Arab states balk at forgiving Iraq debt

DUBAI, United Arab Emirates -- Arab countries made clear Tuesday they are far from ready to commit to a deal to forgive more than $30 billion owed them by Iraq, despite U.S. pressure and a recent debt-relief package by other major countries.

The hesitation on the part of Saudi Arabia and Kuwait -- both strong U.S. allies -- could have widespread ramifications for the effort to help Iraq get back on its feet economically. A weekend deal by Russia, Japan, Europe and the United States to forgive 80 percent of their portion of Iraq's debt hinges on Arab countries going along.

Both Kuwait -- Iraq's largest single creditor -- and Saudi Arabia have said no debt-relief commitments are possible until after Iraq has an elected and internationally recognized government.

Iraq takes the first step in that process in January, when it plans to hold elections for a National Assembly that is to draft a new constitution. If that is ratified, an election to choose a national government will be held in December 2005. It remains unclear at what point in that lengthy process the Arab countries would view a debt-relief deal as possible.

Iraq's interim prime minister, Ayad Allawi, has repeatedly urged Arab nations to commit to debt relief, saying Monday that he "looks forward to Iraq's Arab brothers forgiving their debts from Iraq in the very near future."

On Sunday, the major economic powers of the so-called Paris Club, including the United States, Japan, Russia and European nations, announced they would write off 80 percent -- or more than $31 billion -- of the $38.9 billion that Iraq collectively owes them.

But a clause in that agreement gives the group the option to suspend part of its debt reduction if it is not matched by Iraq's other major creditors, led by Saudi Arabia and Kuwait.

Iraq has said its foreign debt is hindering postwar reconstruction, which also is struggling amid the country's persistent insurgency.

Kuwait said Monday it would support "a major reduction" in the $15 billion it is owed -- but only if a deal was negotiated with an internationally recognized and elected Iraqi government and then approved by the Kuwaiti parliament.

The country's foreign minister, Sheik Mohammed Al Sabah, said Kuwait knew "how important this is, so that Iraq can regain some of its financial abilities," according to the official Kuwait News Agency.

Kuwait's refusal to forgive the Iraqi loans was one issue Saddam Hussein used as justification for invading Kuwait in 1990.

Saudi Arabia, which is owed $9 billion, also has not changed its position.

In January, the country told former Secretary of State James A. Baker III during a debt-relief lobbying trip that it was willing to forgive some Iraqi debt -- but only after Iraqi elections are held.

Saudi Arabia also made participation by Saudi companies in Iraq's reconstruction a condition of any debt relief.

Iraq owes an additional $19 billion to private Saudi companies and banks, which would not be included in any deal between the two governments.

Iraq owes Qatar $4 billion and the United Arab Emirates $3.8 billion. Both countries have adopted stances similar to Kuwait and Saudi Arabia.

Unlike the Persian Gulf states, the much-smaller and poorer Jordan is unlikely to write off Iraq's debt, a Jordanian government official said Tuesday on condition of anonymity.

Jordan might allow Iraq to repay the debt in small installments with a long grace period, or exchange the debt for Iraqi investments in Jordan or vice versa. Jordan has a much smaller economy compared to its gulf neighbors, with few natural resources.

Iraq -- despite its recent violence -- is considered one of the region's largest untapped markets, and infrastructure and reconstruction contracts are expected to be worth tens of billions of dollars.

Iraq's debt carries annual servicing charges of $7 billion to $8 billion.

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Associated Press writers Diana Elias in Kuwait and Jamal Halaby in Jordan contributed to this report.