Last week, Doha became the first Arab capital to formally announce its intention to write off some of the massive debt burden incurred by Iraq during the past 25 years. While most analysts see the move as having little effect on either the Qatari or Iraqi economy, it is nonetheless being seen as an important first step in encouraging other Arab nations to follow suit.
An official from Qatar's Ministry of Foreign Affairs made the announcement January 20, after discussions between deputy emir Sheikh Tamim bin Hamad al-Thani and US special envoy James Baker.
"Reducing debt in 2004 is a crucial and definitive issue [that] provides the Iraqi people with a chance to build a free and prosperous country," the unnamed official told the state-run Qatar News Agency (QNA).
Although the government did not disclose the amount of debt involved, local newspapers put the total figure for Iraqi government debt to Qatar at around $4bn, including interest. Much of the debt was incurred as a result of Iraq's eight-year war against Iran in the 1980s.
Economists at Qatar National Bank (QNB), a commercial bank that is 50% state-owned and seen as close to the government, confirmed that the principle of Qatar's loans to Iraq amounted to just $1bn, with an additional $3bn piling up mostly during the 13-year period of sanctions following Iraq's 1991 invasion of Kuwait.
The announced write-off will cover most - but not all - of the debt the government claims from Iraq. "The state of Qatar will forgive most of the debts Iraq owes it, and will consider waiving the remaining amount at a later, more appropriate time," the foreign-affairs official told QNA.
In an interview with the OBG the next day, Qatar Central Bank Governor Abdulla Bin Khalid al-Attiya described the move as a "political decision" in which the central bank had no part. He added, however, that fiscal surpluses made it a simple matter for Qatar to help a fellow Arab country in this way.
Private-sector commercial bankers said the decision would have no direct bearing on them, since their banks had never been strongly inclined to lend to Iraq anyway. The former Iraqi regime probably borrowed from private banks in Jordan and Bahrain, which also became "havens for expatriated [Iraqi] money", one banker said.
Doha's forgiveness will be relatively insignificant for Iraq's economy, too, given a total foreign debt burden of roughly $120bn. But the gesture is important, as other Gulf states may soon follow suit. Baker visited the United Arab Emirates on the same day as Qatar, during the Gulf leg of a whirlwind tour aimed at relieving the debt burden that US-occupied Iraq inherited from the previous regime. The UAE said it was prepared to start "urgent negotiations" to cancel most of the $3.8bn Iraqi debt on its balance sheets.
Government-to-government debts from Iraq to all six members of the Gulf Co-operation Council (GCC) add up to an estimated $45bn, according to the Gulf Times, an English-language daily published in Doha. Local bankers suggested even higher figures for debts to the GCC countries, citing extensive war loans from Saudi Arabia to Iraq.
Philip Khoury, head of research at Cairo-based brokerage house EFG-Hermes, drew a distinction between loans of the Paris Club variety, given as economic or social development assistance, and loans extended to support military or defensive needs. War loans, Khoury said, are traditionally given lower priority for repayment. After the war with Iran ended in 1998, the Iraqi government contended that the GCC's war support should be regarded as grants rather than loans. Iraq, arguably, had been protecting the Gulf states against a wave of religious militancy emanating from Iran.
The amount of Iraq's war debts is also contentious because of a 13-year suspension of oil exports, which made repayment of loans utterly impossible. After the invasion of Kuwait, Iraq's legal exports were restricted to barters for food, medicine and some spare parts, in accordance with UN sanctions. The loss of export revenues made loan repayment a complete impossibility, Khoury noted. Iraq's oil output had also been severely limited during the war with Iran, when Saudi Arabia pumped extra oil to fulfil Iraq's quota within the Organisation of Petroleum Exporting Countries (OPEC).
Without write-offs, Iraq would probably be unable to ever pay more than one-third of its total accumulated debts, Khoury said.
Japan, along with such non-coalition creditors as France, Germany and Russia, had already said it would help reduce Iraq's debt burden before any Arab state took the plunge. Saudi Arabia still says debt forgiveness must wait until Iraq has a legitimate, elected government. According to US news reports last week, however, the Saudi royal family is preparing to announce a sizeable debt write-off to boost Iraq's economy.
In Doha, the government's decision raised local bankers' hopes for new investment opportunities in an economically open Iraq. QNB - Qatar's largest commercial bank - is thinking about buying other banks in the Gulf region. These might include some of Iraq's 17 tiny private-banks, which are under pressure from US administrators to increase their capital to $5m each in the next two years. Set up in Iraq during the sanctions period, the banks soon lost most of their assets due to severe currency devaluation.
Doha Bank's senior manager for international banking, Sher Ali, said he welcomed signs of "strong government of Qatar support" for the new status quo in Iraq. "Looking at it as a banker, it's positive. This means lots of opportunities for us," he said.
But greater stability and security would still be needed for Qatari banks to put their money in the country, he said.
Andrew Stevens, general manager of the Commercial Bank of Qatar, agreed that relieving debts could make Iraq an attractive market, as it was in the past. Commercial Bank continues to hold a license there for Diners Club International credit cards. Stevens said Iraq was the region's biggest market for the cards prior to the 1991 war.
Yet at the same time, project-financing for Qatar's rapidly expanding natural-gas and petrochemicals industries holds more than enough potential to keep local banks busy, alongside multinational banks. "Clearly the action is here," Stevens said. "For the time being, most of our efforts are concentrated on establishing a greater presence here."