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---------- Forwarded message ----------
Date: Sun, 15 Sep 2002 22:29:36 +0200
From: Ahmed M. Jiyad <amj.mokt@frisurf.no>
To: casi-discuss-admin@lists.casi.org.uk
Subject: War Compensation
The "Cost" of War reparations to the Iraqi Economy
Ahmed M. Jiyad,
Freelance Economic Consultant, Norway.
Phone/Fax: (+47) 5659 7483.
In a posting on CASI, Marc Azar requests some information on war reparation.
The following is a brief assessment on the matter, which I hope it is useful.
To begin with it is important to mention that War reparations is the core of, what is misleadingly
became to be known, Oil-For-Food (OFF) programme (To me it is more appropriate to call it
Oil-Under-Sanction (OUS) programme, and this OFF/OUS in turn is the central peace of the sanction
regime.
I will first provide summery on the balance sheet of the OFF/OUS programme then examine the profile
of war reparations using the latest available data on both of these two issues.
In a simple but expressive way the following table summarises what OFF/OUS programme had actually
turned out to be since its commencement up to early August 2002.
The balance sheet of OFF/OUS programme ($ billion)
At 2, August 2002
Total oil proceeds: 55.8
Approved contracts:
- Delivered supplies 23.700
- In delivery process 10.000
- Approved but lacks funding 2.250
Total approved contracts: 35.950
Contracts "on hold" 5.245
The data above revels many observations:
First, though the country had exported some $55.8 billion worth of oil there still approved
contracts worth $2.25 billion that cannot be implemented due to lack of available funds. This is
attributed to and explained by the fact that OFF/OUS programme was structured to consider Iraq's
humanitarian needs as "residual" having lower priority compared with the up-front privilege of war
reparations;
Second, the category of "approved contracts without funds" is a new one and direct product of the
retroactive oil pricing policy, which had led to shrinking oil exports during this year compared
with previous year. In fact oil production during August (1520 million barrels) was even lower than
that of July (1830 million barrels);
Third, the significance of contracts "on hold" comes from the fact that it represents 22 per cent
of the already delivered supplies, and that over 86 per cent of the contracts that are kept "on
hold" are for humanitarian purposes;
Fourth, if we assume that the funds for the contracts that are kept "on hold" are kept in the
escrow account then the funds channelled for war reparations and cost of UN operations (OIP and
UNMOVIC ) are $16.855 billion, which is equivalent to 30.2 per cent of oil proceeds. But if we
assume that funds for these on hold contracts are not available, similar to the category of the
approved contracts that has no funding, then total funds channelled for war compensation, OIP and
UNMOVIC becomes $22.1 billion, representing 39.6 per cent of oil proceeds.
Fifth, Since the implementation of OFF/OUS programme in December 1996 up until end July 2002, Iraq
received the worth of $23.7 billion of supplies and equipments. This is translated to $34852941 per
month (over a period of 68 months). Between December 1996 and December 2000 Iraqi population
increased from 20826000 million to 22809000 million. (Using data from AMF et al, The Joint Arab
Economic Report 2001) If we assume population increase of 2.3 percent per annum the Iraqi
population in 2001 becomes 23333607 and 23601943 as at end in July 2002. The average population
during the period from December 1996 to end July 2002 is 22280936. Considering the monthly value of
the delivered supplies and the average population would indicate that the per capita per month from
these supplies is only $15.64 (or 52 cents per day per person). This 52 cents per capita per day
covers all supplies delivered to the following sectors: food, food holdings, health, oil,
electricity, water and sanit!
ation, education, agriculture, communication and transport, housing and the Northern governorates
(Kurdistan). The extent of the human tragedy is even worse and deeper if we know that the food
share is 44 percent of the total delivered supplies, meaning that food allocation is only 22.9
cents per day per person. Knowing that two dollars per day per person is, according to the World
Bank, the poverty threshold, one can then tell how much misery and hardships had been inflicted on
the Iraqi population during the last 12 years.
Now let me say few words on the Current Profile of War Reparations
Before attempting to estimate the final war compensation that Iraq should pay we have to examine
the current profile of war reparations (July 2002)
The total value of the submitted claims exceeds $323 billion. After 12 years of work the
Compensation Committee had examined claims worth $142.4 billion, with claims worth $181 billion
remaining to be evaluated.
Out of the evaluated claims only $43.6 billion, representing 30.6 per cent of the evaluated claims,
have been recommended by the panels of experts and approved by the governing council of the
Compensation Committee.
The following is summery of the Profile of War Reparations ($billion)
At 23 July 2002
Total value of filed claims: 323.4
A- Total valued claims: 142.4
A.1- Approved out of valued claims: 43.6
A.1.1- Paid out of the approved claims: 15.5
A.2- Rejected claims: 98.8
B- Remaining claims to be valued: 181.0
If we take, as reference point, the value of approved claims to evaluated claims then multiply by
the value of remaining claims we arrive at 43.6/142.4*181= $55.2 billion. Adding this to the
already approved claims of $43.6 billion will give $98.8 billion.
In my view this is the minimum, and there are very strong evidence that the final amount could very
well be much higher. Here is why:
1- Interest rates.
One of the decisions taken by the Compensation Commission is that claimants for war reparations
against Iraq are entitled to earn interest on the unpaid balance of their claims from the date of
loss. Accrued interest will be paid after the principal amount of awards, but the rate of interest
has not yet been determined.
The first set of questions is related to the level and type of interest rate. Is interest rate
going to be fixed or floating. If it is fixed then at what level, and if it is variable then what
is the mechanism or the reference point to which interest rate is linked: for example LIBOR, prime
rate, or interest rate on the amount deposited with the bank that manages the escrow account, etc.
Furthermore, is this interest rate, let it be fixed or variable, remains the same and applies to
and valid for all approved claims regardless of the original currency of the claim.
The impacts of fixed interest depend largely on its level: higher rate of interest bring greater
burden of war reparation than a lower on. However, fixed rate of interest means known amount of
interest payment.
Variable rate of interest, on the other hand, generate good deal of uncertainty on the eventual
magnitude of interest payment, which implies greater difficulties in assessing its impacts on the
total cost of reparation.
Furthermore, is interest rate, let it be fixed or variable, simple or compound? Naturally if it is
compound then the amount of interest payment becomes much higher than that of a simple rate of
interest.
Additionally, there is an effect coming from the difference between nominal and effective rate of
interest. That difference is related to the terms of interest payment's period: at the beginning of
the year, quarterly, half-yearly, or at the end of the year. When an annual rate is paid at the
beginning of the period this leads to an effective rate of interest at its maximum height over the
nominal rate, while both rates are the same if interest is paid at the end of the year. In between
these two limits the difference between effective and nominal interest rates declines as payment of
accrued interest moves from the beginning to the end of the year.
Finally, as mentioned above accrued interest will be paid after the principal amount of award has
been paid. What does this really means on an operational level? Will the accrued interest on each
claim be paid after the awarded claim has been paid or after all awarded claims have been paid?
Obviously, there is a time effect here. If for whatever reasons Iraq was not able to pay the
approved war reparations then the additional cost, in terms of accrued interest, grow higher as
time go by. The same is also true if the Compensation Commission, again for whatever reasons, drags
on in its work even if there is enough money in the Compensation Fund.
But, as mentioned above, the rate of interest on the approved claims has not yet been decided. When
that will be is not yet clear and the Compensation Commission does not provide indication on when
such a decision can be made!!
In making such a decision will the commission take it as its own domain and solely discretion or in
consultation with the Iraqi authorities. Most likely it will be the former than the latter.
Another issue in this respect is of a circumstantial nature: will the commission take into
considerations interest rates prevailed at the time when the loss occurred for each claim, or an
overall average in 1990/91 or at the time (a future one) of deciding the rate of interest.
Different times have different rates of interest and the difference could be very substantial
indeed, and thus the consequences on total war reparations.
It is only legitimate to air few concerns here regarding the postponement of deciding the rate of
interest (This, however, should not constitute an acceptance by this author of the fairness of
imposing such an additional burden on Iraq's currently meagre financial resources): Was this
postponement intentional to serve specific policy objectives such as exert more financial pressure
and extract more of Iraq's resources, or was reserved as a negotiation tool in the hand of the
Compensation Commission and the powerful members of its Governing Council in their future deals
with Iraq.
The above discussion clearly indicates that though the imposition of interest on war reparations
could defiantly leads to an increase in the total volume of war reparations, there is a very high
degree of uncertainty regarding assessing its extent and the eventual amount of interest payments.
Even if we assume a fixed simple (non-compounding) interest rate of 8 per cent per annum (similar
to that used for Iraqi external debt) that would give additional cost of $7.9 billion annually over
and above the minimum $98.8 billion of war reparation. If we assume the interest accrued from the
end of 1991 until now this simple accumulated interest comes to $94.9 billion. Hence the present
value (end 2002) of war reparations to the Iraqi economy stand at $193.7 billion.
This figure could be much higher if the interest rate is higher than 8 % and/or the interest rate
is compounded.
2- The annual budget to keep the Compensation Commission
In order to know and, if possible, estimate annual cost of keeping the compensation commission we
need first to examine its structure, working procedure, source of funding and the consequences of
all these on Iraq.
The structure of the Compensation Commission includes three organs: a governing council, panels of
commissioners and a secretariat.
The composition of the Governing Council is the same as that of the fifteen-members in the UN
Security Council at any given time. This means that the five permanent members of the Security
Council have permanent representation in this governing council of the compensation commission.
The salaries of the members in the governing council do not come out of the compensation fund,
which is financed by Iraqi oil revenues, but are paid by their own countries.
This Governing Council is empowered to determine the policy of the commission and has the final say
with regards to the received recommendations and suggestions from the panels of commissioners
concerning claims for compensation against Iraq. The decisions of the Governing Council are taken
by a majority of 9 members.
The panels of commissioners are composed of variety of experts whose mandate is to evaluate the
submitted claims and make recommendations on the level of compensations. All cost, expenses and
reimbursements related to the experts- their transport, accommodation, per diems and fees for their
service- comes out of that part of Iraq's oil sales allocated for compensation.
Finally there is a secretariat. The commission's secretariat-its administrative operations to
provide services to the governing council and the panels of commissioners- employs a fulltime staff
of 240, as of April 2002. Like the panels of commissioners the salaries of the secretariat staff
are paid for by Iraq out of the oil sales earmarked for reparations.
In addition to the salaries of the secretariat staff and the cost of the panels of commissioners
the commission's office supplies, building maintenance costs, etc. are also paid by Iraq out of the
oil sales earmarked for reparations. (The Commission headquarter in La Pelouse in Geneva, once a
residence for three secretaries-general of the League of Nations)
The Iraqi economy has to service and bear the burden of not only the war reparations, the interest
payment on them but also the annual cost of maintaining the Commission as long as it is functioning.
But how much Iraq has to pay each year and for how long is not really clear and, thus, open for
speculation since, according to the commission's spokesperson, the annual budget to run the
commission is "confidential."
Questions related to number of panels of commissioners, the number of experts, duration and
frequency of their missions, level of their fees, the conduct of their work and professionalism etc
are all have a bearing on the annual budget.
The secretariat has 240 employees- a staff larger than headquarter of any civilian ministry in Iraq
is not modest by any standard. An administration of such a size could reflect the vastness of the
operation and nature of the commission's mandate, which is entrusted to process and handle the
documentation of the 2.6 million claims, which takes up approximately 3,500 square yards of storage
space. Or this is a deliberate over-employment since Iraq, not the UN, pays the salaries and other
costs of the secretariat.
The choice of an expensive city such as Geneva is by itself a major cost item. Selection of a
cheaper location in one of the regional capitals such as Cairo, Amman, Beirut or Tunisia reduces
the final cost to the Iraqi economy.
In addition to Geneva, part of the compensation commission's work is done in New York at the UN
headquarters. How much additional cost this entails is unknown yet.
In conclusion this cost item has two folds upwards effects on war reparations: the direct cost of
maintaining the secretariat and all organs of the Compensation Commission, and the indirect effect
of these costs. Since these expenses are paid from the Compensation Fund then this would reduce
amounts available for war reparations and thus prolong the payment horizon, which results in higher
accumulation of interest payment.
3- The cost of maintaining OIP & UNMOVIC.
In addition to the war reparation, interest rate, cost of keeping the expensive UNCC two additional
cuts from oil proceeds are made under OFF/OUS programme:
a- 2.2 cents to run the U.N. Office of the Iraq Programme, which administers the oil-for-food
program; and
b- 0.8 cents to run the U.N. Monitoring, Verification and Inspection Commission known as
UNMOVIC;
The share of UNMOVIC was reduced by one percentage point a year ago, but since the inspection
might be resumed then (b-) above could become 1.8 or even 2 per cent.
Now how much the accumulated cost of keeping the UNCC, OIP and UNMOVIC.
Two possible estimations can be made here:
1- As mentioned above if we assume that the funds for the contracts that are kept "on hold" are
kept in the escrow account then the funds channelled for war reparations and cost of UN operations
(OIP and UNMOVIC ) are $16.855 billion. Deducting from this amount what has been paid already
($15.5 billion) would give a total cost of $1.355 billion.
2- But if we assume that funds for these on hold contracts are not available, similar to the
category of the approved contracts that has no funding, then total funds channelled for war
compensation, OIP and UNMOVIC becomes $22.1 billion. Deducting from this amount what has been paid
already ($15.5 billion) would give a total cost of $6.6 billion.
In conclusion, the direct cost to the Iraqi economy of war reparations are much much higher than
the minimum estimation of 98.8 billion.
Good reading.
Direct comments are welcomed and appreciated.
Ahmed M. Jiyad
15th September 2002.
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