The visit to Baghdad by Kuwait’s Emir Sheikh Sabah al-Ahmad al-Sabah and his participation in the Arab Summit was a positive step forward in Iraqi-Kuwaiti relations, but many difficult issues are still unresolved. For example, there is the issue of prisoners and missing persons, and the maritime and land-borders issue still in dispute despite the UN Security Council already addressing it. Most important, however, is the debt to Kuwait that Iraq incurred during the Iran-Iraq war of the 1980s. Compensation for Saddam’s invasion had been resolved by the UN Security Council through "a special reimburstment fund” that was largely financed via a 5% excise from Iraq’s oil proceeds.
However, the debt issue remains complicated. Iraq claims to have obtained debt concessions from a number of creditor nations, such as Japan, Germany, the US and the UAE. The concessions ranged from minimal to complete debt forgiveness. Kuwait still wants its $21 billion paid with interest and arrears. The Kuwaiti government and council of ministers cannot forgive this debt without a law from the National Assembly, and that is nearly impossible given Kuwait's domestic political situation.
Nonetheless, this debt can be resolved by using it to develop the economic relationship between the two countries, which may promote trade and investments and may possibly lead to economic integration. The two countries could defuse tensions by negotiating a repayment schedule that matches Iraq’s financial capabilities in the coming years. The Iraqis may also propose creative solutions to address the debt, such as converting part of it into ownership rights for Kuwait over key Iraqi enterprises and paying the balance over a reasonable and acceptable time frame.
Iraq has had a collectivist economy since the republican system was established in July 1958, and it was solidified under the rule of late President Abdul Salam Aref after the February 1963 coup. Therefore there are many enterprises in various economic sectors, such as manufacturing, tourism, service and banking that are wholly state-owned. Due to Iraq’s political and economic situation since the invasion of Kuwait, these enterprises have either been completely or partially nonfunctioning and must be revitalized through financial investment. That would require securing the necessary funds at a time when the Iraqi government is facing higher priority financial obligations that are forcing it to neglect these vital enterprises. For this reason, allowing Kuwait to invest in these enterprises should be taken into consideration.
There are many cases in which loans were converted into equity through sophisticated financial engineering techniques that addressed many of these obstacles. Although the size of Iraq's debt to Kuwait is large and cannot be completely converted into ownership of Iraqi enterprises and institutions, part of the debt can still be invested in many sectors. The latter part of this plan must be marketed to the Kuwaiti private sector so that the Kuwaiti government can indirectly recover its due.
This mechanism will enable Kuwait to recover part of its debt and will provide new opportunities for the Kuwaiti private sector through direct investments in Iraq, and will then lead to the opening of Iraq’s economy to investors from Kuwait and other Gulf countries. If the Iraqi foreign-investment law that was adopted a few years ago favors investors’ rights, then it should be developed to give further rights to foreign investors, motivating them to buy Kuwaiti and Gulf debts and convert them into ownership rights in Iraq. The government in Iraq must set policies and take actions that encourage direct investment in light of the country’s unstable security and political situation. Low investor confidence in a country with no foreign investment history — except in the oil sector before it was nationalized — must be remedied by ensuring the protection of investors' rights.
It is in Kuwait's interest that Iraq's economy open up and develop according to modern global standards and World Trade Organization regulations. Such economic opening would improve Iraq's living conditions and employment opportunities, which would increase the buying capacity of Iraqi consumers and boost demand for Kuwaiti goods and services — especially in the re-exportation industry — back to their high level before Iran-Iraq war.
The issue of Iraq's debt to Kuwait should be addressed away from domestic political considerations and the hostilities created by Saddam Hussein’s occupation. The pain caused by that occupation requires both countries’ officials to overcome it peacefully. They must lay the foundations for an objective and realistic resolution to the debt issue in such a way that is beneficial for future economic relations.