After 2 1/2 years of massive military outlays, Iraq is finally running into serious difficulties in financing its war with Iran, which has been costing the government an extra $1 billion each month.
The financial strain became serious last October and has been growing more severe, causing long delays now in Iraqi payments of bills to civilian contractors and military suppliers alike.
As a result, Iraq is now seeking import credits and rescheduling of debts from its trading partners, suppliers and backers. It is also once again pressing its reluctant Arab allies for more billions of dollars in interest-free loans.
France, the main western arms supplier, has been asked to arrange much of the financing for the purchase of new French war materiel, including 29 Mirage F1 fighter jets due for delivery this year. In addition, Iraq is seeking the rescheduling of nearly $2 billion of payments due in 1983 on its total debt of around $7 billion, according to the respected Middle East Economic Digest.
Iraq's financial plight has been reflected in its foreign reserves, which have fallen from about $33 billion before the war to less than $5 billion today, according to western analysts here.
As estimated by these analysts, the present shortfall in Iraqi revenues amounts to at least $500 million per month to cover both war costs and regular government expenses.
Iraq has now instituted an "austerity budget," but only after two years of extravagant spending on vast economic development schemes and prestige projects.
But even this new government "austerity" has not affected plans to build a $2.5 billion subway and a $300 million mosque in the capital, or to purchase 50,000 Volkswagen-built cars from Brazil for $300 million.
Still, the cutback in Iraqi spending is clearly noticeable here, where hundreds of trucks once busy hauling goods from Kuwait's port into Iraq now stand idle and the lucrative transit trade has dried up.
Analysts here are divided as to how serious Iraq's financial problems really are. Some believe they are massive enough to make the difference eventually in its ability to stave off repeated Iranian assaults.
But others assert that Iraq's Arab gulf allies, despite their reluctance, will come through in the end to provide the necessary financing, if only to assure their own survival against a belligerent Iran bent on exporting its fundamentalist revolution.
Iraqi President Saddam Hussein early in January complained bitterly about fading Arab financial backing for the Iraqi war effort, reminding his allies that if Iraq had not held out against the Iranian onslaught, "the Arab gulf countries, the Arabian Peninsula and the Middle East would all be in the same situation as Lebanon is today."
His foreign minister, Tariq Aziz, said at the same time that the Persian Gulf Arab states had stopped aiding Iraq financially a year ago and that in any case had provided "less than $20 billion," contrary to estimates ranging as high as $50 billion.
There are signs that Iraq's criticisms of the Arabs and reminder of its role as the military shield of its oil-wealthy neighbors is having some effect.
Kuwait, under pressure from its parliament, stopped making outright grants and loans, which totaled $6 billion the first year of the war. But it reportedly has now agreed to a new oil "loan" under which Kuwait and Saudi Arabia together will provide crude to Iraq's customers and allow it to receive the revenue .
Aziz said in a recent interview that the two countries would lend Iraq 300,000 barrels daily, which at $29 a barrel would provide Iraq with another $3.1 billion.
However, even supposing Iraq manages to find customers for this oil in the present glutted market, the revenue would not be enough.
Analysts here say that Iraqi government expenditures, even with an austerity budget, are running at between $18 billion and $20 billion a year. But the government is only able currently to raise between $10 billion and $12 billion, primarily from its vastly reduced oil exports and various loans and grants. This leaves Iraq with roughly an $8 billion deficit.
Iraq's oil exports have dropped far more dramatically than Iran's as a result of the fighting. Before the war, it was exporting about 3.5 million barrels daily compared to the present level of around 650,000. Its outlets have been cut except for one pipeline through Turkey now carrying all its exports.
Last year, Iraqi oil revenues amounted to just $9.2 billion, according to the Middle East Economic Digest's calculations. This compares to $23 billion in 1979.
Saudi Arabia reportedly has agreed to an Iraqi proposal to build a new 1.5 billion-barrel-a-day pipeline from southern Iraq across Saudi Arabia to the Red Sea port of Yanbu. The $2 billion line, which the Saudis earlier refused to pay for, will now be financed by several western oil companies, which will be paid back later in oil, according to Aziz.
The pipeline would more than triple Iraq's present exports and go a long way toward bridging the financial gap. But the project is not to be completed until 1986, probably too late to make any difference to the outcome of the war.
Iraq's difficulties have surfaced in a number of ways recently. For example, Indian, South Korean, Japanese and French contractors are complaining about Iraqi requests for deferred payments of hundreds of millions of dollars for completed construction work. Some have been told to expect a one- to three- year delays.
Iraq is also looking increasingly for credit financing to cover essential imports. Among those helping is the United States, despite the lack of diplomatic relations between the two nations since the 1967 Arab-Israeli war.
The U.S. Department of Agriculture, which already has agreed to provide Iraq with a $210 million line of credit to buy grains, now is reported to be adding another $240 million to the package.
Turkey, a key trading partner providing Iraq with its only functioning outlet to the sea for its oil, also is being asked to provide $300 million in credits to finance Iraqi purchase of Turkish imports.