Iraq's estimated gross external debt of $120 billion is clearly unsustainable, according to a new Fitch Ratings report. Even taking into consideration much higher oil export revenues in the medium term, it will be necessary for all creditors to grant significant debt reduction.
External interest payments alone would be equivalent to about 37 percent of Iraq's estimated 2004 gross domestic product (GDP) if the debt were being serviced, says Fitch. "Iraq's debt stock would need to fall by about 90 percent to $14 billion for its interest service burden to compare with the median for sovereigns rated B+ or lower by Fitch," said Senior Director of Sovereigns at Fitch, James McCormack.
Fitch believes creditors will eventually agree to debt forgiveness, based on the favourable reception reportedly received by a US initiative led by James Baker to elicit support for a substantial Iraqi debt write-off, although they are likely to wait until after sovereignty is transferred from the Coalition Provisional Authority (CPA).
Paris Club creditors are owed about $42 billion, and a large debt reduction could be envisaged under the new, more flexible Evian Approach announced in October 2003.
"Evian is meant to deliver medium-term debt sustainability as opposed to short-term debt relief," added McCormack, "so creditors will be assessing the prospects for Iraq's oil export revenues, which affect its debt service capacity." The IMF is scheduled to present a debt sustainability analysis to the Paris Club in April.
Fitch notes that Iraqi public and external finances are even more concentrated on revenues generated by crude exports than other major oil exporting countries in the region.
In its review of Iraq's 2004 budget and 2005-06 fiscal framework, the agency broadly agreed with three-year oil export revenue projections of about $50 billion. Much stronger domestic oil demand is expected to accompany economic recovery, however, underlining the need for major investments in oil facilities to support fiscal and foreign currency earnings in the medium term.
A UN-World Bank joint assessment estimated reconstruction costs in Iraq to be $36 billion from 2004 to 2007. International donors have already pledged funding to nearly match that, but the CPA has suggested a further $19 billion is required for sectors and issues not included in the UN-World Bank report, such as redeveloping the oil sector and enhancing security. In Fitch's view, these needs are of equal importance to those identified by the UN-World Bank, and it will be critical for the authorities to access the necessary financing. — (menareport.com)
© 2004 Mena Report (www.menareport.com)
