IRAQ: AN ECONOMY UNDER SIEGE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00927R000300020003-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 23
• Document Creation Date: December 22, 2016
• Document Release Date: January 30, 2012
• Sequence Number: 3
• Publication Date: January 1, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Under Siege
Iraq: An Economy
Secret
NESA 84-10027
January 1984
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Directorate of Secret
Intelligence
Under Siege
Iraq: An Economy
with contributions from
This assessment was prepared by
Office of Global Issues. It was coordinated with
Persian Gulf Division, NESA,
the Directorate of Operations. Comments and
queries are welcome and may be directed to the Chief,
Secret
NESA 84-10027
January 1984
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Iraq: An Econom
Under Siege 25X1
Key Judgments Iraq is trapped in a costly war of attrition that is strangling its economy..
Information available On the threshold of an oil-driven economic takeoff before it embarked on
as of3 January 1984 its war with Iran, Baghdad has seen its oil earnings and foreign exchange
was used in this report.
reserves plummet. The regime has slashed imports, virtually abandoned its
development program, and even terminated combat pay. It now depends on
foreign aid and credits to stay afloat financially. Economic problems
combined with growing casualties and a relentless enemy are increasingly
pressing President Saddam Husayn to escalate the war.
The austerity program has created potential political problems for
Saddam. Shortages of consumer goods are becoming more widespread and
are fostering hoarding and black-marketeering. They have contributed to
an annual inflation rate of perhaps 50 percent. Along with cuts in imports,
other unpopular measures include increased taxes, gasoline rationing, and
a campaign to collect gold from the citizenry.
The populace seems resigned to the economic situation for now, and we be-
lieve the Gulf states and Western creditors will help enough to allow Iraq
to meet basic import needs in 1984. If, however, they are not as generous as
in 1983, imports will have to be reduced further, increasing consumer
dissatisfaction
Iraq's prospects for increasing revenues by opening new oil outlets within
the next year are remote. The only positive development will be a 300,000-
barrel-per-day increase in the capacity of the Turkish pipeline expected to
be ready by April
Athough Baghdad has extracted an agreement from Riyadh to build a spur
linking Iraqi oilfields to the Saudi pipeline to the Red Sea, the Saudis still
may delay construction. We believe Saudi Arabia is reluctant to commit it-
self to a long-term involvement with Iraq. Even if the Saudis permit
construction to begin soon, the pipeline would not be ready before 1985. If
such a pipeline is completed, however, the Iraqi economy would improve
markedly.
Several Gulf states have approached Syria to reopen the pipeline from Iraq
through Syria to the Mediterranean, but discussions with Damascus are at
a standstill. The proposed Jordanian pipeline is unlikely to be completed
before the end of 1985 even if construction begins early this year.
Secret
NESA 84-10027
January 1984
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4ecret
Economic difficulties will not be enough to topple Saddam. If necessary, he
will resort to repressive measures to maintain control over the population.
The more immediate threat to Saddam is a breakdown in the military
situation.
Iraq's economic problems probably will impel it to improve relations with
the United States and moderate Arab states. Baghdad might seek military
equipment and financial aid as well as US diplomatic efforts on Iraq's
behalf. At the same time, Iraq will continue to look to the USSR,
especially for military aid. Iraq probably hopes its threats to escalate the
war will spur diplomatic efforts to achieve a cease-fire and allow it to
resume oil exports through the Gulf
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Iraq: An Economy
Under Siege
Before its war with Iran, Iraq was planning an
ambitious development program projected to cost
$133 billion for the period 1981-85. High on the list of
priorities were housing development, transportation
and communications improvements, and moderniza-
tion of the agricultural sector. Iraqi President
Saddam Husayn's economic policy also called for
massive welfare spending and a steady flow of con-
sumer goods to help secure his power. The govern-
ment regularly announced wage increases for state
employees to mobilize additional support for the Ba'th
Party.
Iraq was able to maintain a business-as-usual attitude
through the first year of the war, thanks to oil exports
through the Syrian and Turkish pipelines, drawdowns
from foreign exchange reserves, and massive Gulf
state aid. Imports peaked at $20 billion in 1981.=
The economy, however, suffered a marked deteriora-
tion in 1982. Damascus closed the Iraqi pipeline
across Syria in April, and the flow of Gulf state aid
slowed. Moreover, foreign exchange reserves were
being depleted. As a result, Saddam imposed spending
cuts in the civilian sector. Low-priority development
projects were canceled or postponed, and late pay-
ments on existing projects became epidemic by the
end of the year. Baghdad also restricted sales by state
retail stores, introduced new restrictions on the import
of luxury goods, and even eliminated some military
benefits.
Finance called for a reduction in spending of 40
percent in the 1983 budget from the previous year's
expenditure levels, according to the US Interests
Section in Baghdad.
The government has almost abandoned its economic
development program, a sharp reversal from the guns-
and-butter approach it maintained during the first
year of the war. Baghdad has canceled nearly all new
contracts not related to the military effort or the
petroleum sector and postponed several nonessential
projects already under way, according to the US 25X1
Interests Section. As a result, many projects are
standing idle, including housing, hospitals, and irriga-
tion work, according to press reports. Among the few
projects where work is continuing are two $1 billion
power plants at Al Yusufiyah and the $3.5 billion
Baghdad-Umm Qasr railroad. In our view, the slow-
down or cancellation of most infrastructure develop-
ment will set back Iraq's plans for rapid industrializa-
tion and self-sufficiency by several years.
The Iraqi consumer has increasingly been affected. 25X1
Indeed, the growing preoccupation of society is ob-
taining scarce goods, according to the Interests Sec-
tion. Imported staples-especially foods-are more
frequently scarce or exorbitantly priced, according to
the US Interests Section and press reports. The list of
Luxury goods are also scarce.
according to the press, a sign of potential disquiet.
scarce commodities in government shops often in-
cludes dairy products, eggs, sugar, cooking oil, and
potatoes. Widespread shortages also exist for automo-
bile spare parts, cigarettes, and beer. Gasoline queues
have cropped up, according to press reports, largely
because the fuel demands of the military take priority.
Gas stations have been guarded by armed soldiers,
The shortages have fostered a thriving black market
and are fueling an inflation rate we estimate could be
as high as 40 to 50 percent annually. With too many
The war affected all areas of economic life in Bagh-
dad in 1983. The development program and consumer
activity were particularly hard hit. The Ministry of
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dinars chasing too few goods, consumers are briskly
bidding up the price of available items. Eggs, for
example, cost about $19 a dozen, and mutton, an
important meat in the Iraqi diet, brings about $7 per
pound, according to the Interests Section
Many scarce items are available only
to those with connections with the Army, the Ba'th
Party, or the local shopkeeper, according to the
Interests Section.
An upswing in hoarding has worsened shortages in the
marketplace as consumers respond to an uncertain
future for supplies and prices as well as growing
rumors of government rationing. Private retailers also
have been holding back goods in anticipation of
higher prices or to save them for favored customers,
according to the Interests Section. Still, although life
has become more spartan, the average Iraqi can meet
most basic needs.
Pent-up frustrations with the war and its impact on
the economy occasionally have surfaced. Members of
the National Assembly, Saddam's rubberstamp par-
liament, have criticized exorbitant prices in the pri-
vate sector, according to the Interests Section. Buyers
at a dairy outlet shouted antigovernment chants when
the Army took the day's supply of dairy products,
according to an unconfirmed report to the Interests
Section. So far, however, the decline in the standard
of living has not resulted in public resentment that
could threaten the regime.
Saddam has been quick to purge those in or out of the
government who question his domestic policy.' He
sacked the Minister of Finance, Thamir Razzuki, last
August, according to the press. Interests Section
sources report that Razzuki disagreed with Saddam's
economic policy and had become too independent.?
Consumer Policies
We believe the regime is attempting to improve the
economic situation to quash growing discontent.
Saddam's major concern as of November was not the
battlefront but the economy
Deputy Prime Minister
Tariq Aziz has publicly described the conflict with
Iran as an economic war of attrition.
The regime so far has rejected comprehensive ration-
ing. Administering a national rationing scheme effi-
ciently and equitably would overextend a bureaucracy
already strained by manpower requirements for the
war, in our judgment. Moreover, with most retail
distribution in the hands of the private sector, the
government probably fears the potential for abuse. F
Baghdad, however, has had to restrict the sale of
certain commodities. The government began issuing
coupons for oil and gas products last October, accord-
ing to the local press. The government also is restrict-
in electricity use in Baghdad,
Moreover, the regime is introducing "special-
ized agencies" to distribute milk products produced
by public-sector dairies. Plans call for the creation of
over 100 of these outlets, which will be privately
owned, according to the Interests Section.
The government is relying on local citizens' organiza-
tions to help stem hoarding and at the same time
deflect criticism from the regime. Baghdad is using
People's Councils-government-created citizens'
groups in various urban areas-to monitor private
shop deliveries and sales. People's Councils in Bagh-
dad already have distributed goods confiscated from
shopkeepers accused of hoarding free to local neigh-
borhoods, according to the Interests Section. Some of
the councils also are using identity cards to restrict
sales to customers living in their areas. In some rural
villages, the local manager of the government store
distributes food based on his interpretation of the
requirements of the local inhabitants
The regime has adopted other measures that almost
certainly are testing popular resolve. Baghdad has
increased income taxes for wage earners to help
finance the war
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"voluntary" gold contributions from the citizenry.
Popular response has been poorer than anticipated.
Teams of Ba'th Party militia representatives have
used intimidation during nighttime collection visits,
according to the Interests Section.
Figure 1
Iraq: Civilian Import Trends, f.o.b., 1976-83
Other steps Baghdad has taken highlight the severity
of its foreign exchange dilemma. Baghdad has re-
stricted the amounts of foreign exchange its many 22
foreign workers can repatriate as well as jobs they
may hold. These controls are hastening the flight of
foreign labor, compounding Iraq's chronic shortage of
skilled manpower already sapped by the war. Women,
largely unskilled, are increasingly used to fill the labor
gap. The government also has reduced salaries and
benefits of its diplomats and closed several smaller
embassies, with a commensurate decline in morale
amon Foreign Ministry emi)loyeesE--------]
Military Spending
Saddam has even been forced to cut the military
budget. Iraq has had to reduce overall military
expenditures as much as 25 to 30 percent in compari-
son with the early months of the war, according to the
Interests Section. Saddam terminated combat pay for
all military personnel last October, a calculated risk
that came when Iran was pressing its attack along the
Iraqi border. These cuts probably included spending
on equipment and materiel already in sufficient sup-
ply. We believe Saddam is counting on the profession-
alism of his officer corps and the fear of punishment
to help ensure the loyalty of the approximately
600,000 regulars in the armed forces.
A sharp curtailment in imports is the immediate cause
of Iraq's domestic economic problems. Iraq reduced
import spending in 1983 to some $11-12 billion, in our
judgment, compared with $19 billion in 1982. The
regime restricted private-sector imports by delaying
the issuance of import licenses and limiting their value
to only 30 percent of 1982 allocations, according to
the US Interests Section in Baghdad. Early 1983
trade data for Iraq's most important Western trading
partners indicate that their sales of manufactured
USSR
Other
M US
OECD
a Preliminary.
b Estimated; based on partial third-quarter
trade data.
goods-including heavy industrial machinery, electri-
cal equipment, and transport equipment, which have
accounted for roughly 90 percent of their exports to
Iraq-were well behind the 1982 pace. Imports of raw
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materials for the light industrial sector and most
consumer goods were also reduced. Consumer goods
.imports from Japan, Iraq's second-largest trading
partner, were down 85 percent during the first half of
1983 from the same period in 1982
Iraq's imports from the industrialized West probably
amounted to only some $7-9 billion in 1983 compared
with $14 billion in 1982. OECD trade data indicated
that Iraq's imports from the West fell by over half to
$4.9 billion in the first nine months of 1983 from the
same period in 1982. The big losers were Japan, West
Germany, and France, which accounted for 54 per-
cent of the drop, largely because projects involving
these countries were postponed or canceled. Oil barter
deals and deferred payments may have allowed Iraq
to increase imports in the second half of 1983-
especially for arms imports.
We believe trade with most Third World countries
and Iraq's regional friends, was much lower in 1983
than 1982, based on early trade data. In 1982 Iraq
received roughly 15 percent of its imports from the
Third World. Turkey's exports to Iraq, once Ankara's
second-largest customer after Iran, were down 60
percent to $190 million during the first three quarters
of 1983 compared with the same period in 1982,
We believe Jordan's
1983 exports to Iraq, once its largest foreign market,
also were below the $80 million level of 1982, a 60-
percent drop from the 1981 peak. According to the
US Embassy in Amman, Baghdad and Amman
agreed in early 1983 to reduce by nearly 80 percent
the target for Jordanian exports through Jordan's
official trade center, which handles about one-fourth
of Amman's exports to Iraq.
Several of these countries have suffered other eco-
nomic consequences because of Iraq's financial straits.
Baghdad's clampdown on imports has crimped the
revenues that Jordan, Kuwait, and Turkey received
from the lucrative transit trade in Iraqi-bound goods,
according to Embassy reporting. Only 10 percent of
the 200 transport companies in Turkey were expected
to survive to the end of 1983 unless trade picked up,
Iraq also
has defaulted on its Baghdad Summit commit-
ments-worth $242 million to cash-short Jordan-as
well as scrapping foreign aid payments to other
LDCs. In contrast, Iraq disbursed a total of $1.5
billion in development aid and military assistance in
1980.
Civilian imports from the USSR in 1983, mostly for
machinery, probably fell well short of the 1982 level
of $1.4 billion, in our judgment, as Iraq wound down
its development program. Soviet deliveries to Iraq
plummeted to $137 million in the first three quarters
of 1983 compared with about $1.2 billion for the same
period in 1982, according to Soviet trade data. Mili-
tary deliveries, on the other hand, probably reached
some $1 billion, based on first-half data. After initial
difficulties, Moscow and Baghdad settled on a pay-
ment scheme for Soviet military deliveries, according
to the US Interests Section. The USSR is Iraq's most
important arms supplier; last year, Baghdad signed
arms deals with Moscow worth about $3 billion and
received $1.7 billion in military hardware
Reduced oil revenues are at the root of Iraq's worsen-
ing economic situation. As a result of lower export
volumes and reduced prices, we estimate oil revenue
plunged to less than $8 billion in 1983 compared with
nearly $10 billion in 1982 and a peak of over $25
billion in 1980. Baghdad has only the pipeline across
Turkey as a route for its oil exports. Iran virtually
destroyed Iraq's two Persian Gulf oil export terminals
at the outset of the war, and Damascus, allied with
Tehran, has blocked oil deliveries through the pipeline
across Syria
Moreover, Iraq was forced to lower the price of its oil
$5 per barrel to about $30 to conform with the OPEC
market realignment last March, according to the
press. The price cut has cost Iraq almost $100 million
a month in oil revenue. Despite the lower price, Iraq,
along with other producers, has had difficulty selling
its oil in a weak market in recent months
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Figure 2
Iraq: Oil Exports and Revenues, f.o.b., 1980-83
I 1 I I I I I I I I I -
0 1 11 III IV 1 II III IV I II III IV I I1 III. 0
Attempts To Increase Oil Exports 2
Iraq is trying to boost oil sales to alleviate its econom-
ic problems. Iraq is in the midst of a program to
expand the capacity of the Iraq-Turkey pipeline.
According to Iraqi officials, the line now can carry
900,000 barrels per day of crude oil and will reach its
planned maximum capacity of 1 million barrels per
day by mid-1984. To encourage liftings from the
Mediterranean, last April Baghdad dropped the tran-
sit fees it charges on oil pumped through the pipeline
1 I I I I I I I I I
-1 1 1 11 III IV I II in IV 1 11 III IV 1 II 1118
1980 1981 1982 1983
by 40 cents per barrel-a cut of almost 50 percent.
Although isolated incidents of sabotage since 1980
have caused only brief closures, the 980-km-long line
is still extremely vulnerable to terrorists or comman-
do-type attack.
Iraq also has arranged for the transport of oil over-
land by truck through Jordan and Turkey,
The oil is then shipped from Al
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Figure 3
Major Existing and Proposed Middle East Oil Pipelines
Boundary representation is
not necessarily authoritative.
Irar/-Inrtie/ Pl,
Tripoli
Mediterranean BEIRUT
rAt
gabah
Saudi
Arabia
Yanbd
at Bahr
petroline Pipeline 1.85
(C SET)/
CKUWt ` (CLOSED)
- Existing oil pipeline
- Proposed oil pipeline
0.7 Pipeline capacity(million b/d)
Oil terminal
C> Major oilfield
Note: Alignments of proposed pipelines are
shown for display purposes only. Actual
routes are not currently known.
0 300
Kilometers
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Aqabah and ports in Turkey. Only small quantities-
about 50,000 barrels per day-can be delivered in this
manner, however, because of congestion and damage
to the roads. Indeed, Jordan is stopping Iraqi oil
traffic to Al Aqabah that does not conform to maxi-
mum weight limits. Moreover, trucking the oil costs
Iraq about $8 per barrel, nearly 30 percent of what it
earns
Baghdad is pursuing several longer term options to
increase exports, including the possible construction
of new oil pipelines through Saudi Arabia, Jordan,
and Turkey. Negotiations are under way with Riyadh
to build a spur capable of moving up to an estimated
500,000 barrels per day of oil to Petroline, the Saudi
pipeline to the Red Sea. The spur would take advan-
tage of unused capacity in Petroline-currently run-
ning well above 1 million barrels per day-and could
also be the first part of a project involving a separate
Iraqi line with a volume of 1.5-2 million barrels per
day parallel to Petroline.
The Saudis, however, fear a separate pipeline will
ultimately cause friction between themselves and
Baghdad and become a target for Iranian military
The other pipeline options are even less advanced. The
line across Jordan to the Red Sea port of Al Aqabah
is only at the feasibility study stage. According to
Embassy reporting, estimates of construction time run
from 16 months to three years, with a cost of about $1
billion. Capacity figures have not been made public,
but we believe it would be about 1.5 million barrels
per day. As for a new Turkish line, Embassy reports
indicate that Baghdad and Ankara signed a prelimi-
nary protocol late last year to study the construction
of a liquefied petroleum gas pipeline that would
parallel the existing crude-oil line to the Mediterra-
nean)
Iraq is not optimistic that the Syrian pipeline will be
reopened, So long as
Iran continues to provide Syria with oil worth about
$1.8 billion on concessionary terms, Damascus has
little financial incentive to reopen the pipeline. Saudi
Arabia's efforts to mediate the dispute have, so far,
failed Other 25X1
Gulf Cooperation Council states' attempts to resolve
the issue are making no headway. 25X1
Bartering
Iraq has bartered, using oil from Saudi Arabia and
Kuwait through 1984. We estimate Saudi and Ku-
waiti oil sales on Baghdad's behalf-in effect a form
of financial aid-probably averaged approximately
200,000 barrels per day in 1983, worth about $2
billion. Saudi exports are going to Iraqi customers
primarily in the USSR and Japan
Saudi Arabia and Kuwait also are
providing smaller amounts of oil using production
from the Neutral Zone, which is shared equally
between the two countries. In most cases, Iraq's
customers pick up the Saudi or Kuwaiti crude and
send payments directly to Baghdad.
Two such deals highlight the importance of such
arrangements to Iraq's financing of the war while
avoiding sharper cuts in civilian imports. The barter-
ing has helped Iraq find customers in a soft world oil
market and, we believe, may disguise some price
discounting:
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? France agreed last June to accept 80,000 barrels per 25X1
day of Iraqi crude, worth about $860 million, in
partial payment for the approximately $1 billion in
outstanding debts Iraq had to pay for French mili-
tary equipment in 1983, according to press reports.
? The USSR contracted last May for deliveries of at
least $1.2 billion worth of Saudi crude to cover
payments primarily for military hardware due in
1983, according to the US Interests Section in
Baghdad. The Soviets, in turn, used the oil to fulfill
their own oil contracts, mainly with India.F 25X1
Iraq also has bartered with civilian trading partners.
Three Japanese trading companies, the largest recipi-
ents of the Saudi and Kuwaiti crude, are taking
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Table 1
Iraq: Current Account Balance
and Financing Arrangements
Grants
Current account balance
Financing the current account
Gulf state aid
Saudi and Kuwaiti oil sales
Commercial and other loans
Trade credits
Reserve drawdown
Other, including errors and omissions
Estimated.
b Estimated; based on preliminary three-quarter data.
c Alternative scenarios for import spending and current account
balance depend in part on our assumed levels of foreign assistance
and reserve drawdowns.
d Assumes Turkish pipeline expansion completed in early 1984.
e Imports are understated to the extent they do not include military
purchases from every country.
f Represents earnings on official foreign assets only.
delivery of oil to cover Iraqi import bills for civilian
goods in both 1982 and 1983, according to the US
Interests Section in Baghdad. A South Korean firm
agreed to take oil for project payments of $800 million
We believe Iraq had a roughly $9-10 billion deficit in
its 1983 current account, down considerably from the
-9.1
-9.7
-3.1-4.1
0.8
-2.2
11.0
9.7
7.9
8.8
9.8
10.8
9.5
7.6
8.5
9.5 d
0.2
0.2
0.3
0.3
0.3
20.1
19.4
11.0-12.0
8.0
12.0
-6.0
-7.1
-5.5
-4.6
-4.8
-4.0
-3.5
-1.5
-1.3
-1.5
3.2
1.6
0.5
0.2
0.2
-5.2
-5.2
-4.5
-3.5
-3.5
-2.0
-1.0
0
0
0
-17.1
-17.8
-8.6-9.6
-3.8
-7.0
18.0
18.5
8.6-9.6
3.8
7.0
8.0
5.5
1.6
1.0
2.0
0
NEGL
1.7
0.5
1.0
0
0
0.8
0
0.5
0
0
1.0-2.0
0.8
1.5
10.0
13.0
3.5
1.5
2.0
-0.9
-0.7
0
0
0
$18 billion deficit in 1982 and the $17 billion deficit
in 1981. Iraq was able to reduce the deficit only by
sharply cutting imports in 1983. Iraq had a trade 25X1
deficit of $3-4 billion and experienced other foreign
exchange outflows of about $6 billion-most of it in 25X1
remittances by Iraq's still sizable foreign labor force.
Financial assistance from abroad helped offset the
deficit. Because official subventions-including Gulf
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state assistance-fell short of Iraq's overall require-
ments, Baghdad has had to rely increasingly on
deferred payments to its foreign suppliers to avoid
politically intolerable import cuts.
Deferred Payments
We estimate Iraq has negotiated deferred payments-
or simply been late in paying-some $1-2 billion owed
foreign companies for a wide range of imports in
1983. Iraqi payments have often run as much as six
months late, and Baghdad generally negotiated for
deferral of payments to 1985 at interest rates below
commercial levels, according to the US Interests
Section.
Many foreign firms are under financial pressure to
come to terms with Iraq to protect their investments,
Pros-
pects for participation in postwar development also
motivate the companies to accede to Iraq's demands.
To avoid piling up its own debt, Baghdad is requiring
foreign firms to find their own financing for the
deferred payments, according to the US Interests
Section.
Iraq is negotiating with a host of foreign suppliers. By
insisting on dealing with individual companies rather
than their governments, we believe Baghdad hopes to
force the firms to meet its terms by playing one
against the other. The Iraqi strategy has had some
success, but not enough to prevent the sharp decline in
imports in 1983:
? A French banking consortium agreed to an Iraqi
request for a $1 billion credit to cover the deferral of
payments due French civilian contractors in 1983.
Still to be resolved, however, are payments for an
additional $500 million in war-related costs owed
French firms.
? Italian firms have agreed to defer payments owed in
1983-84 for most of a $2 billion contract for
warships
Iraq, however, has yet to sign the agree-
ment, probably because of difficulty in meeting the
downpayment requirements. The Italians also have
agreed to refinance a $300 million power project.
? Canadian and Australian companies agreed to defer
over $100 million due in 1983 for agricultural
products, according to the US Interests Section.
? Most payments totaling an estimated $3 billion
owed to Japanese, West German, and British suppli-
ers remained unresolved as of late 1983.
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Other countries-many of which can ill afford to
advance the funds-are participating in the Iraqi
bailout. To protect their own firms, Jordan and
Turkey provided Iraq with supplier credits of about
$365 million to help finance imports in 1983, accord- 25X1
ing to the US Embassies in Amman and Ankara. Iraq
also asked South Korea to defer some of the over $1
billion in payments owed in 1983, according to the US
Interests Section. Baghdad, in addition, agreed to
defer 1982 obligations owed the largest Brazilian firm
in Iraq and is receiving food and other commodities
from the Philippines and Thailand through deferred
Commercial Loans
Commercial loans from the international banking
community in 1983 amounted to about $620 million.
Many Western banks, already concerned about their
overexposure in other LDCs, are reluctant to lend to
Iraq until the war is over, in our judgment. Only one
French and two US banks participated in the largest
commercial credit Iraq received in 1983-a $500
million, five-year loan last March from a bank syndi-
cate; the rest of the 10 leading managers of the loan
were Arab banks. Arab financial institutions-which
may be more willing to lend to Iraq-probably have
less funds available than in the past because other
OPEC countries are withdrawing funds to cover their
own financial needs. Baghdad received only a $120
million loan for the expansion of the Turkish pipeline
from a syndicate headed by the Arab Banking Corpo-
ration and the Arab Petroleum Investments Corpora-
tion, according to the press.
Government Loans
After months of negotiations, the United Kingdom
agreed in October to provide Iraq with a $388 million
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loan with payments spread over the next five years for
the purchase of civilian machinery and equipment,
according to the Embassy in London. In return, Iraq
must pay about $46 million of 1983 debt owed British
firms, according to the press. The only other Western
loan Iraq has obtained is a $50 million railroad
project loan from West Germany, according to a press
report.
The Japanese agreed last August to extend for five
years the deadline on Iraq's use of a $2.5 billion credit
that originally was to expire on 15 August, according
to the US Embassy in Tokyo. Tokyo, however, has
been dragging its feet in response to Iraqi requests to
disburse the funds. Iraq had used only about $700
million of the funds before the war with Iran started,
and Japan froze additional disbursements.
Regardless, the loan extension did not help cover
Iraq's cash needs for 1983 because the credit is tied to
new project spending. Japan will not allow Iraq to
draw on the loan to pay existing debts. Moreover,
Tokyo probably will offer no new sizable credits until
the existing loans are fully disbursed.
Gulf Nonoil Aid
We estimate Gulf state aid-other than oil sales on
Iraq's behalf-in 1983 amounted to about $1.6 bil-
lion. Almost one-third of these disbursements were
late payments for commitments made during 1981-
82. The Gulf states have their own revenue problems
because of the weak world oil market.
Baghdad is demanding that its Gulf state benefactors
provide more aid if they wish to prevent an Iraqi
escalation of the conflict with Iran. Deputy Prime
Minister Ramadan apparently warned Kuwait's Amir
Sabah that Iraq would strike Iran's Khark Island oil
terminal if additional financial support were not
forthcoming from the Gulf states, according to US
Embassy sources in Kuwait. Baghdad also attempted
at the November OAPEC meeting to extort $1 billion
per month from the G if states to forestall an Ira i
raid on Khark Island,
International Organizations
Iraq has not received a response to its request for a
$225 million loan from the International Monetary
Fund (IMF). The IMF has not decided whether
Baghdad qualifies for the loan under its criteria for
helping a country with "temporary" export shortfalls
"due largely to circumstances beyond its control,"
according to State Department reports. Even if the
IMF loan agreement could be reached in principle
soon, negotiating the details would take several
months. Iraq would have to meet other conditions,
probably including import restraints and fiscal re-
forms, which Baghdad would be loath to accept. The
Arab Monetary Fund has provided $90 million to
Iraq
Foreign Reserves
We believe Iraqi foreign exchange reserve drawdowns
totaled more than $3 billion in 1983. Iraq drew down
its assets to about $4-5 billion by September,
It is now selling gold, an
indication that Iraq has little cash remaining. The
government drive to collect gold from the citizenry is
not making a significant contribution to government
coffers, in our judgment.
Iraq's reserve position has deteriorated markedly in
the last few years. Foreign exchange assets amounted
to about $31 billion before the war and $8 billion at
the beginning of 1983. Most of Iraq's remaining
reserves are held as loans to less developed countries,
which will be difficult for Baghdad to convert to ready
cash
Iraq's financial squeeze will continue in 1984. Oil
exports will increase somewhat, but financial aid and
credits from abroad could fall. With foreign exchange
reserves near depletion, Baghdad may have to further
reduce imports at the expense of the consumer.
A sketchy outline of Iraq's 1984 budget, approved in
January 1984, points to another year of strict auster-
ity for the economy. Minister of Trade Hassan provid-
ed no data but stressed that top priority will be given
to import spending for defense and the supply of basic
commodities. The investment program will focus on
the completion of strategic projects that support the
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Figure 4
Iraq: Official Foreign Exchange Assets, 1974-83
a End of year.
b Estimated.
war. Spending for the consumer will center on basic
services such as water, electricity, and health services.
The plan's emphasis on increased productivity and
efficiency probably results from serious war-related
manpower shortages as well as the desire to save
money.
Increased exports through the Turkish pipeline could
add $1 billion to revenues in 1984, but Iraq probably
will be unable to resume significant oil exports
through the Gulf until the war ends. Repairs to the
offshore oil terminals at Mina al Bakr and Khawr al
Amaya will require Western technicians who are
unlikely to begin work while the war continues. Four
temporary single-point mooring buoys are in long-
term storage in Singapore. Even if the war were to
end tomorrow, it would take about 10 months to
install the buoys and even longer to repair the termi-
nals. Syrian President Assad's deeply rooted hostility 25X1
for Saddam will preclude an immediate reopening of
the Syrian pipeline, in our judgment
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Even in the unlikely event construction on the pipeline
through Saudi Arabia began soon, it would not be
available in time to help Iraq in 1984. Construction of
a pipeline to connect to the existing Petroline pipeline
probably would take about a year, after which Iraq
could export an additional 400,000 to 500,000 barrels
per day, The
decision is difficult for Riyadh. Saudi Arabia and
Iraq were adversaries before the war, and we believe
Riyadh does not see an Iraqi pipeline across its
territory in its long-term strategic interests. Moreover,
increased Iraqi oil exports will compete with Saudi oil
sales. The construction of new pipelines across the
Arabian Peninsula to the Red Sea or the Gulf of
Oman would take at least three years. Other pipeline
alternatives also would not be ready in time to help
ease Iraq's financial problems in 1984
renege on 1983 payments due in 1984, it will probably
cause many creditors to shy away from giving new
loans
To maintain its superiority in military equipment-
and offset Iran's manpower advantage-the govern-
ment probably will resist further reductions in de-
fense-related spending. Military contracts signed in
1982 for nearly $5 billion are likely to ensure high
levels of arms spending
Iraq's economic problems will not be enough to loosen
Saddam's tenacious hold on power, in our judgment.
We believe growing war weariness among the popu-
lace and declining morale in the military will pose at
least as serious a threat to Saddam as the economy in
the months ahead. If his ability to attract popular
support significantly wanes, he will resort to repres-
Iraqi oil exports will also be affected by world de-
mand. We project only a modest increase in demand
for OPEC oil over the next few years. As a result, Iraq
probably will soon experience difficulty in marketin
its increased production at current market prices
Baghdad will probably get enough foreign help to
meet its basic import needs in 1984-Iraq continues
to depend on imports for about half of its grain
consumption alone-but not much more. The Gulf
states' oil sales are not likely to recover enough in
1984 to prompt them to increase their direct financial
aid to Iraq substantially unless they perceive a threat
to Iraqi political stability. Commercial banks proba-
bly will refrain from giving major long-term loans to
Iraq while the war continues.
Iraq probably will be able to obtain enough trade
credits to match last year's level. Baghdad has lined
up 1984 credits worth at least $500 million from
several countries including Austria, Great Britain,
West Germany, and Australia, according to the US
Interests Section and the press. Iraq will continue to
negotiate with other countries, especially France and
West Germany, for more deferred payments, but it is
likely to encounter resistance from financially less
able or willing contractors and suppliers. Several
West German firms, for example, have stated they
anticipate serious obstacles to financing in 1984,
according to the press. Moreover, should Baghdad
sive measures to maintain control.
Iraq's economic prospects for 1985 and beyond would
improve if Saudi Arabia allows construction of the
pipeline spur from Iraq to begin soon. Oil exports
through the pipeline would earn Iraq $4-5 billion
annually, assuming the oil is sold at today's prices.
Saudi Arabia and Kuwait would then probably curtail
oil sales on Iraq's behalf, but Iraq would still have an
initial net revenue addition of about $2 billion.
An important part of Iraq's diplomatic strategy to
alleviate its economic difficulties and end the war is
an improvement in relations with the United States.
Iraq believes US leadership is needed to elicit in-
creased Western support for Baghdad. Baghdad prob-
ably also will seek economic help from Washington.
Iraq has received only modest economic assistance
from the United States. Following Iraqi Minister of
State Muhammadi's visit to Washington in February
1983, the United States extended an additional $210
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million package of interest-free loans and export
credit guarantees to Iraq to import US food. The
United States imports virtually no oil from Iraq, and
US exports to Iraq are modest. During January-
September 1983, US sales to Iraq amounted to $440
million, less than 9 percent of total OECD exports to
Baghdad.
Iraq probably will also urge the United States to help
Baghdad gain additional economic support from the
Gulf states and Western creditors. Baghdad sought
Washington's assistance to obtain Riyadh's approval
of the pipeline across Saudi Arabia.
Iraq also will continue its close ties with the USSR.
Baghdad and Moscow signed a comprehensive trade
agreement last November that will give the Soviets an
expanded role in Iraq's development and petroleum
projects. Iraq's sizable arms deals also ensure Bagh-
dad's dependence on the Soviets. While affirming
Iraq's right to export oil through the Gulf, the USSR
indirectly has warned the United States not to inter-
vene in the region, according to the US Embassy in
Moscow. Moscow will probably try to use closer
military cooperation with Baghdad as an entree for
expanding its political influence in Iraq-especially
now that Soviet relations with Iran have soured.
Baghdad, for its part, will remain distrustful of Soviet
intentions and will prevent any spread of Soviet
interference in Iraqi internal politics-especially at-
tempts to strengthen Communist Party influence in
Iraq, in our judgment. Baghdad has warned the
Soviets not to attempt to parlay its dependence on
arms into strategic alliances. Moreover, Baghdad has
not forgotten Moscow's refusal to ship arms to Iraq
during the first six months of the war.
If Iraq cannot ease economic and military pressures, it
may decide to escalate the war in the Gulf, threaten-
ing oil exports vital to the West. The delivery of
French-produced Super Etendard aircraft armed with
Exocet antiship missiles in October and Baghdad's
attacks on oil tankers servicing Iran in the Gulf
represent a major attempt to break the economic
stranglehold. The Iraqis, we believe, are prepared to
make good on their threat to cut off Iranian oil
exports in the hope that this will force Iran into
negotiations to end the war.
More realistically, however, the Iraqis probably would
count on major Western powers to intervene to stop
an escalation of the war and enable Iraq to resume
exporting oil from its Gulf ports. Baghdad does not
believe that Iran will voluntarily permit Iraq to use its
Gulf terminals
Meanwhile, Baghdad's threats
serve as a form of blackmail against the Gulf states.
Iraq wants these states to increase substantially their
subsidies. If this coercion works, we believe the Iraqis
would hold off escalating the war with Iran.
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Appendix
Iraq's Oil Export
Facilities
Before the war, Iraq's crude oil export network was
the most flexible in the Middle East, with a total
system capacity of about 5 million barrels per day-
some 1 million barrels per day above Iraq's prewar
productive capacity. The bulk of the capacity was
located in the two sea-island export terminals of Mina
al Bakr and Khawr al Amaya, each capable of loading
1.6 million barrels per day. Severely damaged at the
onset of the war, these facilities could be repaired by
utilizing existing subsea oil lines in conjunction with
single-point mooring buoys. This would provide Iraq
with a Persian Gulf export capacity of 1.5-2 million
barrels per day within about 10 months. Lacking any
specific guarantee of a moratorium on attacks on Gulf
oil facilities, however, Baghdad would find it difficult
to hire the Western expertise needed to install the
temporary loading equipment or rebuild the perma-
The 1.2-million-barrel-per-day-capacity Iraqi pipeline
across Syria was closed by Damascus in April 1982 to
bolster Iranian attempts to topple Iraqi President
Saddam Husayn. Because of the longstanding ani-
mosity between Saddam and Syrian President Assad,
there appears little hope that the line will be reopened
in the near term. Even in the unlikely event the
pipeline is reopened, possible constraints on the export
capacity of the Syrian oil terminal at Baniyas and
apparent damage to facilities at the other terminal in
Tripoli, Lebanon, may have substantially reduced the
line's effective oil throughput capacity.
Expanding the Iraq-Turkey Pipeline
The Iraq-Turkey pipeline is in the midst of an expan-
sion that will increase its capacity by almost 300,000
barrels per day-to just under 1 million barrels per
day by mid-1984. Iraqi officials announced in Decem-
ber that the first phase of the expansion-involving
installation of new pumps at the existing five pumping
stations-is complete, raising the line's capacity to
almost 900,000 barrels per day. We are uncertain,
however, whether the pipeline can handle the higher
volume. In late summer 1983 Iraq reportedly was
pushing as much as 850,000 barrels per day of oil
through the pipeline with the aid of drag-reducing
chemicals, but the increased pressure apparently
caused leaks and a fire, which closed the line briefly
in September. The current phase of the expansion
involves addition of more pumps and parallel pipe to
several sections of the pipeline, which will reduce
operating pressures in certain critical areas. When
completed, the extra capacity could yield Baghdad up
to $3 billion annually in oil revenues; there are no
apparent plans for additional capacity expansion be-
yond the current program.
New Export Options: Pipelines Through Saudi Arabia
and Jordan
The Saudi Link
Baghdad's best option for a sizable increase in oil 25X1
exports in the next year or so would be a link to
Petroline, the Saudi oil export pipeline to the Red Sea.
An 800-kilometer connector line into Petroline at one
of three pump stations would use a portion of the
excess capacity in the line, estimated at over 1 million
barrels per day.
At Iraq's request, a major international construction
company did a rush analysis on this proposal over the
past few months. crash 25X1
construction would take 10 to 14 months. Industry
experts believe that meeting this compressed schedule
would require a single firm to serve both as project 25X1
manager and engineer, allowing design and engineer-
ing work to be conducted as construction proceeds.
Pipelaying would also have to be done simultaneously
in three or four areas. Pipe and other long-leadtime
items-primarily valves-would have to be ordered
immediately because delivery could take up to eight
Cost estimates for the Iraq-Petroline link vary signifi-
cantly, primarily because detailed design and price
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Table 2
Iraq: Petroleum Export Options
Export Option
Volume
(thousand
b/d)
Leadtime Cost
(months) (million US $)
Throughput volume depends on where the connection with Petro-
line is made; average throughput is estimated at 500,000 barrels per
day. Cost estimate is based on an accelerated construction schedule.
Iraq-Red Sea pipeline
1,600
54
3,600-4,500
Based on a 1981 feasibility study.
Tapline link
500
10
NA
Would require Iraqi crude to be commingled with Saudi crude.
Jordan pipeline
1,000-1,500
36
1,000
Line is still in preliminary study stage.
GCC has endorsed a study to examine the possibility for a line
bypassing the Strait of Hormuz.
Based on current plans which assume no further damage and
sufficient onshore pumping capacity.
a Detailed design work on all projects still needs to be either
initiated or completed. As a result, cost and construction schedules
are subject to change.
estimates have not yet been prepared. According to
one rough US Government estimate, based on histori-
cal experience, the cost of the pipeline, including
pumping facilities, would be about $360 million. This
estimate assumes the project is completed in 18
months.
Riyadh has made
the political decision to proceed with the construction
of a linkup to Petroline.
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the cost would more closely approximate
million if a 10-month timetable is established. Factors
that would drive up costs under these circumstances
include the need to purchase equipment and material
without going through an extended bidding proce-
dure, the need to pay delivery premiums, and exten-
sive overtime for labor.
Phase Two: The Parallel Line
Baghdad views the link to Petroline as only the first
phase of the project, which it eventually hopes will
include construction of a separate Iraqi pipeline paral-
lel to Petroline, extending from the linkup point to the
Red Sea. The second phase is estimated to take about
four years and cost as much as $4.5 billion. Certain
aspects of this proposal resemble alternatives put forth
in a 1981 feasibility study initiated by Baghdad for an
Iraq-Saudi Arabia pipeline. The 1981 plan never
overcame the financial and political roadblocks
thrown up by Riyadh, and, by the beginning of 1983,
negotiations with the Iraqis are under way to establish
rules governing the pipeline's ownership and opera-
tion. In our judgment, Saudi leaders probably calcu-
late that they can maintain full control over the spur,
given its limited capacity and dependence on the
Saudi pipeline. Riyadh probably hopes that its ap-
proval of such an arrangement-although offering no
immediate financial relief to Baghdad-would ease
Iraqi concerns over export limitations, diminish Bagh-
dad's growing sense of desperation, and preclude a
major military escalation by Iraq in the war with
Iran. Saudi leaders may also envision some financial
dividends accruing to them from a linkup to Petroline
through oil transit fees and the need for reduced
monetary aid to Iraq.
We do not rule out the possibility, however, that
Riyadh will drag out negotiations over the spur and
try to postpone the project. Such tactics would be
it was a dead issue.
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Table 3
Iraq-Saudi Arabia: Industry
Capacity Estimates of
Proposed Iraq-Petroline Link
Pipeline Connection Point With Petroline
Diameter
(centimeters) Pump Station Pump Station Pump Station
140
120
1 (West of 3 (Khurais) 6 (160 kilometers
Abqaiq) west of Riyadh)
Financing the Pipelines
Funding for the projects does not appear to be a major
problem.
several companies-primarily Italian, British, and
Japanese-have indicated a willingness to take on the
task and that short-term supplier credits will be made
available. These firms are eager to keep experienced
engineering and construction crews employed and
would be willing to take the risk of helping to finance
the projects if work could begin soon.
consistent with the Saudis' underlying lack of enthusi-
asm for the project and would be characteristic of how
they operate when confronted with unappealing re-
quests for assistance. We believe Saudi leaders also
worry that a more extensive commitment to Iraq
might prompt a backlash from Iran, possibly includ-
ing Iranian strikes against Saudi oil installations. If
Riyadh's commitment to an Iraqi spur to Petroline is
serious, positive evidence in the form of signed con-
tracts for the purchase of equipment and services
should be forthcoming.
The Jordanian Connection
During the past year, Baghdad and Amman have
been exploring the possibility of an export route across
Jordan to the Red Sea. Few details of the project-
which has received only a preliminary study-are
The trans-Jordan pipeline apparently would
run about 800 kilometers from near Baghdad to the
port of Ai Aqabah. We believe its capacity most likely
would be about 1.5 million barrels per day, similar to
that of the proposed Saudi line to the Red Sea. To
handle crude volumes of this magnitude, an export
terminal would also be needed. Although no detailed
design work has been done on this proposal, an
Embassy source estimated it would take about three
years and cost at least $1 billion. We believe a shorter
work schedule might be possible, albeit at a higher
In October, Baghdad signed a protocol with Ankara
covering construction of a 95,000-barrel-per-day, 18-
inch liquefied petroleum gasline parallel to the exist-
ing crude-oil pipeline. Feasibility studies, which the
Embassy in Ankara reports are being paid for by Iraq,
are under way. Baghdad also will be responsible for
arranging financing for the pipeline, which an indus-
try estimate places at $300-400 million. The Embassy
cautions, however, that the project is still tentative,
and much will depend on the results of the feasibility 25X1
study. If a decision is made to proceed, the project is
expected to take about three years
Other Iraqi Oil Export Pipeline Proposals
Although the possibility of a Saudi link or a Jordanian
pipeline appears to be the best way for Baghdad to
boost oil exports significantly, other options have been 25X1
put forward. 25X1
Iraq could link into Tapline, a line through Saudi
Arabia, utilizing unused capacity in the line's south-
ern section. Tapline is essentially unusable as an
export route to the Mediterranean. Damage has
closed the Lebanese section, and, in recent years, only
about 50,000 to 60,000 barrels per day of crude oil
has been sent through the line to Jordan. Iraq could
link into Tapline near Qaysumah, the initial pumping
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station, and run crude south into the main Saudi
pipeline network at the Qatif junction. This section of
line is reported to need refurbishment, however, if it is
to carry its rated volume of 500,000 barrels per day.
Aramco can be expected to oppose this option since
the company intends to use the lower portions of
Tapline to feed crude oil north to its 250,000-barrel-
per-day refinery at Jubail, due for completion late
next year
Earlier this year the heads of state of the Gulf
Cooperation Council (GCC) endorsed the study of
construction of a GCC oil pipeline linking all six
members to an export terminal on the coast of Oman,
bypassing the Strait of Hormuz.
the proposed line would have a
capacity of 2.5 million barrels per day, but no esti-
mate of cost or construction time was available.
Baghdad-which is not a GCC member-has ex-
pressed interest in tying into the pipeline system,
causing doubts about the scheme among some mem-
bers. Given this problem, along with the probable
enormous expense of the project and the fate of
previous proposals to build a "trans-Oman" oil pipe-
line, we believe there is little hope for this project's
proceeding beyond the preliminary study phase.
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