Debt: the economic legacy of Saddam Hussein

A new Iraqi government will be burdened both by high expectations and a very fragile economy.

Iraq is one of the most indebted countries in the world. Total debt is estimated to be between $60 to 130bn implying a public debt to GDP ratio of 230 to 485%. The difference depends mainly on the inclusion of accrued interest and $30bn in assistance given by several Gulf States during the Iran-Iraq war. Iraq considers these to have been grants while the creditors view them as loans.

There is also a further $27bn in unpaid claims against Iraq relating to the 1991 Gulf War. Indeed there is $172bn in potential claims that the UN Compensation Commission has yet to consider. None of these debts have been serviced or paid while Iraq has been under the UN sanctions regime.

If Iraqi oil production were to operate at full capacity, 2.8m b/d, an average oil price of $20 suggests a best case for government revenues would be in the region of $20bn.

Annual current expenditure is estimated to be $15bn according to sources in the Middle East Economic Survey. That leaves only $5bn a year to cover Iraq's debts, prior compensation claims and the cost of reconstruction. A fall in oil prices to $15 a barrel would leave no excess at all.

Hopes have been pinned on expanding Iraq's oil sector. Iraq has an estimated 112.5bn barrels of known reserves, the second largest after Saudi Arabia, and a further 200bn barrels of possible reserves.

However in the short term the focus will be on preventing output from declining rather than expanding it. Some $5bn are needed to reverse the 5-15% downward yield in some oil fields caused by poor management. Even under the most aggressive forecast Iraq's oil output is unlikely to reach 4m b/d until 2005 and 6m b/d by 2010.

The Iraqi authorities own estimates suggest that increasing production to 6m b/d would cost $21bn and could only be achieved within 8-10 years.

Iraq therefore will be very reliant on grants in medium term. The costs of reconstruction will be considerable. After the first Gulf War in 1991 the UN estimated that it would cost $22bn to restore Iraq's infrastructure to its post war level.

Ten years of economic sanctions have passed. Living standards are now 90% below their 1979 level. Sixty percent of Iraqis currently depend on government handouts for their basic needs. Reconstruction costs could easily top $100bn.

There is also much potential. Iraq is not a failed state. It has a centralised government with a functioning bureaucracy and an educated and skilled workforce. Despite its oil wealth Iraq is no position to support itself. Economic sanctions must be lifted, a moratorium on all its debts declared and a clear and comprehensive rebuilding strategy must be set out.