A recent (January 23rd) report by the Congressional Budget Office (CBO) presents the results of studies by Bechtel (under contract from the U.S. Agency for International Development (USAID)), the World Bank and the U.N. and the Coalition Provisional Authority (CPA) on the costs of reconstructing Iraq. The report presents a number of troubling assumptions about even the most basic reconstruction proposals. First, the report notes that 97 percent of the projected Iraqi government revenues come from oil exports. This number is subject to very wide fluctuations based on the price the government can receive for the oil it exports. As Russia found out in the middle and late 1990s, when government revenues are highly dependent on oil prices, the affordability of future government budgets are subject to large, sudden swings. Furthermore, the report notes, the budgets proposed are based on assumptions that most of the Iraqi debt will be forgiven and that debt not forgiven will be repaid at low interest rates. Neither assumption is based on likely outcomes. It is likely that much of Iraqi debt will be forgiven, but the war reparations from the invasion of Kuwait in 1990-91 is less likely to be forgiven. Finally, all the plans for reconstruction assume large amounts of foreign donations, many of which may not materialize. Taken together, the possibility of large-scale reconstruction actually occurring is diminished. The most optimistic situation presented in the CBO report, where oil production increases, oil prices remain high, debt and the interest rate on that debt are low suggest that the Iraqi government could invest 36.2 billion dollars on infrastructure improvements along with the promised (but not bindingly so) $36 billion in foreign aid. In the most pessimistic situation described, where oil production and prices are low and foreign debt and the interest rate on that debt are high, the Iraqi government would have -36.9 billion to spend on infrastructure improvements (i.e., they would not have enough just for basic day-to-day functioning). If foreign assistance amounts to $36 billion dollars, there still would be a slight budget deficit and no money available for infrastructure improvements. However, in the most pessimistic case, as the CBO report notes, it is questionable whether the international community would donate money that would be used only for day-to-day functioning of the Iraqi government. Overall, the prospects for Iraqi reconstruction depend on favorable conditions of oil production and prices, debt and debt-servicing interest rates and foreign aid, none of which are very certain.
CBO. 2004. Paying for Iraq's Reconstruction, January 23, 2004.
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©2004 Richard B. Goud, Jr.
Updated on 26 January 2004 at 21:14 PST