Saudi Arabia and three other Persian Gulf Arab oil producers are providing Iraq with billions of dollars in loans to help it sustain its protracted war with Iran and, at the same time, continue its ambitious economic development plans.
While the exact amount of these loans is not known to outsiders, one diplomatic source estimated it is averaging nearly $1 billion a month; another said he believed Iraq had gotten a total of between $6 billion and $7 billion since the start of the war last September.
The aid has been crucial for the continuing stability of President Saddam Hussein's government. It has allowed him to isolate the economy from the worst effects of the war and maintain the boom already under war before the onset of the conflict. Indeed, Iraqis are better off today in terms of food supplies and available consumer goods than before the war.
Saddam's dependence on assistance from the conservative kingdoms and skeikdoms of the gulf is also having political repercussions. The aid has allowed the donor nations to proceed with plans for their own council on economic and military cooperation with no opposition from socialist Iraq, the main Arab military power in the region.
Most of the loans have come in the form of payments to the Iraqi government from sales of about 1 million barrels of oil daily that the gulf states -- led by Saudi Arabia, with half the total -- have been providing to nine of Iraq's preferential customers cut off by the war from their normal Iraqi supplies.
After the war, Iraq will pay them back in oil or cash for these "war relief" shipments, as they are called, diplomatic and industrial sources here and in Washington say. It is believed Iraq is paying no interest on these oil loans.
[Tuesday, Kuwait announced a $2 billion interest-free loan and reports from there said other Arab states would probably soon follow suit.]
Together with earnings from its sharply reduced oil income and drawings on substantial reserves, Iraq to date has been able to offset the massive loss of income resulting from the drop in its oil exports to less than a third of its prewar level of 3.2 million barrels a day.
Recently, Iraqi oil exports have been running between 800,000 and 900,000 barrels a day, roughly three-quarters of it via its pipeline through Turkey to the Mediterranean port of Ceyhan. The war cut off all Iraq exports through its main gulf terminals, which were destroyed last fall by the Iranians.
"So far we have not felt any pinch in financing because of our reserves, what we are exporting and our friends in the world," Sabah Kachachi, an American-educated economic adviser in the Ministry of Planning, said in an interview. "The war is not a [economic] problem if a settlement is reached in a reasonable period of time."
He refused to say what he regarded as a reasonable period.
Western economists have tend to agree that the main immediate problems facing the Iraq government are not economic and that it can hold on for another year or more without cutting back noticeably on spending.
"The finance minister said at the beginning of the war they had enough reserves for two years of war," said one. "I would say that is still maybe true but it would be pushing it."
During the first seven months of the war, Iraq's foreign reserves dropped from about $35 billion to around $25 billion, the economist said. This means it has been using up its holdings at a monthly rate of $1.4 billion. At this pace, It would exhaust its reserves in about 18 more months.
All these calculations risk being thrown out of joint, however, by the current glut of oil on the world market. Some of Iraq's old clients, notably France, are canceling contracts with Saudi Arabia for their "war relief" oil because they have no use for it. Iraq may also have difficulty finding customers for its slowly increasing exports, unless there is a substantial cut in Saudi output soon.
The Iraqi intention to pursue undisturbed a "guns-and-butter" policy was made clear recently by the publication of $22.5 billion development budget for 1981, a 30 percent increase over last year.
It already has let billions of dollars in construction contracts this year. West German firms have captured the lion's share, with $3 billion in awards. In a two-week period in early April, the government announced another $880 million in foreign contracts. Meanwhile, Baghdad newspapers are filled with tender notices calling for bids on others.
"War or no war, development goes on," remarked Kachachi, who admitted the government had, nonetheless, had to postpone its next five-year plan and shift some priorities as a result of the fighting.
Chief among the changes forced on the government are vast outlays for repairs of war-damaged oil and port installations plus a number of electrical power plants and several cement and sugar industries. Until very recently, when repairs were completed on the Soviet-built Nasiriyah plant, Iraq was missing 60 percent of its prewar electrical power supply from the national grid.
Kachachi said the shortage of power had had a "minimum" effect on the country's economic development pace compared to that on "household consumption," which he had been hardest hit. Until early April, blackouts lasting 10 hours or more were common in Baghdad as the municipality shared the available power in rotation in various neighborhoods.
Another new priority is the acceleration of new or improved road and rail routes to Kuwait, Jordan and Syria to provide Iraq with alternatives to its vulnerable ports on the Shatt-al Arab waterway and Persian Gulf. Kachachi said it was an old transportation strategy now being rushed to completion as a result of the war and the cutting off of direct Iraqi access to the gulf.
"The first thing you need is a good transportation system," he said, "and increased flexibility of export outlets."