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WebMemo #348 on Iraq

October 15, 2003

Q&A on Supplemental Funding for Iraq Reconstruction

By

On September 17, the White House sent to Congress a request for $87 billion in supplemental funding for military operations and reconstruction efforts in Iraq and Afghanistan. In the supplemental request, $65.6 billion is earmarked for the Department of Defense to fund the war on terrorism, including ongoing operations in Afghanistan and Iraq.

 

However, some Members of Congress are questioning the remaining $20.3 billion, which is targeted for economic reconstruction and development in Iraq. Some have proposed that the Administration's aid package be extended as a loan instead of as a grant, to be paid with future Iraqi oil revenues. But adding $20 billion to the existing Iraqi debt of more than $127 billion would burden future generations of Iraqis with a formidable debt repayment schedule that could stifle economic development. Moreover, heavy debt repayments would become a destabilizing political issue in postwar Iraq that could easily be exploited by anti-American factions.

 

If Congress delays or slashes the funds committed to Iraqi reconstruction, it will jeopardize Iraq's fragile political reform process. And while $87 billion is a substantial amount of money, squandering the opportunity to secure a free and prosperous Iraq would be the greater loss.

 

Q: Why is the Iraq supplemental funding important?

 

A: The $20.3 billion supplemental request will provide the Iraqi Governing Council and the Coalition Provisional Authority with the necessary reconstruction aid to secure Iraq's borders; train and recruit police and security forces in both the civilian and military sectors; rebuild crucial public works and infrastructure; restore essential utilities (e.g., water, sanitation, and electricity); increase education and employment opportunities; and reconstruct transportation and oil infrastructure vital to Iraq's future economic prosperity. Essentially, it will provide the Iraqi Governing Council with the means to build popular support for the formation of an elected government that is committed to fighting terrorism.

 

However, the portion of the supplemental request that is earmarked for economic reconstruction and development in Iraq should not be viewed merely as foreign aid. Rather, it is a vital component of the war against terrorism, in which Iraq is a crucial front.

 

Moreover, as an occupying power, the United States has a moral and legal obligation to rebuild Iraq, restore order, establish a legitimate government, and provide a safe and secure environment for the population before exiting the country. Failure to meet this obligation will ensure America's involvement in a protracted conflict/struggle to secure a free and prosperous Iraq and tarnish America's reputation and credibility worldwide.

 

Q: Should the funds be tied to a tracking mechanism or regulatory controls to ensure that they are allocated appropriately?

 

A: Congress should closely monitor how the monies are dispersed in order to measure the effectiveness of the spending plan. However, placing too many financial restrictions could impair the ability of the Coalitional Provisional Authority and its officers to administer the funds in the most effective manner. Responsible officials will need to retain the maximum flexibility to ensure that funds are available as issues and crises arise.

 

Q: Should the $20.3 billion be provided as an unconditional grant or as a loan?

 

A: It is important that Congress administer the $20.3 billion supplemental request in the form of a grant. Providing reconstruction monies as a loan would overburden an already ailing Iraqi economy. Modest estimates place the Iraqi debt burden at $127 billion; however, Iraq faces an additional $100 billion in foreign debts owed to countries such as Russia, France, Germany, Kuwait, and Iran.

 

Furthermore, changing the aid package from a grant to a loan would likely send the wrong message to the Iraqi people and others in the region that the United States is interested only in Iraq's oil resources. It would be a windfall for the propaganda efforts of the Baathist remnants and Islamic radicals opposed to the Governing Council and obscure America's real purpose of helping Iraq establish a stable and legitimate government.

 

Heavy debt repayments could also become a destabilizing political issue in postwar Iraq, easily exploited by anti-American factions, just as the Nazis exploited the heavy war reparations imposed on Germany after World War I to build popular support. Finally, international law precludes Congress from providing the money as a loan because Iraq does not yet have an established representative government with the authority to accept such a heavy debt burden.

 

Q. What would be the impact of delaying or cutting the supplemental request?

 

A: It is imperative that Congress consider the funding of the Administration's supplemental request on a timely basis. If Congress delays or slashes the funds committed to Iraqi reconstruction, it will undermine the legitimacy of the Iraqi Governing Council and jeopardize Iraq's fragile political reform process, which could come unglued unless various Iraqi factions are given strong incentive to cooperate in building a stable Iraq.

 

Furthermore, if the U.S. fails to build a stable government in postwar Iraq, there is a real danger that Iraq could become a failed state infested with lethal terrorist networks, as Afghanistan was before the Taliban regime was removed. This would require U.S. armed forces to mount a long-term containment operation that would cost billions of dollars annually. In the long run, cutting the aid package could therefore be "penny wise and pound foolish."

 

Q: If Iraq is such an oil-rich state, why can't the Iraqis rely on oil revenues to pay off their debt burden and rebuild infrastructure?

 

A: While it is true that Iraq has the world's second largest oil reserves after Saudi Arabia, its oil fields, pipelines, and refineries are in serious disrepair and require a major influx of capital investment to restore oil exports to their pre-war level. Iraq is currently pumping 900,000 barrels per day-considerably less than the pre-war production level of 2.2 million-2.4 million barrels per day. The cost of rebuilding essential infrastructure will be high; the Administration estimates that Iraq will need an additional $50 billion to $75 billion over and above its oil income to rebuild its defective infrastructure over the next few years.

 

Before major reconstruction work can begin, however, the physical security of the infrastructure and workers must be guaranteed. Without adequate security, Iraqi oil will not reach vital markets and investors will be reluctant to invest in Iraq's oil industry. The Administration's budget request addresses the security problem by providing Iraq with the funds to recruit and train security and police officials, which will create an environment conducive to attracting the foreign investment needed to rebuild Iraq's oil industry.

 

Q: What is the possibility of sharing post-conflict costs with other countries and allies?

 

A: By fully funding the $20.3 billion budget request, Congress would demonstrate to America's allies that Washington is committed to rebuilding a stable Iraq. This would enhance American diplomatic leverage in requesting further aid commitments at the October 23-24 international donors conference to be convened in Madrid, Spain. It could also encourage countries (e.g., France, Russia, and Germany) to forgive or reduce the debt owed to them by Iraq.

 

Congress is in a position to lead by example. Failure to approve the budget request before the international donors conference will likely mean fewer funds for Iraqi reconstruction and an increased financial burden on the United States.

 

Carrie Satterlee is a Research Associate in the Kathryn and Shelby Cullom Davis Institute for International Studies at The Heritage Foundation.

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