of sustained and coordinated debt relief.
Is the Paris Club the Right Venue for Iraqi Debt Relief? Proponents of a
doctrine of “odious” debt assert that some of Iraq’s debt’s could potentially be classified
as non-legitimate under international law since they were undertaken during the Hussein
regime and that international law should be able to expunge these debts.21 The concept
of "odious" debt does not appear to be well established in international law.22 Some
contend that by treating the debt under Paris Club rules, the international community is
potentially legitimizing the regime and debts accrued during the Saddam regime.
Others express concern that Iraq’s debt should be renegotiated by a new Iraqi
government and/or an international legal panel, and not by the Paris Club. Some experts
have proposed the creation of an international Iraqi debt commission of financial "wise
men" to evaluate existing Iraqi debt and to disallow debt used for state security or military
aggression.23 Such a commission would then chair negotiations to restructure the debt.
Proponents argue that an international approach of this type would lend greater legitimacy
within Iraq for the eventual debt treatment plan, although it could be argued that most
Iraqis do not want to pay off any of the debts accrued by the Hussein regime.
While such a commission could increase the legitimacy of a final debt restructuring
plan, some believe that Iraq is not likely to seek an “odious” debt claim.24 Moreover, the
U.S. government has made clear its intention to restructure its Iraqi debt through the Paris
Club process, and parallel negotiations with non-Paris Club countries in the Middle East
and Asia, and Iraq’s private creditors.
19 Joseph Siegle, “After Iraq, let’s forgive some other debts” International Herald Tribune,
February 19, 2004.
20 Quoted in Raghavan, Sudarson “African Advocates to U.S.: Reduce Our Debt Like Iraq’s” The
Miami Herald, February 20, 2004.
21 Probe International, a Toronto-based organization maintains a web-site with information on the
concept of odious debt, see: [http://www.odiousdebts.org]
22 See discussion in CRS Report RL31944, Iraq’s Economy: Past, Present, Future,pp. 51-53.
23 Mulford, David and Monderer, Michael “Iraq Debt, Like War, Divides the West” The
Financial Times, June 22, 2003.
24 Chance, David, “Iraq Needs Big Writeoff - Fitch Ratings Agency” Reuters, February 26, 2004.

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