IRAQ: Madrid Donor Conference

February 2, 2005

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Current political and economic issues succinctly explained.

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How much financial aid for Iraq was pledged at the October 23-24 Madrid donor conference?

About $33 billion in grants and loans, almost two-thirds of it from the United States. The widely used estimate of Iraq’s reconstruction needs is about $55 billion over several years. Still, the Bush administration was pleased with outcome of the conference, because non-U.S. pledges totaled more than many U.S. policymakers had expected.

Which countries pledged?

The donors, according to USA Today, The Financial Times, and Brad Setser, International Affairs Fellow in residence at the Council on Foreign Relations, include:

  • United States: $18.4 billion, contained in a supplementary spending bill approved by Congress a few days after the conference ended (the legislation also included $1.2 billion for Afghanistan and $200 million for Liberia);
  • Japan: $1.5 billion in grants in 2004, plus $3.5 billion in loans in 2005-2007;
  • World Bank: $3 billion to $5 billion in loans over the next five years;
  • International Monetary Fund: $2.5 billion to $4.25 billion in loans over three years;
  • European Union: $812 million in 2004;
  • Kuwait: $500 million;
  • Spain: $300 million through 2007;
  • South Korea: $200 million through 2007;
  • United Arab Emirates: $215 million;
  • China: $24.2 million;
  • Slovakia: $290,000.

Many countries, including France, Germany, and Russia--which pledged no new funds--have promised to cooperate with the U.S.-led effort to reduce Iraq’s large debt burden. Some countries also donated products or services in lieu of money: Bulgaria and Egypt offered technical assistance; Iran donated electricity, gas supplies and oil export facilities; Vietnam donated rice; and Sri Lanka gave 100 tons of tea.

How much money is needed?

A U.N./World Bank task force estimated Iraq’s reconstruction needs at $36 billion over the next three years. The $18.4 billion from the United States for 2004 is based on a funding estimate that overlaps with some of the financial needs identified by the World Bank but adds others, including security. Development and reconstruction experts expect that some of Iraq’s long-term needs will be paid for by eventual Iraq oil revenue and private investments, as well as future donor conferences.

How did the creation of a new U.N./World Bank trust fund affect the meeting?

Potential donors seemed reassured by the creation of the new fund. Many nations that opposed the war did not wish to appear to support the U.S.-led occupation of Iraq; the new fund helps mitigate that impression by assuring international donors that their money will be managed by international organizations rather than by the United States. In addition, under international bidding rules, international donor money will be used in a bidding process open to global corporations. U.S. administrators have been criticized for awarding large contracts to American companies such as Halliburton and Bechtel in closed or no-bid processes. A U.N. Security Council resolution adopted October 16 also helped pave the way for increased international financial aid to Iraq.

What did the new U.N. resolution say?

Security Council Resolution 1511 stresses that the U.S. occupation of Iraq is temporary and encourages the United States to let Iraqis govern themselves "as soon as practicable." It also authorizes a multinational force to establish and guarantee security in Iraq, and urges member nations to contribute to the costs of the country’s reconstruction. It partially assuaged international concerns about U.S. dominance of Iraq’s security, economy, and politics. European countries, led by France and Germany, had pressed for a significant U.N. role in Iraq’s reconstruction and a quick transfer of power from the U.S.-led Coalition ProvisionalAuthority to a U.N. administration or the Iraqis themselves. Instead, the United Nations will, for the time being at least, play a mostly advisory role to the Iraqi Governing Council, which must submit, by December 15, 2003, a schedule for drafting a constitution and holding elections.

Did the resolution encourage contributions to Iraq?

Possibly. U.S. Secretary of State Colin Powell called the 15-0 vote for the resolution "a great achievement" and said he was much more optimistic about fundraising prospects after it passed. But representatives of France, Germany, and Russia criticized the resolution, claiming it did not transfer authority quickly enough to Iraqis. "The conditions are not created for us to envisage any military commitment and no further financial contributions beyond our present engagement," a joint statement from the three countries said.

What is the status of the U.S. supplemental spending bill?

On October 29, Congress agreed to provide nearly all the money President Bush had asked for to fight terrorism in Iraq and Afghanistan: $64.7 billion for military operations and $18.4 billion for reconstruction, almost entirely in Iraq. A Senate attempt to make half of the funds for Iraq reconstruction a loan instead of a grant was stymied by a threatened White House veto.

Why did the Senate try to make part of the U.S. funding a loan?

The Senate’s attempt reflected uneasiness on the part of many Americans about giving such large sums to Iraq at a time of unemployment and rising budget deficits at home. American lawmakers were reportedly upset about spending U.S. tax dollars in Iraq while European countries that opposed the war are pressing for repayment of loans they made to Saddam Hussein. The Senate provision, which was dropped from the final version of the legislation, stipulated that the proposed U.S. loan to Iraq would be forgiven if Iraq’s other creditors forgave at least 90 percent of the debt Iraq owes them. Administration officials argued that a loan would add to Iraq’s already heavy debt load and cast doubts on the United States’ commitment to Iraq.

What is the status of debts owed by Saddam’s regime?

This issue has divided the United States and its European allies. The debt run up by the Saddam regime is estimated to be between $120 billion and $135 billion, according to Joseph Siegle, Douglas Dillon Fellow at the Council on Foreign Relations. Iraq also owes some $200 billion in reparations to Kuwait and other countries from the Gulf War. The United States is pushing to classify Iraq’s obligations as "odious debt." Alexander Sack, a pre-eminent international legal scholar, defined the term in 1927 as debt incurred by a despotic power not for the needs or interests of the state, but to strengthen the regime and repress the population under its rule. Some debt experts argue that, because the people had no choice and received no benefit from the despot’s actions, they should not be held accountable for the debt. Others add that institutions or companies that lend to despots and their regimes should consider the risk they are taking. However, there is no formalized international legal framework to define odious debts or to determine which debts of which countries could be thus classified. France, Germany, and Russia insist they won’t forgive debts Iraq owes to them. Hans Eichel, the German finance minister, told reporters on October 18, "We do not only expect to get our money back; we will get our money back."

Which countries are owed the most money by Iraq?

Iraq’s Gulf state neighbors are owed the most, at $30 billion. Japan is next at $9 billion, Russia at $8 billion, France at $8 billion, and Germany at $4 billion.

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